A Free-Market Energy Blog

Gas From Shale Deposits: A Worldwide Game-Changer? (Part II)

By Donald Hertzmark -- October 16, 2009

Editor’s note:  This article is the second of two on shale gas production.  The first dealt with the U.S. situation; this one looks at the potential impacts of shale gas production in Europe and China.

Natural gas production in Europe, currently just over 11 Tcf, has been falling rapidly over the past decade.   About three fourths of Europe’s gas is produced in just three countries: the UK, Norway and the Netherlands.  Production peaked in 2003 at 13.5 tcf.

Consumption, on the other hand, continues to rise.  Gas use in Europe stood at 20.5 tcf in 2008 and is likely to increase further as coal-fired power plants retire or are phased out of service for environmental reasons.  Most of Europe’s imported gas comes from Russia (about 80%), with the remainder mostly as LNG.

Conventional natural gas production is likely to continue its decline since the major source of gas production, the North Sea, seems set on a declining trajectory.

A Scramble for Supplies Seems to Be in Order

With the continent increasingly dependent on the state of Russian-Ukrainian relations, and with Russia’s sales prices pegged directly to oil, Europe’s energy future promises to be even more costly than its past.  Recent efforts at diversifying supplies – LNG, Nabucco, pipelines from Libya and Algeria – have proved only partially successful and retain the oil-linked price structure of Russian gas supplies.

Gas from Shale, Ours and Theirs, May Rescue Europe

U.S. shale gas production has already roiled the world of natural gas.  By providing plentiful supplies to the US shale gas production has promoted heavy discounting of natural gas in the U.S. relative to oil.

In addition to the U.S. consumers who benefit from lower natural gas prices, the shale gas boom has also provided new investment and technology opportunities for both US and European energy companies.  European consumers of LNG have also benefitted from the U.S. shale boom since prices for spot cargoes have fallen with the near-collapse of growth in the US market for LNG.  The main losers from the shale gas boom have been LNG exporters and renewable energy producers who must compete with natural gas in the electricity market.[i]

The list of major foreign investors in US shale gas plays is impressive – Norway’s Statoil in the Marcellus shale, British Gas in the Haynesville shale, Shell in the Fayetteville shale.  Total has purchased significant acreage in its home country, where drilling is set to commence.

With the technological risk of shale gas production now largely overcome thanks to efforts in the U.S., production is mostly a question of finding the right resources.  Major companies, flush with US shale gas experience (and profits) are now looking at Europe.  As with the U.S. earlier in this decade, Europe’s gas markets reflect scarcity with high prices.  However, mud (the stuff of shale deposits) appears to be much more democratically distributed than oil and shale resources have been discovered throughout Europe.

Estimates of the potential shale reserves in Europe reflect the early stage of exploration and test drilling.  However, activity is brisk in Poland (Lane Energy and Conoco), Hungary ExxonMobil), Austria (OMV) and France (Total).  Even the Netherlands is getting another look underneath the old Groningen gas field.  In the UK’s Permian Basin shale deposits may see some exploratory activity soon.  One of the best recent sources on European shale gas resources is a study of shale reservoirs in Europe by Hans Doornenbal, et al, “Petroleum Geological Atlas of the Southern Permian Basin Area: Project overview,” June 2009.  That study estimates at least 230 tcf of gas in NW Europe’s shale basins.  Other estimates are higher, as much as 500 tcf.  Such reserve estimates are not likely to produce the level of output seen in the US, where the resource base is far greater.  However, without drilling the resource extent is not entirely certain.

Only Mr. Market Can Face Down the Bear

As U.S. experience has shown, even a small effort to produce energy economically can yield great benefits in the overall energy market (economists call those pecuniary externalities, reflecting the normal balance of winners and losers in a competitive market).  Europe’s heavy investment in renewables, especially wind, has not produced these kinds of market effects because (1) they replace far less firm energy than predicted; and (2) the cost of energy from these sources is very high, providing cover for high gas prices.

The U.S. is now in a strong position vis-à-vis LNG suppliers because the country has another source of energy that is cheaper.  For the Europeans, negotiating with Russia for lower gas prices by resorting to more costly forms of alternative energy is like shoveling money into a furnace to prove that you have another way to heat your home.  You are not likely to get the best price.

In 1979 a shortfall of less than 5% of crude oil production for a few months (the Iranian revolution) caused the price of crude oil to triple.  In 2008-2009 a 10% increase in U.S. natural gas production (about 3% of total domestic energy production) has wreaked havoc on world LNG markets.  Small changes at the margin can be significant.  If Europe could get 1-2 tcf/year from its shales, 12-25% of what the EU now imports from Russia, then Russia would be forced to listen, the world would become a better place (unless, of course Russia resorted to alternative methods of business negotiation) and the continent’s expenditures for clean energy could start to fall.

Even China has caught the shale bug.  Some gas-bearing shales have been discovered in Xinjiang province and exploration and development will commence during this year.  Since China is a growing importer of LNG, and soon, gas by pipeline from Russia and Central Asia, economical production of gas from shale deposits would exert a price-constricting cold shower on both LNG markets and Russia’s gas exports.

More gas at reasonable prices would be considered by most people to be a good thing.  But not to worry, the sackcloth and ashes crowd still hopes to nip this “problem” of shale gas in the bud.  With enough legal opposition and red tape perhaps shale gas can be consigned to the curiosity corner of energy history, or we can let willing investors and willing buyers run with it and change the world.

The Bottom Line
Will gas from shale end the era of coal? Not anytime soon. Nor will the shale gas revolution permit a vast expansion of gas use for vehicle fuels, à la the Pickens Plan. As with coal-fueled power plants the amounts of gas available from shale are not sufficient to be “the solution.” There is no single solution to energy supply, but gas from shales can fix the gas market, and that would be a real accomplishment, reducing the power of some of the would-be gas monopolists, including Russia. In the end restoring well-functioning gas markets across the world would increase our well-being by reducing the diversion of resources into unproductive crash programs in energy. And that is a pretty big accomplishment.

[i] Even in the US shale gas is not likely to prove sufficient to displace the other major energy resources used in power generation, coal and nuclear.  To effect a 10 percentage point reduction in coal use (from 50% to 40% of power generation) would require another 2.5 tcf of gas each year, about the total increase expected by the DOE through 2030.

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