Turn to the Euro

Europe’s shale gas reserves won’t create an American-style boom, and aren’t enough to make any kind of global dent over the long-term, yet many are calling for the development of Europe’s shale gas plays to prevent the trickle of plant closures from becoming a steady stream that spawns a rising tide of unemployment.

Low natural gas prices as a result of the United States’ boom surplus are already creating a trade disadvantage for companies in Europe, struggling to compete against the cheap imports of U.S. firms that are increasing production. European firms are taking a double hit: paying higher natural gas prices than U.S. competitors while at the mercy of a volatile supply largely controlled by fickle Russia.

According to the International Energy Agency (IEA), European countries in the Organization for Economic Cooperation and Development endured electricity prices that rose an average of 38 percent between 2005 and 2012; during the same period, electricity prices in the United States fell by 4 percent because of the shale gas boom.

Europe’s economy reflects the imbalance, as well, with unemployment in the 17-nation Eurozone at 12.1 percent in April, as compared to a declining unemployment rate at a four-year low of 7.5 percent in the United States.

Potential for Refining

For all the talk in Europe about renewables, the IEA still sees EU gas import dependency growing from 60 percent to 80 percent in the next couple of decades. Shale gas, if proven viable in Europe, has the potential to rein in that growth and stabilize it. The next time Russia cuts off gas supply via Ukraine in the dead of winter in a fit of pique would be a good time to remind Europeans of that potential.

Fortunately, Europe does have some shale gas reserves it may be able to tap to help level the playing field and there are substantial benefits to be gained for Europe from successfully developing its unconventional oil and gas resources. Unfortunately, Europe is steps behind the United States in accessing those reserves and faces a tangle of differing national interests as well as the same environmental concerns oil and gas developers have contended with across the pond.

Interestingly, the two nations with the highest concentrations of recoverable shale resources in Europe also reflect the clash between environmental and economic interests. Poland, which is estimated to contain 29 percent of European shale gas reserves, is embracing unconventional hydraulic fracturing and horizontal drilling techniques, while France, which owns 28 percent of Europe’s shale gas reserves, has placed a permanent ban on any extraction process that involves fracking.

The rest of Europe falls somewhere between the two extremes of Poland and France, taking a “wait and see” approach as the government observes and evaluates shale gas development activities in Poland as well as ongoing environmental studies in the United States.

Not Directly Transferable

While Europe is keeping an eye on new developments and approaches in America, differing geologies make it difficult to do a direct knowledge transfer. The United States also benefitted from decades of conventional drilling, which gave developers the head start of already having extensive data from productive wells and prior surveys. Though the number of active rigs in Europe is on the rise, it still represents a fraction of the number dotting the U.S. landscape.

The U.S. Department of State has set up a Global Shale Gas Initiative (GSGI) to help other countries in their efforts toward greater energy security by sharing insights from the experience of U.S. operations and environmental best practices. Poland was the first European country to sign on with the GSGI, receiving support and benefitting from educational trips to the United States where Polish officials and geologists learn from American operations. 

It isn’t likely that Europe will replicate the U.S. shale experience because of differences in geology, infrastructure, institutional knowledge, corporate cultures and local governments’ acceptance of onshore oil and gas development in general.

Developers also face local populations that are far less incentivized than U.S. landowners, who own the mineral rights to their lands and benefit directly from shale gas development efforts. Mineral rights in Europe are vested in the state, for the most part, leaving developers to pay not only a royalty to the state, but to also rent or buy the land from the landowners. Europe’s population density poses another obstacle for drilling operations in some regions.

Given Europe’s low start, it’s difficult to envision a scenario in which significant commercial volumes of shale gas will be achieved before the end of this decade. (Remember, even the U.S. boom didn’t really manifest itself until the mid-to-late 2000s, and that was after the granddaddy play, the Barnett Shale, took off in 2003 after 20 years of trying to crack the code there.) 

But political pressure is likely to increase as the European economic crisis drags on and the potentially transformational shale gas market proves a lure too tempting to ignore.

Chris Faulkner  is the founder and CEO of Dallas-based Breitling Energy Companies, the holding company of Breitling Oil and Gas and Breitling Royalties. 

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