Thursday, October 30, 2014
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Should Europe be Fracking?

BRUSSELS – The global energy community is abuzz with excitement about hydraulic fracturing, or “fracking,” a newish technology that has opened formerly inaccessible reserves of gas trapped in underground shale formations. The boom in this so-called shale-gas production has allowed the United States to become almost self-sufficient in natural gas.

Europe, by contrast, is clearly lagging. Exploration is proceeding only hesitantly and shale-gas production has not even started, prompting many observers to lament that Europe is about to miss the next energy revolution. Should Europeans be worried?

Critics of Europe’s apparent lack of enthusiasm for fracking miss two key points. First, Europe’s geology is different from that of America. There is a huge difference between potential deposits hidden somewhere in large shale formations and recoverable reserves that can actually be produced economically.

In fact, estimates by the International Energy Agency suggest that the most significant recoverable reserves of shale gas are in the US and China, not Europe. Moreover, even these estimates are really not much more than educated guesses, because only in the US have shale formations been subject to intense exploration over a period of decades.

This process is starting in Europe only now. Poland appears to have Europe’s most favorable geology, and it might become a significant producer on a local scale in about ten years. This is a fortunate coincidence, because shale-gas production would probably make it politically easier to phase out Poland’s economically and environmentally irrational subsidies to local coal production (and consumption). Fracking would also be a strategic boon, because it would diminish the country’s dependence on Russia for gas.

But pro-fracking critics of the European Union miss a second point: the EU has no authority over the development of shale gas in Europe. Licensing and regulation of exploration and production are decided at the national level.

One must admit, however, that in Europe the “Nimby” phenomenon (not in my backyard) is a much more serious obstacle than it is in the US. While it might be true that Europeans are too sensitive to environmental concerns, incentives also play a role. In particular, whereas ownership rights over natural resources in the US typically belong to the individual owner of the land under which the resources lie, in Europe ownership belongs to the state.

As a result, Europeans, facing uncertain environmental consequences while receiving none of the revenues, tend to oppose fracking nearby. In the US, by contrast, local residents benefit handsomely from being able to sell their ownership rights to gas companies – a strong counter-balance to fears of environmental costs.

But private versus state ownership of natural resources is not the only institutional factor underlying the US gas boom. A seldom-mentioned reason is that shale-gas development in the US has benefited from important tax incentives – a model that Europe has no reason to emulate. Governments certainly have a role to play in supporting the development of new technologies, such as fracking; but, once the technology has been developed, there is no reason why one form of gas production should be subsidized via tax breaks.

But the most crucial – and almost always overlooked – point about fracking is that shale gas, like all hydrocarbons, can be used only once. The real issue is thus not whether shale gas should be developed in Europe, but when it should be used: today or tomorrow.

Europe is already a heavy user of gas, but its consumption is stagnating (along with its economy). Despite the hype about the shale-gas revolution, the extraction cost of (onshore) conventional gas remains below that of shale gas. Moreover, an existing pipeline network implies that this conventional gas can be brought to Europe at a low marginal cost. From an economic (and environmental) standpoint, fracking is thus unlikely to bring large benefits for Europe: shale gas might simply substitute for plentiful conventional gas.

In an environment of ultra-low interest rates, the economic cost of being late is low. The best option for Europe might be to wait and let the market operate. Fracking is not yet a mature technology, and thus it is very likely to improve over time. Maybe Europe will become a leader in “advanced fracking” when the shale-gas deposits in the US have already been exhausted.

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  1. CommentedRonald Wagner

    European governments are leaning strongly toward fracking because it makes logical sense. It is a proven technology that has proven to be safe in several decades of use in America. Europe has failed to equal America's success in lowering CO2 emissions and coal pollution. In fact Europe is importing coal from America, which is quite irrational. Coal is the most polluting substance in the world. It causes more health problems than any other substance polluting the world. Any sincere environmentalist should gladly embrace cheap, clean natural gas as a replacement for coal and nuclear power. Natural gas can easily beat the price of any other fuel and is the obvious base power choice to support solar, wind, and geothermal power. I have 4900 reference stories on my blog that back me up.

  2. CommentedMark Simmelkjaer

    America's land ownership/mineral ownership has accelerated the shale gas explosion. Europe's model that rely's on state action and not market incentives makes "unconventional" plays unlikely anytime soon.
    -Mark Simmelkjaer

  3. CommentedMark Pitts

    The fracking controversy reveals that the Left, as well as the Right, is willing to embrace anti-scientific beliefs to bolster their chosen policies. Specifically:

    The sideways penetration that is characteristic of fracking occurs far-far below the level of aquifers. Thus, there is no theoretical reason to believe that fracking would have any more negative effects on aquifers than any other type of drilling. And the empirical data agree.

  4. CommentedMark Pitts

    As fracking has proven, those predicting the imminent exhaustion of natural resources are, yet again, wrong.

    The public has heard the scare-stories so many times before that no one is listening any more.

  5. CommentedProcyon Mukherjee

    We are dealing with some techno-economics where the new technology has transformed the pricing of natural gas vis-à-vis Europe, where the prices are still much higher due to the carbon credits. The natural gas exports from U.S. to Europe has surged but we need to also look at the picture together with coal as coal exports to Europe has also surged by 24% year on year; there is still some advantage in coal over natural gas in terms of pricing.

    The question is should we allow incentives to operate in a market which is already over-supplied, or we look at how to time the auction of the new credits due next year.

    Procyon Mukherjee

  6. Commentedjames durante

    The issue is considerably more complicated:

    1. in many instances, including the upcoming (December) auction of large tracts of the Monterrey Shale in California, the federal government controls the rights because of large Federal land holdings in the west. Much Monterrey shale is on BLM land. The Reagan-Bush-Clinotn-Bush-Obama/Romney Plutocracy is quite happy to auction off land at low prices without consideration of the environmental consequences

    2. the environmental consequences: this is not merely a NIMBY issue; fracking creates toxic water byproducsts which must be held in containing ponds. Which toxic chemicals? Testing at a fracking site in Richardson Texas detected harmful quantities of "carbon disulfide, a neurotoxin at twice the state level for short-term exposure. Benzene, a known carcinogen, and Naphthalene, a suspected carcinogen, were both over state long-term exposure levels by more than 9 times and more than 7 times, respectively. Carbonyl sulfide, dimethyl disulfide and Pyridine were all detected above safe limits for long-term exposure."

    3. Fracking has been shown to pollute subsurface water and aquifers.

    4. Drilling and drill operation releases volumnous amounts of methane, a gas with many times the heat trapping effect of CO2.

    No one expects anyone in a capitalist system to see beyond the cash at the end of their nose. But it's past high time to move toward real energy solutions and not the quick (cash) fix.

      CommentedIrene Dovas

      "No one expects anyone in a capitalist system to see beyond the cash at the end of their nose. But it's past high time to move toward real energy solutions and not the quick (cash) fix."

      I agree. Fracking will cause huge problems for the public, who will end up suffering physically and who will end up having to pay the cleanup costs one way or another. Unavoidable methane leaks will be a problem until the proper infrastructure is in place.

      What's worrying is that as Mr. Gros states, "regulation of exploration and production are decided at the national level." Struggling European countries with the right geology may be more likely to take on fracking to boost their economic situation but the long-term costs, especially with the lack of investment in leak-plugging, will outweigh the short-term benefits. It would be better to invest in human capital than to exploit the environment. A great article that discusses ways developing countries can gain a LONG-TERM competitive advantage is located below, for those interested:

      http://www.becker-posner-blog.com/2010/09/higher-education-and-technological-advances-as-countries-develop-becker.html

  7. CommentedZsolt Hermann

    The article is raising a lot of questions about environmental issues, ownership, distribution and so on.
    Interestingly these issues will all solve themselves in a natural way.
    The article itself suggest that due to the stagnating economy the need for further energy sources is actually declining in Europe, even China is slowing down, causing turmoil on the commodity market, affecting countries like Australia who thought they will continue sailing on the back of the exponential Chinese growth for decades...
    In short this constant quantitative growth economic system which necessitates the total dependence on energy sources, fueling most if not all recent armed conflicts, geopolitical issues is slowing down and basically collapsing. This is not a surprise as the whole model is unnatural and unsustainable and it stared exhausting itself, and now has become self destructive.
    Humanity will not have other options but to return to a necessity and resource based model, and here in terms of resources the "human resources", which today are showcased by social inequality, unemployment, depression, family and general social breakup, are more important than natural resources.
    Thus the need for ever more energy will decrease, solving most of the present questions related to it.
    What humanity should be concentrating on is how to organize, plan the transitional period in between the collapse of the present one, and the building of a new more natural, adapted system so instead of unpredictable, violent jumps as we evolved through history so far, we go through it in a planned, and conscious way.

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