The West's threat to levy sanctions on the Russian Federation for its March 2014 annexation of Ukraine's Crimean Peninsula could come at calamitous consequences - on the other hand it might encourage some European countries to develop their tight shale gas resources by using Bakken-bred technology. Russia's export of oil and natural gas supplies to the European Union constitutes a large share of its economic lifeblood - likewise, its European neighbors can ill risk an energy supply disruption.
Russia and the European Union: Joined at the hip
The 28-member European Union's (EU) gross domestic product (GDP) is essentially equal to that of the United States - about $17 trillion. The European Union is the world's second largest energy consumer, using about 75 percent as much as the United States. However, the EU harbors only about 2 percent of the globe's proven crude oil resources and just 4 percent of its conventional natural gas.
The EU imports more than 50 percent of its annual energy requirements. About one-fourth of its combined oil and gas supplies come from Russia - including 40 percent of its natural gas. While the EU's easternmost countries (e.g. Poland, Finland, Bulgaria, the Baltic States) are most vulnerable to Russian mischief, strong economies are at risk too. Germany, the world's fourth largest economy, depends on Russia for one-third of its natural gas needs.
Russia has a recent history of using energy as a big stick. In 2008, it threatened to cut off gas exports to the Czech Republic when the Prague government agreed to base a U.S. missile defense system on Czech soil (the Czechs subsequently bowed to Russian demands). In 2008 and 2009, Russia cut off natural gas deliveries to Ukraine over prices and alleged Ukrainian corruption.
But, an energy shutdown to Western Europe is clearly not in Russia's best interest. Oil and natural gas sales are Russia's cash cow. (Russia's $2 trillion+ GDP ranks eighth, behind Brazil and ahead of Italy.) According to the U.S. Energy Information Administration (EIA), those exports account for more than 50 percent of the country's federal budget. The EU buys almost 80 percent of Russia's oil exports and more than 60 percent of its natural gas. Using energy to hold Europe hostage could be a bad idea.
At a March 2014 EU-US summit, Jose Manuel Barrosa, president of the European Commission said that Russia's annexation of the Crimean Peninsula could be a "very strong wake-up call for Europe" concerning its dependence on Russian energy. (The European Commission is the EU's executive body.) Some industry analysts view this as a sign that European countries will become more serious about developing their Bakken-like energy resources. In January 2014, the International Association of Oil & Gas Producers said its studies show that, by so doing, Europe could seriously reduce dependence on Russian energy and create 1.1 million jobs by 2050.
Unlike the Bakken formation, Europe's tight shale layers contain little oil. However, recoverable reserves of shale gas are huge. In 2013, EIA estimated that 500-600 trillion cubic feet (Tcf) of natural gas are recoverable (excluding Russian sources) using horizontal drilling and hydraulic fracturing technology. This represents roughly 8-10 percent of global shale gas reserves. Europe, whose annual natural gas demand is about 18 Tcf, currently has no tight shale gas production.
There are five major potential shale gas plays across the continent in addition to several smaller ones. They include:
- Eastern Denmark and southern Sweden southeast into Poland, Ukraine, and the Baltic states.
- Northwest England through the Netherlands into northern Germany
- Southern England into the Paris Basin
- Slovakia, Hungary, Romania and Bulgaria, to the Black Sea
- Eastern Ukraine
The countries with the most abundant shale gas resources (excluding Russia) are: Poland, France, Ukraine and Romania. Attitudes toward shale gas development are piecemeal across Europe ranging from outright banning to guarded optimism to aggressive leasing and exploration. In all, 14 European countries have potentially economic reserves of shale gas.
France nixes fracking, others balking
Four countries with major shale oil resources have outright bans or moratoria on shale gas exploration and development. The prohibitions stem largely from environmental concerns.
France: France has some of Western Europe's most massive shale gas deposits. EIA estimates recoverable reserves to be about 137 Tcf amounting to about 90 years of French consumption. France now imports all of its natural gas needs, securing 14 percent of its supply from Russia. In July 2011, the French government issued a moratorium on hydraulic fracking. French President Francois Hollande reaffirmed the ban in September 2012 and called for all existing shale gas exploration to cease. The policy was subsequently challenged in court by a group of French oil companies. On October 11, 2013, the Constitutional Council, France's highest court, upheld the ban on fracking saying it complies with government's legitimate goal of protecting the environment. The court action effectively dooms any further shale oil development.
The Netherlands: Some 26 Tcf of recoverable shale gas underlie the Netherlands, a country just one-fourth the size of North Dakota. The Netherlands is somewhat unique in Western Europe in that it is self-sufficient in natural gas. Its conventional gas resources even support exports to neighboring countries. In September 2013, the Dutch government placed a temporary moratorium on fracking pending the results of an 18-month environmental study. In February 2014, the Dutch Energy Council recommended the country allow exploratory drilling saying the risk to the environment is very small. Cuadrilla Resources, a British oil company, has plans to drill in three areas if and when the moratorium is lifted.
Bulgaria: In January 2012, under pressure from environmental groups, the Bulgarian government issued a fracking moratorium for an indefinite period. Chevron has been issued a permit to begin exploring the country's estimated 17 Tcf of gas reserves. The government has since softened its opposition to fracking, however environmental groups still have the upper hand. Bulgaria is dependent on Russia for nearly all of its natural gas.
Germany: More than 86 percent of Germany's natural gas needs are imported - one-third from Russia. However, in spite of studies that show its 17 Tcf of shale gas resources could be safely developed, progress has been slow. The government has authorized 12 exploratory concessions to ExxonMobil Production Deutschland and is expected to decide later this year if the company can proceed. At issue is the threat of water resource contamination - especially the risk of endangering Germany's $15 billion beer industry and its 500-year-old beer purity law, a statue Germans take very seriously.
Four countries with substantial shale oil reserves are poised to begin active exploration:
Poland: Not only does Poland possess one of Europe's largest shale oil resources with an estimated 148 Tcf, it has also been the most aggressive in bringing shale gas to market. One Polish official recently stated that shale oil could be as valuable to his country as its 2004 entry into the European Union. To date, 50 exploratory wells have been drilled in Poland. Currently, Chevron is teaming with a Polish company to evaluate the shale oil resource in four licensed areas near the Ukraine border. Poland, which gets two-thirds of its natural gas from Russia, hopes to have shale oil production underway by 2018.
United Kingdom: In December 2012, the British government lifted a moratorium on shale gas exploration and, in an accompanying report said fracking poses no significant environmental or health risk. The British government views exploiting its estimated 26 Tcf of shale gas as a means of replacing dwindling supplies from its North Sea fields. Current exploration is taking place in northern England by Cuadrilla Resources, Breitling Energy, and the French oil giant, Total. British Petroleum announced last year it would not soon enter the shale oil fray. Opposition to fracking has been high in Britain, however, in spite of frequent protests, opponents have little success in curbing exploration.
Ukraine: Prior to its current crisis, Ukraine had awarded shale gas exploration permits to Royal Dutch Shell and Chevron. Shell announced late last year it would drill 15 exploratory wells over the next five years. However, the current lack of political and economic stability in the country has caused companies to put near-term plans on hold. Ukraine possesses about 128 Tcf of shale gas and relies on Russia for about three-fourths of its natural gas supply.
Romania: With 51 Tcf of recoverable shale gas, Romania could become the biggest producer in central Europe. Importing a whopping 98 percent of its natural gas needs from Russia, Romania has enough shale gas to power itself for a century. The government is in full support and has granted concessions to several companies. Chevron will invest up to $600 million over the next 15 years.
Analysts agree that a European shale gas revolution will take time. Unlike the Bakken play, Europe's resource underlies more than a dozen countries with myriad regulations. In addition, its national pipeline systems are not well interconnected, which will require massive infrastructural investment. Add to those the need for horizontal drilling rigs and the expertise those rigs require. Western Europe and Russia could be in each other's pockets for some time to come.