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The Shale Gas Boom: Why Poland Is Not Ready

The Shale Gas Boom: Why Poland Is Not Ready

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This policy brief examines natural gas production in the United States and Poland.
This policy brief examines natural gas production in the United States and Poland.

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Published by: German Marshall Fund of the United States on Jun 04, 2012
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07/01/2012

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Summary:
In this essay, the
authors rst review the keyelements of the shale gas revolu
-tion in the United States. This is
followed by an examination of 
the case of Poland, a country
that may be well endowed withshale gas but which faces major
political, technical, and economic
challenges in exploiting the
untapped resources.
 The Shale Gas Boom:Why Poland Is Not Ready 
by Geoffrey Kemp, Corey Johnson, and Tim Boersma
June 2012
Analysis
Introduction
Over the past ew years, a revolutionin shale gas and oil extraction in theUnited States has dramatically changedthe outlook or U.S. ossil uel produc-tion. Tousands o new gas wells havebeen drilled in exas, Oklahoma, andPennsylvania while a boom in oil shaleproduction is underway in NorthDakota. None o these developmentswas anticipated in energy orecastsmade in the early 2000s, when theprevailing expectation was that U.S.imports o both natural gas and petro-leum would rise during the decaderather than all.Te revolution occurred because o acombination o new technology, pricesignals, avorable state regulatory laws,and the act that unlike most sovereignstates, Americans who own land alsohave owners’ rights to minerals andother products o value beneath thesurace. Te new technologies includebreakthroughs in horizontal, highly accurate drilling techniques and thedevelopment o hydraulic racturingtechniques (“racking”) to inject underhigh pressure a mixture o water, sand,and chemicals into shale rocks torelease the gas.O course, the United States is notmonolithic on regulatory issues. Insome states, especially those withlong histories o drilling or oil andgas, such as Oklahoma and exas,the regulatory environment is gener-ally more avorable to hydrocarbondevelopment. In other states, localopinion is bitterly divided on the costsand benets o drilling (e.g. Pennsyl- vania). And still more states — likesome countries in Europe — haveimposed outright bans on drilling untilmore evidence on the environmentalimpacts is known (e.g. New Jersey,New York, and Vermont).Nonetheless, the conclusion wouldhave to be that the economic benetso producing low-cost gas and home-produced oil are so strong that theUnited States will remain the domi-nant player in the game or many yearsto come. And i history is any guide,the techniques and the saety recordswill improve. Te real question is notwhether shale uels are good or bad,but whether their production will havea negative impact on the developmento more sustainable, cleaner energy sources.In this essay, we rst review the key elements o the shale gas revolution inthe United States. Tis is ollowed by an examination o the case o Poland,a country that may be well endowed
 
2
Analysis
with shale gas but which aces major political, technical, andeconomic challenges in exploiting the untapped resources.
Gas Markets in Motion
Domestic production o natural gas in the United States isbooming. In 2010, roughly 150 billion cubic meters o gaswere produced, and the U.S. Energy Inormation Admin-istration (EIA) has predicted that this number will tripleby 2035. Yet we have to be cautious with such estimates.Earlier this year, the EIA substantially downgraded itsearlier predictions or recoverable natural gas reserves inthe biggest shale deposit in the United States, the Marcellusshale (rom 410 tc to 141 tc). In addition, roughly a decadeago, shale gas and the technologies to extract them werea phenomenon only known by a ew insiders. We have toacknowledge that there are many things about shale gas westill do not know.Despite these uncertainties, the impacts o the shale gasboom have been considerable. Domestically, well headprices or natural gas have dropped dramatically since July 2008. Industry investments are slowing down because o thelower revenues o natural gas on the market. Tis leaves animportant question open or U.S. policymakers and busi-ness executives alike: what to do with all this gas?One obvious option is electricity generation. Natural gas isbelieved to be cleaner than coal, and nuclear energy has anuncertain uture. Both government agencies and academicshave estimated that the number o gas-red electricity plants will rise in the decades ahead, to roughly one-thirdo the total U.S. electricity production in 2035. In addition,some major chemical industries have recently decided toshi a part o their production process back to the UnitedStates, a move prompted by low gas prices. Other optionsor abundant natural gas are less clear or more controver-sial. Using natural gas in transport seems a rather distantscenario because o the large inrastructural investmentsthat would be required, while exporting excess gas is beingdebated by policymakers in Washington, DC as a nationalsecurity and price issue. o date, only one project hasreceived an unrestricted license to export natural gas, whileeight others have been put on hold.Despite the many open questions that remain, the eects o U.S. shale gas on European markets are evident. Liqueednatural gas (LNG) rom Qatar, Eastern Siberia, and otherregions that was intended to nd its way to terminals in theUnited States is now shipped to Europe and Asia. It has hada moderating eect on natural gas spot market prices andhas prompted some major consumers to attempt to renego-tiate earlier long-term contracts signed with suppliers. Tisseems to conrm earlier predictions that shale gas produc-tion could undermine the leverage or market dominanceo traditional major players such as Russia. Yet it is worthmentioning that the share o LNG in Europe is not expectedto be more than 20 percent in the decade ahead, indicatingthat the bulk o natural gas will reach Europe through pipe-lines that are tied up in long-term contracts. Furthermore,prices are not exclusively determined by the market, butalso by inrastructural limitations, available storage acili-ties, and reverse ow capacity. Even when these restrictionswould not apply, it is questionable whether U.S. natural gascould be globally competitive. A study by the Massachu-setts Institute o echnology in 2011 suggests that in a moreintegrated world gas market, most U.S. shale gas is expectedto be more costly to produce than low-cost conventionalresources rom the Middle East and Russia.
Environmental Concerns
Potential environmental risks that have been linked toshale gas extraction could play a decisive role regarding theuture development o European shale gas. While in NorthAmerica, policymakers and regulators were seemingly caught o guard by this gas revolution, this is not expectedto happen in Europe. Private companies are currently investigating cores rom Polish soils in their laboratories inthe United States and Canada, and legislators in Brussels areexamining whether existing environmental rameworks aresufcient to have companies extract shale gas without severeeects on water and air quality. Tis section provides anoverview o the most controversial environmental concernsthat have been linked to shale gas and hydraulic racturing.Fugitive methane is gas that is leaked somewhere duringthe cycle rom extraction to combustion. Methane is agreenhouse gas that is over 20 times more potent thancarbon dioxide, though it stays in the lower atmosphere ora much shorter time span. Most o these methane emissionsare process related and come during eld production, e.g.rom wells, gathering pipelines, or gas-treatment opera-tions. Production-related methane leakage is not limited tounconventional gas, but the general consensus in the scien-tic community appears to be that current rates o leakage
 
3
Analysis
or shale gas are higher than or conventional gas. With theacademic debate ongoing, there is little evidence to make aconvincing argument that shale gas is an ideal uel or thetransition to a low-carbon economy. In order to preventexcessive emissions rom occurring, in 2012 the U.S.Environmental Protection Agency (EPA) adopted ederalrules to regulate emissions rom drilling activities. From2015 onward, gas companies are required to apply so-called“green completions,” e.g. capture technology to keep volatileorganic compounds or methane rom reaching the air. Untilthen, gas companies are obliged to are these emissions,instead o letting them out in the open air (venting). Whatis unknown is the extent to which technological xes in thedrilling and extraction processes can in act reduce unin-tended methane emissions.Also heavily debated is the presumed relationship betweenhydraulic racturing and seismic activity. Recently, severalcases have suggested that human inuence almost certainly contributed to increased seismic activity in parts o theUnited States. Te Ohio Department o Natural Resourcesinvestigated a series o 12 seismic events last year in thatstate, varying rom 2.1 to 4.0 on the Richter scale. Tereport concluded that it is probable that the events werehuman-induced. So ar it appears that this anthropogenicseismicity can most likely be linked to the reinjection o ow back water into the well, and not to the technology o hydraulic racturing itsel. Some evidence or this has beenound in Oklahoma and Arkansas. In the United Kingdom,two small earthquakes halted shale gas development or asubstantial amount o time. In April, industry activities werecontinued, with the provision that a trafc light system beoperated to govern operations. Future seismic activity above0.5 on the Richter scale will require production to halt whileurther tests are conducted.Another contentious issue linked to shale gas extraction isthe contamination o drinking water. So ar, two cases havebeen reported in the United States where this contamina-tion was likely. In Wyoming, the EPA began investigatingprivate water wells three years ago and ound that groundwater contained compounds likely associated with naturalgas production. Another case stems rom Pennsylvania,where in 2011 EPA reported that our domestic water wellscontained inorganic hazardous substances that are knownto be used in hydraulic racturing. Next to uids contami-nating drinking water, leaking natural gas itsel is also apotential problem. In Pennsylvania, substantial evidencewas ound or methane contamination o shallow drinking-water reservoirs.
The Case of Poland
Not a single molecule o natural gas rom shale has beenproduced in Poland, yet enthusiasm about the potentialreserves is widespread. In particular, Polish policymakershave the explicit desire to extract the reserves that havebeen mapped, or reasons o lower prices, high rents, andenergy independence rom Russia. Tere are howeverseveral arguments why uture commercial shale gas extrac-tion in Poland may be difcult to achieve.It is unclear how much gas there is in Poland. While in2011, the EIA estimated that Polish shale ormationscontained nearly 900 times Poland’s annually gas consump-tion in technically recoverable reserves (or 5.3 tcm), in2012 the Polish Geological Institute released gures thatwere much more moderate (between 346 bcm to 768bcm). Moreover, private companies that have been activein local exploratory drillings have generated mixed results.Geochemists in the United States and Canada are currently examining these cores in laboratories and have reportedthat the preliminary ndings are promising, but Exxon atan earlier stage declared that the two wells they had drilledwere underperorming.Even i shale gas could at some point be extracted, severalhurdles would remain. First, the political debate on theEuropean stage seems to have done the Polish case moreharm than good until now. Tis is rooted in deep distrusto Russia in Poland, and also o some o Poland’s EuropeanUnion partners. Yet despite its complex history vis-à-visEurope, the reality is that Russia has been a stable suppliero both oil and natural gas to the continent or severaldecades. o give an example, the oen-quoted supply disruptions in 2009 were not elt by consumers in Germany and Poland because Russia was able to bypass Ukraine andincrease gas exports through Belarus. Te inaugurationo the Nord Stream pipeline, linking Russia directly withGermany and bypassing Poland, has also been portrayed asa betrayal o sorts. Yet it is questionable why, i dependenceon Russia is the existential threat as is oen portrayed,Polish investments in recent years have not aimed to reducethis dependency, by or instance developing the country’sgas market and connecting it to northwestern Europe.

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