Why may the shale gas promised by the US to Europe be non-competitive?

Brussels' hopes on the production of shale gas in Europe as a new alternative source to meet growing needs in energy are weakening before our eyes. Attempts to extend the US shale boom in Europe do fail, demonstrating fiasco of the Washington's intentions to make Central and South East Europe independent of Russian energy.

The Wall Street Journal wrote back in March that Chevron, Exxon Mobil and Shell almost completely stopped exploratory drilling for hydraulic fracking in Europe. Chevron stopped its last European fracking operations in Romania in February. Shell reduced world-wide shale spending by 30% in a number of countries including Turkey, Ukraine and Argentina. Exxon withdrew out of Poland and Hungary, and suspended its German fracking operations.

However, the EU continues to hope, if not for development of shale gas production in Europe, then at least for imports of shale gas from the US in the form of LNG. These high expectations are inspired by the impressive performance of the US shale gas industry.

According to the U.S. Energy Information Administration (EIA), presented in the chart above, currently only four countries in the world - the US, Canada, China and Argentina - have driven the development of shale deposits up to commercial production levels. The absolute leader in the production of shale gas is the United States.

According to Reuters, the total U.S. gas production has increased by 43 percent from 51.9 billion cubic feet per day (bcfd) in 2005 to a record 74.4 bcfd in 2014. The EIA expects gas output to reach 78.4 bcfd in 2015 and 80.0 in 2016.

These optimistic estimates diverge from the views of many experts, who assert that further growth in shale gas production is possible only in case of a stable oil prices rise on the global market. In reality, however, U.S. crude futures CLc1 (Crude Oil Front Month Futures) decreased by 46 % from the level of more than 107 USD in June 2014 down to USD 58 at the end of May 2015.

If such a trend continues further, experts expect that it will hinder the natural gas production growth. This is indicated by the Genscape Inc. data, which predicted a reduction of daily production of shale gas by 1.1 bcfd in the US next year.

Bank of America Merrill Lynch also expects the decline in production of natural gas in 2016 in the US. According to the Bank's forecasts, the reduction will amount to 1.3 bcfd by slowing down the production of shale gas from deposits in Marcellus and Utica under the influence of falling LNG prices by 50%, which in turn are linked to oil prices.

It is obvious that the expected reduction in the production of shale gas will not be conducive to the development of its exports from the United States.

At the same time, the predicted trend in the production of shale gas in the US is not the only problem in the pursuit of shale LNG supplies to Europe. Another problem is the low quality of shale LNG from the US, which calls into question its competitiveness.

Japanese importers highlight in particular the existence of quality problem of shale LNG from the United States. Their attention and concern regarding this issue is caused by the fact that Japan is going to increase significantly the share of LNG from the US in Japanese imports.

Expert opinion in this country is particularly important because Japan is the world's largest importer of LNG. According to a special report of the EIA published in January 2015, Japan's share in global imports of LNG was 31% back in 2010. On March 11, 2011 a tragic earthquake and tsunami hit Japan. The earthquake destroyed all the off-site and almost all the internal power sources in Fukushima-1 nuclear plant. After that terrible disaster LNG demand in the Japanese market has increased significantly, and in 2014 Japan's share in global imports of LNG reached 37%.

Historically, Japan was among the first countries to import LNG. The first shipments of LNG from the United States to Japan took place in 1969 from gas fields in Alaska. Meanwhile, since then the share of US LNG in Japanese imports has remained insignificant. According to the BP Statistical Review of World Energy 2014, the largest supplier of LNG to Japan in 2013 was Australia (21%) followed by Qatar (18%), Malaysia (17%) and Russia (10%).

In recent years Japan, as well as the EU, has looked forward to importing LNG produced from shale deposits in the United States. However the United States is evidently in no hurry to begin LNG exports. It is well known that American exporters had to obtain approvals from the federal Department of Energy to supply gas to countries, which do not have free trade agreements with the United States. Such free trade agreements are in force with 20 countries but there is neither Japan nor the EU among them. The new legislation should simplify the permitting procedure but its adoption is still pending.

More importantly, the prospects of shale LNG supplies to Japan from the US are overshadowed by the fact that the American LNG is of inferior quality, especially heating content, which does not meet the market requirements.

The report of the Institute for Energy Economics in Japan indicated that “LNG from the United States will be leaner than LNG from traditional producers in the Asia-Pacific region with lower heating content, lighter in gravity, less ethane and propane, and mostly comprising of methane. While a vast majority of Japan's city gas has a standard heating value of 45-46 MJ /(m3), natural gas distributed in the US has only 37.3-40.1 MJ/(m3) on average”.

Japanese experts also argue that low characteristics of the US LNG quality besides the weak competitiveness may cause logistical problems associated with its storage and distribution to consumers. As a matter of fact it will require after regasification to mix the leaner LNG from the US with the richer one delivered by other countries or to create a separate capacity for storage and distribution.

Such a pessimistic scenario of LNG supplies from the US to Japan obviously has to be very symbolic for the EU, where the same problems should be expected.

This is actually important taking into account that in spring the European Commission launched an EU Energy Union to bind the 28 countries into a single energy market aimed at tightening competition.

How in case of the newly formed single EU energy market can the politicians in Brussels count on the successful market positioning of shale LNG from the US, less quality, but more expensive considering the cost of shipping across the Atlantic?

Why should European consumers have to pay for these not economically, but clearly politically-motivated plans recklessly focused on replacing Russian gas with the shale LNG from the US having a lower quality to price ratio than its competitors?

Why are Greek affairs in the spotlight even at the White House?

Greece is called the cradle of European civilization. In the XXI century the difficult fate of the country led it to the position of the principal debtor within the Eurozone, forced to ask for a massive financial support, especially in countries - its partners in the EU.

In April the German newspaper Handelsblatt cited Vice President of the European Commission Valdis Dombrovskis, responsible for the Euro and Social Dialogue, that the official assumption regarding the Greek economy development in the current year would be reduced affecting conditions of its external lending. Later on the European Commission predicted the Greek economy would grow by only 0.5 per cent of GDP this year, down from an optimistic 2.5 per cent projection made just three months earlier.

There is no doubt that the Greek economy needs a deep rehabilitation and counts on the support and attention from both the EU Member States, and other countries - its traditional partners.

Many Europeans perceive positively that under these circumstances Greece has proved to be a country that is seeking to rely primarily on its own capabilities. The country is really looking for their own independent solutions that can positively impact on its economic status.

In a harsh economic situation the geographic location of Greece becomes an especially valuable gift of fate, since the country is located between the world's largest suppliers of natural gas and the European countries, especially its neighbors in the Balkan region, which need this kind of energy very much. It gives Greece the opportunity to participate in construction and further maintenance of new pipelines to supply gas to Europe.
It is indicative that after Turkey other Balkan countries together with Greece also confirmed their intention to participate in the transit of Russian gas to Europe. They declared about it at the Budapest meeting of foreign ministers from Greece, FYR Macedonia, Serbia, Hungary and Turkey on April 8. The main objective of this meeting was to coordinate efforts for creating a united infrastructure to distribute the gas delivered from third countries.

It is not difficult to see that this objective complies with the problem posed by the European Commission in order to eliminate the so-called "energy islands" existing especially in the countries of South East Europe, where national energy markets are operating separately without a proper technical connection with the energy networks of other EU countries.

However, despite this seemingly worthwhile convergence of the European Commission and the Balkan countries’ intentions regarding the development of the Europe's gas transmission system, in reality there is no consolidation of Brussels and the Balkans on this, of course, the most important task in the energy sector.
The European Union does not support, but rather warns Athens on prospects of participation in the Turkish stream project. In an interview with regional German newspaper Muenchner Merkur European Parliament President Martin Schulz told: “Greece demands and gets a lot of solidarity from the EU. We can therefore also ask for solidarity from Greece and for this solidarity not to be ended unilaterally by pulling out of joint measures".

Obviously, in the energy sector these joint measures meant to follow the requirements of the EU Third Energy Package, according to which it is illegal to own a pipeline and produce the natural gas that flows through it at the same time.

Many Europeans still remember how the European Commission blocked the South Stream project applying the Third Energy Package last year. In fact, a negative role in this story was played by Bulgaria, which did not grant Russia the authorization for construction in its territorial waters and on land. Thus, Gazprom was not able to proceed with the project. It resulted in a dramatic failure of Bulgaria's plans to become a transit country and a major gas hub in South East Europe.

There is a completely different situation now compared to last year because the Turkish Stream project is to be implemented outside the EU and beyond the borders of the EU legislation. However, although such means of pressure on the Russian gas project disappears, there is still the purpose, for which it is done.
Chairman of the Board of Gazprom Alexey Miller at the conference "Europe and Eurasia: Towards a new model of energy security" held in Berlin pointed out that the main purpose of blocking by the European Commission the South Stream project was to preserve the transit of gas through Ukraine.

Actually there is hardly anyone who still doubts that Ukraine has nothing to do with it. As many of you are aware, the United States played a major role in rising the new regime to power in Ukraine and continue to support it by all possible means. That is why after Russian President Vladimir Putin and President of Turkey Recep Tayyip Erdogan agreed to bypass the transit routes through Ukraine last year, the Turkish Stream project became the new target for the White House and, accordingly, Greece too, since the gas pipeline is to be destined for this country.

The US reaction to the interest shown by Greece with regard to new opportunities to develop its energy sector was fairly predictable. Especially after Greek Prime Minister Alexis Tsipras held talks with Vladimir Putin during his visit to Moscow, the US stepped up attempts to influence the prospects for the gas pipeline along Greek territory.

Repeating a familiar scenario of Bulgarian confrontation against the South Stream project, as if a full-time crisis manager, Amos Hochstein, Special Envoy and Coordinator for International Energy Affairs visited Greece on 7 - 8 May. In contrast to the words of politicians from Brussels mentioned above as they sounded more or less like the language of diplomacy, during the talks in Athens with the Greek Minister of industrial Reform, Environmental Protection and Energy Panagiotis Lafazanis the US Special Envoy directly stated that the US most certainly does not want this pipeline. Covering the visit of Amos Hochstein to Greece, The New York Times in an article entitled "U.S. Urges Greece to Reject Russian Energy Project" emphasized “That pipeline would carry Russian gas to Europe through Turkey and Greece, bypassing pipelines that run through Ukraine”.

As indicated in the press release of the US Embassy in Athens following the visit of Amos Hochstein, instead of participating in the Turkish Stream project Greek side was proposed to concentrate on the Trans Adriatic Pipeline (TAP), Greece-Bulgaria Interconnector (IGB), and expanded use of Liquefied Natural Gas (LNG). In the press-release without reference to any economic grounds it is alleged that TAP would result in 1.5 billion Euros in foreign investment in Greece, generate 10,000 jobs during construction, and provide many millions of Euros in revenue annually over 25 years. However, the real situation with the TAP gas pipeline does not correspond with these promises. Although Athens already determined the route of the Greek section of the pipeline, there is no agreement with Baku on the most important financial component of the TAP deal. Even transit tariffs have not been agreed yet.

The US advices regarding LNG seem very vaguely, taking into account that Greece at first will need to build an expensive regasification terminal.

In this regard, the statement made by the US Embassy, which calls for relying on these projects to improve energy security and reduce Greece's dependence on a single gas supplier looks like so much realistic, using the images of the world famous ancient Greek art, as a fig leaf on the ancient statue.

Therefore, it is logical that after talks with Amos Hochstein Greek Minister Panagiotis Lafazanis confirmed: “We want a multilevel and independent energy policy that will be formed exclusively on the basis of our national interest, the interest of the Greek people and, of course, the cooperation and energy security in our region and in Europe”.

How far the consolidation process in favor of national interests will go on further the next meeting of foreign ministers of the Balkan countries and Turkey reveals in July 2015, where imports of gas from Russia will be discussed among other significant issues.

Why wouldn't we wish the countries of South East Europe to withstand these tests of their commitments’ strength to maintain an independent energy policy pursuing its national interests?

p.s. In this situation, the position of the Greek government will continue to be of particular importance for the energy future of the entire region of South East Europe.