Shale Gas is the New Kid in Town

Shale Gas is the New Kid in Town

In the last several years the shale oil and gas revolution has changed the energy sector in the United States and will transform the country from an importer to an exporter of oil and gas. The economic and political consequences go beyond the American borders.

Hydraulic fracturing, better known as fracking, has caught attention in Europe where high prices and dependency on imported energy make shale gas particularly appealing. But apart from the UK, where the government is hoping to create an energy revolution similar to the one in the U.S., Western Europe is reluctant toward this technology.

Eastern Europe is moving ahead more vigorously with plans to tap into its shale gas reserves. Poland is leading the development, with other countries such as Romania and Ukraine following closely behind. Economics and politics play equally important roles in this case. Considering the almost complete dependence of Eastern Europe on Russian gas supplies, as well as their past experiences with Russia, it is hardly surprising that shale gas is so appealing to many countries in this part of Europe.

But one does not have to go back to the Cold War era to understand the interwoven relationship between energy and politics in Eastern Europe. Russian majority-state owned natural gas provider Gazprom enjoys an almost complete monopoly in Eastern Europe. The three Baltic countries, Estonia, Latvia and Lithuania, along with Bulgaria, Romania and Slovakia, depend entirely on imports of Russian gas, while the rest of Central and Eastern Europe imports more than 70 percent of its natural gas from Russia. Eastern European countries have been consistently paying higher prices for Russian gas compared to their Western counterparts. In 2012, Germany, by far the greatest European importer of Russian gas, was paying $379.3 per thousand cubic meters of natural gas, compared to a staggering $525.5 in Poland and $564.3 in Macedonia.

It is not surprising that Eastern Europe places high hopes on shale gas reserves to diversify energy supplies. Ukraine is particularly open to unconventional forms of gas exploration. According to the U.S. Energy Information Agency, the country has the third largest reserves of recoverable shale gas in Europe, after Poland and France. Royal Dutch Shell and Chevron have already struck deals with the Ukrainian government to start the exploration of two of Ukraine’s largest shale gas areas, worth $10 billion and $25 billion. This not only puts Ukraine at the forefront of the shale gas revolution in Europe, but it could also have far-reaching consequences for the country’s relations with Europe and Russia. Ukraine is painfully aware of Russia’s enormous energy leverage over the country, and extracting its natural gas reserves could be a good way for Ukraine to ease its Eastern neighbour’s grip.

Russia is already feeling the impact of the shale gas revolution in the United States. According to a group of Russian government-linked experts, Russia’s oil and gas exports could plunge in the coming decades as a consequence of U.S. exports to Europe. This would have a deep impact on the fragile Russian economy, highly dependent on energy exports and high oil prices. Gazprom’s exports to Europe have already dropped by 10 percent as a result of the import of cheap U.S. coal, soon to be supplemented by even cheaper shale gas. It is hardly surprising that Moscow is nervous when it comes to shale gas. Gazprom’s CEO Alexey Miller has recently compared the U.S. shale gas revolution to a bubble about to burst, and Russian president Putin has warned that Russia needs to monitor the shale gas revolution with utmost care.

Does this mean the end of Putinomics? Probably yes, in its current form. Russia has its own enormous reserves of shale gas and oil, in addition to natural gas extracted the conventional way. But as exploration and fracking of shale oil and gas gain momentum both in the U.S. and Europe, in addition to the long-standing European efforts to diversify its energy sources, the geopolitics of energy in Europe will inevitably change. Gazprom is already suffering from cheap and abundant U.S. gas, ever stronger competition and the EU’s efforts to challenge its monopoly.

Shale gas will not solve Europe’s energy problems, nor will it cause a natural gas production boom similar to the one in the United States. Yet, we can expect a medium-term impact on the European energy market, primarily through the import of U.S. gas, and a potential long-term impact due to the related increase in domestic production, but only if Europe manages to overcome its strong environmental concerns and the legislative and technical obstacles that still make shale gas in Europe too expensive to extract compared to conventional gas.

About Author

Ante Batovic

Ante was previously a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was also a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a master’s degree in Global Politics from the London School of Economics and a PhD from the University of Zadar.