Opportunity (Almost) Lost
The shale revolution has driven down US energy bills, freed up household income and made North American businesses more competitive. Has dithering Europe already missed the boat?
You'd have to have been hiding in a cave with a candle not to have heard something about The Shale Revolution these past 12 months. One headline calls it the future of affordable energy. Another says fracking is the embodiment of environmental evil. Battalions of activists, lobbyists and journalists have mobilised for and against.
That's because shale gas is turning out be as disruptive as the internet, but with potentially game-changing benefits for European governments, businesses, society at large and anyone with a household utility bill to pay. Look at what's happened in North America in just three short years: natural gas prices have plummeted, coal has been pushed aside as an electricity source, a rejuvenated manufacturing sector is humming along on the back of low energy costs, and now abundant natural gas looks to make the continent a net exporter of fuel in the next 5-6 years.
If that happens, Europe could find itself awash in cheap LNG imports - dampening enthusiasm for investments in any homegrown shale production industry. But we won't have to wait that long to see the risks in letting America extend its lead. With so much gas available, coal has been discarded for power generation and European utility companies have been eagerly buying it up - even building new coal plants to take advantage of the low price. Perversely given the EU's environmental commitments, the result has been an uptick in our carbon emissions and shrinking emissions in the US.
On almost every level Europe is missing the boat on shale. The question is, can we ever catch up?
What we're missing
With the invention of reliable hydraulic fracturing technologies in the 1990s, unconventional gas and light, tight oil has utterly transformed America's energy outlook. By 2010, shale production in the US had soared to ten billion cubic feet per day with the potential to quadruple by 2040. Low estimates of the amount of shale gas technically recoverable in Europe suggest at least 2.3 trillion cubic metres (tcm) compared with 13 tcm in the US. A smaller opportunity, but the potential impact on European jobs and manufacturing is more than tantalising:
· Looking at the US experience for guidance, shale has brought a drastic reduction in gas prices and a corresponding reduction in electricity and production costs in manufacturing , making the sector more competitive
· Estimates from the International Association of Oil & Gas Producers suggest a domestic shale production industry could generate upwards of one million jobs in Europe, many of them in areas hard hit by the recession and Eurozone woes
· With our current reliance on Russian gas, Europeans will also take note of shale's geopolitical dimension. The US is reducing its imports of Middle East oil, making political relationships there less driven by energy dependency
Shale gas could also deliver a social dividend by helping mitigate the worst effects of fuel poverty - an issue of such magnitude that the Church of England felt it necessary to intervene in the shale debate recently, warning opponents against taking a narrow view and advancing the possibility that Shale production could minimise fuel poverty.
The environmental arguments in favour of shale should be self-evident. Shifting to a higher proportion of gas use in energy production will help curb our carbon dioxide emissions. Limiting gas production or consumption, on the other hand, pushes us inevitably back to coal.
With the amount of coal-generated electricity rising in some European countries at an annualised rate of 50 percent, we are already seeing a `new golden age of coal'. The result? Despite decades of political and industrial effort to move the renewables agenda forward, the International Energy Agency (IEA) reckons coal will account for 25-30 percent of the global energy mix in 25 years' time - exactly what it was 25 years ago.
What's holding us back
There are a number of factors holding back domestic shale production here. Some are political, some are related to the structure and operational realities of the European energy industry, and some are down to simple geology. Politics and green activism, however, may be the biggest hurdles to overcome if any of shale's North American benefits are going to be replicated here.
Environmental worries around fracking have so dominated European debate that very little discussion about economic prospects has been able to surface. Public outcry in the Netherlands and Germany has made those governments hesitant to exploit their potential reserves, and France has banned fracking altogether. The overall response to shale from European industry, meanwhile, has been muted or at best ambiguous. We are only now seeing signs that it is waking up.
Has the penny finally dropped?
The UK government has just, belatedly, launched a licensing regime for shale exploration alongside tax incentives for local councils to speed up approvals. Total is the first major to jump behind that opportunity and there have been other positive signs, notably Chevron's deal with Ukraine in November. A good start - but more needs to be done.
Shale gas has the potential to reduce European energy prices, boost employment, create investment opportunities and move us off the current path to more and more coal consumption. If we don't act quickly, arguably with the EU in the lead, the prospect of cheap US fuel exports threatens to smother the development of any nascent European shale industry.
As an energy sector stakeholder I have a four-point proposal
1. Unleash shale gas exploration - now. The rest of Western Europe needs to follow the UK's lead in directly supporting shale exploration to quantify the scale of opportunity in each country
2. Reassure European voters that shale gas points us in a greener direction, even if it isn't a perfect solution in and of itself. An industry consensus on codes of conduct for exploration such as those outlined in the IEA's `Golden Rules for a Golden Age of Gas' would go a long way to seeding public confidence
3. Counter junk science. The environmental concerns about fracking have been overblown and the industry must make a concerted communications effort to debunk myths where they occur with hard facts and evidence
4. To energy companies, utility companies, energy-intensive businesses and derivatives traders, the next 5 years will be a chaotic time in the market so understanding and managing the risks of shale investments in your portfolios needs to be a top priority
Whether or not European shale gas production could ever replicate what's happened in North America is simply unknown. Exploration needs to happen now if we're going to find out.