Strangling Shale Gas in Europe

Extending environmental regulations to all drilling—including exploratory wells—will cut the EU out of the global oil and gas boom.

In October the European Parliament narrowly voted to extend the EU's Environmental Impact Assessment (EIA) directive to the drilling of a single shale-gas well. National ministers are due to vote on the move in the EU Council this month. If they uphold the measure, all shale exploration underway in Europe—from the Bowland Basin in Lancashire, England, to Lublin Province in Poland—will face significant new delays.

The larger danger for Europe is that energy investors may take such a decision as a signal to give up on the EU as a place to develop shale oil and gas. There are now so many more opportunities world-wide for shale-gas development that the industry may conclude its best strategy in Europe is to stay out of it.

The EIA directive has been in force since 1985 as a key plank of EU environmental regulation. It mandates the standards and procedures for environmental assessments and provides a list of projects that must be subject to them. The list, known as "Annex 1," has so far been limited to major energy and infrastructure development, chemical and steel installations, and work with a well-established risk of hazard—asbestos extraction and processing, radioactive waste disposal and so forth.

Currently the rules only require an EIA for gas drilling if the commercial extraction exceeds 500,000 cubic meters per day. That excludes the overwhelming majority of commercial shale wells that Europe might see in the future, and certainly the test wells it will take to get there. Most operating shale wells in the U.S. and China produce less than 100,000 cubic meters apiece per day.

The EIA rule-change would require that all "exploration and exploitation of non-conventional hydrocarbons"—i.e., every hydraulically fractured shale well—be subject to a complex and costly assessment, regardless of how much gas the well produces. The assessment would add approximately a year-long delay to development, and would be mandatory even for test wells that might never turn a profit. That would include, for instance, the exploratory well in Poland that's been producing about 8,000 cubic meters of gas per day since the summer.

It's not as if the industry isn't already facing national and local regulation. There is not yet a single shale-gas well anywhere in Europe producing commercial flows. Cuadrilla Resources started looking into British shale in 2008 and is still waiting on the permits and approvals to commercialize the gas.

So why are EU regulators in such a rush? Surely it would be wiser to wait for Poland, the U.K. and others to proceed with exploration and commercial development. Then, after more national regulatory experimentation, EU institutions would be better able to work out where European regulation could add real value.

Then again, from an environmental perspective it may be that EU-wide regulation is of little value at all, given the nature of environmental impact. The EU's 28 nations cover 4.4 million square kilometers and come with vastly different geologies and natural resources, not to mention different property rights and legal systems. What's good for the Baltic Basin might not work at all for the Fylde Coast.

The controversy also raises a major constitutional question: Under the EU principle of subsidiarity, how could European officials even propose a rule that would regulate down to the level of a single test well? Article 194 of the Treaty on the Functioning of the EU states that European environmental policy "shall not affect a Member State's right to determine the conditions for exploiting its energy resources." That appears to be exactly what Brussels is trying to do.

Before the shale revolution, capital chased fossil-fuel resources. That meant that governments had considerable leverage to decide how to regulate development; capital holders had little say in the matter if they wanted to develop.

Now, however, with the immense shale-gas resources available around the globe, the situation has reversed: Resources are chasing capital. Governments or organizations like the EU that seek to impose burdensome, unjustified or premature regulatory structures, will find the capital quickly heading elsewhere. Oil and gas will still be plentifully produced, just not in Europe, which will be relegated to importer status.

This Op-Ed by Alan Riley was first published in The Wall Street Journal Europe. Mr. Riley is a professor of law at City Law School in London.