For the Eastern European states, the history of gas unfolded differently. After the Second World War, Eastern European states became allies of the FSU through the CMEA. The arrangement resulted in these states becoming dependent on Russian gas supplies. Beginning with the Brotherhood-Transgas pipeline, a series of extensive pipelines were built to carry gas all over Eastern Europe until 1989 when the partnership collapsed. Russian assets and interest in gas became Gazprom and the other countries in the partnership were forced to set up their respective national gas companies (IEA, 2008)
As a result of the increasing demand of gas through out Europe that surpassed production in the 1980’s, imports became necessary and gave rise to imported pipeline gas from Russia and Algeria. This was done amidst fears that Russia could use gas supplies as a means of control thereby weakening NATO (Stevens, 2010). However, because Europe had suffered from the first oil shock and were looking for an alternative to supplies from OPEC, a quota of 30% of Russian gas supply was agreed (IEA, 2008). Since then, the European Commission(EC) has issued a series of directives aimed at creating a more competitive and liberalised gas market, like what exists in the UK (Rogers, 2012).
Finally, improvements in LNG technology in the early 1990’s made LNG more competitive in Europe despite the fact that such deliveries had earlier been made in the UK and France. LNG regasification terminals have been built across Europe including France, Belgium, UK, and Turkey (Stern, 2009). LNG was seen as a solution to the problem of the ‘tyranny of distance’ that had bedevilled the gas market, and was expected to transform the market. However, the sudden boom in shale gas production in the U.S. since 2005 has changed the outlook (Stevens, 2010).
3.0 Unconventional Gases
3.1 The technical background
The term unconventional gas refers to gas produced from sources other than from traditional gas fields or as associated gas. Unconconventional gas ‘is used to describe tight gas, shale gas or coal bed methane and occurs in relatively impermeable rock formations such as tight sands and shale or coal beds’ (Boudiaf &Yegorov 2012, p 2). However, the recent media attention and interest has been on tight and shale gas. This is attributable to their profitability and future prospects (Stevens, 2010). Whereas tight gas is found in low-permeability rock formations needing horizontal drilling and hydraulic fracturing in order to ensure commercial production, shale gas refers to deposits trapped in shale rocks. In addition to being the source of the gas, the shale rocks also act as a means of storing the gas and often overlie conventional oil and gas reservoirs (IEA, 2009). Shale and tight gas have a wider scope relative to conventional gas fields (Stevens, 2010). For instance, according to the IEA 2009, shale gas deposits in place were estimated at 0.2 to 3.2 billion cubic metres (bcm) per km² of territory, as against 2–5 bcm per km² for conventional gas. Due to this, more wells have to be drilled in order to exploit the shale and tight gas. Furthermore, the wells have a faster depletion rate, characterized by an early peak followed by a rapid decline. Evidence from the Barnett Shale Play in 2010 showed wells depleting by 39%, 50% and 95% in years one and two, between years one and three and between years one and ten respectively. Thus the expected life of shale well is between 8 and 12 years as against 30-40 years for a conventional gas well (Stevens, 2010). Conventional gas wells also have a higher recovery rate of around 60-80% compared with shale wells of around 8-30% (Vysotsky, 2010). Therefore, a much better understanding of the geologic formation is required and a greater number of extraction points are needed (Boudiaf & Yegorov, 2012). One source claims that on the Barnett Play in north Texas the average wellhead density is 12 per km² (Komduur, 2010). In order to extract the shale gas, hydraulic fracturing is required. This technique uses chemicals and sand to maintain the increased porosity after the rock structure has been fragmented (Stevens, 2010). This extensive use of special techniques made the extraction of shale gas uneconomical for many years, despite the fact that geologists had long known about its existence (Korn, 2010). ‘However, shale gas really began to take off following the application of new technologies, notably horizontal drilling and hydraulic fracturing, in the Barnett Shale Play this century’ (Stevens 2010, p.11). However environmental concerns over possible contamination of local water sources remain a challenge. This is because hydraulic fracturing involves the injection of a great deal of fluid resulting in saline water being forced to the surface (Stevens, 2010).
3.2 Developments in the United States
Much of the developments and advancement in shale gas production in the last decade, has unfolded in the United States of America, following over 100 years of production in the Appalachian and Illinois Basins (Stevens, 2010). The shale gas revolution took the US natural gas market by surprise, as it was not anticipated. What had been anticipated was a greater demand for LNG imports and led to an investment of about $100 billion in LNG import terminals and now this investment is to a high extent obsolete (Boudiaf &Yegorov, 2012). In April 2009, the US Department of Energy estimated the Marcellus Shale Play to have 262 tcf of recoverable reserves and the Energy Information Administration suggests that technologically recoverable gas reserves are 1744 tcf. According to one estimate from CERA, shale provided 20% of US gas supply in 2009, compared with only 1% in 2000, and this is expected to rise to 50% by 2035 (quoted in Kefferputz, 2010). Now the USA has total reserves for about 100 years and is not likely to remain a gas importer. In addition, the favourable geological and legal conditions allowed it to bring down the local price for natural gas down to $2 per mBtu, well below European and Asian prices (Boudiaf &Yegorov, 2012).
According to Stevens 2010, the drive to develop the resource derives from a combination of factors including:
Enhanced geological knowledge arising out of years of exploration because many unconventional reservoirs overlie conventional ones. Thus, engineers have a head start as to where to drill based on earlier well cores that passed through the shale plays,
The introduction of the Crude Oil Windfall Profit Tax Act, in 1980 that provided a tax credit of $3 per BTU oil barrel-53 cents per thousand cubic feet (tcf),
Technological advancement in hydraulic fracturing and horizontal drilling.
Favourable legislation that enabled hydraulic fracturing to be undertaken legally,
Private ownership of subsoil hydrocarbons due to property rights in the US. Because individual owned the land, it was easier to acquire leases and the financial benefits to be derived made residents indifferent to the disruptions that accompanied shale production.
The existence of a vibrant service industry with the ability to meet the demands of operators.
The aforementioned factors have worked together to produce the success story of shale gas in the US. The questions that arise are whether the shale revolution will continue and whether it could be replicated in other parts of the world (Stevens, 2010).
Figure 6: Source of domestic US gas supplies
Source: US Energy Information Administration, http://www.eia.gov/
3.3 Replicability in Europe
The US shale gas revolution has given rise a debate over whether it could be replicated in other parts of the world. As can be seen from Figure 7, global estimates of shale reservoirs outside the US are significant. Such that, if it could be developed, then is has a great potential of becoming a ‘game changer’ in world energy. Going by geology, the prime targets in Europe are Poland, Germany, Hungary, Romania, Turkey and the northwest of England (Stevens 2010). There are many reasons why the European gas market is well suited to the development of unconventional gas (Gény, 2010). To begin with, it is the second largest regional gas market in the world, with demand of 16.7 Tcf in 2011 (BP ,2012) . Secondly, interest in shale gas development in Europe is on the ascendency due to the need to stem growing dependence on imported gas and to improve energy security which is a major concern in Europe. Thirdly, the existence of an established infrastructure of pipelines as well as processing units is another source of attraction for European gas markets. Also, apart from the UK, natural gas prices in Europe tend to be linked to oil products and are relatively higher (Gény, 2010). Finally according to Rogner 1997, Europe has large possessions of unconventional gas estimated at 1,255 Tcf comprising 549 Tcf, 431 Tcf, and 275 Tcf, of shale, tight and coal deposits respectively. Due to the above reasons, exploration licenses have been given in a number of countries including Poland, Germany, Denmark, Austria, France, the Netherlands, Spain, Ukraine, Romania and the UK (Atkins, 2011). The European Commission’s 2050 Energy Roadmap, expects shale gas to reduce the EU’s dependence on gas imports.
However, despite these positive macro features, the ability of producers to extract unconventional gas in Europe is constrained by many factors (Gény, 2010). These constrains are similar to the six conditions that the IEA put forward in 2009 that must exist in order for Europe to replicate the American experience. These conditions include:
Figure 7: Estimates of global gas resources
Favourable geology Easy identification of the location and potential of the best plays
A major question that has to be answered is whether Europe’s geology holds as much prospects of shale gas as the United States. The development of unconventional gas in Europe is at its early stages and therefore very little is known about the quality, potential, and location of best plays of unconventional gas resources (Genk, 2010). It is generally held that the deposits are deeper with lower basins in terms of materiality. Also because the plays are fragmented and the shale is richer in clay, fracking will be difficult to achieve (Stevens, 2010). Therefore, compared to the United States, the geology is less favourable (Boudiaf &Yegorov, 2012). Furthermore, onshore drilling has been limited in Western Europe depriving it of the needed history of drill core evidence which is available in the USA (Stevens, 2010).
Rapid leasing at low cost of large areas for exploration and development
Unlike the U.S., Europe is largely densely populated and has a higher public and political antagonism concerning environmental risks associated with hydraulic fracturing (Boudiaf &Yegorov, 2012). In 2010, England for example had a population density of 383 per km²; compared with just 27 in the United States. Usually, onshore exploration licenses are granted over relatively small areas with specific work plans. Therefore, in order for the shale explorations to be economically viable, a lot more licenses have to be granted. This will mean that a lot more people will be living close to exploration sites and this could generate a lot of local opposition (Howell, 2012). There is also a need for an amendment of existing laws to cover this emerging activity (Stevens, 2010).
Experimentation and adaptation of drilling and completion technologies
The existence of a vibrant service industry in the U.S. is a major contributory factor to its success. However, the same cannot be said of the service industry in Europe. According to an estimate by the IEA in 2009, 800 wells will have to be drilled per year in order to produce one tcf of shale gas over 10 years. Nearly 200 rigs were at work at the Barnett Shale Play when production peaked in 2008(Star Telegram, 2010). However, only about 100 land rigs were at play in Western Europe as of 2010, compared the over 2500 that were active in the US in 2008. Also because much of the technology of hydraulic fracturing and horizontal drilling is under American control, there is the likelihood of friction if local employment and value chain are dominated by American technology (Stevens, 2010).
Acceptance by local communities
Unlike the U.S. where land is owned by private individuals, the resources in Western Europe are owned by the state. Because the benefits from shale development will go to the state rather than to individuals, this is likely to lead to local opposition. This is especially so, considering the concern over environmental destruction (Stevens, 2010). The UK, Bulgaria, France and Germany have already witnessed protests (Howell, 2012).
Resolution of the environmental consequences
Whether shale gas production is Europe will receive the blessings of regulatory authorities and the acceptance of local communities, will depend to a large extent, on how the environmental concerns will be resolved. The major points of interest are the likelihood that hydraulic fracturing could result in water contamination and also release naturally occurring radioactivity (Stevens, 2010). A minor earthquake in Blackpool in May 2011 was said to be as a result of shale gas activity in the area by Caudrila Resources. ‘On 30 June 2011, France became the first country in Europe to enact a ban on hydraulic fracturing. The French Senate voted by 176 votes to 151 to impose a permanent ban on the use of fracking in shale gas and oil projects due to concerns about the impact of the process on the environment’ (Ernst and Young, 2011, P15)
Adequate local infrastructure to transport and manage equipment and water
The infrastructure in Europe is also far behind that of the USA. Pipeline networks are not as liberal, due to the influence of the handful of players in the gas market, an issue the European Commission has been trying to address (Stevens, 2010). There are also doubts as to whether Europe can manage the large volumes of water associated with fracturing, about 4-5 million gallons per well (IEA, 2009).
Owing to the above reasons, shale gas development costs in Europe are higher than in the U.S. (Howell, 2012). While production cost is estimated to be between 3 $/mmbtu and 7 $/mmbtu in the US, those in Europe are estimated at between 5 $/mmbtu and 10 $/mmbtu (IEA, 2012). We also have to wait for some time to see how these factors play out before a more precise prediction can be made as to whether the U.S. story can be replicated Europe ( Stevens, 2010) . These constraints notwithstanding, expectations that the U.S. experience will be repeated in Europe remain high. "The motivation for developing shale gas differs across European countries, depending on the country’s overall energy plan, its degree of import dependence and the attitude towards environmental concerns" (Boudiaf &Yegorov, 2012,p5). A case in point is Poland which is pursuing an ambitious plan to develop its shale resources in order to reduce its dependence on Russian imports. Even though the country has seen a lot of activity in recent years in this respect, early test drilling results have not been encouraging (Ernest & Young, 2011). What is generally accepted though, is that shale gas will have a significant impact on Europe’s future energy mix, but at a slower pace. Most European Governments are expected to tread cautiously while they await further research into the environmental consequences of hydraulic fracturing. While expecting shale gas to make a major impact on European gas production in less than 10 years from now may be too optimistic, the higher gas prices existing in Europe relative to U.S. prices, is serving as an incentive to shale gas developers (Howell, 2012)
4.0 Implications of the Shale Gas Revolution for E.U Gas Market
Even though the shale gas revolution in Europe is not expected to follow the U.S. experience, the revolution in the U.S. has already had some impact on the E.U. gas market. The major impacts are in terms of capacity utilization, gas prices, and uncertainty of future investment.
4.1 Capacity utilization
The shale gas revolution has already had a serious impact on LNG capacity utilization in the U.S. Analyst had earlier in 2007 predicted an increase in LNG demand due to the prevailing market conditions at the time. This led to huge investments in LNG gasification and regasifications facilities in manay parts of the world (Stevens, 2010). LNG capacity export capacity was expected to grow from 200 mty in 2008 to 300mty in 2013 (Tsafos, 2010). The increase in LNG export capacity was to be of a long term nature with some forecasting a capacity of 450mty by 2020 (Jensen, 2009). Between 2005 and 2010, for example, 24 new LNG trains were commissioned which increased the total number of LNG trains worldwide to 94 at the end of the period (Ernst and Young, 2011). The U.S. market was the target destination for a greater portion of this LNG where gas imports were expected to rise. However, with the increase in domestic supply due to the shale gas revolution, the prospects for LNG supply into the U.S. is no longer as promising (Stevens, 2010). This is evidenced by the decline in LNG imports as shown in Figure 8. As a result, a number of LNG import terminals in the U.S have become redundant, with some operators attempting to transform their facilities into export terminals (Enrnst and Young, 2011). Even though the global economic recession is partly to blame for the decrease in LNG imports, it is an undeniable fact that the shale gas boom has had an equally significant impact on the U.S. gas market (Stevens, 2010). As a result of declining U.S. imports, LNG cargoes which were hitherto destined for the U.S. have been compelled to look for market elsewhere, with some arriving in (Europe Ernst and Young, 2011). The oversupply of LNG is good news for Europe because it strengthens the role of LNG in its energy mix bolstering security of supply, a major Europe concern.
In 2010, countries in Europe imported a combined 60
million tons of LNG. New LNG import capacity is being
added in Europe at sites in Italy, Spain, Portugal and
Poland. The Swinoujscie terminal in northwest Poland
is projected to become operational in 2014(Ernst and Young)
Figure 8: US imports of LNG
Source: US Energy Information Administration, http://www.eia.gov/.
The oversupply of LNG has led to significant drop in gas prices over the last five years shown in Figure 9. A downward trend has been observed at Henry Hub since 2005, with gas prices falling from over 8 $/mmbtu in 2005 to below 3 $/mmbtu in 2011 (Boudiaf &Yegorov, 2012). In Europe the impact of the fall in prices were not immediately felt due to the traditional link between gas prices and oil prices. However, spot prices for LNG have seen significant reduction in prices because of the supply surplus (Stevens, 2010). This has brought to the fore the question of whether oil linked gas prices are likely to fall apart in favour of spot pricing (Stern,2009). Gazprom which is the major supplier of gas to Europe has come under immense pressure, with customers seeking to include spot prices in the calculations its pipeline supplies (Boudiaf &Yegorov, 2012). The lower spot prices have been enhanced further by lower charter rates for LNG tankers (Steven, 2010). In 2009, Russian prices at the German border fell by 30% relative to the previous year. Dutch prices at the TTF Hub also saw a 55% reduction in during the same period (Jensen, 2009) Heren NBP prices
If the shale gas revolution continues, the U.S. is expected to become a net exporter of LNG (Ginter, 2012). This will make more gas available to European markets and cause further reduction of spot prices. Gas producers are attempting to intervene through the proposed Organisation of Gas Exporting Countries (OGEC) (Stern, 2009). However, OGEC is not likely to succeed because the two main countries behind it namely, Venezuela and Iran, are not in good standing internationally, making it difficult for other countries to associate with them (Steven, 2010).
4.3 Investments and future uncertainties
The main concern here is the extent to which future investments in the gas sector have been and or will continue to be hampered by the shale gas revolution. Investors in LNG regasification facilities in the US have already been badly affected. Other projects undertaken in other parts of the world with gas intended for the U.S. market are now in limbo because the anticipated demand is being met locally. For example Qatar’s RasGas III and RasGas IV trains with a capacity of 23 mty were built with the U.S. in mind but now have to access alternative markets in Europe and Asia. In Europe, some governments are waiting for a while to see how things will unfold and are therefore proceeding cautiously (Howell, 2012). Some key projects have also announced delays in commencement. These include the development of the Shtokman field in the Barents Sea, which was to be jointly undertaken by Gazprom, Total and Statoil (Stevens, 2010). Similarly, the Nabucco pipeline project designed to bring gas into Europe from the Caspian region and the Middle East has postponed its start date to 2017 (Ernst and Young, 2011). This trend is likely to continue (Stevens, 2010). However even though shale gas development has been largely successful in the U.S., there is no guarantee that this trend will continue. Firstly, shale wells tend to have a faster depletion rate compared to conventional gas wells. Further advancement in the technology is therefore needed to arrest the situation. Secondly, environmental impact assessments are awaited both in the U.S. and in Europe. If they turn out to conclude that hydraulic fracturing has negative consequences for the environment, this could spell doom for the shale industry. This has resulted in a lot of uncertainty in the gas market (Stevens, 2010). Finally, there is also uncertainty as to whether the U.S experience of shale gas development will be repeated in other parts of the world. As has been discussed above, is not likely to be replicated in Europe in the near term. Australia, Algeria, Libya and China also in a good position to develop their shale reserves (Boudiaf &Yegorov, 2012) . The major obstacle for China which has the largest reserves in the world according to the IEA 2012 might be access to the technology which is currently in American hands (Financial Times, 2012).