Poland’s Test for Shale Gas Might Test Its Resolve

Poland seems to be pioneering the shale gas development in Europe.  Unlike France, Poland embraced shale gas as an opportunity to reduce dependence on Russian gas and enhance its energy security.  According to Rice University’s Baker Institute, shale gas in Poland may account for about 55 percent of approximately 220 trillion cubic feet (tcf) of estimated recoverable shale gas resources in Europe.  The European Centre for Energy and Resource Security estimates that development of only a small part of the European shale gas would help reduce dependence on high-priced Russian gas and allow for greater diversification of gas sources.  With 30 companies exploring shale gas in Poland, there is hope that drilling will begin by the end of this year.  

But there is as much caution about shale gas development in Poland as there is optimism.  Shale gas in the US took 20 years before it reached the current boom.  A combination of a long history of drilling for hydrocarbons, deregulation of the gas market, competitiveness that brought down the costs of producing shale gas and equipment are behind the success of the shale gas in America.  It is yet to be seen how the US scenario could be replicated in Europe.  Costs of drilling appear to be the number one hurdle.  Given the difficulties to extract shale deposits in Europe due to complex geology, it may be more costly to bring them on line compared to the US.  Higher population density and access to water may complicate drilling in Poland, particularly given scarcer water resources in this eastern European country vis-à-vis the US.  The ongoing controversy in the US surrounding water use, well casing, and treatment of flowback water after shale gas production, it is likely that these issues will cause concern and opposition in Poland as well. 

The time, testing and lowered costs of production that led to US shale gas success may be needed for Poland’s boom.  Until then, the wild card is environmental groups that may prevail to stop drilling shale gas before it occurs, as it happened in France. 

Natural Gas “OPEC” or Not?

This week’s announcement of the world’s major natural gas exporters at a meeting in Doha, Qatar, that they will cooperate in producing and trading of this energy source as well as increasing prices and supplies seems to have sent ripples of alarm to importers.  Participants of the Gas Exporting Countries Forum (GECF), which includes Russia, Algeria, Qatar, Iran, Libya, Egypt, Equatorial Guinea,  Bolivia, Venezuela, Nigeria, Trinidad and Tobago, and Oman, agreed that the price of gas was too low.  Iran’s Oil Minister Rostam Qasemi proposed that GECF could establish the price by synchronizing strategies of the member countries.  According to Qatar’s Energy Minister Mohammed Al-Sada, a “fair price for gas would be at par with that of oil.”  While there were assurances that GECF would not limit output for its member, unlike the Organization of Petroleum Exporting Countries (OPEC), gas prices were likely to stay linked to OPEC’s crude oil.  Importers are concerned about possible influence of GECF on the global gas market.

While there are grounds to be concerned about a rise of a potential OPEC-style natural gas cartel, there are major challenges ahead for any gas cartel due to the complexity of the gas market and the difficulty among producers to effectively coordinate volumes of gas production and prices.  Gas is not nearly close to trading of crude oil in the global market and is constrained by pipeline deliveries or liquefied natural gas (LNG) with long-term contracts.  Although the GECF member-countries stress cooperation in developing each other’s markets, often they are also competitors. 

Besides, some GECF countries may risk losing their valued markets by trying to create a gas cartel.  For example, Russia already faces a tough challenge to maintain its presence in the European gas market due to its tainted reputation as a result of its recurring gas wars with Ukraine that left Europe without gas in wintertime on more than one occasion.  Russia provides nearly 40 percent of Europe’s gas demand and needs this market as much as the other is dependent on it.  To this day, Russia is still in a deadlock with Ukraine over gas prices.  As Europe actively seeks to diversify its gas sources from dominant Gazprom, Russia is walking a fine line between pushing for a gas cartel and keeping its lucrative market satisfied.  Lastly, a gas producer’s acceptable price might be too high for its customer(s).  A good example is Russia again.  Recently, Turkey rejected Russian gas because of its high price ($328 per thousand cubic meters in 2010) and signed an agreement with Azerbaijan in October 2011 on a package of gas contracts, which it considers more profitable.  There is no guarantee that unified gas prices of GECF would not backfire on their member-states.  The likelihood of a global gas cartel is not a near-term possibility. 

Russia’s Nord Stream an Ultimate Triumph? Think Again.

A launch of a new Nord Stream gas pipeline from Russia to Germany through the Baltic Sea on November 8, 2011, by the monopolistic giant Gazprom was a triumph to secure its European energy market, but kind of.  More immediately, Nord Stream dealt a blow to Ukraine, which is a transit country of Russian gas to Europe and has been in a repeated dispute with Russia since 2005 over gas pricing, debt and supply.  The Russo-Ukrainian gas war brought gas cutoffs in wintertime to downstream Western European markets.  With a capacity to carry 55 billion cubic meters of gas per year, the new $12.1 billion pipeline bypasses Ukraine altogether and is likely to boost Russia’s leverage on Ukraine in the recurring crisis between the two and help secure Gazprom’s position in the European markets.  While the former may be true, it is hard to bet on the latter. 

While Germany is a main beneficiary of the Nord Stream pipeline, the general sentiment in Western Europe is deep cynicism about Gazprom and fear of more dependence on it as European markets recover from the global economic downturn.  Receiving two thirds of its gas supplies from Russia, Europe’s main goal going forward is diversification of supply sources, which includes greater price and volume flexibility with imports of LNG, development of domestic shale gas in individual EU member countries (e.g. Poland, Germany), and building a direct pipeline access to energy riches of the Caspian countries.  It is unlikely that the launching of Nord Stream and a pending South Stream pipeline (from Russia through Black Sea to Bulgaria, Greece, Italy and Austria) would keep Europe locked to Gazprom.

Recognizing Europe’s policy of diversification of energy sources, a common attitude among Russian policymakers and energy observers is also centered on seeking other markets, particularly to its eastern direction.  While the October 2011 visit of Prime Minister Vladimir Putin to China ended again in an impasse on a gas deal due to price disagreements, Russians are confident that Beijing would eventually need their gas for its energy-thirsty economy and the sources from Turkmenistan and Qatar would be insufficient.  China continues to demand nearly half the price that Russia charges for its gas to Europe.  Some Russian energy observers argue that rushing in to the growing Chinese gas market and accepting its price will be highly disadvantageous to their country.  The Kremlin is aware that the Gazprom's supplies to European markets will be shrinking with time, but until then it is likley to bide its time to negotiate an acceptable price with China as well as to seek entry to the markets of South Korea and Japan. 

EPA to Release a Study on Hydraulic Fracturing in 2012

The US Environmental Protection Agency announced on November 3, 2011, that it finalized a plan to study the impact of hydraulic fracturing (fracking) – a method to extract natural gas from shale formations – on water by examining its mixture with chemicals, use of water in fracking, management of flowback liquids, as well as their treatment and disposal.  The EPA study, mandated by Congress, would be released by the end of 2012, with a final report due in 2014. 

While the shale gas industry maintains that the time-tested hydraulic fracturing method is not a problem, it admitted cases when natural gas migrated from drilling (not fracking) to the surface of drinking water wells.  However, it has been also hard to prove whether presence of methane in drinking water was due to drilling.  For example, Pennsylvania Secretary of Environmental Protection and chief regulator of natural gas exploration in Pennsylvania, Michael Krancer, said that Pennsylvania “had shallow gas formations for centuries,” which has caused methane to pass through to private water supplies.  According to a study done by researchers from the Massachusetts Institute of Technology (MIT), water contamination cases near drilling sites had to do with poor well construction, not the fracking itself.

At a minimum, there seems to be an agreement between the gas industry and environmentalists that natural gas is a necessary clean energy source.  From that starting point and given that shale gas production in the US has revolutionized the gas industry, increasing from next to nothing in 2000 to over 13 billion cubic feet a day now, it is hard to imagine how it could be curtailed under the existing pressure from some environmental groups.  There is a strong belief that that shale gas could fuel the US economy towards growth.  Advocates of shale gas industry are confident that the EPA study would validate that fracking poses no major threat to public health and the environment.  While it is hard to bet on that, the EPA study may demand full disclosure of chemicals and their contents used in fracking and the efficient use and disposal of flowback water – measures that this new industry has already begun taking.