Global Europe

Few had predicted the natural gas market to change as dramatically as it did. In the past, discussions focused primarily on whether there would be enough investments in new natural gas fields to meet the future insatiable demand and on how to deal with rising gas prices. Instead, the gas market is now characterised by a significant glut and depressed prices, leaving countries such as Algeria calling for co-ordinated cuts in natural gas production á la OPEC by the Gas Exporting Countries Forum (GECF) in order to prop up market rates.

The current recession certainly shaved off a couple of percentage points from the overall gas demand as industrial output shrunk in order to cope with the new economic realities. This, however, is only part of the answer. At the heart of the matter lie not only increased LNG but particularly new innovative drilling techniques in the natural gas industry that have led to an emergence of unconventional gas, particularly gas trapped in shale formations. These new techniques, spearheaded in the United States, have already turned the market upside-down. While in 1990 unconventional gas represented around 10 per cent of total US production, today it equals roughly 40 per cent, with shale gas dominating.

The ripple effects of US shale are already felt abroad. With the US market awash with natural gas and prices plummeting to around 5$/mmBtu (million British thermal units), LNG tankers have re-routed to markets in Europe and Asia. Shale gas is now also resonating beyond the borders of the United States with many hoping to replicate the US success in the European Union. This is not only due to the fact that tapping domestic reserves of shale gas increases energy security but also due to a perceived climate-friendliness; natural gas is 30 per cent less carbon intensive than oil, 50 per cent less than coal and has negligible emissions of sulphur dioxide (SO2), mercury and nitrogen oxides (NOx) when compared to other conventional fuels. This makes natural gas a crucial fuel of the future, particularly in combination with the expansion of renewables since the flexibility of natural gas power plants allows them to change their level of output quickly and efficiently.

As such, expanding domestic production by developing virgin shale gas is of great relevance. It is this exact relevance, however, that has started bringing forth great expectations and enthusiasm surrounding shale gas with many in Europe believing that it will be the silver bullet against Russian dependency, promising energy independence.  

Such a scenario, however, is extremely unlikely for several reasons. Not only are the EU’s shale reserves yet to be properly evaluated but the EU also lacks the rig facility companies and drilling workforce. In addition, it has higher labour costs and local opposition to shale gas might be more prevalent than in the US. EU environmental regulation and water sourcing might also hamper the rapid development of shale, given the fact that it requires large amounts of water and the chemical composition used in the drilling process has at times adversely affected local water deposits.

Therefore, while in a global context shale will undoubtedly affect the EU – which has already taken place with US-bound LNG tankers heading to Europe instead – numerous factors make it unlikely that the European Union will replicate the US success story.