The Governor of New York just banned hydraulic fracturing for extracting shale gas. Here’s my very brief reaction from the NYT editorial. I don’t think any of this should be based on the idea that this was done based on ‘only’ scientific information – or even partially. The wider issues are:
Headlines: Shale gas is no longer the story, shale oil is.
Economics: The US is flushed with ‘fracked’ oil and gas. Impacting global prices and geopolitics.
Economics: The fall in oil and gas prices pumps up the US economy and punishes non-democratic states (um, excluding Norway). This has a profound impact – see the Russian Ruble (or is it rubble?) and even the cancellation of South Stream gas pipeline and possible cancellation/delay of expansion of Hungary’s Paks nuclear power plan
Political: Banning extraction of shale gas at this point – with low oil and gas prices, probably doesn’t do much for the US industry as a whole since investments are being cut. I’m sure there are some figures, but lots of gas now comes from shale oil fields – as secondary extraction.
Political: NYC drinking water comes from much of the region proposed for hydraulic fracturing.
Social: Society gets clean water, they have cheap energy (see above) so all is well for the time being.
So in the end, by banning shale gas extraction, at a time with low or no investment in this sector, due to low domestic and global prices, combined with strong social opposition – that would take years to resolve in courts, I don’t see the downsides to the industry, markets or people. A win-win for all. Well, at least at this point. The impact of shale gas and oil extraction on the US and global economy is significant enough to propel a domestic and international energy agenda forward. So I don’t think we have seen the end or the beginning of the end to shale gas and oil.
Juliet: O Romeo, Romeo, wherefore art thou Romeo? Deny thy father and refuse thy name; Or if thou wilt not, be but sworn my love And I’ll no longer be a Capulet.
I went in search of Polish shale gas a few weeks ago. I spent some time looking under rocks in Warsaw and Lublin, asking a few people if they had seen this shale gas revolution. I went to a few offices, met people in cafes and even explored a few bars in search of revolutionaries that were upending the country by drilling holes and fracking the ground apart. This was my fourth trip back to Poland in a year. On this trip I focused on those ‘pesky’ environmentalists everyone blames for slowing shale gas extraction down.
In this blog post I’ll just list a few general impressions and hold the more exact details for some articles. But I met with national and local green people. The great thing about meeting with these people is that they didn’t know where the revolution, or even the start of a shale gas industry, could be found. It even turned out that not only did they not really oppose shale gas in Poland but they were waiting just like the companies for the Polish government to figure out what it wants to do. My statements may be sweeping here, but when it comes down to it, the Polish green organizations could point to why they may oppose shale gas extraction, but they were more articulate describing how and for whom shale gas should be extracted. That is, shale gas should be used within a more localized gas distribution system benefiting those communities that allow extraction to occur. Thus total denial for using fracking technology is not embraced by all, or even many, green Polish organizations. The issue is much more nuanced than widely reported.
The building of a shale gas industry came across as highly theoretical as the members of the organizations themselves were not really convinced that much would come of shale gas in Poland. I was expecting a much stronger reaction against shale gas and a push back against the current exploratory wells being drilled. But the people I spoke to seemed really laid back about any threat. It seemed to me that they have come to the realization there really won’t be any large, or even medium, scale shale gas ‘revolution’ in Poland. Three companies have recently pulled out of Poland – while various reasons are cited, it most likely is a collection of things, but what is now emerging as the incompetence of the Polish state to effectively manage and build an administrative system that incentivizes exploration and extraction.
It is hard to nail down specific reasons for the revolution not taking off in Poland, but I am certainly more of the opinion that the revolutionary wind has been sucked out. From an institutional perspective, state institutions are good at building up and deploying a technology – but don’t expect that this occurs overnight in a revolutionary zeal. Combine this assumption with administrative procedures and the inherent tendency to dot every ‘I’ then the momentum that was propelling companies to drill has just run out. One lessons for the US that can be applied is the speed and scaling up of fracking technology that occured – this will not happen in Poland or Europe.
But asking a state administration to deny its own internal procedures – brings us back to our Romeo and Juliet quote at the beginning. It is not just a question of “wherefore art thou”, but can the Polish state deny its bureaucratic legacy to make shale gas extraction licensing lean and mean – at the bureaucratic speed of Canada and the US? Instead of looking for the answer to this, maybe it is just best to assume the shale gas industry in Poland will be asleep for a very long time. Thus, Polish environmentalists know it is best to sit back and let the Polish state trip over itself. And that is an impression I’ve gotten from everyone on all sides of the debate now. Polish shale gas will be as successful as Polish wind power. Somewhere it will be there, but it will be hard to see where.
Sleep or ELEEP it? That is the question. I’m on the plane home from the US bringing together my thoughts of a sponsored trip that will influence policy and learning. My return from a study tour of Colorado and California provides a firm foundation and inspiration to move forward some key EU policy projects while beefing up my teaching material. And while the ‘business’ side is important, it must be inserted at the start that the personal bonds and connections I developed with my travel companions are equally important.
I am a member of Emerging Leaders in Environment and Energy (ELEEP), under the umbrella of the Atlantic Council and the Ecologic Institute . The EU and the Bosch Foundation provide the funding for our group. We interact on an online Facebook platform, where we share information and have in-depth discussions. Despite the ‘Facebook’ label, this is immensely useful method for sharing information. We are also able to go on trips which brings us into contact with policy makers, business people and in general the people who are making it happen. The group is populated by the ‘who’s who of who is not yet who.’ Thus, about 60 tier-two people that inform and influence the tier 1 people. We are the influencers of the influencers. And one day, despite our self-effacing jokes, will be the tier 1 people. Thus the great outcome of the project is investing in future leaders.
This trip held the objective of informing us of energy issues, mainly revolving around shale gas and renewables. In fact, you can’t talk about US energy policy without a discussion of the impact of shale gas and the fracking technology. It succeeded on this level. The people that we met with and what we saw really helped us contextualize the debate around the gas. In addition our exposure to the success or failure of different policies could be seen as we drove around Colorado and California this past week. The significant footprint of solar power in Colorado – with 300 days of sun, reflected Colorado’s pursuit of a 33% Renewable Portfolio Standard; while in California our legislative staff roundtable, in the Capital building in Sacramento, proved to be a highlight while the legislative staff discussing the issues around shale gas and net metering in the state. Our meeting with the California Air Resources Board was also great.
In my other life before a career, marriage and fatherhood I had a penchant for traveling to distant and odd places in the Middle East, Russia and Europe (I include Budapest on that list). My purpose was always to give me a better sense of what was going on in these places. No doubt those experiences still play a role in my analysis of events in these locations. In a similar vain – and with similar results, this trip, brought me into direct contact with the people that are at the forefront of progressive energy policies and businesses. They are the ones leading the charge on what our global economy will be based on after the current shake-out stops. It is clear to me that the value of investing in the ELEEP program will result in more transatlantic awareness and real influence on policy and business. There are many common issues that are being grappled with on both sides of the Atlantic. Understanding the contextualized nature of certain programs or technologies instills a robust knowledge that can be applied in each of the ELEEP member’s areas.
All this knowledge is not without a price. Sleep is what we paid. Our packed days and travel itinerary meant squeezing the most out of every hour. One week felt like three weeks. Sleep was squeezed but the results were worth it. Overall, the trip exceeded my expectation. I will be following up with some of the people I met to help inform my work on shale gas policies and regulations in Europe. Also, the courses I teach on sustainability in business and energy will be enhanced using the material I came across on the trip. I’m now indebted to the program and the people I met in ELEEP and in each state. Both my professional and personal life are richer for this travel experience. But time now for a little shut eye before the plane lands – then the action to implement change begins.
The war of energy independence is on! Like all wars there will be losers. And like some wars, we stumbled into this one. Through the narrowing of options, outdated partnerships and the emergence of new options, the global energy landscape is getting on a new footing. Bold statements can be used to describe any period in our recent energy history. But there are five reasons why the War of Energy Independence is on:
1: High oil price
High oil prices are driving diversification. The global economic decline and the link to oil is clear, policy makers must now attempt a partial break between the oil based economy and economic growth. It would be great to pronounce this break as a clear strategy that governments are pursuing, but while the logic is there, the policies and actions are not. Greater oil dependency may also create war (Iraq et al.) and even now reducing oil usage creates a more effective US military.
2: Shale gas technology
As sexy as it is to cite shale gas as a game changer, there is no doubt it has altered the carbon landscape in the US. It is also the biggest indicator of the technological based war for energy independence. The dramatic impact it has made in the US and what the US economy can achieve through cheap gas, indicates the fossil fuel era is not over, but on a new course. It is also a clear export technology the US is pushing throughout the world. For us observers in the CEE region, the US government just a few years ago was absent. Starting in Hungary and spreading throughout the region, with the emergence of the shale gas potential, the US government and the oil majors are now more than happy to show up to energy conferences. The push for energy diversification for the CEE/SEE countries, away from Russia, is supported by the US government by using shale gas technology – not renewables. Overall, whether in the US or Europe gas from shale deposits can provide diversification and increase national energy security.
The war is on: Technology killing off big oil – but is it possible? Can a politician kill oil dependency?
3: Nuclear is out-ish
With the anniversary of Fukushima on us, the profound impact it has had on the nuclear industry in the Europe and America as a widely deployed technology means it is now a marginal technology. I am a supporter of nuclear power, but it remains hard to see how the third and fourth generation reactors, that are much safer, can be deployed to demonstrate its long-term viability. If we live in an age of competitive markets with short term investments dominating the energy landscape, then long term projects like nuclear (or Nabucco) will be the rare exception. For these to go ahead, other factors like energy security (or corrupt business practices) will have to overcome the current financial and even technical realities of alternatives that are now present. Thus, in one sense this war based on a technological race may have its first victim.
4: Renewable Energy – it is here and now
The wide deployment of renewable energy and the demonstrated success of it means it is here and now. Technological success is not a question – it is just a question of whether governments will enable it to succeed – and at what level. As Germany is demonstrating you can have a future without nuclear and with large, large scales of clean energy technologies.
5: Energy Efficiency– well, is it here?
The big acknowledgment that energy efficiency plays in an essential role in a low carbon economy is as persuasive as clean air is good for us. But what is being done? The dispersed action that must occur means creating effective energy efficiency schemes are not as easy as building a centralized generation plant. It take local and national action to make it happen, along with creative financing. The pay-offs are huge and can make a significant difference in ‘winning’ the War of Energy Independence. But the wide spread deployment of energy efficiency measures remains a battle that still must be fought.
The war is spreading beyond Washington and Brussels. In Bulgaria there is now the Movement for Energy Independence (DEN) that seeks to create an energy strategy built on technologies and resources not dependent on Russia – including re-evaluating and using shale fracturing technologies. This movement on the European periphery is indicative of the merging of three issues: 1) energy security, and a push for reducing reliance on Russian energy dependence (gas, oil and nuclear), 2) the viability of renewable energy technologies, and 3) the broader issue of climate change. The necessity of having a carbon based economy is no longer there. Proven technologies can now be utilized that are distributed, or the resources are delivered from multiple sources, located nationally or regionally. Gas, can now come from shale deposits, LNG or by pipeline from non-Russian sources. Oil’s high price creates an inducement to move away from it, while energy efficiency can reduce demand for all energy inputs. Who wins the war of independence will play out in the corridors of power – politicians now hold the key to decide which technologies will be favored.
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.
The potential of shale gas to alter the geopolitical landscape of energy is becoming too delicious to ignore. The recent report by researchers from the James A. Baker III Institute for Public Policy at Rice University determines that Russia will become a shriveled supplier to the European market by 2040. According to the report, Russian exports will only comprise 13% of the European gas mix, compared to 27% in 2009. The dramatic impact, as determined by the researchers, will be the scrapping of South Stream and altering supply sources for Nabucco. Europe will thwart Russia’s energy weapon by utilizing the increased liquidity in the European and global gas markets. The findings suggest that the overall impact on Europe, of exploited shale gas plays, will be a more independent continent with a reorientation towards the foreign policies of the United States. However, this perspective overlooks fundamental realities about the geopolitics of gas in Central and Eastern Europe and how US foreign policy should respond.
If geological formations are like children, as the head of a gas exploration company recently said, proclaiming shale gas as a revolution is akin to stating your child will be the leader. There needs to be fertile ground for a revolution to take hold, not self proclaiming prophecies. Shale gas extraction technology is evolutionary rather than revolutionary offering diversification rather than independence.