Means of energy acquisition in Europe is a common topic, but the popularity of the subject has increased in recent years due to the United States shale boom. Fracture stimulation operations has spurred tremendous energy growth in the U.S. backed by glowing reports claiming the country will surpass Russia as the top oil producer, become a net gas exporter by as early as 2020, and even possibly obtain North American energy independence by 2035. The U.S., once heavily reliant on OPEC imports, now is flush with hydrocarbon reserves.
Europe, meanwhile, has staunchly opposed the use of fracture stimulation and enforces very strict regulations. France, Bulgaria, Netherlands, Czech Republic, and Luxembourg have banned the method outright. David Cameron, Prime Minister of the United Kingdom, advocates fracture stimulation and has become a lightning rod for criticism from UK residents. The sensitive issue has sparked numerous protests and campaigns across the continent. Regardless of opinion, hydrocarbons have enriched the U.S. energy industry while Europe, which still uses hydrocarbons for more than 85% of its fuel needs, is balking at the opportunity to boost its energy supply. The British Geological Survey estimates more than 1,300 Tcf of natural gas lie in shales in northern UK, but regulations prohibit effective extraction.
Pavel Molchanov of Raymond James released a note covering the issue on May 6, 2013, and says the non-likelihood of global shale commercialization can be based on regulatory/political hurdles, constraints in availability of rigs and skilled labor, along with general inertia.
Europe has roughly 70 onshore rigs, while the United States has more than 1,700. With opportunities exponentially greater in the U.S., Europe is struggling to lure skilled rig workers across the Atlantic Ocean. Nearly every European country imports its resources from Russia, with some relying 100% on natural gas exports from the country. The rising costs and reliance of Russian natural gas has forced some countries to explore hydrocarbon production. However, their unfamiliarity with the legal process has backfired, and prospective companies are pulling the plug on potential deals.
In his Industry Brief on October 17, 2013, Molchanov recaps what he describes as “A Rough Week for Shale Gas in Eastern Europe.” The government of Lithuania conducted a tender for an exploration play, and Chevron (ticker: CVX) emerged as the winner. However, negotiations broke down when Lithuania proposed a shale resources tax of 40%, as opposed to its initial mark of 16%. CVX pulled out of the deal, citing significant changes to the fiscal, legislative and regulatory climate. Lithuania’s prime minister later remarked the policies could perhaps be improved. “Well, too late,” said Molchanov. Poland, to its credit, has at least advanced past the negotiating stage, and has drilled 51 wells to date. However, the country’s regulations remain unclear and is discouraging new operators. Also, a bizarre fine is implemented for drillers who are believed to be operating too slowly. The difficult geological layout is also hampering production.
Countries like Ukraine and Romania are in a position similar to the UK, where production is favored by the government but opposed by its citizens. Chevron is the biggest company involved in the region, and, despite receiving production approval from each country, CVX has been forced to suspend operations in response to an outbreak of protests and threats.
Meanwhile, Europe continues to search for alternatives with widely varying investment sizes. Coal consumption is increasing due to its cost-effectiveness, even though it’s the most polluting form of energy available. A World Health Organization report on October 15, 2013 discovered more than 90% of European city dwellers are subjected to air so unhealthy that it leads to respiratory problems, heart disease and shortened lives. Governments are pouring billions into research for renewable energy, even though the form provided less than 5% of Europe’s energy needs in 2012.
The European Commission claims the rising energy bills will continue to climb for the next 20 years if changes aren’t made to the system. For the foreseeable future, the majority of Europe will continue to depend on Russia’s hydrocarbon imports as a stopgap to its energy issue.
Paolo Scaroni, Chief Executive Officer of Italy-based Eni (ticker: E), said the U.S.’s industrial competitiveness is tough to match, and Europe’s unwillingness to open up to fracing is having a major effect on the energy industry. “I can’t imagine anybody making an energy intensive investment in Europe,” he said.
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