Thursday, 11 March 2010

Europe's Road to Energy Security

Unconventional gas could free the EU from dependence on Russian gas supplies.

Last week, Russian President Dmitri Medvedev visited Paris to wrap up the sale of the French warship, the Mistral, to Russia. In turn, French President Nicolas Sarkozy was able to announce that France would get a stake in the Russian-sponsored Nord Stream natural gas pipeline and an increase in supplies of gas from Russia starting in 2015.
All this wheeling and dealing is hardly the epitome of great statesmanship. Nevertheless, it has become expected as European governments seek to close the gap between their own shrinking energy resources with those provided by Russian mega-supplier, Gazprom.
But it needn't be that way.
North America, for example, is now awash with natural gas. Technological advances in drilling and accessing "unconventional" gas sources—such as in shale and coal beds—have turned America from an importer of gas to a potential exporter. Estimates vary, but the United States likely has more than a century's worth of this fossil fuel at its disposal.
This revolution in gas supply has obvious and significant implications for American economic and energy security. However, if these technological advances were duplicated in Europe, the result could well be a geo-political game-changer on the Eurasian landmass as well.
Although it is still too early to predict the amount of accessible unconventional gas reserves in Europe, there are many locations in Europe, including areas in Germany, Poland and Sweden, that are analogous geologically to high-return sources of gas in the U.S. and Canada. Estimates by the U.S. Department of Energy and the International Energy Agency suggest that there are over 1,200 trillion cubic feet of unconventional gas reserves. This is more than six times the conventional reserves now on hand in Europe: More than enough to supplant nearly four decades of gas imports at current European levels of use. And many experts think these agency estimates are on the low side.
The advantages to Europe for tapping into this new resource are clear. It can substantially reduce Russian leverage over its European customers, such as Germany and many of its former Warsaw Pact allies. It can also prevent the "Gas Exporting Countries Forum," a collection of the world's leading natural gas producers that includes nations such as Iran, Libya and Venezuela, from becoming an "OPEC"-style monopoly for gas. With the U.S. no longer in need of importing significant amounts of liquefied natural gas (LNG) from abroad, the global glut has already allowed Europe to begin diversifying its suppliers and lessening its overall dependence on Gazprom.
In fact, precisely because Russia's Gazprom risks losing a substantial share of the European energy market to Europe's own producers, European development of unconventional gas could result in Moscow being a more reliable and pliant energy supplier. In turn, Russia still has a vast amount of untapped gas reserves but its production continues to decline due to its inability to draw investment and technology from the West. If Europe's capitals play their cards right, they ought to be able to get far better deals for their companies in developing Russian reserves as Moscow worries about no longer being competitive in this transformed gas market. In short, if Europe follows the American lead in natural gas exploration, when it comes to who is dependent on whom in the energy supply chain between Russia and Europe, the shoe could begin to shift to the other foot.
But there is a big "if" in that equation. Will Europe actually follow America's example?
Right now, Europe has nowhere near the drilling infrastructure or skill set that exists in North America. For example, the U.S. has somewhere between 1,500 and 2,000 drilling rigs available for use in gas exploration, while Europe's total stands at less than two dozen. Also, labor costs are far higher; competition among companies to keep costs down is far less; and regulatory and environmental standards tougher. Much of America's drilling can take place in relatively open spaces; whereas European population density makes it more likely that governments on the Continent will face cries of "not in my back yard" from towns and individuals.
None of these issues are insurmountable, although they do likely mean that the rapid exploitation of unconventional gas sources that took place in North America will not be duplicated in Europe. That said, the fact that natural gas is a cleaner fossil fuel than coal or oil, and hence more environmentally friendly, should boost Europe's incentive to make the most of newfound reserves. No less an incentive is the fact that, in the absence of exploiting these unconventional reserves, estimates are that Europe will require a 90% increase in gas imports over the next two decades if it hopes to keep up with domestic demand. A failure to do so will only increase Europe's dependency on precisely those countries whose foreign and domestic policies we find problematic. But, conversely, exploiting these reserves could produce strategic windfalls that go well beyond simply increasing Europe's energy supplies.
Mr. Schmitt is director of the program on advanced strategic studies at the American Enterprise Institute.