Donald Trump tweets on Qatar: consequences for gas consumers

Three tweets of Donald Trump have deepened the diplomatic isolation of Qatar. Earlier, Saudi-Arabia, Bahrain, the United Arab Emirates, Egypt, the Maldives, and Yemen started the Qatar-bashing by cutting diplomatic ties and closing their borders and air and sea connections. The fact that the US President is choosing sides in this conflict is a complete turnaround from earlier US policy aimed at promoting unity among Arab countries. Trump is also dealing a remarkable kick to a key ally of the US in the Middle-East. Many analysts and politicians commented today that the US happens to have its military headquarters and thousands of soldiers in Qatar. A basis from which they have just launched the offensive on Raqqa, the de facto capital of IS in Syria.

It’s of course not the first time that Donald Trump’s tweets are a source of surprise and uproar for US politicians, diplomats, and officials. But what caused him making such a remarkable, uncontrolled, and unchecked turnaround in the minefield of Middle East policy? Well, many observers have remarked that Donald Trump often displays classic playground bully behavior. And which kids get chosen as targets by the playground bullies? The weakest of the pack.

Unfortunately for Qatar, that’s just what they are. The small country has just 2,5 million inhabitants, and just 500.000 of those are Qataris, all the rest are immigrant workers. Nevertheless, in geopolitics, Qatar has played a disproportionately big role for many years. It could do this, thanks to the following:

• No country in the region has managed to exploit its fossil fuel wealth as well as Qatar. Sitting on large natural gas reserves, they developed a large capacity for producing and exporting Liquified Natural Gas (LNG), an achievement that none of the other Arab countries have been capable of copying. This brought them economic ties to many countries across the globe which resulted in political leverage. Moreover, it brought in loads of money.
• Qatar invested some of that money in initiatives that gave them a large international audience. Think about the world cup soccer that it will host in 2022. Or top class airline Qatar Airways. And most importantly, think about Al Jazeera, the leading source of information in the Arab World, meaning that Qataris spread the news.
• Qatar consciously searched for backing by the world’s superpower US for supporting its larger-than-life geopolitical ambitions by allowing America to build such a strong, crucial military presence inside its borders.
• But as a small, militarily weak country, Qatar has also tried to be friends with everyone. They have simply shared the diplomatic bed with too many partners. In the Middle-East this makes you vulnerable to accusations of “supporting terrorism”. One of Mr. Trump’s tweets suggests that this is what the other Arab leaders whispered in his ears when he visited them. This caused him to give the thumbs up for the diplomatic isolation that was put in motion earlier this week.

Mr. Trump’s move on Qatar might also have been inspired by his economic reasoning. I think that he’s been right in pinpointing the main weakness of the US economy, namely its large trade deficit. To make America great again, he wants to import less and export more. And what does he want to export? Definitely America’s fossil fuel wealth. Think about his coal policy. He must know very well that the extra coal produced in the US will not be burned in US power plants. The low natural gas prices make it much more profitable to produce electricity in gas-fired plants and coal prices have to drop a long way before beating gas. So the extra coal will be exported, continuing a trend of rising US coal exports that started a few years ago. Coal will help to fill the trade gap.

Donald Trump hasn’t revealed much yet about his thoughts on natural gas. But as the US has just started to develop its LNG export business, we can easily see how the prospect of selling more liquid gas to the world fits perfectly in Mr. Trumps ambitions to reverse the trade deficit. And who will the American LNG sellers meet as fierce competitors in the LNG markets? Qatar indeed.

Donald Trump’s tweets on Qatar should be seen in the light of his tweets on China and Germany. His eagerness to make the US an export rather than an import success story easily turns into envy when it comes to countries that have written an export success story of their own. An envy that results in poisonous tweets.

US diplomats and officials are scrambling to undo the consequences of Mr. Trump’s 74 words, written in the nightly hours. Economically, they seem to be a reversal of the Carter Doctrine to which the US has adhered for almost four decades. Under this doctrine, the US seeks to promote unity and peace in the region to safeguard the free passage of energy. It expresses a deep belief in global free markets being in the best interest of the US economy. Now we seem to have a more protectionist and dirigist president, adhering to the Putin doctrine of using political leverage to push America’s economic interests. “Free trade” in the Donald Trump dictionary seems to mean: “Americans sell everything to the rest of the world”. Competitors are to be blocked with import taxes and accusing tweets.

Citizens in Doha are currently stockpiling food, which shows their fear of further derailing of this conflict. In this highly militarized part of the world, the danger of armed conflict is always luring. An escalation in military terms or an economic blockade of Qatari LNG exports would have devastating effects on the world’s gas markets. In 2015, Qatar exported 106,4 billion cubic meters of natural gas of the world’s 338,3 bcm. Removing that gas from the world market would have serious consequences. It might be good news for US LNG exporters. But China has just announced that it plans to triple its LNG imports by 2030. We could surely use Qatari gas for that.

Qatari gas is of particular importance to European gas consumers. They are the marginal MWh’s. When the ships from Qatar come, gas prices in Europe drop. When they sail to Asia instead of Europe, our prices increase. We should therefore carefully watch this conflict and hope that it doesn’t derail further.

On the success of Hub gas pricing across the globe

This week, I was invited to speak at a C5 conference in Berlin on long term gas contracts. My presentation (or speech rather) was on recent developments in gas production and the impact that they might have on developments in gas contracting in Asia. It gave me the chance of reflecting upon the transformations that we have recently seen in Europe’s gas market and their possible impact across the globe. I’d like to share those thoughts with you.

 

Several other speakers, among them Patrick Heather of the Oxford Institute of Energy Studies and Brian Little of Nexant, confirmed that in 2013 more than 50% of Europe’s gas will be brought to market based on Hub pricing instead of oil-indexed pricing. The word ‘tipping point’ was shortly discussed, but most speakers were rather prudent  as to using it. Whether this ‘more than half the gas’-moment symbolizes the point at which an inevitable evolution towards 100% Hub-based has been started, I leave up to energy market historians to decide in a year or five. It’s not important, the important thing is that we are there already. If anyone would have said at a similar gas industry conference in 2008: “in five years, more than half of Europe’s gas will be traded at Hub conditions”, he would have been ridiculed. But it has happened, which once again shows how unexpectedly dynamic markets can be.

 

To assess whether this rapid evolution towards gas-to-gas pricing can be repeated in other parts of the world such as Asia, let us look more deeply at the phenomena that explain it. I am explicitly not talking about causal relationships, as I believe that it’s difficult to assign what exactly has been a cause and what has been an effect in these gas market dynamics. I see four phenomena:

 

1. As Emir Hamad bin-Khalifa Al-Thani has ceded power to his son, it is befitting to praise his role in the development of Qatar’s gas industry and his significance for the world’s gas markets. The extra volumes of (liquefied) natural gas brought to the world’s markets by the Qatari’s have caused a supply glut that certainly in the years 2009 – 2011 contributed to low prices on Europe’s Hub markets. It caused the decoupling of Hub and oil-indexed prices that, even if Hub prices have risen in the last two years, is still a reality. I’m not sure if their contribution to the development of the Hub pricing model was a conscious choice, but the Qatari’s did even more than just bringing extra MWh’s into the market. They were also the first major supplier that signed long term contracts with Hub-indexation rather than oil-indexation.

 

1. In the last five years, there has been a ten percent decline in the demand for natural gas in Europe. I was pleasantly surprised to see on the conference that now even a large gas supplier such as VNG stated that this decline in demand might be structural and not just linked to the economic crisis in Europe. The gas industry has long been quite delusional in thinking that the demand will come back as soon as the crisis is over. VNG was giving examples of how the broader climate policy is causing a structural decline in gas demand in Europe.

 

These first two phenomena have caused a temporary surplus of supply in the European market. I think this is a quite essential feature of energy markets. In energy markets, lead times for supply expansion are quite long. Therefore, supply elasticity is slower than demand elasticity. If prices of energy are high, producers start up projects to produce, pipe and/or liquefy extra volumes, projects that take five to ten years to start delivering. This is the boom phase. By the time the extra energy hits the markets, demand has often started to decline in a reaction to the high prices. The result is a supply glut. Prices crash and investment comes to a standstill, the bust phase. As demand increases again in a reaction to the higher prices, supply crunches start to occur, causing prices to rise again and the whole cycle to start up again. I know it’s a simplified scheme, but there are too many examples of it to ignore it. One of the interesting features of the shale gas development in the US, is that the lead times for supply adaptations seem to be much shorter than in conventional gas development.

 

In the glut phase, we have a clear example of a buyer’s market. The consumers have the bargaining power. This is clearly what we have seen in the last five years in Europe. End consumers could put pressure on traditional suppliers: mid-stream players that buy in the framework of long term contracts from producers to resell to end clients. Clients pushed the mid-stream companies to make Hub-based deals instead of the more expensive traditional oil-indexed contracts. The mid-stream companies were squeezed between the Hub conditions they had to offer their clients and the Oil-indexed prices enforced on them by the producers. This has caused a spate of contract renegotiations. Some of those came to a commercial solution. Others ended up in legal action. Last week, news broke out that RWE has won such a dispute against Gazprom. All this fighting over pricing between suppliers and producers (which is what this whole conference was about), clearly supports my vision that in the last five years the European gas market has been a buyers’ market. Of course, the lower price level has been the main reason why these buyers opted for Hub pricing. But I’m seriously convinced that in the long term the greater transparency, fairness and economic logic of Hub pricing will continue to support it. Moreover, two more phenomena have contributed to the success of Hub pricing in Europe.

 

1. In many corners of Europe, some decisive steps have been taken to finalize the liberalization process that was started in the late nineties. Germany’s opening up of the gas market since 2007 has been crucial. In 2012 we saw a similar process in Italy, where government decisions to free up transit capacities to competitors of incumbent suppliers has caused the PSV Hub market to develop rapidly. Poland has announced a similar policy for this year, it will be interesting to observe if it succeeds. And how about Spain, which wants to launch a Hub, will that be supported by measures facilitating access to the Iberian market? It has become much easier to develop a gas supply business in many European countries. This has been the playing field of smaller (second tier) mid-stream players, that have developed supply businesses based on sourcing gas at the Hubs. They were the competitive nail in the coffin of the first tier mid-stream companies and their long-term oil-indexed contracts.

 

1. This was made possible by the rapid development of Europe’s wholesale Hub markets themselves. Here it becomes very difficult to assign causes and effects, but the higher liquidity of many of these markets have developed and facilitated the development towards Hub-based gas retail markets. Especially TTF has played and increasingly plays a pivotal role in this.

 

However, in the last three years, some disturbing factors have occurred. Hub prices have started to increase. This is due to two reasons. The first one is the well-known increased demand from Asia. The second one is the delays of gas production projects that we have seen. I wouldn’t exactly say that this has caused a supply crunch, and it should be remarked that Hub prices are still well below oil-indexed prices at this moment. Still, the glut is getting thinner, causing nervousness in the markets. As a landmark of this development, we can point out the decline in LNG production witnessed in 2012. This decline was mainly caused by the reduction of production in traditional LNG production countries such as Egypt and Yemen.

 

Could better times be ahead? We have recently made another tour of the websites giving information on today’s projects for developing new LNG production. If all goes according to plan, we might see an increase of 30% in LNG production by the end of 2015, most of it coming from Australia, but it also contains the first cargoes of American shale gas brought to the world’s markets through the Sabine Pass terminal. Treat this information with care, as the Australian projects have been plagued massively by cost overruns and delays. But several industry experts that I spoke with at the conference confirmed our information. We are not talking here about planned LNG production, we are talking about facilities that are being built, so the chances of the projects being abolished are rather slim. Will Australia become the next Qatar in the coming two years?

 

That brings me to the Asian market, which is where most of this Australian gas will go (which would make more gas from places closer to us available to the European market). If these extra LNG volumes hit the market, one of the four phenomena that contributed to European Hub market development, more supply, would materialize in the next three years. But as far as the other four are concerned, it’s looking rather bleak. Gas demand in Asia is still increasing. And there are no steps taken towards liberalization of the gas markets or development of Asian gas Hubs. Therefore, the development of a full-fledged Hub market like we have seen in Europe seems improbable in Asia. What we might see though, is continuing and increasing pressure of Asian midstream gas companies to index their gas contracts to a Hub price (European or American) rather than to oil prices. This illustrates an important point about the main topic of the conference. The question is not whether long-term contracts will prevail or not. The question is which pricing model will be used in future long term contracts.

Eulogy on Polish shale gas

Last week’s E&C conference on energy procurement in Warsaw brought us a strange surprise. We had programmed Greg Pytel from the Sobieski Institute to speak on the topic of the development of shale gas in Poland. Like many buyers from Western Europe we are also eagerly looking at the developments of shale gas in Poland. Like another speaker, Patrick Heather of the Oxford Institute of Energy Studies, said: “before I came here, if you would have asked me which country had the best prospects of developing anything like the US shale gas boom, I would have said ‘Poland’”. We all observed the enthusiasm of the Polish public and politicians regarding their shale gas reserves. They didn’t hesitate in pointing at shale gas’ potential of unchaining the Polish gas market from the omnipresent Russian supplies. Those illusions were shattered apart when Greg Pytel bluntly announced in his first slide of his presentation “Shale gas in Poland is dead”. How could this have happened?

 

Before plunging into the analysis, let’s first recount the facts that cause such deep pessimism over the future of shale gas production in Poland. In the last weeks, Marathon Oil and Talisman, holders of rights to explore for Polish shale gas, have announced their withdrawal from Poland. They were quite vocal about the reasons for doing this, which has caused quite a shock across the European energy market community. They are following the example of ExxonMobil, the world’s biggest energy company, which pulled out in 2012. To the defense of Poland, we have to point out that Chevron, Total, some smaller international companies, Polish Orlen and – keep this in mind – state-held PGNiG are still active in Polish shale gas exploration (we are still very far from the production phase). However, the fact that three important companies have pulled out seems to signal that something is going terribly wrong in Poland. Or isn’t it? Maybe it just shows that hydrocarbon development never is an easy thing. For all the boom-talk of the moment, shale gas development in the US wasn’t an easy piece of cake either and took more than a decade to materialize. Many in the industry think that without the stubborn persistency of one man, George Mitchell, it wouldn’t have happened at all. But then, of the 39 exploration wells planned for 2013, by May only 2 had been drilled. That doesn’t look like a shale gas rush.

 

So let’s get back to the question. What is going wrong in Poland? Greg Pytel said that the problems were above and not below the ground. He clearly states that Polish shale gas is failing due to a lack of political willingness to develop it and not due to a forbidding geology. That being said, the shale gas layers in Poland are said to be more difficult to drill than anything encountered in the US. But, as Greg rightly points out, that just means that more effort needs to be done. Some of the world’s tight gas wells are producing despite very challenging conditions. Such challenging production means that more money needs to be invested. And for that investment to happen, you need a rewarding, business-friendly climate. And that seems to lack in Poland.

 

Very soon after the first wells had been drilled, stories surfaced of bureaucracy slowing down the development. In heavily regulated Poland, obtaining drilling permits turned out to be a nightmare. To give just one example, if companies wanted to drill in a different direction or at greater depth than initially planned, they had to apply for new permits, losing valuable time in the process. That is hardly the right approach for the trial and error development of a new hydrocarbon region. On top of that, the Polish government was never very clear about its willingness to let the foreign companies reap the benefits of their investments. Apparently, there is no clear guarantee that holders of an exploration license will also get a production license when they have found the gas. That is a strong disincentive to invest in exploration! This cold feet behavior regarding production licenses can be described as avarice on behalf of the Polish government that wants to reap in shale gas benefits. There are rumors that international companies will be obliged to enter into joint venture structures with state-held PGNiG (there they are again) to produce the gas. Other rumors cite tax rates as high as 80% on future production.

 

Excessive permits bureaucracy, lack of clarity regarding licenses, threats of nationalization of production, excessive tax rates: that’s hardly the sort of business-friendly climate to stimulate investment in technologically and financially complex hydrocarbon production. Is this due to a general lack of a good business climate in a former communist country such as Poland? Or is it a general European problem? Shouldn’t we consider the reluctance to allow the hydraulic fracturing necessary to drill shale gas in countries such as France or the UK as another example of how European politics are lethal to the development of shale gas?

 

It is clear that the differences in property legislation are contributing to the problem. In the United States, the owner of land almost always owns the mineral rights to that land. That means that if any gas is found on the land, it belongs to the owner of the land. The shale gas boom in Pennsylvania started when people with cowboy hats turned up on farmers’ driveways with million dollar contracts in their briefcases to buy up the mineral rights. That means that there is a large group of Americans that have a direct financial interest in the development of shale gas. The owners of the land will not impose unreasonable environmental demands (some say: not enough). And the price of using the land is determined in a free and open market where a multitude of potential producers negotiate with a multitude of owners. This is totally different in Europe where mineral rights belong to the government. Poland is an illustration of how the government squanders the bounty by not displaying rational economic behavior. On top of that, the local population in the gas-producing areas is only getting the trouble and not the benefits of production on their land. They are therefore not pressurizing their politicians to treat the bounty more sensitively.

 

Is the death of shale gas signaling the death of shale gas in Europe? I would say that countries like the UK or the Netherlands with their history of hydrocarbon development might take the lead. However, as far as the UK is concerned, we have to consider that most of its hydrocarbon production until now was offshore. And the UK has a long history of strong local resistance against onshore industrial initiatives. Patrick Heather – who apparently is partly French – surprisingly remarked that France might be the first country where shale gas is developed on a large scale. Indeed, France has the sort of strong centralized political power to decide on nation-wide industrial projects. Think about high speed rail or nuclear power development. Up until now, that central force decided that hydraulic fracturing was a bad thing. But France is also very sensitive about energy independence. If for some reason, it has to scale down its nuclear energy, it might decide that developing its shale gas reserves isn’t such a bad idea after all.

 

All in all, the developments in Poland show that unless we see a rapid reversal of current developments, European shale gas production is not for the near future. And that despite the fact that due to the shale gas revolutions elsewhere, Europe is becoming the only continent that remains dependent on imported energy, as European Council President Herman Van Rompuy observed yesterday.

Are we approaching an age of energy abundance?

Do you remember the first months of 2008? Every week, prices increased. Oil prices rose near an all-time high of 150 dollar per barrel and some analysts “predicted” that they would soon reach 300. That was obviously a disaster every time you had to fill the car. But European buyers of natural gas were also affected as back then almost all the gas contracts were pegged to oil prices. Natural gas prices rose above 40 euro per MWh. And if you were impressed by the tripling of oil prices, what to say of coal that rose from a level around 50 dollar per ton to more than 200. Electricity prices were obviously affected by these increases in combustible prices and in many countries baseload prices rose to a level near 100 euro per MWh. For buyers of energy these were terrifying times. Every delay in price fixing decisions caused a frightening increase in energy costs. We had several emergency meetings with companies in those days that were desperately looking for ways to avoid dramatic increases of their energy budgets.

Most analysts agreed on the root cause of this unprecedented bull-run. As countries like China and other emerging economies grew at exponential rates, the planet just wasn’t capable of producing enough commodities to fuel that growth. The developed economies had already depleted the world’s geological reserves so much, that there wasn’t enough left now that the developing economies joined the race. We were just plainly running out of oil, coal and natural gas. That was the simple logic behind the 300 dollar per barrel prediction of a Goldman Sachs analyst that forced many buyers of energy into panic decisions. And the fact that other commodities such as copper were also rising to historical highs proved the point. The peak oil theory became wildly popular. This was a calculus introduced decades ago by a Shell geologist called M. King Hubbert. According to Mr. Hubbert, production of oil reserves followed the elegant path of a bell-shaped curve. At some point the peak was reached and after that ever declining production rates were inevitable. Mr. Hubbert had applied his bell-shaped calculus to the US oil production and produced a reasonably accurate forecast of the peaking moment. As oil prices increased exponentially, more and more observers became convinced that we had reached or were at least near the peak of the curve of worldwide oil production. Some were even convinced that we were on the right side of the bell shaped curves of coal and natural gas production as well …

Open-minded people will acknowledge that reality is in most cases way too complicated to fit elegantly bell-shaped curves. But I have to admit, that as prices just kept on rising, even I was tempted into some Hubbert-style thinking. What explains the attractiveness of the peak theory? I believe it is our instinctive scarcity scare. Most of the people reading this blog article can satisfy their basic needs without much trouble, just like me. Just consider the most essential needs, warmth and food. Heating myself and my family means the occasional phone call to the plumber to fix my gas-fired boiler and checking gas bills and contracts from time to time. And the struggle for daily food means phone calls with my wife in which we discuss food variety and who will take the ten minutes to stop by a shop on the way back home. However, thinking about it, I have to return just two generations to find ancestors for whom the struggle for essentials was much harder. I remember a story told by my grandfather in which he scattered white flower on his coal reserves in the shed to check whether his suspicions of a coal-stealing neighbor were true. Less than a century ago, people still had to fight daily to get their share of the scarce energy and food. Unless you are born in some old aristocratic family, you carry in yourself the genes of people that survived due to their scarcity scare. This explains why perfectly civilized societies start the completely irrational hoarding behavior or even worse, looting, as soon as the first signs of scarcity are on the horizon. Slightly ashamed of our luxurious contemporary life styles, the idea of increasingly scarce energy supplies fascinates as well as scares us. The horror picture of 300 dollar oil fascinated us, because we are silently scared of having to return to the harsh daily struggle for the scarce commodities for keeping your family warm.

Some economists kept their cool and displayed a ‘what goes up must come down’ mentality. They remarked that this wasn’t the first peak in oil prices, and that previous peaks had been followed by deep decreases. They argued that high prices would put the laws of supply and demand at work, leading to corrections. Only, as the lead times for adaptation in energy are very long, this takes some time. As the bull-run extended in time, some renegade economists started to declare that energy was a basic good and hence not price-elastic. Whatever its price, consumers would continue to consume ever more energy. And accepting the ‘inevitable’ truth of M. King Hubbert’s peak theory, even if producers wanted to increase supply, they couldn’t. The cooler economists responded that energy supply and demand are price-elastic, but it is slow elasticity. Investing in more energy-efficient equipment and in new production isn’t done overnight. These delays explain the ‘boom-and-bust’ cycle of energy prices. Cool-headed economics has proven to be right again. In the second half of 2008, the energy prices corrected sharply and dropped back to their pre-peak levels. Peak oil (and other energy) theorists used the economic crisis as an excuse. As soon as that crisis would pass, the plain logic of the bell curves would kick in again. But isn’t the economic crisis in itself a sign of the elasticity of energy demand? If energy prices rise too high, this pushes the world into a recession, causing demand to drop sharply. The 2008 crisis (which still isn’t over, at least not in Europe) has a complicated web of causes. But high energy prices are definitely part of that. The increasing impact on their budgets of high fuel prices was one of the reasons why so many Americans couldn’t pay back their mortgages. So, even if 300 dollar oil prices and equivalent prices of other energies are possible, they would very probably be extremely short-lived, as they would push the world in a deep recession. That draws a bleak picture of life in a perpetual economic crisis on the other side of Hubbert’s peak. The last five years have learned that economic stagnation isn’t fun, so we all have a moral duty to avoid ever ending up there.

As the economy has recovered, specifically in the commodity-devouring developing economies, energy prices on the world markets have increased again, but they haven’t hit the previous highs (yet?). Electricity in many countries of Europe is currently even trading at its lowest level since 2005. And we are clearly seeing that energy demand and supply are impacted by more fundamental phenomena than just the economic crisis:

DEMAND SIDE:

– Combined with climate policy measures, the high prices of 2008 have caused renewed enthusiasm for energy efficiency improvements. This seems to have caused a sustainable downtrend in energy consumption in the developed world (both the EU and the USA). However, the effect of this is largely undone by continuing growth in energy demand in the developing world.

SUPPLY SIDE:

– Oil production in 2011 was 1,5% higher than in 2008. So, we are not on the right side of the bell-shaped curve yet. It should be remarked that these extra barrels are increasingly expensive to produce, causing oil prices to remain high. But it looks like we still have enough oil left. Thanks to shale oil, US oil production was 16,44% higher in 2011 than in 2008 and some are optimistic that these unconventional resources could ultimately mean an end of oil imports in the US. So, Mr. King Hubbert, the tail end of the US oil production curve is not bell-shaped …

– Peak theorists that simplistically extended the peak oil theory to coal and natural gas, were ignoring the fact that undeveloped reserves of those fossil fuels were much higher than those of oil. As oil prices remain high, the world has tapped into its coal and gas reserves. Coal production in 2011 was 12,8% higher than in 2008, gas consumption grew 7,5%. This clearly shows that the peaks in coal and natural gas were nothing more than an expression of slow elasticity. Natural gas production has been boosted by conventional and unconventional gas production. I have extensively written about the shale gas revolution on this blog. If it can spread across the globe, gas abundance could become a reality.

– The prices of wind and solar power production have dropped to a level that necessitates only limited subsidies to stimulate their growth. Therefore, the growth of the share of energy produced from these renewable sources seems unstoppable.

The previous energy crisis (the 1970’s) was followed by a long period of energy abundance and historically low prices. Are the trends above sufficient for the world to be entering an age of energy abundance again? The hunger for energy of the developing economies is continuing to put pressure on the world’s energy markets. But if shale gas becomes a worldwide reality, energy abundance could become a fact, especially if it is combined with an adoption of more energy-efficient and more renewable technology by the developing economies.

There are many obstacles on the road to energy abundance. And the legendary unpredictability of energy markets makes it impossible to say if we are heading for it or not. So please don’t interpret this blog as a forecast of low energy prices. The important message is that abundance is not unthinkable. Still, we see many energy buyers that continue to be driven by scarcity scare in their price fixing decision. This is partly due to the fact that abundance stories don’t get much political and press attention. Many conservative politicians prefer the peak energy theories because they fit within their energy independence policies that are supportive of their hawkish geopolitical position. Do you really think that the American public would have allowed the sacrifice of American blood and money in the Iraq War if back in 2003 they would have known that they were heading for the abundance of homegrown shale gas and oil? On the liberal side, the scarcity scare fits within the anxiousness to do something about climate change. This seems to be the predominant policy of Europe. We need to be very careful as we are approaching a possible age of energy abundance. If Europe unilaterally choses for more efficiency and renewable rather than more (unconventional) oil and gas, we might end up with a much higher bill than the rest of the world. Can we really afford that?

Benedict is giving a presentation on this topic on our (Central) European Energy Procurement Conference on the 16th of May in Warsaw. Send an e-mail to info@eecc.eu if you want to attend or click here.

Le marché de l’énergie français en Décembre: une fin d’année mouvementée pour EDF et GDF!

Les différents événements observés à la fin de l’année 2012 témoignent de la mutation constante des marchés. EDF s’est montré très offensif sur le marché du gaz pour asseoir davantage sa position et tenter de faire face aux tensions croissantes. En revanche, les déconvenues liées à l’EPR et le souhait de Hollande de fermer Fessenheim jettent un froid sur la scène nucléaire française. Même bras de fer avec GDF en Belgique, qui cherche à redémarrer ses centrales nucléaire à Doel et Tihange. Par ailleurs, dès Janvier, GDF va pouvoir appliquer en France une hausse des tarifs réglementés pour le gaz, mais en augmentant heureusement la part d’indexation sur le marché hub dans sa formule d’approvisionnement.

Electricité

Un nouveau dérapage des coûts de construction du premier EPR en France a été annoncé début décembre. La facture avoisinerait désormais les 8.5 milliards d’euros, au lieu de 3.3 milliards d’euros prévus au début du projet. Suite à cette annonce, l’italien ENEL a décidé de se retirer du projet, laissant EDF faire cavalier seul et lui rembourser au passage les 613 millions d’euros investis. Enel se justifie également  au travers de la « forte baisse de la demande d’électricité et un calendrier incertain pour les autres investissements dans le nucléaire en France». La question de la rentabilité de l’EPR est alors ouverte. Tout dépend de la suite qui est donnée: s’agira t-il d’un modèle unique ou est-ce le premier d’une construction en série? Le président du directoire d’Areva (Luc Oursel) a lancé quelques chiffres: selon lui, le prix de l’électricité produite sur ce site coûtera entre 70 et 80 euros par MWh, à comparer aux prix de marché inférieurs à 50 euros par MWh actuellement, et au prix de l’ARENH de 42 euros par MWh en vigueur. Même si la construction en Finlande souffre également de problèmes, le chantier des deux EPR en Chine obéit encore au planning fixé et se maintient dans le budget prévu. Toujours selon Areva, le coût de l’électricité fournie par un EPR standard devrait à terme tomber à 60 euros par MWh en Europe. En effet, M. Oursel a confirmé son objectif ambitieux de commercialiser au moins 10 EPR de 3ème génération d’ici la fin de l’année 2016 et se doit donc de rassurer la clientèle! Parmi ces 10 EPR, 2 seraient très probablement construits en Grande Bretagne et exploités par EDF Energy, mais il y a encore quelques incertitudes à l’heure actuelle.

Poursuivre l’exploitation d’une centrale existante est donc bien moins risqué en termes économiques. Cependant, le débat a encore été ravivé quant au souhait de François Hollande de fermer Fessenheim d’ici 2016. Il s’agirait d’une bien mauvaise affaire pour EDF au vu des investissements en cours. Le montage du dossier de démantèlement prendrait environ cinq ans, mais EDF serait contraint de réaliser entre temps les nouveaux investissements imposés par l’expérience post-Fukushima, soit environ 350 millions d’euros. Cela s’ajoute aux travaux récemment effectués pour prolonger l’exploitation de la centrale jusqu’en 2021. Ceux-ci avaient déjà couté 300 millions d’euros. Ces travaux en font par conséquent une centrale à l’avant-garde des normes de sureté les plus exigeantes! Par ailleurs, dernier bémol, EDF se doit fournir de l’électricité à ses homologues allemands et suisses qui ont participé au financement de la centrale, et cela au coût de production actuel estimé à 25 euros par MWh, bien inférieur au prix de marché (centrale déjà amortie). Une perte de plusieurs centaines de millions d’euros est là aussi à attendre. Pour orchestrer cette fermeture, Francis Rol-Tanguy, surnommé M. Fessenheim, a été nommé en Conseil des ministres mercredi 12 décembre. Il devra garantir que les emplois liés à la centrale soient préservés. Il n’est cependant pas parvenu à entrer sur le site lors de sa visite le vendredi suivant, refoulé par des salariés mécontents, qui n’ont « pas besoin de liquidateur ». De nouvelles actions sont prévues.

En Belgique, Electrabel (filiale de GDF) tente d’obtenir le feu vert pour redémarrer Doel 3 et Tihange 2, les deux centrales stoppées  suite à la découverte de fissures dans les cuves qui abritent les cœurs des réacteurs. L’entreprise a remis début décembre un rapport à l’Agence Fédérale de Contrôle Nucléaire (AFCN) avec ses conclusions et son plan d’action pour le redémarrage des deux unités, estimant qu’un redémarrage est possible : “Toutes les normes et standards internationaux ont entièrement été respectés lors de la construction des centrales” et  “le constat initial selon lequel il s’agirait de défauts dus à l’hydrogène non évolutifs et formés lors de la phase de forgeage est confirmé” et indique que « les résultats confirment l’intégrité des cuves des réacteurs considérés, ce qui permet le redémarrage immédiat et l’exploitation sûre de Doel 3 et Tihange 2 ». L’évaluation finale de l’AFCN est attendue pour la mi-janvier 2013. Une telle annonce a redonné de l’optimisme au marché de l’électricité en Belgique, avec des prix atteignant des niveaux intéressants.

Il y a quelques années, il était fait mention d’une renaissance nucléaire à travers le monde. La France avait la volonté ferme de placer son industrie nucléaire à l’avant-garde de cette nouvelle vague d’investissements. Que reste t’il de cet optimisme? La catastrophe de Fukushima et les évènements de 2012 en Belgique ont montré que l’électricité nucléaire semble moins sûre que promis initialement. Tenant compte des conséquences catastrophiques qu’un accident de centrale nucléaire pourrait avoir, on ne peut prendre aucun risque avec un potentiel problème de sécurité/sûreté. De plus, en raison de la taille de ces centrales, un arrêt lors d’un éventuel problème mène à un défaut de capacité disponible considérable. Imaginez-vous que l’on découvre demain un problème nécessitant  de fermer immédiatement toutes les centrales nucléaires en France. L’échec financier de Flamanville démontre que le nucléaire n’est pas une électricité bon marché non plus. Sans aides à l’investissement et avec la prise en compte de ces coûts de sûreté, l’électricité nucléaire se veut plus chère que l’électricité produite à partir des sources fossiles. De plus, elle n’est que légèrement moins chère que l’électricité verte produite à partir d’éoliennes, à travers les panneaux photovoltaïques ou grâce aux centrales biomasse. Les coûts d’investissements de ces énergies vertes suivent par ailleurs une courbe décroissante, ce qui n’est pas tout à fait le cas pour le nucléaire.

Le gouvernement français actuel semble être sensible à ces arguments contre l’expansion de l’industrie nucléaire. Néanmoins, si l’on tient compte de la grande dépendance du nucléaire en France (la plus forte dans le monde), un renversement complet et rapide de la politique énergétique nous semble difficile à réaliser.

Gaz

Les tarifs règlementés du gaz naturel vont augmenter en 2013. Delphine Batho a confirmé une hausse de 2,4% au 1er janvier, et non pas de 0.8% comme cela aurait du être le cas. En effet, le Conseil d’Etat a  jugé trop faible la hausse de 2% accordée par le gouvernement à GDF Suez en Octobre dernier et réclame une correction (estimant que la limitation de la hausse imposée par l’Etat n’était pas conforme, porte préjudice aux fournisseurs alternatifs et crée un déséquilibre budgétaire pour GDF). Les nouveaux tarifs permettront donc de rattraper le retard accumulé. Cependant, bonne nouvelle, la renégociation des contrats d’approvisionnement demandée par le premier ministre a aboutie positivement : la part d’indexation sur les hubs va augmenter de 26 à 36% dans la formule d’indexation du prix (et donc dans le portfolio de GDF), permettant de contenir cette hausse qui aurait le cas échéant été de 4%. La part des produits pétroliers recule donc. Seconde modification: les prix seront ajustés tous les mois et non plus tous les trimestres pour lisser les évolutions.

La partie d’échec géopolitique qui oppose les deux projets de gazoducs concurrents South Stream et Nabucco, portés respectivement par la Russie et par l’Union Européenne, vient de tourner à l’avantage du premier. Vladimir Poutine a inauguré le démarrage de la construction du gazoduc South Stream. Celui-ci est censé couvrir 2 380 kilomètres dont 925 kilomètres en offshore pour une mise en service fin 2015. Le coût est estimé à 16,5 milliards d’euros. Le tracé évite soigneusement l’Ukraine, et permettrait également de contrôler une grande partie des livraisons du gaz en provenance des gisements de la mer Caspienne et du Kazakhstan, concurrençant directement le gazoduc alternatif Nabucco. Henri Proglio, PDG d’EDF était présent à l’inauguration, dans la mesure où EDF intervient à hauteur de 15 % dans ce consortium. De nombreuses discussions quant à la pertinence de ce projet sont ouvertes. Il est cependant clair que cela va à l’encontre de la politique de L’Union Européenne visant à accroitre la diversification des approvisionnements de gaz!

Preuve du dynamisme et de la volonté de développement d’EDF dans le marché gazier, l’entreprise s’est portée candidate au sien d’un consortium à la reprise de TIGF (filiale transport et stockage de gaz du Sud Ouest mise en vente par Total), estimée entre 2 et 3 milliards d’euros. Annoncé comme un autre possible repreneur probable, GDF n’a pas remis d’offre. Sa filiale GRTGaz gère pour l’instant les réseaux des 2 autres hubs PEG Nord et PEG Sud et aurait pu compléter son tableau de chasse avec la dernière pièce du puzzle, permettant éventuellement un rapprochement plus rapide des 3 hubs.

La France continue à mener une politique à double visage concernant son marché de gaz naturel. D’un côté, la pression mise sur GDF pour évoluer vers une plus forte indexation Hub (plutôt que l’indexation pétrolière) est en phase avec la politique européenne. Mais d’un l’autre côté, des opportunités pour le renforcement des marchés Hub sont ratées. La France souffre du manque d’unité de son marché interne de gaz. Si GDF reprenait le réseau TIGF, une unification pourrait être réalisée, avec comme résultat un meilleur fonctionnement du marché Hub français. En plus, alors que la France pousse GDF à forcer ses fournisseurs à s’indexer sur le Hub, EDF assiste le plus grand ennemi des hubs gaziers, Gazprom, à réaliser son projet South Stream, un projet menaçant la diversification de fourniture nécessaire pour la réussite des marchés Hub en Europe.

Les adaptations récentes de la politique énergétique de la France semblent être inspirées par une acceptation de certaines réalités de marché plutôt que par une volonté d’avancer. Reste à voir si une politique plus visionnaire se réalise.

article by Baptiste Desbois

TIGF sells its gas transportation grid

It has always been an oddity in centralist France, this part of the gas transportation grid called TIGF. It is situated in the South-West of the country and it is owned by Total and not by state-held gas firm GdF. Total has now decided to divest and sell its piece of French gas grid. Four bidders are selected: EdF, Enagas, AXA and CDC. Hold on, you might ask, did you say EdF and not GdF? Well indeed, GdF, owner of the rest of the transportation grid in France is not among the bidders. So the unification of France’s gas transportation grid will not happen.

One of the main flaws in European gas market liberalization is the lack of a North – South gas corridor. There is a pipeline link between the Netherlands and Italy, but so far, no extensive trading activity was seen due to failing capacity rights allocations. And Spain is a gas island, linked to the rest of Europe with just a small pipeline. Also, the lack of good links between France’s regional gas grids (PEG North, PEG South and TIGF) makes North-to-South gas competition difficult. Not unifying France’s gas transportation grid by having GdF at least bid for TIGF therefore looks like a missed chance at first sight. The lack of interconnection with Southern-Europe means that the key-consuming region in the North-West is not plugged directly into the gas fields of Northern-Africa. It also means that Spain’s many LNG import terminals, which due to the crisis have large spare capacities cannot be used to alleviate the broader European market. Organizing a better North-to-South gas market integration looks like a vital step in improving Europe’s diversity (hence: security) of supply.

The necessity of diversifying Europe’s gas supply has been emphasized by the recently announced takeover of Wingas shares by Gazprom. Wingas was a 50/50 joint venture between Wintershall, the oil and gas business of German chemistry giant BASF and Russian gas behemoth Gazprom. BASF has now ceded its shares to its Russian partner, getting access to upstream production assets in Russia in return. The acquisition of Wingas earmarks Gazprom’s continuining efforts to get hold of downstream assets in the European market. And this is not a small step. Wingas is a large gas supplier in Germany and has important positions in the Benelux, French and UK market and in Denmark, Austria and the Czech Republic. Gazprom is now completely owning one of the top ten European mid-stream gas companies. Getting control over Wingas is an important step in Gazprom’s strategy of acquiring a dominant position in the European gas market. Without entering into the geo-political speculations that always surround Gazprom’s business decisions, anyone with a heart for European gas market competition will agree that becoming to reliant on a single source of supply isn’t a good thing. With North-Sea gas production starting to decline and with increasing competition on the world’s LNG markets, extra supplies coming from the South of Europe could bring welcome relief.

(Just another remark on Gazprom’s acquisition of Wingas. Gazprom’s strategy of dominating Europe’s gas market doesn’t seem to be very successful until now. Gazprom seems to be losing rather than winning market share. The Russians’ stubborn resistance to the replacement of expensive oil-indexed gas pricing with the more fair and transparent pricing at Hub conditions is the main cause for this. Shortly after the announcement of the Wingas share deal, BASF announced that it signed a 100% Hub-indexed 4,5 bcm per year gas deal with Statoil. This is an important illustration of how Europe is turning its back on Gazprom and its oil-indexation fetish. But of course, if the Hubs can’t get access to supplies outside of Russia, Gazprom might prevail in the end.)

Returning to the South, it is very interesting to see Enagas, the owner of the Spanish gas grid bid for TIGF. If they would be successful, this could lead to a better interconnection of the Spanish and French gas markets. It could also mean that a cross-border gas grid and balancing zone comes near. We could consider this to be comparable to Gasunie’s attempt as of next year to extend the Dutch gas Hub TTF into Northern-Germany. Such cross-border gas grid operations are a very interesting developments towards an integrated European gas market. However, with so many things that are still to be fixed inside the Spanish market today, this paragraph might sound like day-dreaming, I realize. There remain issues to be solved with different odorization practices in France and Spain for example.

The fact that Electricité de France (EdF) is among the selected bidders confirms that the traditional French electricity producer continues to diversify. EdF wants to become a broader energy group by expanding its gas business. It is unclear to me in how far it can achieve this by going into the grid operation business. This seems to be based on the mistaken belief that owning parts of grids is helpful in extending market share. The experience of the past five years in Europe’s gas markets have shown that independent grids with easy access to their capacities are the best option for developing gas trading. It is also unclear how financial insitutions like AXA and CDC will contribute to solutions for Europe’s gas grid challenges.

Finally, by selling TIGF, Total is following a trend among IOC’s, Independent Oil Companies. These are retreating from downstream energy marketing to have more capital to invest in the increasingly expensive exploration and production activities where they are in fierce competition with NOC’s (National Oil Companies). Last week I was speaking to the country manager of a large IOC and he confirmed to me that his company had no intention at all to go into the retail gas business in Europe. Total is still offering gas to end clients in several European countries, among them obviously France. Could the sale of TIGF mark a broader retreat to the upstream activities?

The shale gas debate in France: defeat the prevailing obscurantism!

Contribution by Baptiste Desbois

 

Last week, Daniel Cohn-Bendit, Member of the European Parliament, regretted the French tendency to “seek mirages” referring to a decision in France to allow research into the possibility of producing shale gas in a more environmentally friendly way. Green activists across Europe are eager to keep us from ever producing shale gas because they think its production is causing environmental damage. In this eagerness, they now go as far as to condemn the research into the possibility of producing the gas without the environmental damage. Are we stuck in the same situation as in the 17^th century, when Galileo was condemned for his audacity to research an alternative cosmology? Do we have to narrow-mindedly present shale gas to the Inquisition, without looking further than the tip of one’s nose, and without looking for progress on the subject? As emphasized by Mr. Mestralet, CEO of GDF Suez, France systematically closes the door before opening it.

Certainly, hydraulic fracturing raises questions. However, it is condemned without much further thought due to strong propaganda, without much real evidence of its effects on the environment. The purpose of this blog is not at all to praise shale gas but to highlight the absurdity of the current situation. Of course, any ecological disaster must be prevented in every possible way. François Hollande claims there is no evidence that the exploitation of shale gas by hydraulic fracturing is free of heavy risks to health and to the environment. But neither is there convincing evidence to the contrary, nor that there aren’t alternative solutions. It’s like sweeping the hopes for a return to the industrial competitiveness of France. Why would shale gas be rejected in case clean technology can be found, combined with transparent governance?

The recent “Gallois” report ordered by Hollande and issued in early November, clearly recommends conducting research for exploiting shale gas to boost France’s international competitiveness. Ironically, Pawlak, Polish Minister of the economy then said: Total is welcome to try this at home! “. In the aftermath, the European Parliament, more open to discussions, rejected an amendment proposing to place a moratorium on the exploitation of shale gas, but calls for back up with “robust regulatory regimes”. Will France finally open its eyes and look more closely at this potential gold mine on which it might be sitting? What would General De Gaulle think of a France that refuses to research the possibility of exploiting its natural resources?

Flashback

After a strong mobilization, France became the first country to ban the use of hydraulic fracking in July 2011, with the Jacob law. Based on this law, Nicolas Sarkozy and Nathalie Kosciusko-Morizet canceled three licenses for shale gas exploration in the south of France in December 2011 (two from the American Schuepbach and one from Total), grabbing full attention in the media. In addition, Sarkozy also confirmed that other operators “can’t proceed with the exploration or exploitation of gas and oil shale based on the hydraulic fracking technique”. The discussion was then closed under the Sarkozy era; tensions went down although the pressure set by the industry has always been maintained.

Change of government in 2012 led to the re-opening of the debate. Prime Minister Jean-Marc Ayrault woke the sleeping topic by saying that the debate related to the exploitation of shale gas was still open and will be handled by Holland during the environmental conference. Montebourg also fueled the controversy by claiming that shale gas is not a forbidden subject at all, driving ecologists mad. As Minister of Industrial Renewal, he is at the forefront to understand all shale gas opportunities. On the environmental conference on the 14^th and 15^th of September, François Hollande made it clear that he aims to follow the same line as Sarkozy. He announced that he “listens to the economic arguments,” but said that considerations on shale gas in France were “frequently exaggerated”, coupled with too much environmental uncertainties to allow the exploitation. He said this guideline will be firm throughout his five years as president and by the way took this opportunity to dismiss seven applications for exploration licenses. This made an end to the debate.

A new announcement came from Hollande on the 3^rd of November: he expressed his support to research of other techniques to exploit shale gas. He automatically excluded hydraulic fracturing but accepted that researchers work on that topic, “funded by businesses and researchers”. He confirmed that he would take responsibility if an environmentally friendly technique would suddenly pop up.

New turn of events and new pressure: On the 5^th of November, the Gallois report (ordered by the government to propose measures to rebuild competitiveness of France) is given to Ayrault. 22 measures were proposed to reset wheels in motion. The fifth proposal was about shale gas! The report proposes to “conduct research on technical exploitation of shale gas “, possibly in collaboration with Germany. Logically, the government immediately announced that this measure would not be retained.

Latest twists and turns: The Economic Affairs Committee of the Senate has decided to reopen the debate on shale gas and ask the Parliamentary Office for Evaluation of Scientific and Technological Choices (OPECST) to examine alternatives to fracking. This same committee believes it would be “regrettable to prohibit reflection and research for the development of environmentally friendly technologies” and indicates that the goal of the research is to better evaluate the resources in France. To be continued…

But what quantities are we talking about?

Based on current knowledge, it is very difficult to identify the potential of shale gas in France. Resources appear to be concentrated in two large basins around the Paris region and in the south of France. This last basin is assumed to be the most interesting from a geological point of view. However, they belong to densely populated and/or touristic areas, partly explaining the current reluctance for producing gas.

Source: International Energy Agency, OECD 2012

The U.S. Energy Information Administration released in 2011 a study in which recoverable resources are compared in several countries European countries (the study is available at http://www.eia.gov/analysis/studies/ worldshalegas/pdf/fullreport.pdf).

The figures mentioned in this report evolve depending on the current knowledge (In Poland, for example, the Geological Institute has sharply revised the estimate for this country). However, it provides the reader with a first idea about what we are talking about. France is expected to owe about 5.1 trillion cubic meters of shale gas, and stands therefore at second place after Poland. Both countries owe most of the resources in Europe. Ukraine ranks third, but with about 5 times less volume than France.

The consumption/resource ration is virtual but still an interesting indicator. It tells us the number of years that can be covered by shale gas (relative to current consumption). In that case, Poland is widely ahead: The resource might cover more than 300 years of consumption! Denmark is second (about 150 years) and France third with about 100 years. Of course, these figures should be read with care: the overall potential may prove to be much less than predicted here, and the proportion of economically recoverable resource might represent a low ratio. Also, experience in the US has shown that when more gas is produced, consumption also picks up. It is also to be expected that France would export much of its shale gas if it would produce it. However, the interest in shale gas is largely justified.

What would be the economic impact?

98% of the gas consumed in France is imported (32% from Norway, 15% from the Netherlands, 14% from Russia, 14% from Algeria …), often through long term contracts. 40 years ago, this dependence was only 70%. The impact on the bill has thus increased during these years, to reach 9.7 billion euro in 2010 (according to the General Commission on Sustainable Development).

To illustrate the economic impact, let’s have a closer look at the price relaxation caused by the shale gas revolution in the United States on the spot market, and compare it with the prices in France (PEG Nord spot product traded on the PowerNext exchange). In the United States, more than a quarter of the gas is now coming from this unconventional cheap resource (and this proportion is expected to grow to 50% in 2035, according to some scenarios established by the U.S. Energy Information Administration), relaxing the market price of gas.

Since 2010, the price gap between France and the United States has gradually increased to reach more than 18 €/MWh at this moment. The American gas price remains below the threshold of 10 €/MWh, and is less volatile. In France, the price per MWh currently exceeds 27 euro (170% more expensive!). At this point, there is no need to describe the thoughts of consumers of natural gas, especially large industrial consumers, when they see such a gap.

Moreover, in France, and more generally in Europe, the gas demand is decreasing but prices remain stuck at historically high levels, mainly because of tight supply (reserves depletion in the North Sea, LNG diversion to Japan …). France is complaining of increasing gas prices, but refuses systematically the shale gas option without even taking the time to study it. It has been announced that nearly 4 million households are living in a precarious energy situation in the country! Of course, France doesn’t face the same situation as the United States. The exploitation of shale gas requires a lot of wells and space. A huge quantity of water is required, together with a dense network of gas pipelines. The situation is more difficult in France. However, Christophe de Margerie, CEO at Total said “When you’re in a difficult economic situation like today, and you don’t take the opportunity to develop the gas, it’s a shame.” The idea is not to praise this energy, but there are some interesting factors that would allow France to improve the current situation, in addition to the security of supply and cost benefits. However, remaining uncertainties are very large.

What are the issues?

The purpose of this article is not to discuss whether the exploitation of shale gas is harmful for the environment or not. Nobody pretends to know, as studies are often contradictory. This must be investigated precisely and scientifically. If it’s not possible to develop good practices, better to keep the door closed! If better technologies can be developed, the debate should remain open.

 Green activists are against shale gas production for two reasons. First of all, the Gasland movie is a masterly piece of suggestive filming. Anyone (including me) with some sense of environmental justice will feel thoroughly shocked after seeing it. What are these big bad gas companies doing to these poor people? However, a few days after watching it, you start to realize that if any at all, the “evidence” in the movie is anecdotic. For example, the actor/director Josh Fox is continuously taking water samples, suggesting pollution, but the test results of these samples are never shown. Secondly, environmental activists across the globe are increasingly alarmist about global warming. Recent reports on arctic ice melting point out that they are right in doing this. However, they loose all sense of pragmatism and want the use of all fossil fuels to end immediately. This includes natural gas, which was hailed just two decades ago by environmentalists as the least polluting fossil fuel. Opposition to shale gas is also based on idealistic refusal of any fossil fuel use.

On the other hand, shale gas is not an infamous or ugly gas, as the population seems to believe. It is standard gas, but trapped in an unconventional reservoir. And the carbon footprint linked to the combustion of gas is better than burning oil or coal! U.S. emissions of greenhouse gases are rapidly falling as coal plants are closing one after another because of the competitive natural gas price. The problem lies in the methods of production (leakage) and in the water usage. If new environmental-friendly methods would appear, would this reluctance disappear?

The second point is the marginal image of gas conveyed in France. With the high nuclear rate in France, gas is a fuel that tends to stay at the background. The French trend of electric heating is also erasing the importance of natural gas. I am convinced that the discussions would have been less negative if the topic was oil shale. The impact on the wallet would be more meaningful and people would be more easily convinced, although oil is more harmful than gas.

To conclude

The door has been closed even before it was half-opened. The problem lies in the blindness and the refusal of any discussion. Why refuse research? Why assert without proof that hydraulic fracking is harmful, and can’t be improved? Why closing the door before looking for alternatives? It’s also difficult to believe that shale gas will not be exploited in the future, even if environmental studies play against them. The larger the resources turn out to be, the more difficult it will be to withhold from producing them. Hence, environmentalist’s strategy of blocking research into the potential.

In case no decision would be taken regarding shale gas, it would be great to support a choice of speeding up the development of renewable sources of energy. Replace traditional gas heaters with heat pumps for example! Or speed up marine technologies! France has the second world largest maritime area, and is positioned at the forefront for some technologies. The worst decision would be to continue to do nothing…

Le débat sur le gaz de schiste en France: vaincre l’obscurantisme régnant !

Une contribution de Baptiste Desbois

 

La semaine dernière, Daniel Cohn-Bendit, député européen, a regretté la tendance française à “rechercher des mirages” en faisant référence au fait de permettre à la recherche de travailler sur de nouvelles méthodes propres permettant l’extraction de gaz de schistes. Depuis l’ouverture du débat, les militants écologistes s’opposent à l’exploitation de ce gaz non-conventionnel en prétendant que l’extraction par fracturation hydraulique se veut source de  dommages environnementaux. Le débat prend désormais une autre tournure, dans la mesure où toute recherche visant à produire le gaz de schiste sans porter atteinte à l’environnement est par avance condamnée. Sommes-nous de retour au 17^ème siècle, lorsque Galilée fut condamné pour l’audace de sa thèse ? Faut-il présenter les gaz de schiste devant l’Inquisition de manière bornée, sans regarder plus loin que le bout de son nez, et sans faire un instant confiance à la recherche pour progresser sur le sujet? Comme le souligne M. Mestralet, président de GDF Suez, la France referme systématiquement la porte avant de l’avoir ouverte.

Certes, la fracturation hydraulique suscite des questions mais est directement condamnée, sans la moindre preuve réelle de ses effets sur l’environnement. Le but de ce blog n’est bien sur pas de faire l’apologie du gaz de schiste mais de souligner l’absurdité de la situation. Tout doit être fait et renforcé pour éviter un désastre écologique. François Hollande affirme que rien ne prouve que l’exploitation des gaz et huiles de schiste par fracturation hydraulique est exempte de risques lourds pour la santé et l’environnement. Mais rien ne prouve le contraire non plus, ni qu’il n’existe pas de solutions alternatives. Cela consiste à balayer d’un geste les espoirs de tous les industriels priant pour un retour de la compétitive de la France. Pourquoi rejeter les gaz de schistes dans le cas où une technologie propre et maitrisée peut être trouvée, combinée à une gouvernance transparente?

Le récent rapport Gallois remis début Novembre et commandé par François Hollande, recommande pourtant de mener des recherches sur les techniques d’exploitation des gaz de schiste pour relancer la compétitivité de la France. Ironiquement, Pawlak, le ministre polonais de l’économie a alors lancé: « Total est bienvenu pour expérimenter chez nous »! Dans la foulée, Le parlement européen, plus ouvert, a rejeté un amendement proposant de placer un moratoire sur l’exploitation des gaz de schistes, mais appelle à un contrôle solide. La France va-t-elle finalement ouvrir les yeux et regarder de plus près cette potentielle mine d’or sur laquelle elle est assise?

Flashback

Après une forte mobilisation, la France était devenue en juillet 2011 le premier pays à bannir l’usage de la fracturation hydraulique au travers de la loi Jacob. S’appuyant sur cette loi, Nicolas Sarkozy et Nathalie Kosciusko-Morizet ont médiatiquement abrogé en décembre 2011 trois permis de recherche de gaz de schiste dans le sud de la France: deux à l’américain Schuepbach et le troisième au français Total. En plus de ces trois permis, Sarkozy a également confirmé que les autres exploitants « ne pourront pas procéder à l’exploration ou à l’exploitation des gaz ou des huiles de schiste par cette technique de fracturation hydraulique », grâce à cette fameuse loi. La discussion fut close sous l’ère Sarkozy et les tensions retombées, bien que la pression de la part des industriels a toujours été maintenue.

Changement de gouvernement en 2012 et reprise du débat. Le premier ministre Jean-Marc Ayrault a réveillé la bête dormante en affirmant que la question de l’exploitation des gaz de schiste n’était pas tranchée et sera traitée par Hollande lors de la grande conférence environnementale. Montebourg a également alimenté la polémique en affirmant que les gaz de schiste ne sont pas un sujet interdit, au grand dam des écologistes. En tant que ministre du redressement productif, il est évidemment en première ligne pour saisir les enjeux que cette ressource représente. Vient ensuite le 14 et 15 septembre 2012 la conférence environnementale où François Hollande a repris la même ligne de conduite que Nicolas Sarkozy. Il a annoncé  qu’il “entendait les arguments économiques”, mais a jugé que les considérations sur les possibles gisements en France étaient “souvent exagérées” et qu’il y avait trop d’incertitudes environnementales pour se lancer dans leur exploitation. Il a indiqué que cette ligne de conduite sera ferme tout au long du quinquennat et en a profité pour rejeter sept demandes de permis d’exploration. Le débat fut donc brutalement clos.

Nouvelle annonce de la part de Hollande lors d’une conférence de presse le 3 novembre: le président s’est  dit favorable à la recherche d’autres techniques pour exploiter le gaz de schiste. Il exclut d’emblée la fracturation hydraulique mais accepte la poursuite de la recherche de techniques propres « financées par les entreprises et les chercheurs ». Il prendra sa responsabilité si une technique apparait… Nouveau coup de théâtre et nouvelle pression pour le gouvernement: le 5 Novembre, le rapport Gallois (commandé pas le gouvernement pour proposer des mesures pour remettre sur pied la compétitivité de la France) est remis à Jean-Marc Ayrault, Parmi les 22 mesures proposées pour relancer la France, la 5ème concerne les gaz de schiste. Le rapport propose de «mener les recherches sur les techniques d’exploitation des gaz de schiste» et ce éventuellement avec l’Allemagne. Le gouvernement a naturellement immédiatement annoncé que cette mesure ne serait pas retenue.

Dernier rebondissement : La commission des affaires économiques du Sénat vient de décider de rouvrir le débat sur les gaz de schiste et a saisi l’Office parlementaire d’évaluation des choix scientifiques et technologiques (OPECST) pour examiner les solutions alternatives à la fracturation hydraulique. Cette même commission estime qu’il «serait regrettable d’interdire toute réflexion et recherche permettant la mise au point de technologies alternatives et respectueuses de l’environnement» et indique ces recherches «permettraient de mieux évaluer les ressources contenues dans le sous-sol français». Débat à suivre…

Mais de quelles quantités parlons-nous ?

En l’état actuel, il est très difficile de cerner le potentiel que représentent les gaz de schistes en France. Les ressources semblent être concentrées dans deux grands bassins, autour de la région parisienne et dans le sud est de la France. Ce dernier bassin est présupposé être le plus intéressant d’un point de vue géologique. Ces deux ensembles appartiennent à des zones densément peuplée ou touristique, ce qui explique notamment les réticences actuelles.

Source: International Energy Agency, OECD 2012

L’agence américaine “Energy Information Administration”  nous propose une étude datée de 2011 dans laquelle sont comparées les ressources récupérables de plusieurs pays en Europe (l’étude est disponible à l’adresse http://www.eia.gov/analysis/studies/worldshalegas/pdf/fullreport.pdf). Les chiffres évoqués dans ce rapport évoluent naturellement au fur et à mesure qu’apparaissent de nouveaux travaux. En Pologne, l’Institut Géologique vient par exemple de réviser fortement à la baisse cette estimation pour ce pays. En revanche, cela peut donner au lecteur une première idée des quantités en question.

La France disposerait dans sous sous-sol près de 5100 milliards de mètres cubes de gaz de schiste, et occupe donc la deuxième place après la Pologne. Ces deux pays renferment l’essentiel des ressources en Europe. L’Ukraine troisième pays du classement, possède environ 5 fois mois de ressources que ces deux pays.

Le ratio consommation/ressource est un indicateur virtuel intéressant. Celui-ci nous indique le nombre d’années que peuvent couvrir les ressources de gaz de schiste (par rapport à la consommation actuelle). Dans ce cas, la Pologne prend largement les devants: cette ressource couvrirait plus de 300 années de consommation! Le Danemark se place en seconde position (environ 150 ans) et la France 3^ème, avec une bonne centaine d’années. Bien sûr, ces chiffres sont à prendre avec des pincettes: ce potentiel global peut s’avérer être beaucoup moins important qu’annoncé, et la part extractible dans des conditions techniques et économiques abordables peut ne représenter qu’un faible ratio. Cependant, l’intérêt suscité par les gaz de schistes est amplement justifié à la vue de ces premiers chiffres. Il est également à prévoir que la France serait en mesure d’exporter une grande partie de son gaz si celui-ci est produit.

Quel serait l’impact économique ?

98% du gaz consommé en France est importé (32% de Norvège, 15% des Pays-Bas, 14% de Russie, 14% d’Algérie,…), souvent au travers de contrats long terme. Il y a 40 ans, cette dépendance n’était que de 70%. La facture énergétique de la France s’est donc creusée depuis ces années, pour atteindre 9,7 milliards d’euros en 2010 (d’après le Commissariat Général au Développement Durable).

Pour illustrer l’impact économique, regardons de plus près la relaxation engendrée par la révolution des gaz de schistes aux Etats-Unis sur les prix de marché Spot et comparons cela avec les prix français du produit Spot PEG Nord à la bourse de PowerNext. Aux Etats-Unis, plus d’un quart du gaz produit provient désormais de cette ressource non-conventionnelle bon marché (et cette proportion est appelée à grandir vers 50% en 2035, d’après certains scénarios de l’US Information Energy Administration), relaxant les prix de marché du gaz.

Depuis 2010, la différence des prix entre la France et les Etats-Unis s’est progressivement accentuée, pour dépasser 18 €/MWh. Le prix du gaz américain se maintient en dessous de la barre des 10 €/MWh, et se veut également moins volatil qu’en France où le prix par MWh dépasse actuellement les  27€ (170% plus cher !). Inutile de décrire les pensées d’un industriel lorsqu’il constate cette différence de prix !

Par ailleurs, en France, et plus généralement en Europe, la demande de gaz baisse mais les prix restent bloqués à des niveaux historiquement élevés, notamment en raison de tensions sur l’offre (appauvrissement des réserves en mer du Nord, redirection du GNL vers le Japon,…). La France se plaint d’un prix de gaz croissant, mais écarte systématiquement cette option sans même prendre le temps de l’étudier. Il vient d’être annoncé que près de 4 millions de ménages vivent en situation de précarité énergétique en France ! Bien sûr, la France n’est pas les Etats-Unis. L’exploitation des gaz de schiste nécessite beaucoup de forages, donc beaucoup d’espace. Il faut également beaucoup d’eau, et un réseau de gazoducs dense. La situation est plus délicate en France. Cependant, Christophe de Margerie, le PDG de Total, affirme “Quand on est dans une situation économique comme aujourd’hui difficile [ …], ne pas se donner la possibilité de développer du gaz, c’est dommage”. L’idée n’est pas de faire l’apologie de cette énergie, mais il existe donc certains facteurs intéressant qui permettraient à la France d’améliorer la situation. En plus de la sécurité d’approvisionnement et d’un coût intéressant. Reste que les incertitudes sont très grandes.

Pourquoi cela bloque t’il ?

L’objectif de cet article n’est pas de discuter si l’exploitation des gaz de schistes porte attente à l’environnement ou pas. Personne n’a la prétention de le savoir, tant les différentes études sont contradictoires. Cela doit être étudié précisément et scientifiquement. Si de bonnes pratiques ne sont pas possibles, fermons alors le dossier ! Cependant la recherche n’a pour l’instant pas eu son mot à dire. Si d’autres techniques propres existent ou sont développées, le débat devrait rester ouvert.

Les militants se positionnent contre la production de gaz de schiste pour deux raisons. En premier lieu, l’opposition aux gaz de schiste tire sa source des campagnes « chocs ». Gasland est un véritable chef-d’œuvre en matière de film suggestif. Toute personne (y compris moi) possédant une certaine sensibilité environnementale se sent immédiatement choqué après l’avoir vu. Que font ces horribles compagnies à tous ces pauvres gens? Cependant, quelques jours après l’avoir visionné, vous commencez à réaliser que les preuves avancées dans le film semblent être anecdotiques. Par exemple, l’acteur/réalisateur Josh Fox suggère constamment la présence de pollutions, mais les résultats des tests ne sont jamais montrés. Il y a certes bien eu des balbutiements lors du démarrage de l’exploitation des gaz de schistes, mais l’image véhiculée par le film est extrême. Bien sur, cela fait parti du jeu des opposants (et heureusement qu’ils existent pour modérer les ardeurs de leurs adversaires!). Deuxièmement, les militants du monde entier sont de plus en plus alarmistes quant au réchauffement climatique. De récents rapports confirment la pertinence de leurs propos. Toutefois, ils perdent parfois tout sens du pragmatisme et réclament l’arrêt de l’utilisation des combustibles fossiles. Cela inclut le gaz naturel, qui a été salué deux décennies à peine plus tôt par les écologistes comme le moins polluant des combustibles fossiles. L’opposition au gaz de schiste est ancrée sur un refus idéaliste de toute utilisation de combustibles fossiles.

En second lieu, Le gaz de schiste n’est pas un gaz infâme, comme le pense la croyance populaire. Il s’agit de gaz standard, piégé dans un réservoir non conventionnel. Rappelons que le bilan carbone de la combustion du gaz est bien meilleur que de bruler du carbone ou du charbon! Aux Etats-Unis, les émissions de gaz à effet de serre chutent car les centrales à charbon ferment les unes après les autres en raison de la compétitive du gaz naturel. Le problème réside dans les méthodes de production (fuites), dans les produits injectés et dans l’utilisation de l’eau. Si des méthodes propres apparaissent, ces réticences vont-elles disparaitre ?

Le second point est la vision souvent marginale du gaz en France. Avec le fort taux de nucléarisation de la France, le gaz est un combustible de second plan. La tendance française du chauffage électrique tient également à distance le gaz naturel. Je suis convaincu que les discussions seront moins passionnées s’il s’agissait de pétrole de schiste. L’impact sur le portefeuille des particuliers serait plus parlant, et seraient alors plus facilement convaicus bien que le pétrole est plus polluant que le gaz.

En conclusion

La porte est refermée avant même d’avoir été entrouverte. Le problème réside dans l’aveuglement et le refus de toute discussion. Pourquoi refuser la recherche, comme cela a été invoqué? Pourquoi affirmer sans preuve que la fracturation hydraulique est risquée, qu’elle ne peut être améliorée et pourquoi fermer la porte à la recherche d’autres alternatives ? Imaginons qu’une technique respectueuse de l’environnement existe, la France s’en prive d’office en refusant la recherche.

Difficile également de penser que les gaz de schiste ne seront pas exploités dans le futur, même si les études environnementales jouent en leur défaveur. Même quelques écologiques en sont malheureusement convaincu! Cela va probablement dépendre des ressources que la France possède. Il est légitime que l’opposition refuse toute exploration, car il serait en effet plus difficile de bloquer la porte si les ressources s’avèrent être énormes!

Dans le cas ou le gaz de schiste n’est pas exploité, il serait alors formidable de s’appuyer sur ce choix pour développer d’autres énergies plus propres encore. Remplaçons par exemple les chauffages traditionnels au gaz par des pompes à chaleur ! Ou alors, penchons nous sur les technologies marines! La France possède par exemple le deuxième espace maritime mondial en termes de surface, et se positionne à l’avant garde pour certaines technologies. Le pire serait de continuer à ne rien faire …

Can we please have a debate on shale gas production in Belgium?

Last week was a horrible week for all those that care about Belgium’s economy. Ford, Dow, Duferco, they all announced massive layoffs. Especially in the North-Eastern province of Limburg, the closing of the car manufacturing plant of Ford has hit hard. This unfortunate episode is casting serious questions over the attractiveness of Belgium as an industrial country. Ford quoted high energy prices as one of the reasons for shutting down Genk. I have some serious doubts about this. Ford is delocalizing the Genk production to Spain. I service clients in both Belgium and Spain, and at this moment, energy prices in Spain are certainly not lower. On the other hand, it is clear than one of the conditions for supporting your country’s industry is giving it access to affordable energy. Coincidentally, a source of such economic progress might by lying under the feet of Limburg’s worried people. Geologists agree that unconventional gas can be found in the soil of Flanders, certainly in the ex-coalmining province of Limburg, namely coalbed methane and shale gas. Will Limburg go through a shale gas boom like e.g. Pennsylvania in the US? Or will our European cold feet behavior as to shale gas production prevail? In times of economic mayhem, these questions are more urgent than ever. President Obama has been claiming that shale gas production in the US will create 600.000 jobs by the end of the decade. After all the lay-offs of this week, that job-creating potential of gas production cannot easily be denied. And who would mind building up a Dutch or Norwegian style National Ressources Fund of natural gas royalties to support Belgium’s social security system? (Which, it seems inevitable in Belgium, opens up a distribution discussion. The national ressources belong to Flanders, the social security is Belgian …)

When I first saw a map by the U.S. Energy Information Administration (EIA) that showed the presence of shale gas in Belgium, I almost fell off my chair. There is hardly any debate on this topic in my country. My colleague Bart made a rapid media scan that was very telling. It shows the number of articles on shale gas in papers in different countries:

I know that this press scan is a very rudimentary analysis, but it is a powerful illustration of the lack of a debate on shale gas in Belgium. At least France and the UK have one, although it should be said that the articles in the French newspaper were very unipolar against shale gas production. The press in the UK and in Germany struck us for the quality of the information. It was also fairly balanced between pro and contra shale gas production. With shale gas and coalbed methane under our feet, Belgian policymakers, scientists, media and industry representatives should seriously ask themselves why we are not discussing its economic potential and its environmental hazards more actively?

Coalbed methane is gas trapped in coal-seams, shale gas is trapped in deep layers of rocks with low porosity. We’ve always known that the unconventional gas was there, only we didn’t have the technologies for producing it. For shale gas, the breakthrough came when hydralic fracturing (fracking) and horizontal drilling technology was combined. What you basically do, is pump water and chemical additives into the shale rock layer at high pressure. This creates fissures through which the shale gas escapes into the wellhead. This fracking procedure has been the subject of a vehement attack by environmentalists that highlight its environmental hazards. If you read French newspapers, you would probably come to believe that fracking is opening up the doors of environmental hell. However, much of the environmental criticism seems to be based on perception rather than scientific knowledge. In the table below, I attempt to show the two sides of the discussion:

The most powerful argument against fracking is the danger of seepage of natural gas in drinking water layers. This has been imprinted into the minds of many people by the scene in Josh Stone’s documentary ‘Gasland’ of somebody setting his tap water on fire.	Many specialists claim that this phenomenon is due to ‘natural seepage’. It is well known that in areas with gas reserves, natural concentrations of methane in drinking water occur. US Environmental Protection Agency (EPA) experts have declared that there is no proof of widespread methane seepage due to shale gas production.
Environmentalists often cite a report from the University of Cornell that claims that releases into the atmosphere of methane when shale gas is produced make shale gas production a larger contributor to global warming than coal.	Soon after the report came out, the data was seriously questioned. And most experts declared it to be irrelevant, when it became clear that its author ignored methane releases during coal production.
In the UK, environmentalists stopped the activities at a shale gas exploration site after they had caused “an earthquake”.	Yes, gas production causes seismic activity, although the level of the tremors is never higher than the tremors caused by a passing train. The UK “quakes” were below that “passing train” level.
Fracking fluid contains highly toxic, carcinogenic and even radio-active chemicals.	Industry officials claim that their fluids contain nothing that you wouldn’t find under your sink. A Halliburton official recently drank a glass of his company’s frack fluid at an industry conference.
Fracking is rapidly depleting water ressources. Every fracking session is consuming an amount of water equal to 8 Olympic swimming pools.	Some claim that coal production consumes even more water. And the industry is making a serious effort to reduce the water depletion by recycling and reusing the water.
Fracking reject, the water, chemicals and subsoil particles that resurface after the frack process, pollute the environment.	Yes, some US shale gas sites caused pollution due to sloppy wastewater storage practices. But on many other sites it has been proven that reject can be stored, evacuated and even recycled in a safe way.
Gas production sites are highly disruptive to the pristine character of the countryside.	Yes, the drilling & fracking phase is a nuisance, but it lasts only a few months. After that, the gas production site is not much more than a pipe and a wellhead sticking a few meters out of the ground.

I am not an expert in environmental science. But reading reports on shale gas makes clear to me that there are two sides to every story. Wherever I go in France I’m confronted with ‘No to shale gas (non au gaz de schiste)’ bumper stickers. On the other side of the discussion, there are the reports from scientific institutes that make clear that shale gas production can be done reasonably safely, if the necessary environmental practices are taken into account. Such reports have been issued by The Royal Society from the UK or the Bundesanstalt für Geowissenschaften und Rohstoffe from Germany, for example. In the US, where all the environmental disaster caused by shale gas extraction is supposed to take place, environmental groups like The US National Wildlife Federation or the Center for Rural Pennsylvania give tips for improving environmental protection standards in shale gas extraction, but they don’t claim that it’s impossbile to do it reasonably safely. And Insurance company Lloyds has declared shale gas production hazards to be insurable. (For those that are looking for more reading, check out Nick Grealy’s “No Hot Air” website over here.)

And on the other side of the “Frack off” opinion of environmentalists, we should also consider the economic benefits, which are very clear if you look at the United States at this moment:

1. Shale gas has created many “shaleionaires”, people that became rich after selling the shale gas extraction rights of the land they own. In Europe, as the states and not the individuals are owners of the mineral rights, this wealth can be used to the benefit of the overall population.
2. Shale gas production has proven to be a potent creator of employment.
3. The price of gas in the US has dropped to 1/3 of the gas price in Europe, creating important competitive advantages for American energy-intensive industries.
4. The US has become the largest producer of natural gas of the world, larger than the US and Qatar.
5. Because of the cheap gas prices, gas-fired power production has soared in the US, reducing the production of power by coal-fired power stations. This has caused a remarkable drop in carbon dioxide emissions in the US.
6. Thanks to this shift to gas-fired power production, the US is now exporting more of its coal, which is benefiting the country’s trade balance. For the further future, exports of gas are also on the radar.
7. The US is on the path to energy independence, reducing its dependence on imports of hydrocarbons from the Middle East.

This is my opinion. Yes, shale gas production will cause environmental dammage. Any extraction of natural ressources, or any industrial activity has an impact on the environment. The question is: what is the net cost for the environment of shale gas production? What is causing most harm: producing power from shale gas or from coal? Is shale gas production much more damaging than conventional gas production? And does this net environmental impact outweigh the economic benefits? This last question is not something that can be decided on a scientific basis. Science is to deliver the solid factual basis for running the debate. But balancing ecology and economy will ultimately be a political decision. Which points out the necessity of having a good public debate on the topic of unconventional gas production.

This brings me back to the situation in Belgium. This afternoon, I was reading through some reports of debates in the Flemish parliament on the topic of unconventional gas production. First conclusion: minister Ingrid Lieten is working on it. In the next months or years, it might become clear whether the coalbed methane and shale gas reserves in Belgium can be extracted and if the economics might fit (is the extraction economically feasible?). Second conclusion: many politicians participating in the debate lack basic knowledge. There was a huge mix-up of the topics of coalbed methane, shale gas and carbon sequestration. Third conclusion: the Green Party has most expert knowledge, which it is abusing to dominate the debate. Without any protest, Green party members have repeatedly claimed in the Flemish Parliament that all scientific reports point out that shale gas production cannot be conducted safely, which is manifestly untrue. Especially after last week’s dramatic events in Belgium’s industry, I hope that our politicians seriously consider the economic potential of shale gas production and start up a sincere debate on its opportunities and risks. I recently read a book that was a beautiful illustration of the dilemma that we face in this pro or contra shale gas debate: The End of Country. It was written by Seamus McGraw, a publicist that lives in Pennsylvania and had to take the decision whether to sell the mineral rights of his parents’ property to a shale gas production company. I want to end this blog with the following quote from the book, as looking at the desperate people in Genk immediately made me think about it;

“Such images were imprinted in my DNA. And what little I knew about the oil and gas industry – the catalogue of environmental disasters that spanned the globe, from Valdez, Alaska, to the coast of Australia, did nog reassure me. But on the other hand, all I needed to do was look around at the many formerly thriving farms on and around Elsworth Hill, places that after nearly forty years of bad federal and state farm policies had failed, places where a sense of desperation and loss was as thick as the brambles that covered once carefully tended fields, to see that something needed to change, and perhaps this was that chance. That, too, was imprinted in me. The documents that the woman with the nose ring [representing the gas company] carried in her briefcase could be blueprints for the construction of a new world up there, a world where some people at least no longer had to lie awake at night wondering whether this was the year they would lose everything. There might even be a greater good that could come of it, maybe for the state, or even for the nation at large. There was, after all, a lot of talk in those days about energy independence, and this, I told myself, could be a step in that direction. But it could also be a step backward. Those same papers could be a declaration of war by a new world on an old one, a fading world where the same people would lie awake at night wondering how they could have allowed themselves to stand by while the land, their birthright, was poisoned and maimed. Such things had happened before, and it was always the people on the ground, those who lived in the out-of-the-way places where energy is found, who paid the highest price” (Seamus McGraw, The End of Country. Dispatches from the Frack Zone, Random House, 2011, p. 10&11).

(By the way, Seamus signed the papers, and shale gas is now being produced on his parents’ property.)

Brent price in euro per barrel at an all-time high

Have you recently visited a petrol station somewhere in a Euro country? Shocked by the price level? Well, unnoticed by the press, the cost of oil has risen to its highest nominal level ever. The Brent price ended the day at 120,11 dollar per barrel on Thursday the 16^th. This is well below the Brent-in-dollar peak of 146,08 on the 3^rd of July 2008. However, the euro was then trading at almost 1,6 dollar, whereas now the euro trades below 1,3. The consequence is an all-time high Brent-in euro price of 92,52 euro per barrel. That is the reason why filling your car these days is a costly affair on Europe’s roads.

Fortunately, Europe has managed to significantly reduce its dependence on oil products. Due to fuel efficiency standards, cars guzzle less fuel. Residential heating has been switched away from oil products thanks to environmental policy and the expansion of the gas grids. And environmental policy again, has reduced the usage of oil for industrial and power producing purposes. The consumption of oil in Europe is displaying a steadily declining trend ever since 2005.

High oil prices would have been bad news for almost every continental European consumer of natural gas three years ago, as they all had contracts with the price of natural gas pegged to oil prices. Fortunately, the end market in North-Western Europe is now massively switching to the gas-to-gas pricing of Hub markets (NBP, Zeebrugge, TTF, NCG, Gaspool, PEG). True, these gas prices have also risen in the past year, but not as much as oil prices. With the oil-indexed gas contracts of the past, natural gas would have cost more than 40 euro per MWh by now, just as it did in 2008. At the forward Hub markets, gas consumers can now fix prices below 30 euro per MWh and spot prices haven’t risen much above 25. However, natural gas consumers in countries where access to Hub markets is difficult (Spain, Portugal, Italy, Eastern Europe), have every reason to look worryingly at oil market developments.

High energy prices are particularly bad news for Europe at this moment. Financial markets continue to worry about the potential cataclysm that Greek bankruptcy could cause in Europe’s banking sector. Partly due to this fear, economic growth has stalled. This week Germany published a -0,2% figure for the last quarter. Policymakers across Europe are hesitating between austerity programs to reduce budget deficits (right wing) and policies to support economic recovery (left wing). High energy costs might push struggling businesses over the bankruptcy line. Other companies might have possibilities to pass through higher energy costs in the prices of their products. But is this increasing inflationary pressure a good idea at a moment that consumer confidence drops due to the fear of a Greek tragedy? We should all hope that the combination of a recovering US economy and a weak euro supports export-oriented businesses. But it is clear that the record high Brent-price is bad, bad news for Europe.

The reason for increasing oil prices is simple. OK, here in Europe we reduce the consumption of oil. And yes, the US is reducing as they have also embraced the reduction of fuel consumption by cars. However, such declines are completely undone by developments in emerging economies where the consumption of oil doesn’t stop from growing. On a worldwide scale, we consume more oil year after year. There is enough of if left for the time being. But producing it comes at ever higher costs, which explains the increasing oil price. Squeezing petrol out of the oil sands of Alberta simply is a much more expensive affair than drilling holes in the Arabian dessert. Of course, there is some risk premium added to the price, as the markets ponder the consequences of an oil embargo on Iran and the increasing risk of military conflict in the Persian Gulf. Of course, the forces of speculation are also back. But beware of under-estimating the underlying problem. The increasing demand in oil cannot be met with cheaply produced stuff. The marginal cost economics of oil markets explain the high prices and volatility.

Even if the world’s economy is growing at a slow pace at this moment, it is still growing in the emerging economies, and faster than anywhere else in the world. And countries like China, India, Brazil or Russia, haven’t managed yet to decouple economic growth from oil consumption increases. So, unless we get a repetition of the financial-economic catastrophe of 2008, there isn’t much chance that filling your car will get much cheaper in the near future.