SHALE GAS IN THE EBRD REGION: A GAME CHANGER?

Shale gas may help EBRD countries of operations diversify their gas imports. But it is unclear how it will affect emissions without effective cross-border energy and carbon markets.

The US energy market has changed drastically since the rise of shale gas in the country. The US is now the world’s largest gas producer and is expected to become a net exporter. Will shale gas be a similar game changer in the EBRD region?

This article argues that the impact of shale gas in the EBRD region is likely be limited in the coming years due to high uncertainties about the size of resources, production costs and environmental impacts.

The first step towards a successful shale gas future: more reliable data on resources

Given that only few test drills have been conducted, the size of shale gas resources in Europe is highly uncertain. A recent study suggests that the largest resources outside the US are located in China, Argentina, Algeria, Mexico, Canada and Australia. Less shale gas is expected to be found in the EBRD region. The most promising fields seem to be in Russia, Ukraine, Poland, Romania, Lithuania, Egypt and Morocco.

The current estimates are very crude and may be subject to revisions. In Poland for example the initial estimates had to be corrected downwards by 90% after the first test drills had been undertaken. And it is too early to determine what the volumes are technically and what of those would be economically recoverable.

The second step: addressing environmental risks and concerns

There are some significant environmental risks related to fracking (technically known as hydraulic fracking) which could be exacerbated especially in densely populated areas. The largest concern is the impact on water resources. Fracking requires more water during the extraction process of shale deposits than conventional gas.

Chemicals used in the fracking process could contaminate water sources if the wellhead is not adequately cased. Moreover, diligent treatment and storage of used water are essential. The same actually holds for conventional fossil fuels but fracking requires substantially more wells.

Further concerns, especially in urban areas, are related to unintended seismic events or gas leakage at the well. Finally, the impact of fracking on land and road use needs to be considered and local pollution though truck emissions taken into account.

Third step: clarifying the economic attractiveness of shale gas

While shale gas production costs in Europe are difficult to assess, with cost estimates varying widely, they are expected to be higher than in the US. The production cost of shale gas in the EBRD region will determine whether shale gas can compete with other fuels such as coal and piped natural gas. The production costs of shale gas are influenced by factors such as geological characteristics (e.g. European shale gas resources are generally deeper than in North America), the need for supporting infrastructure, but also commercial factors such as taxes and royalties. Besides, indirect factors can play an important role such as the cost of water, land-use rights and stakeholder consent.

Shale gas implications for security of supply

Shale gas promises a more diversified energy mix and supply. The graph below illustrates that most of Eastern Europe depends on imported gas, predominantly from Russia. Diversifying gas supply would be great news for countries like Ukraine, Poland or the Baltic states. However, a recent study for Europe shows that gas import dependence may still remain around 60% even with shale gas development, due to the comparatively low transport costs for piped gas relative to new production from shale gas. Therefore, EBRD countries are unlikely to become self-sufficient in gas.

Even without shale gas resources or production, countries may enjoy indirect benefits from the global shale gas development as more liquefied gas (LNG) can be imported. Traditional structures can be broken up and trade across a hopefully more liberalised European network will positively affect all EU countries in the future.

Source: based on KPMG report

Shale gas implications for climate change

The surge of shale gas in the US has resulted in a reduction of that country’s carbon emission due to crowding out coal. Carbon emission in the EBRD region could be also reduced if shale gas replaces coal which emits at least 40% more CO2 when generating electricity.[1] Compared to conventional gas, shale gas is a little less carbon-intensive (below 10%) than gas transported in pipelines from outside of Europe (e.g. Russia and Algeria). However, shale gas emits up to 10% more carbon than conventional gas sourced in Europe.

Natural gas is certainly an important part of the low-carbon transition. In that sense, greater gas supply is welcome because it increases supply volumes. In order for shale gas to replace coal and reduce carbon emissions, two important challenges have to be overcome. First, global gas markets need to become more liquid and interconnected for shale gas to lower the gas prices. Rigid gas supply contracts (take-or-pay) currently contribute to high gas prices in Europe and shale gas could have a positive impact by increasing competition with coal. Second, a meaningful carbon price is necessary in the EBRD region to reflect the higher carbon-intensity of coal.

Climate change is a global problem and the impact of shale gas on carbon emission cannot be assessed at the regional level. This is illustrated in the recent US shale gas boom where coal was replaced by shale gas and the excess coal stocks were then exported to other regions including Europe. To avoid such carbon leakage and ensure a positive effect on global emissions, carbon pricing is needed at a global level.

Outlook

The future of shale gas in the EBRD region involves many uncertainties about actual reserves and their production costs. These costs are expected to be higher in Europe than in the US due to environmental concerns, higher population density and geology. Due to these uncertainties, shale gas is not expected to play a major role in the EBRD region in the coming years. While shale gas may help countries to diversify their gas imports, it is unclear what the consequences will be for emissions unless there are effective cross-border markets for energy and carbon.

SOURCE: EBRD, 2013

[1] AEA (2012) Climate impact of potential shale gas production in the EU, Report for European Commission DG CLIMA

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