Comparing the game changing analysis of US shale gas and the reality in Europe exposes how traditional risks affect the much hyped industry. Understanding the risks for the European shale gas industry exposes a range of constraints that impact the growth of the industry. The debate around shale gas as a ‘game changer’ needs to give way – particularly in the media – to a new level of analysis that sees the industry as bound by traditional political-economic risks.
Providing an effective political-economic analysis of shale gas requires separating different elements of the industry. Just as the study of oil has multiple dimensions with a mature analysis ‘industry,’ shale gas has suffered from the element of news media hype and an over reliance on the geological and technical risk analysis of extraction. Academia and scientific forums are catching up, but while everyone waits regulators, politicians and the industry itself are being called on to make immediate decisions. This produces its own set of risks, which correspond more closely with political-economic risk that have long term impacts on the industry’s long term growth.
I decided the other week, to really focus on professional posts on this blog. As my father mentioned in my last post about Nabucco, if I swear then people won’t take me seriously. Absolutely true. 😉 But then should we always treat the world of energy so seriously? For me it is a such a great topic. Multiple perspectives offer greater insight.
Thus, when I read on Natural Gas Europe that Nabucco was changing size, my professional restraint went out the window.
A new proposal, would see a pipeline between Bulgaria and Austria with a reduced capacity approximately half of what was originally planned. The consortium however, is still maintaining the viability of the original plan. “We are in the process to calculate several scenarios, including different sizes in terms of capacity and length of the pipeline. However, our preferred scenario still is the base-case and no final decisions have been made, yet,” said Christian Dolezal, spokesman for the Nabucco consortium.
But a shorter and smaller Nabucco? Is it really the big Nabucco that we know? The one that was so attractive to so many people, the pipeline extending from the Caucasus all the way to Austria? Well, no not really. It is another pipeline plan that relies on the Turkish infrastructure (or the jumble of other pipelines that have to be sorted out) and is aimed at the short to medium term for meeting Europe’s demands. The substantial changes to the project, while retaining the Nabucco name, requires a bit of teasing to call the consortium out on their obvious gutting of the project.
The new market reality (for the short and medium term) may demonstrate that a smaller pipeline can get Europe by for some years to come. The recent cold winter and high gas demand has shown, even when Russia reduces delivers, the sizable storage facilities and greater interconnection (compared to 2009) in Europe provide an effective buffer. Southern Europe (particularly Italy), which was hit hardest in the past few weeks from reduced Russian deliveries, may benefit from Azeri gas being delivered through TAP or SEEP, now that ITGI could be out of the picture. So maybe this is the future of European gas: storage, continued reliance on Russian gas with some diversity for South East Europe and Italy. South Stream has never looked better.
As for a shorter and smaller Nabucco, it didn’t come to me right away, but then I thought… isn’t there a song about this? No, no, not the opera one…. something more modern. And well, yes there is. The teasing element for the Nabucco consortium, for the switch, needs to be expressed in song – straight from ‘bad taste hits’. And I think this song better describes the new Nabucco pipeline than the opera (I’ve posted the censored version to maintain my professionalism). And just maybe Nabucco needs a new name, the short, short man pipeline (SSMP). Meet the new Nabucco Man:
If there is ever a question of whether fossil fuels will survive the rise of renewable energy, we only need to look at the decimation of whales to understand resource depletion. The industrial harvesting of blubbery wales resulted in their near extinction from the sea in the mid-1900s (podcast). It is a stark and exaggerated comparison, but it serves the point to demonstrate the industrial drive that occurs for extracting the earths resources. It is now time to see that renewable energy, energy efficiency and even the concept of peak oil will not stop the resource drive for oil and gas. Just as the green energy movement is riding on technological advances, so is oil and gas.
Part one of this article on shale gas laid the foundation for a risk assessment. Do the laws of gravity actually apply to the high-flying shale gas industry and all the media hype? Yes, laws, regulations and even social support constrain and direct shale gas investment. In part two, of this article I will now address two types of risks that I had not expected to apply to the shale gas industry, technological lock-in and institutional lock-in. The risks on environmental compliance and regulatory risk, are the ones that jump out the most. But it is better to go deeper into these less addressed risks to understand the more obvious.
Technological advances for ‘unconventional,’ ‘tight gas,’ or ‘shale gas’ stem from (the obvious) movement from ‘conventional gas’. Technology keeps advancing. The price of oil is only on an upward trajectory. Gas is now the alternative fossil fuel; but security of supply concerns must be addressed at reasonable market prices. This can be done by using more advanced technologies to extract gas. In this review of emerging oil and gas technologies, gas to liquid technology can fuel cars, or in this review of shale technology, extraction of gas and oil from ‘super fracking’ becomes even more efficient. Both demand and supply sides of fossil fuels are now adjusting to market and technological conditions and potential.
If there are advances in technology, then why would technological risk even be an important factor to consider? My previously developed definition of technological lock-in (altered from Gregory Unruh’s, 2000 & 2002) is, “Perpetuation of a dominant design that is inferior to newer technology. Industries that have a signiﬁcant systemic-technological relationship are most susceptible, due to buffered market forces.”
Technological lock-in can also emerge through ‘institutional lock-in‘ which understands that regulatory (or other state) institutions only change slowly to protect past investments in the energy sector. Due to social and political considerations state institutions may prevent the roll-out of newer technology. Older approved technologies will need to be used, even if output declines due to resource depletion. In this consideration, owners of other types of technologies may want to prevent the deployment of newer technology.
There is strong social and political resistance to shale gas extraction technologies, as seen in France and Bulgaria that have bans on the technology. The recent report on the legal framework in Member States highlights the nascent industry of shale gas in Europe. With only Poland moving ahead strongly, but currently with very small production levels. The report demonstrates that there is scope for improving environmental and public review of shale gas projects (despite media reports that currently not much needs to be done).
The supporters or geopolitical energy realist, may have been caught off-guard and the quick introduction of shale gas bans. But there is now public and private push back against these bans, and no doubt there will be a reconsideration of the role that shale gas (and oil) play in national energy strategies. In France it is possible there will be a re-examination. In Bulgaria a group of energy experts see the current energy policy short sighted, with shale gas as a potential booster to the country’s energy security issues – with now almost total dependency on Russian gas. Just as Poland sees the drive for greater energy security lying in shale gas, so may Bulgaria.
Improvement through the technological process of fracking and shifts in state institutions, through greater environmental reviews and a broader understanding of the benefits and drawbacks of shale gas technologies all influence deployment. As the technology of fracking improves, the industry becomes more knowledgeable about the local geology and political/public landscape, and as state institutions introduce regulatory safeguards – responding to public concerns, shale technology will become more widely deployed. Mitigation of the more obvious regulatory and environmental risks emerge from addressing the technological and institutional risks.
This debate and discussion is set on the background of the geopolitical landscape of energy independence. Technological advances are not only for solar and wind power, the dominant position the fossil fuel industry and its ability to innovate and evolve, reflecting market and political-social realities, this should not be underestimated. The future energy mix – realistically, continues to rely on fossil fuels, resource depletion is the end-game, but improved innovation and technology will ensure it continues to compete and (hopefully) contributes to a cleaner and low-carbon energy future.
I have to thank the Atlantic Council’s Emerging Leaders in Environmental and Energy Policy (ELEEP) online group for some of the articles cited here – and also a source of inspiration for exploring this topic more.
Separating the game changing analysis of shale gas from hype and connecting it with reality is an important task. Providing an effective analysis of shale gas requires separating between the different elements of the industry. Just as the study of oil has multiple dimensions with a mature analysis ‘industry,’ shale gas has suffered from the element of news media hype and an over reliance on the geological and technical analysis of extraction and incubation of the industry. This focus fails to provide both a short-term and long-term perspective that assesses traditional risks existing in the energy industry.
Traditional risk analysis demonstrates shale gas is just like you and me – not a superstar Hollywood actor. The debate around shale gas as a ‘game changer’ needs to give way – including in the media – to a new level of analysis that sees the industry as bound by traditional political-economic risks. The recent report produced for the European Commission on the legal frameworks that surround unconventional ‘shale’ gas demonstrates how the laws of gravity apply to this ‘new’ technology.
The study examines the legal and regulatory framework in four EU Member States: Poland, France, Germany and Sweden. The report provides a good overview of the legal environment, and the licensing procedures, including public involvement and how environmental concerns and impact of the technology are addressed.
What emerges is a barenaked industry, with limited drilled wells and companies operating in constrained regulatory and legal framework. No doubt improvements could be made to the permitting process and procedures streamlined or public involvement increased, but the industry is not breaking down the steal door to become the disruptor of the gas sector. There are too many traditional risks blocking a clear path to a broad use of the technology.
A risk typology can be produced that demonstrates just how down to earth shale gas is. Drawing from two categories of risks that I put together for an article on the transition towards a low carbon economy by 2050, the risks emerge as applicable to the new industry. If we take the identified risks, and just list a few anecdotal events then we can see the constraints.
Fuel price risk:price variability and uncertainty over future costs; e.g. comparison between Russian pipeline gas and shale gas.
Demand risk:gas produced will not be needed as projected; e.g. impact of renewables, LNG and pipelines (and energy efficiency?).
Performance risk: wells do not produce as predicted to satisfy contractual obligations.
Environmental compliance risk: The ﬁnancial risk to which parties to an energy contract are exposed, stemming from both existing environmental regulations and uncertainty over possible future regulations; e.g. this is the most popularized risk at the moment, France and Bulgaria demonstrate that public opinion can lead to blocking the use of shale gas technology.
Financial risk: no or limited amount of money available. This does not seem too applicable at the moment.
Regulatory risk: The risk that future laws, regulations, regulatory reviews or renegotiation of contracts will alter the beneﬁts or burdens of contracts for either party; e.g. this is real and tightly connected with environmental risks.
Technological lock-in: Perpetuation of a dominant design that is inferior to newer technology. Industries that have a signiﬁcant systemic-technological relationship are most susceptible, due to buffered market forces. This may be more applicable in Russia where shale technology is not being deployed. But the use of ‘traditional’ conventional technologies may be encouraged to be used first before unconventional technologies are deployed; e.g. the ban in France and Bulgaria will continue the use of established technologies.
Institutional lock-in: To reduce uncertainty and to provide continuity to past investors regulatory institutions may change only incrementally, thereby relying on older technologies and inhibiting newer technologies. This may not occur like this, but avoidance of unconventional technology by regulators may lock a country into older technologies, that over time, if traditional gas fields faulter, won’t work as well.
Administrative capacity risk:Constrained stafﬁng levels in government institutions prevent a larger policy and regulatory response. This may occur, as demonstrated in the EC report, if laws and regulations and the agencies that implement these, are not made more flexible or given the tools to properly account for the special characteristics of the shale gas industry.
Investment risk: Investments are impacted due to uncertainty in the operational environment; e.g. the differenence can be seen between different countries like Bulgaria and Poland, where one country is not moving ahead and the other is. At the moment, it seems like there are willing investors and uncertainty in any country (only legal blockades) are preventing greater investment.
Geopolitical risks: relations with third countries. This is a separate category that needs a full analysis of how Russia is and will react to greater use of unconventional gas technology in Europe.
The categories listed here provide a rough guide to examine the types of risks that have emerged to stop greater investment and what risks may emerge more forcefully in the future. No doubt environmental compliance risks, administrative capacity risk and geopolitical risks emerge as key areas that the industry must focus on. These are divergent risks and take different strategies to overcome or to mitigate. But effectively addressing these becomes important to the growth or decline of the small industry in Europe.
It takes a long time to write a journal article. To speed up my speed, I recently checked out a book on how to write a journal article. I’m glad I did, and while I think I improved my process, it is still a long process. Particularly when drawing on new empirical data. Writing a blog provides an exciting break from the precision that should go into a journal article. Blogging actually just helps to develop the writing flow necessary to plough through complicated (sometimes boring) arguments and perspectives. Doing both provides a nice balance.
Last year I was fortunate enough to be asked by the Energy Regulators Regional Association (ERRA) to assess through a publication their 10 year anniversary. I approached it like I would any research project. And what I got was a great amount of interviews – 31 total, including interviews with 17 current and former head regulators from across Eastern Europe and the CIS countries. I decided to incorporate this into a journal article drawing on my theoretical research into governance (see my Energy Policy article on risk governance) – which is slanted towards the role that regulators play. Thus you get the emergence of a new global regulatory regime, sitting under regulatory capitalism. In short, there is a lot of connection with how I explored state structures in my PhD (2006) and how I still view the inner workings of the state. Below is the abstract and if you follow this link, you can download the conference paper I wrote for the Ninth International Conference on European Energy Market.
I’m posting this with the hope that there is some feedback. But then I’ll add a whole host of disclaimers saying that the journal article will actually be clearer, more concise and will actually say what I’m trying to say in this first draft version. This conference paper didn’t allow much space, so things had to be cut and reduced – including the methodology. I really have to focus on what the reader expects to get out of the article and what the article demonstrates about transnational regulatory networks and the flows of knowledge within them. Any feedback can be sent to: firstname.lastname@example.org
Diffusion of Regulatory Knowledge: A case study of transnational regulatory networks
In 2001, the Energy Regulators Regional Association (ERRA) was established in Budapest, Hungary to foster cooperation and education necessary for the leaders and the staff of new national regulatory authorities (NRA) in Eastern Europe and in the Commonwealth of Independent States. This paper examines the diffusion of regulatory knowledge from the US and EU to ERRA members. The research is based on 31 interviews with current and past ERRA members, regulatory staff and individuals closely associated and knowledgeable about ERRA’s formation and its activities; seventeen of these were either current or former leaders of their respective regulatory institutions. This provides a theoretically grounded perspective of how regulatory knowledge is diffused to ERRA members. The rise of a new international regulatory regime – regulatory capitalism, supported by an approach of sectoral governance, is demonstrated to be intertwined with the global diffusion of NRAs and the establishment of best practices reliant on a system of formal and informal learning and trust between regulators.
He got a letter and I didn’t. What does Francis Fukuyama know about Hungary? What does Francis Fukuyama have to do with Hungary? What does Francis Fukuyama get for writing a blog post about Hungary? A letter. A letter sent from Zoltan Kovacs, Ph.D. of the State Secretary for Government Communication. Dr. Fukuyama wrote one blog post about how Hungary provides an example of why state institutions don’t really matter, because “bad actors can undo even the best-designed institutions.” And the Hungarian Prime Minister Orban emerges as the bad apple leading the bunch.
The letter even came with the Hungarian shield and underneath the “Ministry of Public Administration and Justice.”
Sometimes life really is unfair. How many blog posts about the autocratic nationalistic anti-Western views of Orban, do I have to write to get noticed by the Hungarian State? Not to mention the fact that I wrote BEFORE Fukuyama about Orban upending the current international technocratic governance regime and the repoliticization of technocratic state institutions. All I got a few months ago, after writing about the Hungarian state’s nationalistic energy strategy was an email from the lawyer of the state owned energy company, MVM, to not use their logo (that was pretty cool too). But a letter from a state organ, now how cool would that be? That is like reaching the blog-o-sphere!
But there are two reasons I have not gotten a letter. First, my wife is Hungarian and I live in Hungary (I’m assuming Fukuyama’s partner is not Hungarian). Because I live here, the Hungarian government knows they got me. Having an Hungarian wife means I have an Hungarian mother-in-law I’ll never be able to leave Hungary. Also, the last letter I got from the state, was to tell me they were taking away my private pension money. Overall, there is plenty of time and multiple ways they can get me.
Second, I am always right. I have not gotten a letter, Paul Krugman has and now Fukuyama has as well. I only wish those two popular authors could be as exact as me.
Now that I’ve gotten over my jealousy, let’s examine the letter. It is fairly clear from the letter that Dr. Kovacs sent, that Dr. Fukuyama was totally wrong and misguided on four very important points. 1) Retirement ages for Constitutional judges – Z.K. says all judges above 62 must retire (reduced mental capacity??); 2) Hungary has not infringed on the independence of the Central Bank (they are trying, but haven’t been able to do it yet); 3) the new constitution is very good for debt reduction (self-denial); and finally 4) the new electoral law is great for candidates (failed to say for which party).
Ah, Fukuyama didn’t cross his ‘T’s’ and dot his ‘I’s’. For anyone following the constant flow of ‘corrections’ sent out by the Hungarian government this is where they get everyone. When authors try to simplify what is going on in Hungary, sometimes they brush over an item – but this is where the State Secretary for Government Communication – and other state institutions get these authors, and try to make them look ignorant. They get letters like from Dr. Kovacs pointing out their missing ‘periods.’ But like all state bureaucrats, and even like the Communist censors of the past regime, they miss the point of the article, thereby confirming and reinforcing the message. (Maybe it is here that Kovacs was trying to demonstrate that institutions don’t matter).
The point of the blog post that Fukuyama was driving home – and stated – was that Victor Orban is a bad man. Within the structure of the state it doesn’t matter how the state is set up, with checks and balances or rigid regulatory structures, if there is a lack of mature democratic political culture within a country and in political parties, then the state structure, which is weak, will crumble when a bad person, like Victor Orban comes along. “If the political will exists to do something even in a system with a lot of veto players, it will happen.”
Fukuyama was not worried about a slash or a dot, rather he states, “The new Hungarian constitution is bad not so much for what it is, but what it reveals about the long-term proclivities of its authors.” The letter sent by State Secretary Kovacs re-enforces the point and demonstrates that Kovacs indirectly accepts Fukuyama’s perspective and argument. It does this on two points.
A worker performs his duties in the Hungarian Ministry of Public Administration and Justice
First, by sending a letter attempting to clarify minor ‘inaccuracies’ the institution of “Ministry of Public Administration and Justice” does not challenge Fukuyama on his argument that Orban is bad and the ‘spirit’ of the new constitution indicates this. The Hungarian state engages at the wrong level. When Fukuyama ends with “Maybe institutions don’t matter, after all.” He becomes right (I actually disagree that institutions don’t matter). Fukuyama becomes right, because Kovacs demonstrates what a bureaucrat he is by becoming a cog in the state machinery sending out letters to blog posts pointing to technical inaccuracies while being oblivious of the main argument.
Second, Kovacs’ letter is an example of the the “proclivities of [the constitutions] authors,” or rather the proclivities of state leaders and how they have employees of the state engage the public. State institutions, have people like Kovacs (and those that work for him) combing every minor detail on a published article or public comment and then writing a letter to defend the current autocratic regime of Victor Orban. This is done by state institutions, instead of accepting and encouraging an open media space in Hungary where a diverse exchange of views occurs without crippling fines for owners of media outlets. Prosecution remains possible if you use the words from the new national anthem in a rap song, as the Hungarian rapper Dopeman did. It is those people that are beyond the reaches of the Hungarian state, that receive such letters. Fukuyama’s makes the point in his blog post, Orban is “grabbing control of the media regulator,” well, Kovacs in his finely crafted and detailed rebuttal did not disagree, thus we can only guess that Kovacs also agrees – or at least accepts this point.
Watch a crime being committed: “Gabriella Skoda, spokesperson of the Attorney General’s Office has previously told the press that „the district attorney has viewed the music video and based on its contents contended that a misdemeanor crime against a national symbol has been committed and the suspicion of crime has been ascertained, therefore an investigation was initiated”.
Restraining of state institutions – including secretaries and prosecutors, should occur, rather than media outlets, so the state does not issue a letter over every little criticism. A country with an open democratic system, does not have the state attacking every criticism in the public sphere – it only makes the state look paranoid – it shows the proclivities of the state machinery. And if they are an open and democratic country, why would they be paranoid? Unless almost every international institution is examining your country for undemocratice practices, then you might be paranoid, as is the case with Hungary. Institutions don’t matter, but for people in Hungary that have their pensions taken away; companies that accrue losses, due to nationalism; and the lack of media plurality, due to government fines and prosecutions – the importance of institutions, and the views and actions of international institutions do matter – (and this, Fukuyama would agree with – added Feb. 8, 2012).
My favorite video, that sadly describes so well the views of people in Hungary – even more now after Hungary has crawled back to the IMF. (click on captions for English subtitles)