All Hail Shale

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As Putin's army masses in the East, Europe starts to rethink its opposition to fracking. 

BY Keith Johnson

MARCH 13, 2014 

Twitter Russian leaders, especially Vladimir Putin, have spent years trying to persuade European countries to hold off on expanding shale gas production for the simplest of reasons: Such a shift would pose a long-term threat to Russia's energy dominance over Europe. But the Russian invasion of the Crimean peninsula is giving Europe new enthusiasm for fracking -- and potentially bringing about the exact outcome Russia has spent years trying to avoid. 

The Old Continent has been largely reluctant to use the drilling technology that has enabled the U.S. energy boom despite indications that Europe sits atop plentiful shale gas reserves. Only a handful of countries, led by Poland and the U.K., have seriously considered it, while several have banned fracking altogether. There are growing signs, however, that Russia's heavy-handed antics could be changing Europe's energy calculus in fundamental ways. 

On Wednesday, the European Parliament passed energy legislation that included tougher environmental rules for oil and gas exploration -- but specifically excluded shale gas projects from the new regulations. This week, Poland passed tax breaks meant to juice shale gas exploration there. Big European business lobbies, including steel-makers and the EU employers' association, just called for the continent to embrace shale gas as a way out of its energy straitjacket. 

"Given the absolute necessity for Europe to diversify its sources of supply of gas and to find solutions to the huge energy price differential with its main competitors, we see no alternative but to proceed as rapidly as possible with shale gas exploitation as part of the energy mix in Europe while retaining all the precautions necessary in pursuing this approach," Gordon Moffatt, director general of European steel lobby Eurofer said in a statement Thursday, a day after the group sent an open letter to all European heads of state and government urging a shift in energy policy. 

Europe's growing support for fracking isn't entirely new. Business groups across the continent were calling for more shale gas production even before the Russian invasion of Ukraine triggered fears that Moscow could use energy as a weapon to prevent European powers from intervening. Even in France, home to some of the continent's most ardent environmentalist groups, fracking's high-profile defenders include Industry Minister Arnaud Montebourg. 

But in the past, fracking proponents zeroed in on economic arguments, namely the fear that European industrial firms are losing ground to their U.S. counterparts, which are blessed with relatively cheap and abundant natural gas that serves as both fuel and a key ingredient of petrochemicals like plastics and gas-derived diesel. Now, though, energy security fears unleashed by Russia's aggressive behavior have joined economic arguments in fracking proponents' arsenal. 

"It's been a shot in the arm for Europe, in a way it wasn't in the previous two gas cutoffs" in 2006 and 2009, said Elizabeth Rosenberg, director of the energy security program at the Center for a New American Security (CNAS). "This is a significant reinvigoration of efforts that are already under way, but has served to make the public and policymakers to think more creatively about the energy options they have." 

Putting the focus on the security of energy supplies, as Putin's approach to Ukraine seems to have done, could make it easier to muster support across Europe for the controversial practice. That's because the economic arguments business groups brandish to advocate for fracking -- bringing energy prices closer to U.S. levels -- don't pass muster. 

Even if Europe developed its abundant shale gas resources, most studies suggest that Europe's different geology, including deeper shale deposits, would make European shale gas a much more expensive proposition than U.S. shale gas. Other differences with the United States, such as the regulatory framework, access to capital, and supply of drilling rigs, also make a European repeat of the U.S. shale gale an uphill struggle. 

Still, worries about energy security, fueled by Russia's behavior, are reshaping the debate. And that is especially ironic because Putin and top Russian energy officials have spent years trying to discredit fracking, calling it environmentally risky and financially unsustainable. Most industry observers say Russia's attitudes toward fracking are less about genuine environmental concerns and more about the threat that it poses to the country's energy-export business. 

Putin impressed foreign observers at an annual dinner in 2011 with a detailed diatribe against the practice, sketching out the perils of fracking on dinner napkins. Alexander Medvedev, deputy chairman at state-dominated energy company Gazprom, has also railed against the environmental dangers and higher costs associated with fracking. Alexey Miller, Gazprom's chief executive, famously called the U.S. fracking boom "a bubble that will burst soon." 

"Lots of the largest conventional oil and gas producers have tried to pour cold water on fracking technologies and raise concerns about its environmental impact. And you can see the obvious reason why, particularly if they're in a precarious fiscal position like Russia where more supplies on the market potentially erodes their pricing power," Rosenberg of CNAS said. 

Until now, environmental concerns about fracking, including possible threats to groundwater and the environmental footprint of intensive drilling in densely populated areas, have ruled it out in many countries with potentially promising shale resources. France, for instance, has banned fracking, while Germany has essentially done so. Bulgaria, reliant on imports of Russian gas, also outlawed the practice, ostensibly on environmental grounds. 

Other countries, notably the U.K., Poland, Romania, and Ukraine, have all promoted shale gas exploration to varying degrees. Polish Prime Minister Donald Tusk has been especially vocal about the risk Europe faces from relying on too much Russian gas; Polish tax reforms this week are meant to make domestic gas production easier. 

Ukraine's hopes of using its own shale reserves to minimize reliance on Russian energy imports have been hit hard precisely by the crisis. Kiev signed a pair of multibillion-dollar deals with Chevron and Shell last year to explore for shale gas, but the unrest, change of government, and Russian incursion have put those plans on hold for now. 

Given the political, financial, geological, and regulatory challenges Europe faces in its quest to replicate the U.S. shale boom, even Russian aggression may not be enough to kick-start fracking in Europe. But as the continent prepares to revamp its energy policy for the next generation, security of supply is looming ever more important.