international analysis and commentary

The US shale gas revolution and its impact on Europe

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Will the US shale gas revolution be exported to Europe, and will Europe undergo an industrial renaissance based on an indigenous lower-cost energy supply like that which is happening in the US? It is very early to know, but the general view is that shale gas exports from the US will have an indirect impact on the European economy, rather than a direct one.

It is important to step back and look at what is happened in the US and how its shale gas revolution has evolved in order to understand Europe’s position. The development of shale gas in the US has taken over thirty years, and has only really increased during  the last decade.   If you go back only six or seven years the US had numerous re-gasification plan applications to import gas because there was fear that the US was going to run short of gas. Today, by contrast, the political debate is focused on how much gas the US can export. To put it into perspective, gas historically traded at $2-3 per thousand cubic feet (Mcf). In the middle of the last decade it peaked at $8-12 and today it’s trading at $4-5, where experts expect it will stay.  Currently there are about 18 projects applying to export LNG and the debate among government and industry officials is what amount of LNG exports will be allowed.

If you compare Europe to the US, experts estimate that the potential shale resources on the Continent are roughly 350 trillion cubic feet (Tcf). That’s about half the US potential which is estimated at about 700-800 Tcf.  Experts believe the largest European deposits of shale gas are in Ukraine, a location with clear political uncertainty right now. The next two biggest resource bases according to experts are France and Germany, which  both currently ban fracking. The UK has about 20% the amount of Ukraine, and there is a considerable amount of news about this potential, though it is not nearly as large as France and Germany. Meanwhile, the one place where the major multinational companies have invested is Poland. Most of the European shale gas wells have being drilled in this one country, however the major companies (Conoco, Exxon and Total) that tried to export the capabilities and technologies from the US to Europe have decided to focus elsewhere because they no longer see it as potentially  attractive as expected.

What we’re seeing with the major companies is that they are now focusing on exporting their skills and knowledge to bigger markets. So where are they investing? They’re investing substantial amounts of capital in China, which, interestingly, has potential shale gas resources that are 50% larger than those of the US. Other investment destinations are Ukraine, Russia (Shale/Tight Oil), Australia and North Africa.

Given this context, the geopolitical question for Europe to address is how the continent can make sure it benefits from the shale gas revolution. One answer lies in diversification of supply sources. As there is potential for shale gas in Ukraine, North Africa and even Saudi Arabia (all locations geographically nearby), this gas could be piped to Europe. Another benefit lies in LNG, which does take time to produce, but there could be potential for cargos to reach Europe at a lower cost.  As companies in the US and Canada begin to export more LNG, more supply will enter into the system and that means that Europe could have more diversified sources at a lower cost. As for Europe’s own shale gas potential, there are two key issues to address: no one has found large basins in Europe, comparable to those in the US, and more resources are needed for exploration; there are considerable environmental concerns and government restrictions against fracking.  In any case, the US precedent can be instructive, as few people anticipated what is now happening in the American energy sector.

In conclusion, it is incredibly important for European governments to realize that they have to foster the potential of this additional energy source, but dramatic results are very unlikely in the short term. The revolution may well hit Europe, but it will certainly take time.