No Easy Fix
At first blush, Europe’s own shale gas would seem to be the obvious answer to the continent’s energy security woes. The U.S. EIA estimated in 2013 that Europe, including Ukraine but not Russia, holds 598 trillion cubic feet (tcf) of shale gas, or 8.3 percent of the global shale gas reserves. A 2013 study by Germany’s Federal Institute for Geosciences and Natural Resources suggested that Europe’s shale gas resources were nearly three times the size of its entire reserves of conventional natural gas. If all European countries with unconventional gas were to overcome political and other obstacles and develop their resources according to a certain set of best practices, the Paris-based IEA estimates that Europe could produce 0.4 tcf a year of unconventional (mostly shale) gas by 2020 and almost 2.8 tcf a year by 2035. This latter number is impressive, equaling not quite half the amount of gas Europe imported from Russia in 2012.
Unfortunately, Europe will not realize such production, barring a dramatic and wholly unexpected shift in attitude. Despite great expectations at the turn of the decade, Europe has been unable to unleash its own shale potential. A range of factors has hampered Europe’s ability to replicate the U.S. experience. Geology, for starters, has proven more complicated and less promising than originally hoped. Initial estimates of Europe’s reserves have been scaled back significantly since the heady days of the first EIA report in 2011.
One might expect Poland to be first out of the blocks in the commercial production of shale. Given its history, its heavy reliance on Russia, and the belief that its technically recoverable shale reserves were the largest in Europe, Poland salivated at the prospect of becoming self-sufficient in natural gas. International investors flocked to the country in 2011 to scoop up concessions; one even reportedly paid for some on a credit card. The government awarded more than ninety licenses, and those receiving them spent billions drilling dozens of test wells. Yet, in March 2012, the Polish Geological Institute assessed Poland’s shale gas basins to hold only a fraction of what the EIA had estimated a year earlier—albeit using a very different methodology. One executive from a major U.S. oil company summed it up tersely: “The rocks aren’t there.” Far from turning Poland into a “second Norway”—a reference to Norway’s status as an energy powerhouse—as predicted by Foreign Minister Radoslaw Sikorski in 2011, there was no commercial-scale shale gas production in Poland as of 2017.
Poor geology, though, is not the only reason major international companies—ExxonMobil, Chevron, ConocoPhillips, Shell, Eni, and others—have scaled back or terminated their European efforts to find and produce unconventional energy. Fiscal and regulatory frameworks have been tough to navigate, and have consistently undermined the incentive to operate. Where laws and regulations do not limit fracking, other factors—such as dense populations, property rights that deter exploration, and lack of available drilling rigs and infrastructure—often do. In Austria, simply complying with all regulations makes shale gas uncommercial to develop.
Moreover, Europe’s ambivalence toward natural gas as a fuel has stymied shale gas development. As described by Oxford scholar Jonathan Stern, unlike in other parts of the world, advocates of natural gas in Europe have been unable to make a strong case for the fuel. Doing so has been especially difficult in light of high gas prices from 2011 to 2014, government support for renewables, a failure in European carbon pricing and cheap coal, and concern about security of supply. The resulting coolness toward natural gas has further raised the bar for European shale gas development in the face of growing environmental concerns. As a result, the trend is distinctly in the direction of growing restrictions on fracking and less shale development rather than more.
As of 2017, each country in Europe had its own laws governing shale development; the European Commission does not have a mandate to unilaterally set binding community-wide policies related to shale. France, Belgium, the Netherlands, Luxembourg, Bulgaria, Ireland, and the Czech Republic have banned fracking. Germany has moved to the left on the issue, with its coalition government and parliament agreeing to a ban on fracking except where state governments give express permission for exploratory drilling.
Poland and the U.K. have been the most encouraging of shale gas exploration, although the approaches taken by different parts of the U.K. have varied widely. Restrictions exist on fracking in Northern Ireland, Wales, and Scotland, despite the fact that Scotland is believed to have sufficient shale gas resources to meet Britain’s natural gas needs for three decades. London has been the most ardent voice against the imposition of uniform regulations on shale development by the European Commission. The U.K.’s departure from the European Union may set the stage for more aggressive exploration and production in at least parts of the island. But elsewhere in Europe, without Britain railing against regulatory restraints, bureaucrats in Brussels may have better luck in securing the authority to set continent-wide restrictions on the practice.
Figure 8.1: Status of Fracking in Europe as of July 2015
Source: Brigitte Osterath, “Whatever happened with Europe’s Fracking Boom?” Deutsche Welle, July 20, 2015, www.dw.com/en/what-ever-happened-with-europes-fracking-boom/a-18589660.
This environmental activism is in line with European sensibilities and Europe’s status as a leader on climate change and the environment. But some see a more nefarious hand in Europe’s definitive move away from the production of shale gas. Former Denmark prime minister Anders Fogh Rasmussen harbors such suspicions—and he said so publicly in 2014 while he was secretary general of NATO. Rasmussen sees the fervor with which political parties and other environmental groups have sought to discredit fracking in Eastern Europe as a function of aggressive, quiet funding by Russia. Long before there was talk of Russia meddling in the politics of the United States, France, and Germany, Rasmussen told an audience in London that he has “met allies who can report that Russia, as part of their sophisticated information and disinformation operations, engaged actively with so-called nongovernmental organizations—environmental organizations working against shale gas—to maintain European dependence on imported Russian gas.”
Given Europe’s current trajectory, no rational actor would expect Europe to soon reach the levels of shale gas production the IEA deemed possible back in the early 2010s. Even if Europe did ramp up its shale production, this output would be more likely to fill in for declining European conventional gas production and mitigate any further dependence on Russia, rather than substitute for large volumes of Russian imports. In fact, even in the most optimistic shale gas scenario, where unconventional gas production grows from almost zero to nearly half of Europe’s indigenous production in 2035, net imports are still expected to go up. In this way, the new energy abundance falls short of its potential to transform geopolitics in Europe. Looking for the real impact of the energy boom on European political dynamics requires us to look elsewhere—perhaps to U.S. LNG?
A New Game in Town
A resident of the Baltic Sea port of Klaipėda might have once boasted to visitors about the forty-eight-bell carillon hanging in the city tower that is the largest musical instrument in the entire country. But on October 27, 2014, Klaipėda received a much larger national treasure: the country’s first LNG storage vessel, aptly named the Independence. Led by Klaipėda’s mayor, hundreds of Lithuanians turned out to welcome the arrival of the floating storage regasification unit in a gathering punctuated by cheers and cannon salutes. It was not just a local event. The prime ministers of Lithuania and Latvia attended, as did members of the U.S. Senate. Norway, Estonia, Finland, Sweden, and other countries also sent representatives. Lithuanian president Dalia Grybauskaite. spoke emotionally, acknowledging that until that moment, her country had been entirely dependent on imports from Russian government–owned Gazprom. She declared, “The liquefied natural gas terminal is an important strategic project and a great victory of our state. It is not only energy independence, but also political freedom. From now on, nobody will dictate [to] us the price for gas or b
uy our political will.” U.S. Secretary of State John Kerry sent a congratulatory letter, which was read aloud by a U.S. diplomat.
Secretary Kerry’s letter did not specifically mention the possibility of U.S. LNG flowing to Lithuania. But, Kerry’s statement that “The United States looks forward to continuing our joint efforts with Lithuania . . . to further strengthen energy security in Europe” could be interpreted as both an oblique reference to future American exports and an indication that the United States was in the European natural gas market to stay. Whatever was actually intended, Secretary Kerry’s letter spoke both to the potential for and the limitations on U.S. involvement in Europe’s ongoing energy struggles with Russia and Gazprom.
Certainly, hopes on both sides of the Atlantic had been high. Just seven months earlier, in the wake of Russian soldiers flowing into Ukraine in March 2014, Speaker of the U.S. House of Representatives John Boehner wrote an opinion piece in the Wall Street Journal in which he optimistically declared “the ability to turn the tables and put the Russian leader in check lies right beneath our feet, in the form of vast supplies of natural energy.” Four foreign ambassadors—from Hungary, Poland, Slovakia, and the Czech Republic—seemed to agree; they sent a letter to the U.S. Congress the day after Boehner wrote, requesting that the United States take steps to expedite the sale of American natural gas to Central and Eastern Europe. In fact, the match between Europe’s desire to lessen its dependence on Russia and America’s newfound shale gas seemed so perfect that it fueled deep suspicion among more than a few Russians. When I traveled to Russia just a week after the formal annexation of Crimea, many Muscovites shared with me their view that the United States had provoked the Ukraine crisis for the express purpose of frightening Europe and creating a market for American natural gas.
However desirable the goal may be to Europeans and Americans, those expecting U.S. exports to bump Russia out of Europe’s natural gas market will be disappointed. The size of U.S. LNG flowing to Europe will depend far less on Washington’s wishes than on energy markets. Even under the most favorable conditions, U.S. LNG will not displace Russia as a major supplier of natural gas to Europe.
Most analysts scoffed when then House Speaker Boehner called for U.S. LNG to provide an escape from Russia to Europe. They rightly pointed out that American and European companies, not governments, would make decisions about whether to buy U.S. LNG or to sell it to a European market. They stressed that the potential for profit, not geopolitical factors, would be the most important factor. Such trade will only materialize if the difference between the price of gas in America and the price of gas in Europe is large enough so that—even after paying additional costs for liquefaction, transport, and regasification—firms can make a profit on the trade.
This remains true. When Boehner penned his op-ed, expectations of significant LNG trade between Europe and the United States were modest given what was perceived to be a small window for arbitrage between the price of gas in America and that in Europe. Yet, in the years since, some companies have in fact assessed that it is commercial to send U.S. LNG to Europe; the continued very low price of Henry Hub gas still allows a profit to be made. If anything, the opportunity seems more attractive to companies in 2017 than it did in 2014, as much lower LNG prices in Asia mean that the opportunity costs of exporting to Europe (rather than further east) are significantly less than they were a few years ago. Indeed, many of the first shipments of U.S. LNG did flow to Europe. By February 2017, Italy, Malta, Portugal, Spain, and Turkey had all received some amount of U.S. LNG.
This modest flow of U.S. LNG exports to Europe, however, does not presage a flood. A report from Columbia University anticipated that, based on expected future U.S. LNG exports, American natural gas will claim just shy of 12 percent of European gas supplies by 2020 or 2025. In a much more robust scenario, where total U.S. LNG exports are double this amount, American gas claims 19 percent of Europe’s market. As shown in the figure below, such inroads will come at the expense of Russian exports, to some extent. But one should also note that a doubling of U.S. LNG exports does not automatically translate into a penetration of Europe’s markets that is twice as big. U.S. LNG is likely only to displace natural gas from suppliers whose gas may be more expensive to produce, and that is almost certainly not Russia. Moreover, Gazprom is not a static player and it could well drop the price of its piped gas to defend its market share if it thought it could squeeze out other competitors.
Some experts are even more optimistic, anticipating U.S. LNG will do even better in Europe. In 2016, one consultancy projected that the United States would be sending more than half of its LNG to Europe by 2020. Releasing another report at the same time, a German bank estimated that the United States could send as much natural gas to Europe as Russia does within a decade. While it is difficult to know what exact scenario will play out, we can be confident of two things. First, U.S. LNG exports will continue to help diversify European gas supplies—and diversity is a key element of national security and political independence. Second, under any scenario, Europe will remain a large consumer of Russian natural gas.
Figure 8.2: Impact of U.S. LNG on European Gas Supplies, 2020–2025
Source: Jason Bordoff and Trevor Houser, “American Gas to the Rescue? The Impact of US LNG Exports on European Security and Russian Foreign Policy,” Columbia University, Center on Global Energy Policy, September 2014, 29, http://energypolicy.columbia.edu/sites/default/files/energy/CGEP_American%20Gas%20to%20the%20Rescue%3F.pdf.
Exceeding Original Hopes in Unexpected Ways
The positive impact of the new energy abundance on Europe’s energy situation is not so much in the volume of U.S. LNG that flows, or in the European shale gas that is produced, but rather in the transformative effect that the boom has had on reshaping natural gas markets. What matters much more than the size of Russia’s market share in Europe is the extent to which the continent—as a whole and as individual countries—is resilient in the face of a Russian gas shutoff and is therefore less vulnerable to the political leverage Russia sometimes seeks to exert through its gas trade.
At the time of Putin’s ominous April 2014 letter, Europe had few options to quickly or easily obtain alternative gas supplies if the Russian leader had followed through on his threats. The economies of many European countries—especially those most reliant on Russian gas—would have been badly battered.
One might have thought that existing—but unutilized—European LNG capacity provided a meaningful security blanket to Europe’s consumers at this time. In 2013, Europe was only utilizing a quarter of its existing LNG regasification capacity, leaving idle capacity roughly equal to the volumes it was importing from Russia. But, while in theory, Europe could have revved up those facilities to import more gas in the face of Russian obstreperousness, in practice doing so would have been very difficult. For starters, there was the matter of Europe’s overall interconnectedness. At the time, a third of Europe’s regasification terminals were in Spain or Portugal. Even if those terminals had been fully employed, the dearth of pipelines to carry that gas over the peaks of the Pyrenees and beyond would have made it highly challenging, if not impossible, to replace curtailed Russian gas on the other side of Europe.
Markets also have to be factored into the equation, and 2014 saw intense global competition for LNG. Asian consumers, particularly after Japan forsook nuclear power following the Fukushima tragedy, were thirsty for LNG and willing to pay prices much higher than Europeans. Should Europe have needed to dramatically increase its LNG imports in 2014, it would have been bidding against Asia for what, in the short term, was a finite quantity of LNG. Who is to say that Europe would have won this bidding war? Had it, one can be sure it would have been at a price that was appreciably higher than the $16 per mmbtu drawn by LNG in Asian markets on average between 2011 and mid-2014. The uncertain ability to replace Russian gas at a potentially debilitating price is really not much of an insurance policy.
Now, thanks to t
he natural gas boom and invigorated European energy policies, this situation is changing, and Europe’s options are more real and much larger in scope. As discussed in Chapter Three, until recently, it was common practice for many natural gas contracts to include destination clauses or “take or pay” provisions that require a consumer purchase a certain amount of gas regardless of its needs. Such clauses allowed price differences to persist between Western and Eastern European countries and hindered efforts to create a common energy market among all members of the EU. The surfeit of natural gas and the move toward a global market helped Europeans push back against these once common practices, opening the door to closer integration of EU states and a resultant increase in energy security.
Even more important in increasing European resiliency has been the overall growth of the LNG market. Whereas the tightness of this market in 2014 would have made it extremely expensive for Europe to substitute LNG for piped Russian gas—even if the infrastructure to do so had existed—the well-supplied markets of today put Europe in a much more advantageous position. The shale boom has both directly and indirectly expanded the volume of available natural gas—and the U.S., Australian, and other LNG producers will be adding even greater amounts of gas to markets in the years to come. At least for some time, the essential dynamic will no longer be one of Europe competing with Asian consumers for LNG, but producers competing with one another for markets.
In this more flush market, Europe may still find imported American gas more costly than Russian piped gas when conditions are calm. But in a crisis situation, Europe would be better able to substitute American or other LNG for Russian gas, even at a somewhat higher price, thereby considerably downgrading the threat of a Russian embargo. The ability to withstand a curtailment of Russian gas exports should alleviate the constraints European countries feel today when contemplating a confrontation with Russia and in taking action to circumscribe Russia’s ability to challenge the parameters of the existing international system.
Windfall Page 20