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EU risks squandering its shale-gas riches

For a continent on the verge of financial collapse, spending billions on gas imports is crazy when supply security sits in shales beneath its feet

INDECISION in Europe isn’t just crippling the EU’s response to sovereign debt issues in the eurozone. It is also wasting a huge opportunity to make inroads into its crippling gas import-dependency problem.

The EU probably sits atop a bounty of shale-gas reserves. Probably is about as good as the guesses get for now, because no-one really knows. The US’ Energy Information Administration (EIA) reckons these reserves, excluding Ukraine, Norway and Turkey, amount to about 500 trillion cubic feet.

But there has been little drilling; there are few core samples to go on; and there’s next to no hard evidence of just how great the endowment is. The EIA’s April report, for example, speculated that the UK held 20 trillion cf of recoverable resources. Since then, Cuadrilla Resources says it found 10 times that amount at its licence near Blackpool, in England’s northwest.

If the numbers for the EU are even remotely accurate, they should be triggering a rush to develop the resource. Instead, despite the arrival of some drillers and two years of talk, the European gas sector remains on the defensive, seeking to win an argument that it should be allowed even to drill these deposits. It also remains fearful of new political risks; uncertain of the demand outlook; and understandably unwilling to throw good money after projects that may never win the backing of the EU bureaucrats, or regional councils.

Things just aren’t happening quickly enough. There are only about seven hydraulic fracturing (fracking) rigs operating across the entire European continent, says Bruno Courme, head of Total’s regional shale-gas business. In North America, there are now more than 1,000.

And while the industry has yet to get off the ground in any meaningful sense, it has already been walloped by environmental opponents who, taking their cue from ecological activists across the Atlantic, say the companies are going to steal our water, poison our aquifers and trigger earthquakes. As Linda DuCharme, boss of ExxonMobil’s European gas division, told the European Autumn Gas Conference in Paris this week, the furore over shale gas has arrived even before the resource has begun to be exploited.

A victim of EU politics

For all its promise, shale gas has become another victim of Europe’s endless internal politics. According to the EIA, France’s shale-gas reserves are Europe’s second largest. But its powerful nuclear lobby didn’t like the idea of a domestic gas business, so the country banned fracking. No wonder a oilfield-services sector in Europe remains some way off: who would build a new industry if politicians decided later to make it illegal?

Meanwhile, EU directives, designed before anyone in the European Commission had heard of shale gas, hang over investment decisions. There isn’t even any collective notion of how drilling rights would be handled if the well pad were in one jurisdiction and the subsurface resource in another. William Wilson, a barrister at Burges Salmon, a UK law firm, says such cases could only be decided case-by-case.

All of this is depressing for an industry that believes it can help solve Europe’s energy-security worries and deliver a cleaner-burning fuel to help the EU meet its ambitious emissions targets. New rules are needed to govern any shale-gas development. But they aren’t coming soon. There’s every chance that the EU will wait for the US Environmental Protection Agency’s report into fracking, now likely to appear in 2014, before going ahead with its own regulations.

Slow progress

Such slow progress should make anyone wonder if the EU really wants to promote a domestic shale-gas industry. Gunther Oettinger, the EU energy commissioner, wants to table legislation next year, and claims the sector will receive a “high level of acceptance when we have the same European common standards, a high level of safety and security, and quality for environmental interests”.

Don’t bet on it. France likes nuclear. Germany likes piped Russian gas. And the rest of the EU is neither willing, nor able to provide leadership on shale gas – or anything else.

This is a shame, because Europe is missing an opportunity to fashion a shale-gas business that skips the problems that have emerged in the US. The sector in Europe, if it took off, would not belong to the mom-and-pop companies that pushed the industry forwards in the US. It would be the play of much bigger companies, including the majors, which have much bigger commercial reputations to defend.

Things have moved on. Chevron and ExxonMobil said this week that they would both disclose the fluids used in their fracking operations. Getting to that point in the US took years. Such companies are better lobbyists, true – but they are also much more adept at standardising best practices. And they have more cash to throw at wells to ensure methane can be captured, aquifers protected and fault-lines respected.

A missed opportunity?

So Europe would be unwise to miss this opportunity. Energy projects usually make a return on investment – and there is money stuck in pension and hedge funds that could underpin a shale-gas industry where the demand fundamentals may be even more attractive than they are in the US. Gas prices in Europe – more than double those in North America – should also encourage developers.

And then there is Europe’s economic problem. The International Energy Agency reckons that as the EU’s domestic natural gas production falls steadily over the next two decades, demand will keep growing – by 2030, the import deficit for the bloc will amount to a whopping 540 billion cubic metres a year (cm/y), almost double the figure for 2010.

At a moderate price of $350/’000 cm/y, that would yield a gas-import bill of about $200 billion by 2035. That’s like bailing out Europe’s sovereign-debt exposed banks almost twice over – every year.

Shale gas isn’t going to solve that problem on its own. But it might save cash-strapped EU countries many billions of euros.

For a union whose very economic future is under threat, that alone ought to be a compelling reason to take decisions about how to tap the resource – and take them now.

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