international analysis and commentary

Shale gas and the EU Energy Roadmap 2050

88

The nuclear downturn in Europe and EU C02 emission-reduction policies are spurring European countries to modify their energy mix, and the successful story of unconventional gas retrieval in the United States is leading energy groups to look for shale gas sites in the “Old World”. As the European Commission finalizes its Energy Roadmap 2050, to be published in mid-December, it is likely to include the development of such unconventional gas resources.

Over the past few years, shale gas has consistently gained market share in the United States. Production from 2006 to 2010 was raised from 1.0 to 4.8 trillion cubic feet, transforming the country from a net importer into a self-sufficient country. It is estimated that the US has over 750 trillion cubic feet of unconventional gas reserves on its territory, which could cover 40% of America’s future energy demand. The International Energy Agency forecasts $20 trillion will be invested up to 2035 to develop unconventional sources of gas and oil, especially as their reserves are 10 times greater than conventional oil ones. Growing international competition for energy sources and its consequently inflationary pressure on energy commodities, as well as unstable Russian gas supplies, turmoil in Northern Africa, and coal’s high level of pollution have all spurred energy groups to consider the development of shale gas also in Europe.

So far, these groups have focused their attention mainly on Germany, Spain and Poland, countries considered to have the most potential for this source. Analysts estimate that the Old World could have enough shale gas to cover Europe’s gas demand up to 2070, potentially decreasing the impact of Russian gas exports to Europe. European shale gas production is expected to grow to nearly 30 billion cubic meters (bcm) per year by 2015 and reach 120 bcm by 2020.

Current interest in shale gas and the resource’s strong potential are also a cause of some concern, especially on two fronts. First, there are to energy groups in Eastern Europe, which have signed long-term gas supply contracts with Gazprom: the development of shale gas could consistently decrease gas prices, potentially leading them out of the market.

The second front in environmental: several NGOs and environmental groups have raised concerns regarding the exploitation of shale gas (the French Senate has already adopted a bill banning its exploration). However, the lack of clear evidence on its potential negative impact, together with high unemployment rates and the ongoing economic crisis, is serving to leverage support for unconventional gas projects with the potential to create jobs.

So far, the European Commission has not taken any official position on this, but the Energy Roadmap 2050 will take a largely positive approach to the development of shale gas. The document will put forth five scenarios to decarbonize the power sector, while also reducing EU emissions 80-95% from 1990 levels, by 2050. Until 2030, each scenario is likely to foresee a rise in inflation-adjusted electricity prices, and between 2030 and 2050 the “high renewables” scenario is bound to suggest another significant price increase due to the costs of investment into the required energy infrastructure. Furthermore, an increased use of renewables would also replace conventionally-fuelled plants, so owners would inevitably have to charge higher rates to cover their costs.

In the document, the Commission is also likely to highlight the fact that the full implementation of existing EU policies represents the cornerstone to any decarbonization of the electricity system. It will also make the point that Member States and investors demand a greater degree of certainty on the policy framework. To this end, the Commission will probably propose a menu of options for consideration, including setting new milestones, setting a binding energy-savings target for 2020, completing the EU internal energy market, and developing a policy framework for renewable energy for the period after 2020.

Although each country’s energy mix is a purely national prerogative, the Commission can certainly set the stage for a new shift to gas. Poland, in particular, with a power sector that is highly reliant on coal – over 90% of its electricity comes from it – could switch to gas. As state aid for coal mines is to be terminated by the end of this decade, the development of shale gas could also represent an important opportunity to create jobs and develop a new national industry country.

Although the Roadmap will devote much attention to the development of renewables – and rightly so – in the short term renewables are likely to face significant hurdles. Therefore, the development of the shale gas industry in Europe has the potential to draw a considerable flow of investment.