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Shale gas in context – opportunity or risk?

Certainly, shale gas should change the energy map. Crucial are consequences of contemporary energy market. What do we think about these changes? We have to  
primarily try to determinate the impact of this new resource of energy.

Impact of cheap coal

On the one hand, shale gas investments in the U.S. is now reflected in lower prices of gas for consumers: they have three times lower gas prices than consumers in Europe and even much more than in Asia. Another impact of the shale gas is on traditional energy resources, especially prices of steam coal. Cheap imports of coal from the U.S. to the EU are a nightmare for established European mining companies. The reduction in coal prices resulted e.g. in the coalfields in the Czech Republic and inland of Poland where lower prices of coal makes mining unprofitable and some companies are now massively fire employees (e.g. joint-stock company New World Resources, keep mines in Czech Rep. and in Poland, is now reducing staff and actually sells some of mines). The cost of one tonne of coal extraction in this part of EU usually ranges from 80 to 90 euro, but this year the price of coal fell to 60 euro per tonne. These changes are beneficial for whole economy, of course, with the exception of the mining sector.

U.S. independency

We must not forget the cliché that the U.S. thanks to shale gas become energy independent on unpredictable partners. Of course, U.S. in this regard was transformed from the important importer to equally important exporter. But total energy independence is so fundamental geopolitical changes that it is difficult to believe it. It is possible that these high expectations are supported by investors in shale – this is one way how to force the price of their own shares to grow.

Problems of shale gas-mining in EU

“Shale madness” in some countries has resulted in a real disappointment. For example, in Europe, although there exists some promising deposits, is completely missing the infrastructure for the extraction of shale, research of gas fields is not sufficient as well. For comparison, the infrastructure for shale gas was built in the U.S. for last ten years. EU dedicate the last decade for glorification and support of renewable energy. Almost all European countries where the aid of green energy was enacted (in the form of guarantee of minimum purchase prices or subsidies) suffers from the problem of higher electricity prices.

In Poland, formerly with large reserves of shale, expectations are confirmed – recently several companies for gas extraction left this country. For example left Mexican Exxon Mobil, further American Marathon Oil and Canadian Talisman Energy rather sold its operations to partner (to San Leon Energy).

Next problem is the density of population in Europe. Apart from environmental protests (however, these protests ebbed) is problematic the disapproval of owners and neighbours of places of mining. The miners can expect difficult (and expensive) negotiations.

Pessimistic voices are drowned out by United Kingdom and Ukraine where according to the results of regular interests of investors seems shale gas has a chance of profitability (for example, in Ukraine was signed a big contract for the extraction of shale gas with Royal Dutch Schell).

Shale connotations

The expansion or disappointment from shale extraction can also affect the search for new “traditional” sources. There are hopeful deposits of oil and natural gas in the eastern Mediterranean (Leviathan gas field), which is on the coast and the territorial sea of ​​Israel, Lebanon, Syria and Cyprus.

The use of these relatively abundant resources impede unclear political situation rather than technical or geological problems. However, the onset of shale gas may push investors to utilize as quickly as possible of traditional mineral resources for which the EU has apropriate infrastructure and plenty of customers. It is the race against time until the new resources arrives on the scene of new energy sources.

Shale gas will also have an impact on nuclear power. If shale gas can reduce price of energy then it is bad news for nuclear power. Nuclear energy has relatively high input costs and the profitability of Nuclear Power Plant comes from higher price level energy. For nuclear energy is negative growing number of energy-independent countries. It heralds a less demand for new nuclear power sources. On the other hand, increasing energy independence in the world will push the remaining countries (that do not have good luck on the shale deposits) to get their independence by the help of new Nuclear Power Plants. In current economy (all human activity is dependent on sufficient electricity) is energy-independence regarded as future standard of sovereignty.

Generally, the gas market, unlike oil market, is not controlled by an oligopoly exporters and the development of the sector was not based on government subsidy – so the gas is fully based on active market forces, which only reinforces growing sector shale gas.

Threat to Norway

For Norway is shale gas a problem – lower price of energy means lower demand for Norwegian export. Even a lower energy-independence of some EU members means a lower importance of resources of Norway. If United Kingdom is considered as competitor of Norway than the repeal the moratorium geological survey for shale fields on the end of 2012 looks like strengthening export opportunities of  the rival of Norway (Britain should in domestic industry use shale gas and other resources give up for export). The same rivality should be between Norwegian export of gas or oil and U.S. export of coal. It seems that shale gas should change the situation into an disadvantage for Norway. But real efficiency of shale gas in EU is also unclear – In fact, the situation will change very slowly.

Author: Vladimir Stipek

3rd July 2013, in Prague, for The Nordic Page

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