Pro-fracking campaign in the global media is fading fast. A year or two ago the extraction method suitable for the Arizona desert was presented as a key component of the EU's energy security policy by high-ranking officials in the European Commission. Many large corporations that announced an influx of investment into Eastern European fracking projects between 2010 and 2013 are now gradually reducing the scope of their planned work. Their decision was prompted by environmental and political problems that receive insufficient coverage in the industry media. It’s becoming clear that fracking technology can’t be brought to the EU “as is” from the United States.
Recently published data by Rice University, Texas indicates that simple recycling of the tainted waste water is not safe, OilPrice.com writes. A year or two ago supporters of hydraulic fracturing used to preach about “green innovations in the shale revolution” with the passion of small-town televangelists, but now, after the publication of new data, they have switched tactics and simply remain silent about environmental problems. Yet concerned citizens of New York City are more aware. "Making fracking safe is simply not possible, not with the current technology, or with the inadequate regulations being proposed," Louis Allstadt, former executive vice president of Mobil Oil, said during a news conference in Albany called by the anti-fracking group Elected Officials to Protect New York.
What did the U.S. State Department do with a not-so-green technology that is too dangerous to use at home? Export it to the closest allies in Europe, of course. Nor should one forget that in the United States itself, the “shale bubble” would have been impossible without the direct support of U.S. Dept. of Energy programs, as well as the backing of Hillary Clinton’s State Dept., which pushed the issue on an international, political level.
In 2011 Forbes was painting the optimistic forecasts about the future of shale gas in the EU, but today there are at least a few reasons why these claims have been left hanging. Lawmakers in Europe have strictly limited the use of fracking technology in some EU countries, such as France, the Czech Republic, Bulgaria, and to a certain extent in Germany. Even in the United Kingdom, where legislators usually follow the US lead and take a much more optimistic view of fracking, a special parliamentary commission concluded in May 2011 that the nation’s explored shale reserves hardly merited the title of a “shale revolution”. Given the rising global demand for energy (up by 40% according to IEA estimates), shale gas will do no more than find its own niche within the British energy mix. And there is absolutely no reason to believe that continental Europe, with the strictest environmental legislation in the world, would accept shale more readily than the British Isles.
The current seasonal decline in oil prices has also been interpreted by some of Russia’s former energy officials as a direct consequence of the shale revolution. The predictions are being made about the impending end of the “oil era” and the cheap American energy that will soon be flooding the European market. Thus it is important to note that the very low cost of oil will make it completely unprofitable to develop oil fields using hydraulic fracturing technology. In other words, dreams of a“post-carbon era” will not come true within a reasonable planning time-frame. And OPEC members are unlikely to want a repeat of the landslide of prices, which deeply frightened many Middle Eastern and African countries in 1985-86. Today Saudi Arabia’s budget for 2015 was calculated based on an oil price of $98 per barrel, Nigeria proposed a $78/b oil price benchmark. Global price forecasts vary from conservative $70 (Goldman Sachs, Commerzbank) to bullish $100-105 (Barclay’s, Standard Chartered). Note that both price forecasts set a limit to the use of shale in Europe.
The three main arguments made by the exporters of fracking technology to Eastern Europe look particularly controversial today. Let us take a look at these arguments in the light of the new data.
1. Fracking imports to Europe are needed here and now, “as is,” with no need to take into account the economic situation in each EU country or its economic potential.
The promotion of fracking technology cannot significantly affect the Eastern European market without factoring in each country’s economic situation, as well as the local and regional energy balance, infrastructure, and logistics. In every country, be it Bulgaria, Serbia, or France, there are interest groups (lobbies for nuclear energy, coal, etc.) ready to defend their share of the national energy mix. Reformatting the local market is a task that will keep European bureaucrats busy for years, if not decades. Local conditions always dictate the rules of the game. The most striking example is the recent failure of the Shell project to produce shale gas in the Donbass region. Of course, a bloody civil war is an unusual type of force majeure, but at the same time, this case is a good example of a corporation that pulled out because of sudden problems in the field.
2. Any damage fracking causes to the environment can be predicted and the risk managed using business procedures that have been previously tested in the U.S.
Although the damage from fracking may seem common knowledge, in fact, the subject of environmental oversight is still quite critical. Ask the local residents about earthquakes in Great Britain, look into water poisoning in Poland. Judge for yourself the scale of the farmers’ revolt in France and Romania. The farmers understand - the corporations using fracturing liquid that poses a threat to ground-water reservoirs have a tendency to waltz in, make their money, and leave, while their children have to grow up on poisoned land. Practices that have caused problems even in the vast deserts of the southwestern American states could lead to a new Chernobyl in the densely populated countries of the EU. However, for many Euro-Atlantic politicians fracking represents the latest path to energy security and a way to “contain” Russia, making this the wrong time for discussions of its safety or economic viability (too many careers in Brussels are dependent on the confrontational style of energy policy).
3. The shale revolution can quickly “liberate” Europe from its dependence on piped-in gas and long-term contracts.
An important advantage of pipeline supplies provided under long-term contracts is their predictability and stability. Moscow continues to scrupulously fulfill its contractual obligations, and thus the underground gas-storage facilities in Western Europe are not running low on Russian gas despite the new “Ice Age” - stemming from the problems in Ukraine - that has overtaken the relationship between Russia and the EU. The Euronews television channel has a lot to say about the importance of shale gas and alternate supply routes (such as the TAP), but few officials in the European Commission see these projects as realistic - just take a look at the EU’s policy papers. EU officials avoid wishful thinking when composing documents for their own consumption, noting such facts as: production in Norway is declining; the South Stream pipeline - viewed objectively - is indispensable; LNG from Qatar is expensive and the Japanese will be vying for it as well; and so on. Long-term contractual commitments stabilize the market, prevent the spread of non-transparent re-export schemes, and provide German industry with the raw materials needed to revive the EU economy. As noted by the Austrian energy expert Klaus Warum, in the EU the term “Security of Supply” is used by the European officials to describe what is actually a form of unfair competition in the energy market.
Thus, it is unlikely that we can expect to see a repeat of the American “shale boom” in the next few years here in Europe. Fracking will certainly be limited in Europe (5-15% of the market, depending on local conditions). There has been so much bluster by EU officials about winning “the EU’s independence from Russia” using American technology that now they cannot just abruptly abandon the dream of “freedom gas.” The obvious advantages of utilizing the major gas-delivery routes, as well as a trading system based on long-term contracts, will counteract the effect of any dramatic increase in the role of shale gas in the EU’s energy systems.
Another curious contradiction is striking. On the one hand, strident claims of how the “shale boom” is going to liberate Europe continue to be published. On the other hand, a very unhealthy interest is arising in the creation of regulatory risks that affect the supply and storage infrastructure (the technical and economic parameters, the bureaucracy surrounding the OPAL pipeline, the German media outrage over the sale of RWE Dea, etc.). Suffice it to cite one recent example of this type - a shocking statement from Michael Theurer, a member of the European Parliament from the Free Democratic Party (a pro-American and quasi-liberal party), claiming that if the gas-supply situation worsens, the gas-storage tanks of private foreign companies operating in Germany would need to be - drumroll please - “nationalized” (“gegebenenfalls durch Enteignung sichern”). This suggestion from a purported liberal that “private property be expropriated” was published not in some communist rag like Vorwarts!, but in Focus, an influential national weekly, in an important editorial on the gas issue. This leads one to the conclusion that if fracking were truly a panacea for the chaos in Ukraine, this “business-oriented” MP would be unlikely to threaten foreign investors with confiscation and expropriation.
If common sense is to be sacrificed in sanctions tit-for tat, Europe will have to use coal or expensive petroleum products, believes Dr. Pavel Zavalny, President of the Russian Gas Society, Deputy Chairman of the State Duma Committee on Energy. “If we look at the negative scenario, gas prices for Eastern and Central Europe could jump to $800 per 1 thousand cubic meters. It will also have a rippling effect in the Asian markets, as the European consumers will have to compete with Asian consumers.” The expert noted that, in case of tougher sectoral sanctions, Russia’s oil & gas industry will invest more in oil equipment and reorient its investment policy to China. In some cases it may entail a delay of completion of the projects on time and on budget. “This is not the first time in history sectoral sanctions are implemented against Russia. We always overcame all difficulties and became only stronger” – concluded Dr. Zavalny.
What should the European officials do now with their enormous collection of promotional materials touting fracking and expensive alternative energy sources? Probably toss it all in the trash, along with the pizza ads, and await the next “bubble.” Although it’s hard to say what that one will look like. But to get an idea, let’s look at the acknowledged leaders of public initiatives in the US. For example, the Bill & Melinda Gates Foundation, the world-famous endowment established by these genuine philanthropists, recently took an interest in a fuel source as ancient as the world itself - dry animal dung fuel. If the US State Dept. plugs its resources into the creation of dung-fuel propaganda, that will spawn an eco-friendly and energy-efficient candidate ripe for promotion as the next financial bubble and freedom fuel for “liberating” Eastern Europe. As they say, back to basics. And as a bonus - five years of fresh headlines in the international business press.
By Igor Alexeev for Oilprice.com
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