Should Europe be Fracking?

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The global energy community is abuzzwith excitement about hydraulic fracturing, or “fracking,”a newish technology that has opened formerly inaccessiblereserves of gas trapped in underground shaleformations. The boom in this so-called shale-gasproduction has allowed the United  States to become almost self-sufficient innatural gas.

Europe, by contrast, is clearly lagging. Exploration is proceeding onlyhesitantly and shale-gas production has not even started, prompting manyobservers to lament that Europeis about to miss the next energy revolution. Should Europeansbe worried?

Critics of Europe’s apparent lack ofenthusiasm for fracking miss two key points. First, Europe’s geology is different from that of America.There is a huge difference between potential deposits hidden somewhere in largeshale formations and recoverable reserves that can actually be producedeconomically.

In fact, estimatesby the International Energy Agency suggest that the most significant recoverable reserves of shale gas are in the US and China,not Europe. Moreover, even these estimates arereally not much more than educated guesses, because only in the US have shaleformations been subject to intense exploration over a period of decades.

This process is starting in Europe onlynow. Polandappears to have Europe’s most favorable geology, and it might become asignificant producer on a local scale in about ten years. This is a fortunatecoincidence, because shale-gas production would probably make it politicallyeasier to phase out Poland’s economically andenvironmentally irrational subsidies to local coal production (andconsumption). Fracking would also be a strategic boon,because it would diminish the country’sdependence on Russiafor gas.

But pro-fracking critics of the European Union miss a second point: the EUhas no authority over the development of shale gas in Europe.Licensing and regulation of exploration and production are decided at thenational level.

One must admit, however, that in Europe the “Nimby”phenomenon (not in my backyard) is a much more serious obstacle than it is inthe US.While it might be true that Europeans are too sensitive to environmentalconcerns, incentives also play a role. In particular, whereas ownership rightsover natural resources in the UStypically belong to the individual owner of the land under which the resourceslie, in Europe ownership belongs to the state.

As a result, Europeans, facing uncertain environmental consequences whilereceiving none of the revenues, tend to oppose fracking nearby. In the US, bycontrast, local residents benefit handsomelyfrom being able to sell their ownership rights to gas companies – a strong counter-balance to fears of environmental costs.

But private versus state ownership ofnatural resources is not the only institutional factor underlying the US gasboom. A seldom-mentioned reason is that shale-gas development in the US has benefited from important tax incentives –a model that Europe has no reason to emulate.Governments certainly have a role to play in supporting the development of newtechnologies, such as fracking; but, oncethe technology has been developed, there is no reason why one form of gasproduction should be subsidized via taxbreaks.

But the most crucial – and almost always overlooked – point about frackingis that shale gas, like all hydrocarbons,can be used only once. The real issue is thus not whether shale gas should bedeveloped in Europe, but when it should beused: today or tomorrow.

Europe is already a heavy user of gas, but its consumption is stagnating (along with its economy). Despite thehype about the shale-gas revolution, the extraction cost of (onshore)conventional gas remains below that of shale gas. Moreover, an existingpipeline network implies that this conventional gas can be brought to Europe at a low marginal cost. From an economic (andenvironmental) standpoint, fracking is thus unlikely to bring large benefitsfor Europe: shale gas might simply substitutefor plentiful conventional gas.

In an environment of ultra-low interest rates, the economic cost of beinglate is low. The best option for Europe mightbe to wait and let the market operate. Fracking is not yet a mature technology,and thus it is very likely to improve over time. Maybe Europe will become aleader in “advanced fracking” when the shale-gas deposits in the US have alreadybeen exhausted.

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关键词：Should Europe King euro shou technology contrast started become energy

The global energy community is abuzz with excitement about hydraulicfracturing, or “fracking,”a newish technology that has opened formerly inaccessiblereserves of gas trapped in underground shaleformations.The boom in this so-called shale-gasproduction has allowed the United  States to become almost self-sufficient innatural gas.Europe, by contrast, isclearly lagging(Europe seems lagging behind US in one new technology)

Critics of Europe’sapparent lack of enthusiasm for fracking miss two key points.
First, Europe’s geology is different from that of America.In fact, estimatesby the International Energy Agency suggest that the most significant recoverable reserves of shale gas are in the US and China.(geology problem)
pro-fracking critics of the European Union miss asecond point: the EU has no authority over the development of shale gas in Europe. Licensing andregulation of exploration and production are decided at the national level.One must admit, however, that in Europe the “Nimby” phenomenon (not in my backyard) is a muchmore serious obstacle than it is in the US.ownership rights over natural resources in the UStypically belong to the individual owner of the land under which the resourceslie, in Europe ownership belongs to the state.(ownship problem)
private versus state ownership of natural resources is notthe only institutional factor underlying the US gas boom. A seldom-mentionedreason is that shale-gas development in the UShas benefited from important tax incentives – a model that Europehas no reason to emulate(US's tax break)

the most crucial – and almost always overlooked –point about fracking is that shale gas, like all hydrocarbons,can be used only once. The real issue is thus not whether shale gas should bedeveloped in Europe, but when it should beused: today or tomorrow.the extraction cost of (onshore) conventional gasremains below that of shale gas. Moreover, an existing pipeline network impliesthat this conventional gas can be brought to Europeat a low marginal cost.In an environment of ultra-low interest rates, theeconomic cost of being late is low. The best option for Europemight be to wait and let the market operate.(better to develop it later)