Unconventionals: Europe Not a Monolith

Things might be different if there were one, unified natural gas market in Europe.

At the Unconventional Gas & Oil Summit in Warsaw, Poland, Ian Nathan, Manager in Energy Intelligence’s Research & Advisory group specializing in global gas and LNG gave a talk to delegates entitled Analyzing the Economic and Geopolitical Dynamics in Unconventional Gas Development. 

Joking that the previous speakers had stolen all of his points, he began: “I’d like to focus a little bit more on market matters and the competitive landscape. The idea here is to really avoid looking at Europe as a monolith when it comes to gas – maybe some day it might be. As far as the gas market is concerned, I think this is the direction that the region is headed.”

“We can all agree that EU institutions and directives are critical for understanding unconventional gas prospects in all of Europe, but the developments are still forged at the country level, and to an extent, the sub regional level,” he explained, saying for that reason he would pit Eastern Europe versus Western Europe and their prospects for development of unconventionals.

“This division of East versus West may continue to matter for now as priorities, capabilities and market structure vary across the region, but a liberalizing, converging European gas market with a level playing field will actually amplify the importance of country-level policies, even as the East-West division begins to erode,” he said.

Nathan showed what he termed “megatrends,” like “high impact, low uncertainty” as in the US unconventional gas boom.

In terms of the East/West bifurcation, he noted that the West was better developed, well supplied with gas. France and Spain, for example, imported gas from 13 countries each in 2010.

"Increasingly competitive markets in Western Europe,” he said, “may ease the entry of new gas players.”

“Do countries really need to be bothered with shale gas?” asked Mr. Nathan. “Is the energy security imperative really that desperate?”

He recalled an energy conference he had participated in 2010. “I was on a panel on shale gas and I said ‘If countries want and need the gas, they’ll find a way to make it happen. They’ll find a way to procure it, create the conditions for it.’

“More importantly, I start to ask myself if the competitive environment for gas at trading hubs might possibly undermine unconventional gas developments. I think this is a key concept that undermines the idea that competition necessarily means more gas. Indeed, pricing signals should help the market allocate product to high value areas, but the key here is the product still needs to be competitive. It might be a little bit too early to tell, but that’s a question I like to keep in mind,” he remarked.

Meanwhile, he said, in Eastern Europe the situation was a bit different in that it lacked the same competitive pressures. “Not only are former Soviet-bloc countries more dependent on Russia for gas, but market development has been slower, as has been the adoption of the EC’s Third Package. Fewer supply options exist but they’re also smaller economies,” offered Mr. Nathan.

“Large supplies of untapped indigenous gas would be helpful, not simply from the energy security standpoint which we always discuss, but because of the benefits caused from the economic impact.”

He queried whether or not the legacy of oil-linked wholesale structure in Eastern Europe would provide the high value market space required to encourage higher cost indigenous gas developments. “Will shale gas extraction be a cheaper alternative to oil-linked imports? Again, you come back to the US experience having heard a lot about the conditions that existed that helped encourage shale gas development in the US, but I also come back to the fact that having a higher price environment was one of those conditions,” he explained.

Nathan went on to discuss regionalization of shale gas development.

“Will Europe become a single market?” he asked. “Poland wants to liberalize its market within a few years, so in this way it will be moving closer to Western Europe, faster than say Bulgaria, which is taking a slower track toward the EC mandate. So it’s not all happening over night or at once. Not everyone shares the same priorities, so it’s complicated. In a converging, increasingly competitive gas market, all gas, no matter where it originates, including indigenous unconventional gas, will need to compete for market traction.

“In this regard, I start to wonder where is the ‘acid test’ going to be,” he explained. “Great Britain, which is arguably the most liquid, most transparent gas market in Europe?”

In a more competitive European gas market, he said he started to think about Gazprom.

“It sticks to its current formula – it makes sense to Moscow. Oil linked contracts continue to govern a significant volume of gas consumed in Europe. But will that more liberalized, unified market offer an opportunity to alter its strategy?”

He concluded: “It will need to remain a large supplier to in order to have that sufficient market impact. There are more than a few questions about its investment priorities and its ability to continue to produce at the levels it’s producing now down the road.”

According to him, if the EC had its way the regional and state distinctions in the marketplace would erode, which would have connotations for states in developing gas, as it would level the playing field. “From a policy point of view, policy would provide an encouraging and supportive environment for indigenous gas development and would be even more important as gas is easily traded and transported across borders.”

In terms of politics, he noted that when one thought of “European gas” they thought of Russia (another megatrend). “So the question is to what extent would shale gas erode Russia’s influence? This is one of the most talked about reasons for developing shale gas in Eastern Europe; in Western Europe, it’s a critical uncertainty, because there are greater volumes at risk, but they’re concentrated in Germany and Italy.”

Finally, he said under the regulatory aspect, Mr. Nathan said that it was likely that more unconventional gas regulations would be seen at a country level as the industry developed. He commented, “I have a little trouble wrapping my head around a ‘one size fits all’ regime at the EU level. I would be curious to see how that turns out.”

“The technology trends – the diffusion of unconventional gas technologies – will be dependent largely on the extent to which regulation allows,” he said.

Regarding the overall development of unconventional gas in Europe, Mr. Nathan concluded: “It’s really a race between market reforms at the European level and individual country developments at the shale gas development level; the rate at which each develops has impacts on the other.”