European Affairs

In the United States, unconventional gas is transforming the energy picture – it has increased supply dramatically and reduced the need for imports. US gas production peaked in 1973, and in the early 2000’s, the Energy Information Administration (EIA) at the Department of Energy was forecasting a progressive need for imports to meet demand. Then came the shale gas revolution from technical innovations that made accessible deposits that could not be developed commercially in the past. The US Department of Energy estimates a 400 per cent increase in shale gas between 2007 and 2020. In its April 2009 report, “Modern Shale Gas Development in the United States: A Primer,” the US department of energy said that that the US natural gas production rates for 2007 of about 19.3 Tcf, the current recoverable resource estimate provides enough natural gas to supply the US for the next 90 years. Separate estimates of the shale gas resource extend this supply to 116 years.



Europe hopes it can replicate this success story, as technology on both sides of the Atlantic increasingly sets the political, economic and social agenda as a driver of innovation and the creation of valuable jobs. And there is in fact good reason to cheer. There are substantial reservoirs of unconventional gas in Western Europe and huge supplies in Poland and Ukraine. But Europeans who believe they have a cure-all should realize that much needs to happen before unconventional gas transforms Europe as it could America. Unconventional gas may well become a game-changer for Europe – but not yet and unlikely before the end of this decade. The case for unconventional gas is simple. As noted earlier, a few years ago, forecasts showed the United States becoming progressively dependent on gas imports. Prices would rise and security of supplies would wane. Then came a technical revolution in producing unconventional gas that reversed the decline in the country’s output and obviated the need for more imports. Key innovations were hydraulic fracturing and the ability to drill horizontally and directionally. By 2008, US companies were half-joking about exporting gas to Europe and Asia. T. Boone Pickens in 2009 said abundant gas reserves in the United States made this country the “Saudi Arabia of natural gas. “As the technology has matured, companies are looking beyond North America for places to go and grow. Countries are touting their unconventional gas potential to attract investors. Australia has been the center of a recent surge in interest, with China and India following.

Buzz about Europe as Next Big Thing in Shale Gas

But nowhere has the buzz in political circles been as intense as in Europe. Transformation is in the air. In late 2009 and early 2010, one got a sense that Gazprom was beginning to lose its "grip" on the continent, defeated by unconventional gas and by a glut in global gas supply brought on by the economic crisis. Around the continent, news of companies wanting to invest in unconventional gas overwhelmed all other energy news – no matter that most companies were years away from spending much money or that they were mostly intent to get a foothold while entry was cheap. Included in the buzz were a series of moves by companies such as Exxon Mobil, BP, Total, and Statoil who moved into shale gas in the United States so as to build up their expertise to develop unconventional gas internationally. Europe would be a chief beneficiary if they did. For a continent without much good energy news, unconventional gas appeared to be the answer.



Is this enthusiasm justified, and how much unconventional gas might Europe produce? We do not really know yet. Production levels and commercial viability will be determined after activity picks up. Even in the United States, estimates about what can ultimately be produced from unconventional resources change with time. Beyond the actual resource itself, however, there are several success factors in the United States that for Europe to experience something similar, most, if not all, of these ingredients must be in place to produce meaningful results in a meaningful time frame.

No Automatic “Slam-Dunk” for Shale Gas

First, intensity matters. Producing unconventional gas is an intensive process. The United States has been able to deploy huge physical resources in regions familiar and comfortable with petroleum development. While initial finds were made by smaller independent companies, the majors have only recently begun to show serious interest. Smaller independents (still sizeable companies) led the way because they could act more nimbly and did not need huge proven payouts to justify an investment. Hundreds of rigs drill tens of thousands of wells each year. By contrast, the activity in Europe revolves around a relatively small number of rigs drilling a relatively small number of wells. This is not enough. There is an order of magnitude difference in scale – and that scale will be needed to main technical gains and to bring down costs. What is more, given the history of oil and gas production in the United States, there is a deep pool of experienced field personnel and geoscientists to work on gas; the same can hardly be said for Europe. Second, competition matters. The American gas revolution would not have been launched without innovation, and innovation would have been impossible without the experimentation and adaptation conducted by hundreds of companies. For those states in Europe who think they can outsource their gas fortunes to a few big names, they are missing the point of what happened in North America and why. And although Europe will benefit from the gains in North America, success will come from adaptation to Europe’s unique circumstances, not from mere replication. Third, above-ground risk and regulation matter. As the gas industry has moved into the Eastern United States, it has been challenged on the possible environmental effects from the technologies used to produce unconventional gas. States are reviewing the impact on water supplies, while drilling close to population centers drawing a reaction from people unaccustomed to waking up next to rigs in the near vicinity. State regulators have stopped a handful of projects in the US because of environmental concerns. Europe’s regulatory authorities will need to monitor activity in a way that reassures the public, and to make an effort to mitigate or avoid a not-in-my-backyard (NIMBY) backlash. Fourth, markets matter. The American gas market is large and liquid, allowing companies to sell gas easily and to use the futures market to support their heavy drilling programs that require constant re-investment. Europe mostly lacks such markets, with most countries dominated by a couple of large buyers. Negotiating commercial agreements to sell the gas was a non-issue in America; it can be a big obstacle in Europe.

Gas Heaven Will Take Hard Work

Before Europe gets carried away, therefore, it needs to pay attention not just to the big picture, but also to the realities that are transforming the United States. As many resource-rich countries have discovered, having a resource is no guarantee that you can make it work for you. Unconventional gas development is a long and uphill path as evidenced by results in the U.S – and it is one that Europe has only just started on.