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Talking about a revolution. Is shale gas the answer?

Waiting for the tanker to come (c) Paul Johnston via Flickr

Waiting for the tanker to come (c) Paul Johnston via Flickr

Ever since Moscow decided to up the ante and invade the Crimean peninsula, shale gas reentered journalist lingo. Many have chipped in the debate, including Speaker of the House John Boehner who has argued that American gas is the sole remedy for Russia’s dominance of the European energy market. His diagnosis was that since natural gas was at the origin of the Ukrainian crisis, the United States should transform its shale gas revolution into a geopolitical weapon and help Europe wean itself off of the Kremlin’s whims.

Boehner’s calls for greater American involvement in Europe was echoed by a declaration of the governments of the Visegrad 4, a group composed of Hungary, the Czech Republic, Poland and Slovakia. In a joint statement, the heads of state appealed to U.S. authorities to grant easier access to gas imports coming from the U.S.

Their fears come after Gazprom announced that it managed last year to supply a record 30 percent of Europe’s gas needs, increasing its share by 20 percent from 2012. The rise was fueled by the changing energy dynamics of existing European producers and Germany’s own plans of phasing out nuclear energy by 2022. With tensions in Ukraine and the ever-decreasing trustworthiness of Russia’s commitments to guarantee European energy security, it seems that the moment is perfect for the U.S. to step in.

Unfortunately for the more liberal-minded hawks, the notion that American shale gas is the answer to solving Europe’s energy puzzle is completely bonkers. Why? Because the ruthless laws of supply and demand trump all aspirations underlining this plan, rendering it a geopolitical fantasy for the short term.

A whale of a shale

It is important to underscore a fundamental assumption about the economics of shale gas, before moving into its political importance. Unconventional sources of oil and gas have traditionally been too costly to produce. Only in the last decade, as oil prices skyrocketed to record highs before settling around the $100 mark, has the appeal of tar sands, deep water oil and shale gas become economically feasible. Therefore, while there may exist considerable deposits of unconventional sources of energy in the world, they can only be tapped in a high price environment. As soon as world oil prices go down, shale gas will no longer be a viable alternative.

The shale revolution, which started in the United States in the late 2000s, revamped the American energy landscape, with promises of energy independence and a reversal in global energy flows. While a decade ago U.S. imports were forecast to grow rapidly, today the Department of Energy has concluded bilateral deals for approximately 100 billion cubic meters per year destined for export to Asian countries.

Consequently, a number of American ports have been undergoing upgrades in order to create the infrastructure necessary for exporting large quantities of gas overseas. As for new terminals, only the Sabine Pass port in Louisiana has received environmental approval from the Federal Energy Regulatory Commission to begin construction, expected to be completed in late 2015.

In addition to the high costs associated with extracting the gas from shale rock through a process known as “fracking,” processing it entails additional costly complications. Unlike oil, gas needs a physical infrastructure (i.e., pipelines) in order to be transported across long distances.  Exporting shale gas by sea means liquefying and cooling it to -162° (Liquefied natural gas – LNG) and transporting it by using special ships (cryogenic sea carriers). What this means is that in order to produce the quantities needed to achieve economies of scale and to actually make an impact on global markets, both supplier and consumer countries need to adjust their infrastructure accordingly.

So what about Europe?

Unfortunately, in present conditions, exporting LNG to the Ukrainian market is virtually impossible. To begin with, Turkey does not allow tankers to cross the Bosporus strait, allegedly because of environmental concerns but in reality over fears of upsetting Moscow. Even if the US would succeed in strong-arming Ankara, another difficulty would arise: Ukraine does not have the expensive LNG terminal needed to receive the gas. Other European countries are in no better shape.

But Europe also owns important shale gas deposits. Indeed, Poland has an estimated 5.3 trillion cubic meters, closely followed by France with 5.1 tcm, Norway with 2.4tcm, Ukraine and Sweden, each with 1.2 tcm. This begs the question of why these deposits have not been developed yet. One reason comes from the lack of investment in fracking technologies. Only Norway has the necessary infrastructure to extract, process and ship LNG.

Nevertheless, the most difficult hurdle to surpass comes from overcoming environmental concerns over the impact extensive fracking could have on the long term. France, Bulgaria and the Czech Republic have banned the method altogether. Romania has seen violent protests over a planned Chevron operation in the small town of Pungesti, Germany is refusing to issue production permits and the UK has placed strict regulations in place.

To complicate matters further, the European Parliament has called for a robust regulatory framework that would dramatically reduce the areas that can be exploited and would make costs skyrocket, further decreasing the feasibility of shale.

What role does Russia play in this complicated puzzle? The current energy conundrum stems from the deals sealed between the USSR and Europe in the ’80s. Under this agreement the main pipeline that crosses Ukraine was built. Coupled with the recently finished Nord Stream pipeline (2011), which goes directly to Germany, Moscow has managed to capture a large slice of the market. Its hold was further consolidated by Gazprom’s pricing technique, offering discounts on long term contracts.

As a direct consequence, European LNG imports coming mostly from Qatar have dropped by 47% since 2011, Doha opting instead to ship its wares to Japan’s energy strapped market at much higher prices. According to the Washington Post, prices in the United States have to “remain below $6/thousand cubic feet for exports to be competitive enough to reach Europe. This is not a given.”

What can the U.S. do?

According to Michael Levi of the Council on Foreign Relations, U.S. gas can only be a useful buffer, but it is “absolutely not the killer app.” He emphasizes the supporting role that American knowhow can play for the fledgling European market.

In the Baltic countries, which are heavily dependent on Russia’s exports, the need to find alternative solutions is most acute. Estonia, Latvia and Lithuania, all have LNG terminals that are either under construction or in the planning phases, while Poland will finish its hub by the end of this year. For the moment, investment in Ukraine has frozen over legal and financial uncertainties, despite having signed contracts with Royal Dutch Shell and Chevron to develop several shale gas fields in the Carpathian region.

If the Obama administration wants to do something in the short term, it should encourage American involvement in the markets that are interested in shale gas but lack the means to see through their aspirations. Providing technical support, where American companies have unrivaled expertise, or financing the expensive investments needed to develop shale gas fields, are some tools that should be put to use.

The unstable legal context that regulates shale gas in Europe, Gazprom’s increasing hold of the supply, and the steady decrease in the output of non-Russian gas fields are just some of the elements that complicate Europe’s desires to energy independence. In the end, it is the perennial laws of supply and demand that reign supreme.

The fact that the U.S. has already concluded long term deals for all of its approved gas exports means that there are virtually no supplies left that could be sent out to Europe in the near future. The bottom line is that even if American shale gas exports have the potential to be part of the solution for European markets, this process will happen only over the medium term and only if global oil prices hover around the $100 mark. First and foremost, the U.S. must finish developing its own production and export infrastructure. Unfortunately, the Ukrainian crisis cannot wait that long.