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Which MBA?
Shale gas in Europe and America
Fracking here, fracking there
Europe will have trouble replicating America’s shale-gas bonanza
Nov 26th 2011 | from the print edition

SHALE gas has turned the American energy market on its head. Production has soared twelvefold since 2000, to 4.9 trillion cubic feet, or a quarter of the country’s total gas output. By 2035 the proportion could rise to half. As the shale gas flows, prices have come crashing down. Not long ago, America depended on imports of liquefied natural gas. Now it is likely to become a gas exporter. These benefits have not gone unnoticed in Europe.

The old continent has nearly as much technically recoverable shale gas (natural gas trapped in shale formations) as America. Europe’s reserves are 639 trillion cubic feet, compared with America’s 862, according to America’s Energy Information Administration, a government agency. But technically recoverable does not mean economically recoverable, notes Peter Hughes of Ricardo Strategic Consulting.

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Costs are higher in Europe, for several reasons. First, European geology is less favourable: its shale deposits tend to be deeper underground and harder to extract.

Second, America has a long history of drilling for oil and gas, which has spawned a huge and competitive oil-services industry bristling with equipment and know-how. Europe has nothing to compare with that. In 2008, at the height of the gas boom in America, 1,600 rigs were in operation. In Europe now there are only 100. America’s more cut-throat market drives costs down. A single gas well in Europe might cost as much as $14m to sink, three-and-a-half times more than an American one, estimates Deutsche Bank.

Third, America’s gas industry faces fewer and friendlier regulations than Europe’s. Call it the Dick Cheney effect. And fourth, in America wildcat drillers, if they strike it rich, enjoy access to a spider’s web of existing pipelines, so they can get their gas to market. Europe has no such network nor open-access rules.

Some European countries are keen to replicate America’s shale-gas boom. Poland, which may have Europe’s largest deposits, has issued exploration licences to more than 20 firms. Test wells have been sunk. But Poland’s prime minister, Donald Tusk, reckons that commercial production will not get under way until 2014.

Other European countries are less gung-ho about shale gas, often for environmental reasons. France has potentially abundant reserves, but has imposed a moratorium on hydraulic fracturing (or “fracking”), the technique for winkling gas from rocks deep underground, while the dangers are assessed.

These include the possible pollution of groundwater by the chemicals in fracking fluids, and the leakage of methane, a gas that aggravates global warming. Another fear is that fracking may cause earth tremors. Recent seismic activity near a test well in Britain has been linked to it. Such concerns are real and widespread—in August South Africa followed France’s lead and slapped a moratorium on fracking. More studies will be needed before the public is reassured.

Americans worry about the environmental impact of fracking, too. But Europeans worry more, not least because western Europe is far more densely populated than America. Extracting shale gas is more disruptive than hoicking other hydrocarbons out of the ground—far more wells must be sunk than are needed to produce the same quantity of conventional gas. Fracking requires oceans of water, brought in by fleets of noisy tankers. More people will live close to a typical European drilling site, so opposition to drilling permits is likely to be louder.

The legal framework is different, too. In America, mineral rights belong to the landowner. In Europe, they usually belong to the state. So when American property–owners see drills, they see dollar signs. European landowners just see big, ugly drills. (The situation is different in America if the gas lies under federal land. If so, getting leases can be trickier.)

Keep on fracking

American leases typically oblige gas firms to keep flushing out gas regardless of market conditions. So the gas carries on flowing whether prices are high or low (as they are now). And landowners keep wallowing in royalties whether the driller makes a profit or not. No such legal provisions are likely in European contracts.

In America, almost everything points in the right direction for the shale-gas industry, observes Paul Stevens of Chatham House, a think-tank. In Europe most things point the other way. But not all.

Europeans may care passionately about the environment, but they also care about the security of their energy supply, and its price. Many European countries buy gas from Russia, a country that uses hydrocarbons as a weapon to bully its neighbours. This is perhaps why Poland has been quickest to embrace shale gas; it trusts Russia as it would trust a bear to guard a picnic hamper. Ukraine, another nervous neighbour, recently awarded exploration licences to Exxon Mobil and Shell, two Western energy firms.

European gas prices are around twice what they are in America, a big incentive to frackers. In Europe, the price of conventional gas is largely indexed to oil prices, and the gas is provided on long-term contracts that stipulate minimum volumes irrespective of market conditions. This makes locally produced shale gas, supplied on flexible terms, look attractive.

Gazprom, Russia’s state-controlled gas giant, often disparages efforts to extract shale gas—a sure sign that its bosses are rattled. Yet they may not be affected for a while. America’s shale revolution began 20 years ago, but its impact has been felt only in the past five years. Europe’s may take just as long, reckons Mr Stevens. But when the fracking begins in earnest, it could turn Europe’s energy market on its head, too.

from the print edition | Business
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