April 15, 2016 By FTI Consulting
Europe still needs pragmatic solutions to its critical energy challenges.
Europe’s Energy Union Strategy shapes the EU’s approach to climate and energy policy. Its intentions are clear: to provide a framework to address an increasingly turbulent and rapidly evolving geopolitical landscape at a time when our own indigenous resources are declining. In short, seeking to ensure we have a reliable, affordable and sustainable supply of energy at a time when we are becoming ever more reliant on foreign imports.
It may no longer be dominating media headlines and radio talk shows but shale gas continues to be a part of this equation. In the UK, Spain, Poland and Germany shale gas continues to be at the forefront of national policy discussions looking at how it could potentially be a part of each nation’s respective energy mix.
Why? Because we need it. Europe’s energy debate is still dominated by contradictory arguments seeking to balance need with price, security, competitiveness and a greener carbon free future. To get there we need pragmatic solutions built on consensus. Not blinkered dogma or unrealistic demands that fail to address the impact on industry, consumers and our own need for secure energy.
This is a more complicated process than perhaps one might think. While the energy mix remains a national competence, our shared future requires all 28 Member States to agree on some common objectives. In principle this was achieved back in 2014 when national governments asked the European Commission to place energy security and the decarbonisation of Europe’s economy as its top priority, positioning the EU as the world’s leading advocate in renewables.
Consequently this resulted in the Commission’s Energy Union Framework, which was published and adopted in early 2015. It has five key pillars: (I) energy security, (II) EU energy market, (III) energy efficiency, (IV) EU’s economy decarbonisation and (V) enhancing research & innovations. Within these discussions the public debate over shale gas continued. Do we need it and do we want it? The Framework subsequently concluded that non-conventional fossil resources – such as shale gas – remains one option to help address Europe’s needs. As a domestically produced energy source it can help drive Europe’s energy security. What is driving policymakers are some critical energy challenges that Europe faces. Despite being the world’s largest single economic market, it is becoming ever more dependent on imported energy. In 1995, 43% of its energy came from abroad. This had increased to 53% in 2014. The cost to the economy? €400 billion and rising. Wholesale electricity prices are also around 1.7 times higher than in the United States, leaving Europe at a competitive disadvantage. At the same time, China is becoming more influential in the world’s energy markets, challenging Europe’s economic position. All this is happening at a time when the European economy is still recovering from the financial crisis which started almost a decade ago.
Despite its great ambitions, the EU’s annual energy demand is anchored in fossil fuels, responsible for 73% of total consumption. Even with the adoption of the Paris Agreement at the United Nation’s COP21 conference in December 2015, and the global determination to mitigate greenhouse gases emissions from 2020 onwards, we can’t just switch this off over night. Europe needs a pragmatic and holistic solution.
Europe’s energy mix is an important part of this equation. As the definition indicates it involves a combination of sources to provide a comprehensive and forward-looking approach. Europe could hold 14 trillions of technically recoverable cubic metres of shale gas across several Member States. This is the equivalent of 30 years of domestic gas supply for the whole of Europe based on current demand. Europe will continue to rely on fossil fuels for a significant share of its energy supply for the foreseeable future. In line with the EU 2030 Climate & Energy framework, renewables will comprise only 27% of Europe’s energy mix by 2030. Therefore, lower carbon fossil fuels can work alongside renewables and reduce EU’s CO2 emissions.
More broadly, Europe will be increasingly dependent on its second most important fuel – natural gas. Between 2010 and 2030, the EU is expected to increase its gas demand from 595 to 618 bcm, an annual uplift of 0.19%. Why is this good for the region’s carbon emissions objectives? Because it can act as an important bridging fuel, replacing and reducing reliance on more carbon intensive fossil fuels, such as coal which still constitutes 17% of Europe’s energy mix. Shale gas, as one of the least carbon intensive fossil fuels, could be part of a broader, complementary solution and facilitate the transition to a carbon free economy.
An example of the sustainability benefits can be seen in the United States, where the increased production of conventional and unconventional gas (e.g. shale gas) using hydraulic fracturing technology, has led to the lowest CO2 emission levels since 1994. This fact has been publicly acknowledged by the most prominent climate scientists, the U.N. Intergovernmental Panel on Climate Change (IPCC).
So, Europe has a clear need, a policy framework, a potentially huge indigenous resource and exploration that was underway across the region. So what has happened? It only seems yesterday that sites were being identified up and down the land, fracking was dominating media headlines and public opinion was so divided.
The answer is the world’s volatile oil price which has fallen to a 12- year low. It will recover – that is for sure – but the period of $100+ a barrel is unlikely to return for the foreseeable future. The impact meanwhile on many of the main oil producing countries such as Russia and Brazil, has been significant and many of the large energy multinationals have been hit hard, reducing investment in new opportunities such as shale gas.
But elsewhere, progress continues. Outside of the US, other countries such as Australia, Canada, China and Argentina are heavily investing into shale gas upstream projects. More recently even Saudi Arabia, the world’s largest petroleum exporter, has announced plans to become a shale gas producer by 2020.
Back in Europe, the EU is in the process of finalising its shale gas Recommendation review to assess the effectiveness of the minimum principles for shale gas exploration set out in January 2014. The outcome will complement existing EU legislation, in creating a framework for the oil & gas industry.
At Member State level, exploratory drilling has already taken place in Romania, Lithuania, Denmark and Hungary. Spain and the Netherlands are reviewing the opportunity. The objective? To identify the commercial sweet spots and potentially kick-start production.
Poland, the original frontrunner, has encountered more challenges than originally ascertained in developing a commercial opportunity despite significant government support. The current oil price has not helped but while many of the multinationals have moved on, domestic interests remain committed in a country that is still hugely dependent on coal.
In Germany the Bundestag is currently progressing draft legislation which outlines a proposed regulatory framework on hydraulic fracturing. It sets out new guidelines as to how the exploration and production of shale gas could be carried out in the country while putting strong emphasis on scientific research. It is currently under internal consultation amongst the coalition partners of the Federal Government and is expected to be passed into law later in 2016.
However the great hope is the UK. The country is believed to be rich in shale gas reserves with significant deposits.
In 2013, the Government’s Department of Energy and Climate Change (DECC) published a study conducted by the British Geological Survey which concluded that the total amount of gas in place in the north of England could be around 37 trillion cubic metres. Further deposits are believed to exist in the East Midlands, Sussex, Wessex, Wales and Scotland.
The industry has strong support from the national Government, driven by a number of contributing factors: the continued sharp decline of gas production levels in the North Sea, increased gas imports, together with the goal of phasing out coal-fired power plants by 2025. It therefore adopted the Infrastructure Act in early 2015, to simplify access rights for underground land use for oil & gas development, as well as publishing new guidelines that foresee the fast-track of shale gas planning applications through a new administrative process. In addition, the Government is also consulting on legislation to introduce tax incentives for shale gas exploration and has announced community financial benefits. Simultaneously, 22 operators were offered 159 onshore blocks as part of the 14th Oil & Gas licensing round, where 75% of the blocks are devoted to the exploration of unconventional resources.
However, the amount of gas that is economically and technically recoverable will only be determined once exploration drilling commences. This needs to happen for anybody to be able to understand the opportunity. This is where the current challenge lies. The planning process devolves the decision making process to the county level and applications have recently been submitted in Lancashire and North Yorkshire. But despite the UK having more than 160 years of oil and gas industry regulation expertise, there is a fundamental lack of technical experience at County Hall level leaving the process vulnerable to misunderstandings and NIMBYISM. The bigger national story gets lost.
In response the UK’s Secretary of State for Communities and Local Government has been given new powers to oversee how applications are reviewed and now has the ability to call them in for final determination. The outcome of the first applications in Preston New Road and Roseacre Wood in Lancashire are expected later this summer.
To conclude, shale gas has not gone away. It’s a global phenomenon that remains a part of a vibrant policy discussion. The recent successes of the COP21 talks in Paris in December reiterate the fundamental need for Europe to diversify its energy mix and secure a broader range of indigenous supply while promoting investment into affordable renewable energy. The dramatic impact of the oil price on the energy sector and those who are dependent on it is distorting the reality of a broader European energy landscape that remains remarkably resilient. Whatever happens in Riyadh, Moscow or Washington, Europe is still contributing to global warming, is still importing more of its energy from abroad and its industry continues to compete on the global stage. All the original arguments around sustainability, security and affordability haven’t gone away meaning shale gas remains firmly on Europe’s energy agenda in the longer term.