Europe could miss out on shale gas revolution
EUROPEAN industries and some European governments have recently begun to recognise that the unconventional gas revolution is no longer confined to North America, but is spreading globally.
The rapidly expanding production of shale gas has transformed the United States from being the world’s largest import market of liquefied natural gas (LNG) to a self-sustaining gas producer and a net gas exporter.
In 2009 the US overtook Russia as the world’s largest gas producer. In 2010 it overtook Qatari gas production as the world’s largest LNG exporter by about 60 per cent.
The sudden gas glut since 2009, from an overcapacity of LNG, stems from a combination of three factors: a drop in demand linked to the global economic recession; an unexpected dramatic increase in American shale gas production; and new global LNG delivery capacity.
LNG is now less expensive in Europe than pipeline gas for long-term contracts.
The development of unconventional gas in the US since 2006 has not only triggered a revolution in US energy markets, it has also become the tipping point for fundamental change in global gas markets.
It has laid the groundwork for an expanded role of natural gas in the world economy.
The International Energy Agency (IEA) has said that the world is set to experience a ‘Golden Age of Gas’ in which unconventional gas has already become a ‘game changer’.
Some countries in Europe - including Poland, the United Kingdom, Lithuania and Ukraine - and China and Australia, have shown interest in exploiting their own unconventional gas resources.
But potential environmental risks have swayed other countries into adopting moratoria or outright bans on the production of shale gas, and particularly on fracking, the process of hydraulic fracturing to get gas out of the ground.
The IEA predicts that nearly half the increase in global gas production up to 2035 will come from unconventional gas, if the industry receives a ‘social licence to operate’ within stringent regulatory regimes to satisfy public environmental and social concerns.
The US is debating whether to export shale gas to Europe and Asia from 2015.
But there are some new strategic developments on the European gas market which could also affect energy security.
One is the predicted stagnation of gas demand up to 2020, rather than a significant rise previously forecast.
Other factors include: the expansion of new LNG terminals in Poland, the Baltic States, Croatia and other countries; new gas interconnectors with reverse flow capacities in central and southeastern Europe; and the impact of the liberalisation and unbundling (the separation of prices for goods and services) processes within the EU-27.
The decline in US domestic coal consumption as a result of the coal-to-gas switch also opens the prospect of it becoming a leading coal exporter, reaching 500 mt (million tonnes) per year by 2030, to Europe, Asia and other regions.
The rising volume of relatively cheap coal imports from the US to Europe in 2012 has reduced Europe’s consumption of gas. It has also led to higher greenhouse gas emissions and put Europe at odds with EU climate and energy policies.
But the energy revolution is also having a big impact on the overall economic competitiveness of the US economy and industries towards rivals in Asia and Europe.
Development of unconventional gas reserves in the US has increased foreign direct investment (FDI), created hundreds of thousands of new jobs, dramatically reduced energy prices for industry and helped to strengthen energy diversification.
Europe’s energy-intensive industries, such as the chemical industry, have become increasingly concerned that the gas glut in the US has reduced natural gas prices there by more than two-thirds since 2008.
In Europe, gas prices have remained relatively expensive because of the linkage to oil prices and long-term contracts with Russia which have ‘pay-or-take’ clauses. The importer has to pay the supplier a certain price, even for products they do not take, for this type of contract clause.
Cheap US gas prices have already led to a revival of US energy-intensive industries and manufacturing. A recent US Department of Energy report said that LNG exports would generate up to US$47 billion in new economic activity by 2020 with little impact on domestic natural gas prices.
Cheap gas reserves also call into question the renewable energy policies of the EU.