Unconventional sources of natural gas: development and consequences for Central and Eastern Europe
The International Institute of Political Science (IIPS) has recently released a new study which was prepared by the researchers from both IIPS and th Department of International Relations and European Studies and which focuses on potential impacts of unconventional gas development in Poland.
The study titled Unconventional Sources of Natural Gas: Development and Possible Consequences for the Central Eastern European Region responds to the highly topical issue of use of unconventional gas resources that can fundamentally change energy situation in the Central and Eastern Europe, just as in the recent case of the United States. The aim of the study is to analyze the current situation of unconventional gas development in Poland, possible limits of shale gas extraction, the legislative framework for mining and position of the key players operating within the Polish gas market. Attention is also drawn to the European Union and role of Russia due to its current dominant position in providing gas supplies for Europe.
In case of the EU, the study focuses primarily on relevant actors in legislative process and related legislation concerning regulation of mining and environmental protection.
We analyzed the specific Polish problems for UNG development, and then the role of the European Union in UNG’s European development, as well as how various Polish actors perceive the problems. This analysis was supplemented by a chapter devoted to Russian perceptions to the development of this potentially significant competitor to their energy exports. Finally, we examined possible regional implications of Polish UNG development. Our response to the question we posed in our introduction is that emulating North American UNG development will be problematic. Polish extracting costs will be strikingly higher than in the United States.
This results from the following:
Deposits are located at greater depths;
Water is even 10 times more expensive than in the US;
A large group of small, independent land-owners may complicate the ideal distribution of drilling-pads and construction of new infrastructure;
Existing infrastructure (pipelines and roads) is insufficient;
Polish regulation tries to guarantee state control over the sector (even with changes to critical laws, a residual trend should be expected);
Environmental and certification requirements in Europe are stricter and prevent use of the most efficient American technology (leading, however, to lessened environmental impact);
Long-lasting and uncertain licensing procedures make effective planning and optimal technique application impossible;
Europe has considerably fewer experts and assistance firms at its disposal (from drilling, to flow-back fluid cleansing, to catering and accommodation); and
Companies are far less competitive – for example, the expected rent for a drilling platform is between 25 to 30 thousand USD per day. In 2010, the rent for the very same platform in the US would have been 20 thousand USD per day.
Lastly, in Poland, and generally in Europe, a significant learning curve should not be expected, as was the case in the US. Complex industry entry requirements, more formal requirements, and stricter UNG regulation promises a considerable slowdown of initial production growth, as well as a slowdown of price decline. Without a sufficiently high level of production, it will not be possible to effectively utilize economy of scale, and investments specific to Europe (and/or Poland) will pay off very slowly.
Polish UNG extraction will only be successful when the price of gas settles between production costs (including all additional costs, taxes and profit) and the upper limit set by prices which existing suppliers are able to offer.
The EU’s role in the process is clear. The crucial theme for Brussels will be in how exploration and extraction will reflect on the environment. The most debated and lobbied issue will be environmental regulation because of the potentially strict legislation’s implications on economy of production. UNG’s importance for EU energy security will not be greatly emphasized. UNG will have to function in accordance with market principles in the common energy market and it cannot expect any financial or other support from the EU.
The EU will, in the medium-term, limit itself to data collection and supervision of the environmental the common market. One can expect that with an increasing intensity of production, the control function of the European Commission and the behavior of member states will clash in greater frequency. From the EU perspective, the most important positions will be those of the DG Environment and perhaps of the DG Energy, with a somewhat unforeseeable role for the European Parliament. Private companies and their representation in Brussels will tend to calm and weaken the ongoing debate as much as possible, while NGOs will tend towards the opposite. Thus, data will be crucial. Any sort of study, report, or research results will be thoroughly followed and by this or that part and used to support or attack UNG.
To read the full report, click here.