In an explosive new report, researchers from the influential French think thank IDDRI take apart many of the myths that in their view have developed around the unconventional gas and oil “revolution” in the US. Shale has not led to an industrial renaissance in the US, they write, nor will it make the US “energy independent”. Shale gas has not even contributed significantly to lower CO2 emissions in the US. For Europe, says lead author Thomas Spencer in an interview with Energy Post, development of domestic shale gas is unlikely to lead to lower gas prices or to significantly enhance security of supply. “We should not get distracted by shale gas.”
“It is not empirically justified to advocate shale gas as main solution to Europe’s energy problems. Shale gas can be of limited value to some countries in the long term. But it cannot be the main element in our energy strategy.”
Although he doesn’t put it quite like that, Thomas Spencer, Programme Director Climate at the influential French think tank IDDRI, is on a myth-busting mission. He is convinced that the expectations that are raised in some quarters that shale gas could be a miracle cure for Europe’s energy problems are unfounded. “Shale gas has an enormous seductive power in the public debate at this moment”, he notes. “There is no solid foundation behind that.”
Spencer and his fellow-researchers at IDDRI, Oliver Sartor and Mathilde Mathieu, spent some six months investigating the underlying economics of the US shale gas revolution, with an eye to finding out what its implications are for Europe. In their hard-hitting report, which just came out – aptly titled “Unconventional Wisdom” – they concentrate only on economics, not on environmental issues. “We wanted to find out how the development of shale gas in Europe could affect what we call Europe’s ‘carbon competitiveness’, because we saw that shale gas plays a very important role in this debate.”
In France, where shale gas exploration has up to now been prohibited by the government, IDDRI (Institut du développement durable et des relations internationales) is very well known. IDDRI and its Director Laurence Tubiana play a major role in the French national debate on the energy transition initiated by President Hollande. The Institute is funded by the government, business and through projects. “This allows us to be independent`, says Spencer. “Our major task is to inform the public debate in France and the EU.” He says he and his fellow researchers went into the subject with “an open mind”.
The first thing that Spencer and his colleagues discovered when they looked in depth at the US situation may come as a surprise to many. They concluded that “despite very low and ultimately unsustainable short-term prices of natural gas, the unconventional oil and gas revolution has had a minimal impact on the US macro-economy.” Not only that: “the unconventional oil and gas revolution” also had “a minimal impact on US manufacturing”, they write. There is “no evidence that shale gas is driving an overall manufacturing renaissance in the US.”
The main reason for this is that the importance of energy and energy-intensive products in the final value of many goods is much more limited than is sometimes thought. “With the exception of all but a small handful of energy-intensive sectors, the impact of lower gas prices on total production costs appears to be very small and would not necessarily be passed on to consumers anyway.”
There goes myth number one. Myth number two: contrary to what its advocates claim, shale will not make the US “energy independent”, write the IDDRI researchers. And three: it won’t do anything for US carbon emissions either. As the report puts it:
“The US shale revolution will not lead to a significant, sustained decarbonisation of the US energy mix nor will it assure US energy security. A reference scenario based on current policies sees US emissions stagnant at current levels out to 2040, clearly insufficient for a reasonable US contribution to global climate change mitigation. Oil imports continue to rise in monetary terms. While it can promote some coal to gas switching in the short term if additional policies are enacted, there is also the risk that the unconventional oil and gas revolution further locks the US into an energy- and emissions-intensive capital stock.”
The IDDRI researchers acknowledge in their report that “the growth in unconventional energy production [in the US] can be considered revolutionary in terms of its scale and its speed.” US natural gas production rose by more than 30% between 2005 and 2012 to 677 bcm (billion cubic metres), bringing US production back to its historical peak level reached in 1973. Oil and liquid fuels production also rose spectacularly, although it is still 13.5% below the 1970 peak of 10 mbpd (million barrels per day).
In gas, the US is now “on track to become a net exporter” by 2018. In oil, however, “the picture is quite different”. The US still has to import 8 mbpd. In view of the “more limited prospects” for unconventional oil – and the high oil consumption in the US – the US is highly unlikely ever to become a net oil exporter.
Nevertheless, despite the impressive growth of unconventional oil and gas production, the idea that the US is undergoing some sort of ‘re-industrialisation” thanks to its shale gas and oil is an illusion, says Spencer. “We can say with conviction that this idea is not correct.” According to Spencer, the economic impacts of shale have been very sectoral and very local. “There has clearly been a positive impact on industries that use shale gas as feedstock, such as petrochemicals and fertilisers. But for the overall economy the impact has been very small.”
In terms of employment, some 100,000 additional jobs were created in the oil and gas sector in the US between 2008 and 2013, obviously “non-negligible”, say the authors, but still “extremely small in a labour force of 155 million workers”.
The idea that the shale gas revolution has enabled the US to reduce its CO2 emissions – which even president Obama has boasted of – is also largely a myth, the IDDRI researchers discovered. When gas prices fell to very low (and unsustainable) levels in 2012, there was some coal-to- gas switching in the electricity sector. The share of gas-based generation increased by 10 to 12%, presumably leading to lower CO2 emissions, although as the authors note there is still considerable uncertainty about life-cycle emissions from shale gas.
However, the share of coal in the power sector “then began to bounce back and has remained at a steady level of around 40% of total generation since June 2012.” This indicates, says the report, that “even at very cheap gas prices, coal has remained competitive.”
The authors calculate that the decline in CO2 emissions in 2012 in the US can be ascribed for some 80% to lower energy use (as a result of a mild winter, economic recession and vehicle fuel efficiency standards) and only 20% to coal-to-gas switching in combination with greater use of wind power. In the longer term, as gas prices will have to rise to make drilling profitable, coal-to-gas switching is unlikely and so shale gas will not have any positive effect on CO2 emissions.
The IDDRI researchers repeatedly stress the “critical importance of additional policy interventions and additional incentives” for the US to become more energy efficient. They fear that the shale revolution could lull the US into a false sense of security and lead the country to “further lock-in political support for fossil fuels”. They argue that renewable energy and higher efficiency standards will do much more for the competitiveness of the US as well as for its CO2 emissons. Spencer notes for example that industrial energy efficiency in Europe improved 19% in the period in the period 2000-2011, in the US this was only 9%.
If the shale gas revolution is not as revolutionary for the US economy as is often claimed, for Europe the prospects are even less promising. The IDDRI researchers note first of all that there is considerable uncertainty on the real size of European shale gas resources. There may be more (economically recoverable) shale gas in the ground than we know now, but there may also very well be much less, they say. “European shales tend to be smaller, deeper, more highly pressurized (which makes fracturing more difficult) and higher in clay content.” This means that although there may be “productive sweet spots within shale plays”, Europe probably “would not be able to simply transpose US drilling techniques”.
All in all, taking all above and below ground factors into account, Europe could at most reach a production level of between 30 and 50 bcm per year by 2035, says Spencer. He notes that to reach this level would require drilling about 700 to 1,000 wells per year over several decades – obviously a challenging task in the densely populated European continent. Even so, 30 to 50 bcm amounts to no more than 3 to 10% of projected total demand. “Even our most optimistic scenario would see European gas imports at best stabilise”, Spencer notes.
People often forget, says Spencer, that the development of shale exploration took several decades in the US before production really started to take off. To the public, the US shale gas revolution seemed to have popped out of nowhere, but that’s a misconception. Spencer notes that between 2000 and 2010 no less than 17,268 exploratory gas wells were drilled in the US. This level of drilling was necessary to find the most productive shale plays. Europe would at least have to repeat that performance to imitate the US example.
What is also often ignored is that shale gas production is quite expensive. It is true that US gas prices are relatively low, but that’s because supply is high and demand limited to the power sector and some industrial sectors. Most shale gas producers in the US are operating at a loss. According to the IDDRI researchers, the cost of domestic shale gas production in the EU will be higher than the cost of conventional production or of Russian and Algerian production. “Thus it is difficult to see domestic shale production leading to a significant drop in EU gas prices in the coming decades”, they conclude.
Nor are LNG imports of US shale gas likely to lead to lower gas prices in Europe, says Spencer. “For Europe the key issue is the liquidity and price in the global gas market. Shale gas from the US can help a little, but they are no panacea.”
Spencer does not go as far as to say that Europe should not pursue shale gas. “For some countries, particularly in Eastern Europe, it may be a useful element in their energy strategy.”
Some people argue that the Ukrainian crisis shows the importance of developing shale gas, but according to Spencer it shows rather the importance of an overall energy strategy aimed at increasing interconnections, reducing demand, increasing efficiency and boosting renewable energy production. “Ukraine should be a lesson for EU leaders to view European energy policy not in isolation, but as a package.”
If there is one conclusion Spencer draws from his research, it is exactly this: that shale gas can be no substitute for a comprehensive energy strategy. “We have to work on energy efficiency, on eco-innovation, on renewables, on reduced demand. We also have to continue developing a competitive internal energy market based on investment in infrastructure and integration of markets. That is the only way to boost competitiveness, achieve security of supply and realise our climate goals. We should not get distracted by shale gas.”
The report by Thomas Spencer, Oliver Sartor and Mathilde Mathieu, “Unconventional Wisdom – an economic analysis of US shale gas and implications for the EU”, can be downloaded for free from the IDDRI website here.