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.
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.