A Green View: The Economics of Shale Gas in Europe
Beyond the hype: The economics of shale gas in Europe
There is something paradoxical about the discussion on the potential of shale gas in Europe: As more international oil and gas companies leave Poland due to disappointing results and as more local communities and governments in potential shale plays object to becoming a pin cushion, the believers in a shale gas ‘game changer’ scenario for Europe become more vocal. Unsurprisingly, Polish Secretary of State for European Affairs, Piotr Serafin, stated: "What we need in Europe is lower energy prices and the way to reduce them is also through the exploitation of shale gas in Europe". BusinessEurope links shale gas to the competitiveness of European industry. With only a couple of dozen exploration wells drilled in Europe, such hopes seem premature.
By repeating the link between shale gas and lower energy prices often enough, shale enthusiasts hope that the development of unconventional fossil fuels in the EU will gain acceptance. The differential in natural gas prices in the US and the EU is typically presented as a state of affairs that will last for decades to come. Unless, of course, Europeans go on a well-drilling spree tomorrow … Shale gas supporters usually leave out the bit of the story how low American gas prices are the result of the shale gas boom in the US, which was fueled by record high and volatile gas prices between 2005 and 2008. The combination of a drilling boom before 2008 and weak demand after 2008 led to low natural gas prices. Drilling for natural gas has been declining from a high of more than 1500 rigs in 2008 to about 350 right now, as rigs have been moved to shale oil and liquid-rich shale plays. Even though prices have more than doubled from their low point in February 2012, natural gas prices of over $4.00/MMBtu still are not high enough to make drilling for shale gas profitable again. US dry gas production has hit a plateau since September 2012 and will likely start to decline. At that point and given the recent increase in demand for gas in the US power sector, US gas prices will continue their upward trend. And the fears of a permanent competitive disadvantage for EU industry will prove to be overblown.
Linking shale gas and lower energy prices in Europe overlooks the fact that shale gas drilling in Europe will be more expensive than in the US. Deutsche Bank revisited the break-even costs for shale gas in the UK and Germany and assessed them at around $ 11/MMBtu. The Center for Economic Research ZEW surveyed over 200 energy experts: More than 60% of the interviewees held the view that shale gas development will only considerably increase in Europe, once gas prices reach around $ 15-19/MMBtu (40-50 EUR/MWh), which is well above current natural gas prices in the EU. So, it is because companies anticipate higher, not lower prices in Europe that they are involved in unconventional exploration. In the current economic climate and the subsequent drop in demand for gas, we agree with MEP Reihnard Bütikofer that a shale gas boom in Europe will remain a ‘fata morgana’, something that is always on the horizon but never materialising. Gas executives jump on every opportunity to emphasize that renewables will depend on feed-in tariffs for the foreseeable future. However, the only way to improve the immediate outlook for shale gas exploration will be by providing lavish fiscal incentives (read: subsidies) for shale gas exploration. Governments whose energy policies include a ‘dash for gas’ are contemplating such initiatives. For example, Poland announced that it will not levy any tax on hydrocarbons until 2020.
But, for the sake of argument, let’s assume that shale gas development does get underway in Europe; what would be the impact on European gas prices? To develop just 20 Bcm from shale gas operations (which would account for about 2-3% of natural gas consumption by the EU in 2035) would require drilling about 500 to 800 wells per year, i.e. at least 5000 wells over the next decade. Producing 20 bcm of shale gas would require a 5 to 10-fold increase in drilling activity in Europe. Currently, there are only 140 drilling rigs in Europe, so there is a major logistical bottleneck for this industry. At a cost of just under EUR 13 million per well (figure from Joint Research Centre of the European Commission), this represents a EUR 70 billion investment over 10 years. If that amount of private capital for investments in energy efficiency and renewables were mobilized, Europe would have a genuine no-regret option, rather than relying on a high-risk strategy of shale gas.
Furthermore, any future development of shale gas in the EU must be analyzed against the backdrop of rapidly declining domestic conventional supplies of natural gas and increased demand projections. The World Energy Outlook of the IEA projects that conventional gas production in the EU will decline by more than 100 Bcm by 2035, keeping its fingers crossed that Norway can keep its production at current levels. In the same period, natural gas consumption is scheduled to increase by 82 Bcm. Developing 20 Bcm of shale gas or even twice that is only a drop in the bucket in light of this. As a famous British political stated, "If you find yourself in a hole, stop digging”. The EU should take his message literally. Accelerating investments in reducing demand for natural gas in the residential and industrial sectors will be a cheaper and more effective strategy to keep rising import dependency in check.
Industry, and the shale enthusiasts that they fund, will of course dismiss our message that the economic benefits of shale gas have been hyped beyond proportion. We feel comfort in this statement, attributed to Mahatma Gandhi: "First they ignore you, then they laugh at you, then they fight you, then you win." Right now, we are somewhere between the laughing and fighting phase. Debunking the claim that shale gas might lead to lower energy prices is just a first battle. Exposing the grave climate, environmental and health risks involved in drilling thousands of shale gas wells in a densely populated continent like Europe will be next. We’re feeling pretty confident.
Geert De Cock, Policy Officer Food & Water Europe
In close cooperation with MEP Linda McAvan and Friends of the Earth Europe, Food & Water Europe organized an event on this topic in the European Parliament (Brussels, May 14, 2013). More info is available on the website: