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Shale gas in Eastern Europe: gold for a new sheikdom or vain illusion?

June 3rd, 2012 by Cédric Jeancolas, Mines ParisTech and Elsa Merckel, Mines ParisTech

Except for the serious environmental problems brought up by their exploitation, of which we are utterly aware, what are the factors conditioning the success or the failure of shale gas exploitation in Eastern Europe?

“Shale gas definitely represents the future and Romania must determine if such deposits do exist on its territory” has said recently Alexandru Patruti, the head of the Romanian national agency for mineral resources. It clearly seems that Romania wants to bank on its shale gas reserves so as to free the country from imports from Russian giant Gazprom, even though the Polish case is more well-known. Poland, who would like to be called “the Sheikdom at the Vistula”, has the best geology in Europe for shale gas and is the best representative of this new East European trend. Some people are even stating that Poland could become a net exporter of gas within a few years. Ukraine, Czech Republic and Lithuania have also been mentioned. Besides, given what happened in the US, where shale gas accounts for a quarter of the gas supply, allowing the country to turn into the biggest natural gas producer in 2009, East European countries can legitimately expect such an enticing fate. But is this shale gas experience transferrable to the Eastern Europe case? Why is Eastern Europe such a singular case?

As for the former countries from the Eastern Bloc, the opportunity not to rely anymore on Russian gas supplies is quite enticing. As a transit area, Eastern Europe is all the more vulnerable, which enhances its willing to behave like the United States, as far as unconventional gases are concerned. Being able to produce their own gas could allow Eastern countries to either stop the importations from Russia or negotiate the prices with this latter. On the graph below, the percentage of Russian gas supplies in terms of total consumption has been represented.

First of all, it is important to notice that the Russian suspension of deliveries during the crisis of January 2009 was quite traumatizing, as shown on the map below. Some countries like Bulgaria and Macedonia were not able to meet the demand for heating.

On the other hand, a lot of Eastern countries are producing a big part of their energy using coal, which is far more polluting than gas, as a gas-fired power plant emits almost 50% less CO2 than a coal-fired power plant. The Polish case is thus quite relevant as more of 80% of its energy production is based on coal. As some of its coal-fired power stations are meant to reach the end of their commercial life very soon, it could be a possible idea to replace them by shale gas plants. Generally, it is always a precious asset to diversify its energy mix. If the price of coal soars (this can happen if carbon price increases a lot), Poland will be less impacted with a diversified mix. That’s probably why two Poles out of three are in favour of the exploitation of shale gas and one out of two considers that its exploitation doesn’t damage the environment.

Moreover, gas energy is suitable for Eastern Europe where the climate is continental. People need a lot of energy for heating and they need a flexible energy source to offset temperature variations. Gas energy, whose storage capacity offers flexibility, is therefore appropriate.

Another interesting advantage is the fact that Eastern Europe is already equipped with a pipeline network. This existing network represents considerable savings since the network for gas transport is often a deterrent entry barrier in the gas industry. Of course, there will also be a huge amount of money invested in R&D, exploration and security, but big companies, like Chevron or Total, are used to investing a lot in promising projects and, in the case of shale gas, don’t hesitate to invest massively. For instance, in Poland, 40 companies have obtained licenses to exploit shale gas deposits.

Thus, we have seen that the Eastern Europe energy landscape is particular and can be favorable to the boom of the shale gas, but aren’t there some stumbling blocks as well which make it impossible to follow the U.S. example?

Obviously, the environmental oppositions to these technologies remain very famous and legitimate: high water consumption, contamination of ground water, earthquakes… Moreover, the European legislation is still stricter than the American one.

However, before considering any other drawbacks of such a controversial technology, we should concentrate first and foremost on the reserves themselves. Are there really so many reasons to be optimistic? As far as Poland is concerned for instance, the last official report (issued at the end of March 2012) into shale gas reserves has lowered the capacity from around 5300 billions of cubic meters to 350-770 billions of cubic meters, which represents an impressive lowering of one tenth. Even if authorities argue that the game is still worth the candle, the public opinion is likely to be less enthusiastic if the announcement by Chevron country manager Thomas Holst “the benefits will far outweigh the risks” is not trustworthy anymore.

While the American dream is still going around, we have to become aware of the fact that East Europe and the United States have two very distinct markets. As this has been explained by Jeff Makholm, senior vice president of U.S. energy consultancy Nera “If you discover shale gas in the U.S., you immediately have access to a competitive pipeline market to ship your gas to the customer. In Europe that’s not the case”. The real question is: who will control the production? Knowing that the Yamal pipeline, where most gas for export in Poland runs, is jointly owned by the Polish national gas company and Gazprom, we can say that it is not all rosy as for the future.

Finally, we have to focus on property rights as there is a big discrepancy between the United States and Europe. Whereas the American private land owners generally own the rights to minerals on their property, it is the State in Europe that owns these same rights and can allow a company to drill. Therefore, the Eastern countries absolutely need a government that agrees to attract investments, which is obviously not always the case as it is very dependent on the public opinion and the European rules.

This E.U. context could be crucial in the future. While some countries like Bulgaria have forbidden the hydraulic fracturing, we are bound to wonder if shale gas technology can survive in an economic and politic entity such as European Union, if there are such disagreements between the member countries on the subject.

To conclude, shale gas represents an interesting potential to free Eastern Europe from Russian gas imports. The 2009 gas crisis has raised awareness of the precarious situation of being that dependent on one supplier. But reserves seem to be less important than expected and they are dwarfed by the U.S. and China reserves. Besides, there are specificities in Europe such as property rights that make it harder to expect an intensive exploitation of shale gas. Added to this, the environmental debate is still virulent and we are not likely to observe big changes in Eastern Europe overnight.

Cédric Jeancolas and Elsa Merckel, Mines ParisTech

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