For a Europe that hasn’t embraced shale gas, other options are multiplying

European shale gas: who needs it?

Europe, it is true, has made no real progress with shale gas so far. But its security of gas supply has seldom looked healthier following a series of major discoveries. The timing of that is perfect as the continent moves toward liberalized markets.

This is extremely good luck for consumers and the European Commission, which is railroading through the gas and power market opening rules.

Fears of a gas shortage would only hinder attempts at opening up markets. They would play into the hands of any remaining unreconstructed incumbents who could continue to impose premium prices for an allegedly premium fuel.

In the mid-1990s, the UK introduced radical competition in gas supply–enabling next-door neighbors to have different retailers–at a time when production in the North Sea was ramping up. Competition among producers ended the tyranny of oil indexation to set prices, and brought levels down toward the marginal source of supply.

Had this been done at a time of shortage, prices–freed from the stabilizing effect of oil indexation–could only have gone up. The national energy regulator at the time said as much: the oversupply provided the tailwind that competition needed to become airborne in the UK.

Almost two decades later, the rest of Europe is catching up with the UK. Oil indexation may persist in most term contracts, but large sums of money pass from sellers to buyers to bring the two back into rough equilibrium, as oil prices outstrip demand for gas.

This reduces the price of gas for consumers, but growing supply could do a lot more than that. Gas is being found in the most unexpected of places, and producers in the region welcome the opportunity to sell their output in one of the world’s more affluent and transparent market places.

This boom in supply comes, ironically, from the shale gas opponents. A number of countries have imposed moratoria if not outright bans on shale gas, until the science is better understood and the risks of hydraulic fracturing eliminated. Even France, so heavily reliant on nuclear, has stuck to its gas on this issue.

It is naïve to expect a source of energy to be cheap, fully dependable and entirely risk-free. However, one should be surprised if the renewables industry exaggerates the environmental threats of shale gas production, since the disparity between the price of wholesale US gas and offshore wind is simply too eye-watering for consumers to contemplate.

Nor do the rumors that Russian gas giant Gazprom has been offering discounts on gas in exchange for moratoria–to prevent the US phenomenon becoming a global affair–ring entirely hollow.

Conventional gas, however, is abundant. New provinces are opening up all the time, not even counting the vast reserves under Iran.

Southeast Europe, often the victim of arguments between Russia and Ukraine, is sitting on large reserves. Two fields in Romania and Bulgaria–Neptun and Khan Asparukh– between them are holding perhaps 300 billion cubic meters, or over half the continent’s annual gas demand.

The Mediterranean is home to much more than that off the coast of Israel. The Caspian Sea, focusing on solely the Azeri section, again has more than that, waiting for a decision on the route before flowing into Turkey and westward. Both these new provinces have attracted the majors, always looking at ways to increase their reserves and expand their portfolios.

In Iraq and in Iraqi Kurdistan too, material reserves are all in the wings, with prospective producers focusing on Turkey and the west. And at some point, the Turkmen resources could also flow into Europe.

Norway is about to have a record year of gas production, despite its outages and strikes. Russia, of course, has the gas and is building pipelines to bring more as well. By 2016, its Bovanenkovo field will be at plateau, adding more than 100 Bcm/year that will more than replace declines elsewhere in the country.

And this is without even mentioning US exports; the reserves in east Africa; the shelved Shtokman field; and the Australian LNG projects that are all expected to keep Asia and Europe in particular comfortable for many decades to come.

The arguments against an EU shale boom are persuasive. It’s not so much the environmental issues, so much as the technological, geological, logistical and land-ownership problems. Thanks to entrepreneurial technocrats, many of the threats that some critics have raised as foreboding will no doubt anyway have been much reduced by the time that its need becomes urgent. Dry fracking, now being developed in the US, is just one example.

The price of gas is falling as regulations limit the ability of incumbents to hoard transport capacity and to withhold the gas from the spot market. Shale gas will, of course, be welcome, and its day will probably eventually come in Europe. But the market can manage well enough without it for the time being.

 

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