In the first of a two part series on the major issues surrounding shale gas extraction in Central and Eastern Europe, Andrew Ryan summarises how these new sources will be exploited differently to US reserves.
Unconventional gas has been recorded since the nineteenth century. However, our story doesn’t really begin until the 1980’s, when the Arab-Israeli Oil Crisis and a genuine fear about the security of energy supplies overlapped with rising prices and dwindling conventional reserves. It also coincided with the USA reaching an onshore energy resource maturity in both natural gas and oil, resulting in the exodous of many major oil companies either to different countries, or to offshore drilling sites. This meant that remaining resources, many of them seemingly unviable, were left to small and medium sized enterprises (SME’s). Of these, shale gas (one of four unconventional gases) is extracted using a technology called hydraulic fracturing, which, through a reduction in cost base price has recently become economically viable. The USA has ruthlessly exploited this resource leading to huge increases in output and a rapid fall in prices.
Understandably, countries everywhere are attempting to repeat the USA’s shale revolution. These aspirations are particularly acute in Eastern Europe, notably in Poland and Ukraine. The nature of natural gas transit combined with a socialist legacy and the subsequent existence of state-owned companies, leads to the creation of powerful regional monopolies such as Gazprom. With service suspensions in Ukraine still fresh in many people’s memories, the stakes appear significantly higher in Eastern Europe. Large unconventional reserves and excitement about this fuel of the future therefore make this region seem like the perfect opportunity to experiment.
Few people then would dispute that shale gas will be exploited at some point in the future. The real question that arises is whether shale gas will be a competitively priced substitute to current supplies. This is not just a question of reservoir quality or technological capacity, but of the institutional ability to exploit these reserves. To help us understand this, we need to turn to our only known example of economically viable extraction – the US.
Compared to America, the biggest stumbling block for Central and Eastern Europe thus far seems to be the marked absence of SME’s. Instead, the challenge will probably be taken up either by international Oil Companies (IOC’s) or national giants, such as PGNiG and Naftogaz. Neither of these entities have the qualities that made shale gas so successful in the US: a constant drive to grow, being structurally nimble and a willingness to take risks.
The inherent problem of shale gas is the constant need to find new sources and ‘sweet spots’, while at the same time reducing the cost base, through either technological innovation or greater geographic understanding. These are activities that lumbering state-owned energy giants, or to IOC’s who are still heavily invested in conventional and offshore reserves, are not best placed to undertake. Indeed, with an increasing number of IOC’s departing Poland, PGNiG in particular has a seemingly insatiable appetite for licenses. With the market vulnerable to the potential of artificially low priced liquefied natural gas (LNG) from the USA and massive conventional reserves in Russia, it is hard to believe that the shale gas revolution will be that revolutionary.