A golden age for gas? Is non-conventional gas a game changer for Europe and the world?

Jean-Pierre Schaeken Willemaers, Chairman of the Energy, Climate, and Environment Department of the Thomas More Institute

June 2012 • Tribune 35 •

The increasing share of renewables in the EU power generation requiring more and more gas-fired power plants to compensate for intermittent electricity production, the replacement of coal-fired power stations, the partial switch from nuclear to gas in Europe’s power sector in the aftermath of the 2011 Fukushima disaster in Japan, the expected reduction in newly built nuclear power plants which will be partially offset by combined cycle gas power production, the penetration of natural gas in road transport, although at a slow pace for the time being, will lead to an increase in annual gas consumption.

Some years ago, a game-changer emerged: non-conventional gas. The development of this gas is overturning the market. Its reserves are massive and well distributed worldwide with the biggest deposits in China, the US and Argentina although the volumes estimates are still uncertain. Unconventional gas may hold the key to expanding the long term role of gas in the global energy mix. Already the unconventional gas revolution has reshaped the market in the US and lastingly affected global markets. Total emissions from production are only slightly higher than for conventional gas. However in Europe, it is more expensive to exploit shale gas than in the US because of deeper and more complex geological structures, stricter environmental legislation and higher density of population.

The question is: could shale gas development stall because of environmental concerns? Are the most cited harmful effects of shale gas production such as visual nuisance, ground water contamination, uncontrolled methane releases, water consumption or earthquake hazards, real problems?

The experience shows that these consequential effects can be adequately addressed with existing technologies, of course at a cost, but without affecting the profitability of the projects to such a point that investments are deterred. If gas producers want to see a golden age of gas, they have to apply golden rules to their extraction technologies. EU’s gas dependence is going to worsen in the future if non-conventional gas is not part of the game. In that respect it is unfortunate that most European governments have decided to suspend non-conventional gas exploration, Poland being an appreciable exception. On the other hand, lower priced spot supplies are increasingly undermining long-term contracts that have traditionally dominated the market. Spot prices are structurally lower than Gazprom’s oil-indexed prices. In particular, the UK NBP (National Balancing Point) became an attractive alternative to oil indexed contracts.

In this context, Gazprom’s contractual approach is hardly sustainable in Europe. This new situation leads to renegotiations of the oil indexed prices in the long-term gas contracts in favour of a more gas-on-gas pricing or other forms of pricing closer to the market’s reality. This is the case of a number of European gas companies, some of them having filed a legal action against Gazprom to revise the terms of their gas purchase contract, in particular the oil-indexation clause.

However, even though gas prices are down at the European hubs, long-term contracts are not expected to completely disappear in the future. Worldwide demand will continue to grow and long-term contracts give the security of supply. In the same way, it does not seem likely that the link between oil and gas prices will entirely vanish because, inter alia, of big oil companies.