14 February 2014

Europe should see shale evolution, not revolution

Joshua Posaner
4 February 2014 

Andreas Goldthau, Marie Curie Scholar at Harvard University’s Geopolitics of Energy project, gives Interfax a state-of-play analysis on some of the key issues facing Europe’s gas supply future.

Poland and the UK may see the shale industry advance, but others may not follow (3legs Resources)

Andreas Goldthau recently became the Marie Curie Scholar at Harvard University’s Geopolitics of Energy project, covering the natural gas markets of Europe. Previously, as professor at the Central European University in Budapest, he published a series of texts on energy security.

A few weeks after taking up his post in Cambridge, Massachusetts, Goldthau gave Interfax a state-of-play analysis on some of the key issues facing Europe’s gas supply future – including shale gas, the role of Gazprom and prospects for United States LNG exports.

Interfax: As you have noted, shale gas makes headlines these days in Europe. However, the glow is quickly fading as protest movements gather momentum and regulatory proposals antagonise the industry. Is there a way back for the great shale project in Europe, or is it doomed to fail?

Andreas Goldthau: We will most likely not see a shale gas revolution in Europe along the lines of what the US has experienced. Rather, we should expect an evolution – slow, with drawbacks, but not stalling either.

The industry will move forward in some countries, such as Poland and the UK, and others may or may not follow. This is not only a function of environmental movements but also of available capital, regulatory environments and, not least, geology.

However, the most important thing is to get expectations right: even if European shale gas deposits were developed at the pace and volumes projected by the International Energy Agency, they would only stabilise Europe’s import dependency rate and not reduce it.

On top of that, it is unlikely that domestic European shale will have a significant impact on prices. It might, however, help foster more gas-on-gas competition, which is a good thing for Europe.

Interfax: The result of the European Commission’s ongoing investigation into Gazprom’s conduct in the markets of Central and Eastern Europe is expected within months. In light of the concessions made on contract pricing, is the ‘market-maker’ position of Gazprom under threat?

AG: First of all, it is remarkable the EU went tough on Gazprom in the first place. The commission has obviously taken on the gas market as its next big target, and uses the competition policy toolbox to foster its liberalisation agenda.

The message is simple and compelling: if you want to sell gas on our market, you are welcome to do so, but you have to play according to common market rules. In that respect, it is less of an issue whether Moscow will be able to maintain its role as a key supplier for Europe. The question is, under what conditions.

The times of price discrimination among Central and Eastern European customers will be over. However, in the long run market developments may do as much to undermine Gazprom’s dominant position as the commission’s regulatory actions. The oil price index has already come under severe pressure, and new, more spot-based pricing mechanisms will play in Europe’s favour.

Interfax: The narrative of a redrawing of the supply map because of US exports of LNG later in the decade is dominating much press coverage of global markets. How do you picture the impact on the markets of Europe and Asia – and how extreme will change be on the status quo?

AG: If the US starts exporting LNG on a large scale, this will certainly have massive repercussions for the international gas market. Current export applications awaiting approval amount to roughly 80% of current global LNG trade. Even if only a small share of these eventually comes to the fore, this would make the US a dominant player on the market.

Furthermore, LNG exports would come with pricing models linked to the Henry Hub – the US spot market for gas – which would make it the global pricing mechanism. Oil indexation – the traditional model – will come under severe pressure, and incumbent players such as Russia or Qatar will need to find answers to a rapidly changing gas market in which the US will likely set the rules of the game.

Whether all of this will happen, however, is still very unclear. For one thing, exports to Europe will require a significant and persistent spread between Henry Hub prices and UK NBP prices, otherwise shipping costs will make LNG cargoes to Europe unattractive. Secondly, licensing will likely remain restricted to countries [with a US free trade agreement] for the time being.

On top, there are bottlenecks with regards to export infrastructure. This implies LNG exports will grow rather slowly.

Interfax: The easing of sanctions on Iran makes the prospect of gas exports into Europe a realistic option for the decade ahead. How could this affect Europe?

AG: It will take years – if not decades – to get the Iranian oil and gas industry fully up on its feet again. Long-standing sanctions have had a devastating impact on Iran’s infrastructure and have severely limited the country’s ability to make use of its resource wealth.

At present, ironically enough, Iran is a gas importer, so the country’s leadership will have other short- to mid-term priorities. And it remains to be seen whether the current rapprochement between Iran and the West will last. I would therefore be hesitant to put too much optimism into prospects of gas exports to Europe.

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