Russia and shale can solve Europe’s energy problem

The sooner the region realises its energy policy is a mess, the sooner it can grow, says Paolo Scaroni

The aim of European energy policy should be to combine economic growth with environmental sustainability. However, we have ended up with energy costs that hamper growth – yet greenhouse gas emissions have not fallen despite the decline in energy consumption.

The problem is that we have, so far, failed to grasp the implications of the US shale revolution for Europe. Thanks to the rapid increase in efficient non-conventional gas production, US companies pay about $3.50 per million British thermal units (mBtu) for their natural gas. That is about a third of what Europeans pay.

Turning to electricity, not only are European consumers hit by relatively high gas feedstock prices, but they also have to pay an extra charge to cover the more than €30bn of incentives to invest in renewables which EU countries spend every year. As a result, Europe’s electricity is twice as expensive as America’s.

Cheap energy gives the US a huge competitive advantage. And it comes on top of other factors that make the US a good place for an industrial investment, including a qualified, flexible labour market, a deep managerial pool, fiscal advantages and a generally business-friendly environment. In light of this, it is hard for businesses to justify new investments in European industries. Energy-intensive activities – such as petrochemicals plants or refineries – that can relocate to the US are doing so. European gas demand is already down 15 per cent since 2008.

As well as growing more expensive, European energy has grown dirtier. That is because cheap, clean gas has crowded out coal in power generation in America. And that coal has made its way across the Atlantic at prices that are still competitive compared with our own, higher, natural gas prices. All this has caused a deterioration in Europe’s energy mix: gas-fired power generation has decreased by 25 per cent between 2010 and 2012, while coal-fired power generation has increased by 10 per cent. The paradox is that the rise in carbon emissions caused by the extra coal has almost wiped out the benefits of the investments in renewables and the reduced economic activity of the past five years.

Europe is now in an uncomfortable position compared with a hyper-competitive US. And the problem will not disappear on its own. Even if the US were to export significant quantities of shale gas to the continent, by the time it has been liquefied, transported and regasified, it will be twice as expensive as it would be in the US. It is not enough to bring European gas prices down from today’s levels of about $11-$12 per mBTU to, say, $8-$9. We need to go all the way to matching US benchmark gas prices of about $3.50 per mBTU.

So what can we do about this? One idea would be to look for – and then exploit – shale gas in Europe. We may have quite a lot of it – for instance in France, Germany and the UK. But to produce it we need a public consensus – and there is still a lot of opposition in western Europe. Of course, the opposition is understandable – fracking is loud and invasive, and the continent is densely populated. But if Europe is serious about creating wealth and jobs, it is an option worth exploring.

The country that is furthest along the road to consensus-building is the UK, which can count on political will, tax incentives and even a blessing from the Archbishop of Canterbury. If it does manage to create a healthy shale gas industry, it could pave the way for continental Europe to follow.

Other potential components of the solution for Europe are nuclear power, energy efficiency, better use of conventional hydrocarbons – in short, anything that can make energy cheaper and more readily available.

But there is another, more radical, idea. We could strengthen commercial and political ties with our traditional energy suppliers, and especially Russia, which supplies 25 per cent of Europe’s gas – a figure that is growing.

There is certainly room to do something. On the cost front, it is actually cheaper to extract the vast conventional gas reserves in Russia, Algeria and Norway than those in the US. And if our suppliers keep trying to obtain the highest possible price for their gas, they will squeeze European industry and destroy their natural market. If European companies emigrate across the Atlantic, everybody loses: European kids will not have jobs and Russian kids will not have gas revenues.

On the other hand, there is plenty to be gained by reviewing the relationship between Europe and its traditional suppliers. Our businesses could gain access to abundant and cheap gas, and suppliers would be guaranteed a stable, growing market.

Could north Africa and Russia become Europe’s Texas and Oklahoma? Not any time soon. But, over time, the forces of gravity do seem to be pulling us ever closer. And when something makes fundamental sense, it often finds a way to happen.

The writer is chief executive of Eni, the global oil and gas company and Europe’s largest natural gas operator

Letters in response to this article:

Poland is developing shale gas too / From Mr Jan-Roman Potocki

Russian gas not the answer to Europe’s energy problem / From Mr Barrie Bain

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