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2011-11-29 11:15:00
Shale gas in Europe and America
Europe will have trouble replicating America s shale-gas bonanza
SHALE gas has turned the American energy market on its head. Production has
soared twelvefold since 2000, to 4.9 trillion cubic feet, or a quarter of the
country s total gas output. By 2035 the proportion could rise to half. As the
shale gas flows, prices have come crashing down. Not long ago, America depended
on imports of liquefied natural gas. Now it is likely to become a gas exporter.
These benefits have not gone unnoticed in Europe.
The old continent has nearly as much technically recoverable shale gas (natural
gas trapped in shale formations) as America. Europe s reserves are 639 trillion
cubic feet, compared with America s 862, according to America s Energy
Information Administration, a government agency. But technically recoverable
does not mean economically recoverable, notes Peter Hughes of Ricardo Strategic
Consulting.
Costs are higher in Europe, for several reasons. First, European geology is
less favourable: its shale deposits tend to be deeper underground and harder to
extract.
Second, America has a long history of drilling for oil and gas, which has
spawned a huge and competitive oil-services industry bristling with equipment
and know-how. Europe has nothing to compare with that. In 2008, at the height
of the gas boom in America, 1,600 rigs were in operation. In Europe now there
are only 100. America s more cut-throat market drives costs down. A single gas
well in Europe might cost as much as $14m to sink, three-and-a-half times more
than an American one, estimates Deutsche Bank.
Third, America s gas industry faces fewer and friendlier regulations than
Europe s. Call it the Dick Cheney effect. And fourth, in America wildcat
drillers, if they strike it rich, enjoy access to a spider s web of existing
pipelines, so they can get their gas to market. Europe has no such network nor
open-access rules.
Some European countries are keen to replicate America s shale-gas boom. Poland,
which may have Europe s largest deposits, has issued exploration licences to
more than 20 firms. Test wells have been sunk. But Poland s prime minister,
Donald Tusk, reckons that commercial production will not get under way until
2014.
Other European countries are less gung-ho about shale gas, often for
environmental reasons. France has potentially abundant reserves, but has
imposed a moratorium on hydraulic fracturing (or fracking ), the technique for
winkling gas from rocks deep underground, while the dangers are assessed.
These include the possible pollution of groundwater by the chemicals in
fracking fluids, and the leakage of methane, a gas that aggravates global
warming. Another fear is that fracking may cause earth tremors. Recent seismic
activity near a test well in Britain has been linked to it. Such concerns are
real and widespread in August South Africa followed France s lead and slapped a
moratorium on fracking. More studies will be needed before the public is
reassured.
Americans worry about the environmental impact of fracking, too. But Europeans
worry more, not least because western Europe is far more densely populated than
America. Extracting shale gas is more disruptive than hoicking other
hydrocarbons out of the ground far more wells must be sunk than are needed to
produce the same quantity of conventional gas. Fracking requires oceans of
water, brought in by fleets of noisy tankers. More people will live close to a
typical European drilling site, so opposition to drilling permits is likely to
be louder.
The legal framework is different, too. In America, mineral rights belong to the
landowner. In Europe, they usually belong to the state. So when American
property owners see drills, they see dollar signs. European landowners just see
big, ugly drills. (The situation is different in America if the gas lies under
federal land. If so, getting leases can be trickier.)
Keep on fracking
American leases typically oblige gas firms to keep flushing out gas regardless
of market conditions. So the gas carries on flowing whether prices are high or
low (as they are now). And landowners keep wallowing in royalties whether the
driller makes a profit or not. No such legal provisions are likely in European
contracts.
In America, almost everything points in the right direction for the shale-gas
industry, observes Paul Stevens of Chatham House, a think-tank. In Europe most
things point the other way. But not all.
Europeans may care passionately about the environment, but they also care about
the security of their energy supply, and its price. Many European countries buy
gas from Russia, a country that uses hydrocarbons as a weapon to bully its
neighbours. This is perhaps why Poland has been quickest to embrace shale gas;
it trusts Russia as it would trust a bear to guard a picnic hamper. Ukraine,
another nervous neighbour, recently awarded exploration licences to Exxon Mobil
and Shell, two Western energy firms.
European gas prices are around twice what they are in America, a big incentive
to frackers. In Europe, the price of conventional gas is largely indexed to oil
prices, and the gas is provided on long-term contracts that stipulate minimum
volumes irrespective of market conditions. This makes locally produced shale
gas, supplied on flexible terms, look attractive.
Gazprom, Russia s state-controlled gas giant, often disparages efforts to
extract shale gas a sure sign that its bosses are rattled. Yet they may not be
affected for a while. America s shale revolution began 20 years ago, but its
impact has been felt only in the past five years. Europe s may take just as
long, reckons Mr Stevens. But when the fracking begins in earnest, it could
turn Europe s energy market on its head, too.
from the print edition | Business