Could the extraction of shale gas constitute an energy independent Poland?
Essai en anglais lauréat du concours “Shale Gas Poland 2012: The Energy Independence Conference” organisé en mai 2012 par la Fondation Casimir Pułaski sur le thème “L’extraction du gaz de schiste peut-elle conduire à l’indépendance énergétique de la Pologne ?”.
Essay on the topic “Could the extraction of shale gas constitute an energy independent Poland?” awarded for the competition “Shale Gas Poland 2012: The Energy Independence Conference” organized in May 2012 by the Casimir Pułaski Fundation.
Although Poland is far from being the most vulnerable Member State of the European Union (EU) for energy supply – its import dependency rate, all fuels included, reached 31.7% in 2009 against 53.9% on average for the EU-27 –, she is characterized by a high sensitivity to the issue of supply security. History and politics matter here more than numbers: one may indeed have assumed that due to a higher import dependency rate for oil than for natural gas, the first would receive more attention. However, the rigidities of gas trade and, above all, Russia’s position as an irreplaceable key supplier have rather cast the light on the latter, especially after the first ‘gas crisis’ in 2006.
In this context, it is not surprising that the ‘shale gas revolution’ has had a particular echo in Poland after it was discovered in 2010 that the country may sit on enormous resources which would ensure decades, if not centuries, of self-sufficiency for gas consumption. Assessments were so optimistic that beyond energy independence, Poland could even dream of becoming a gas exporter like the United States may soon turn. Shale gas would in such a case not only be instrumental in achieving a strategic goal but would also allow Poland to raise huge revenues in order to accelerate economic modernisation and smooth the short-term, adverse effects of welfare state reforms.
Yet the chances for this scenario to occur are constrained by three ranges of factors. First, energy independence is illusory if it comes at too high a cost for businesses and households to afford it. Energy is a basic input which must always be considered as a means to deliver more directly useful goods and services: if it is excessively expensive, even when available in plenty, it stops to fulfill its main function. One should therefore look closely at the total cost of shale gas extraction and check whether it is competitive in regard with alternatives (I). Second, as mentioned above, natural gas is actually not the energy source for which Poland is most dependent on external supply. Taking in account that gas-exporting countries are often at the same time oil-rich, the political objective of energy independence could hardly be met if extreme vulnerability to oil disruption was to remain intact. It is in consequence necessary to inquire to which extent natural gas, if at all possible, can substitute other sources of energy and at what price (II). Third, Poland does not evolve in a bubble isolated from the rest of the world. EU membership in particular imposes on her certain priorities that she may not share to the same degree, e.g. fight against climate change. Nevertheless, Poland is bound by EU legislation and the growing role of shale gas in her energy mix may purely and simply be not compatible with EU environmental targets, especially CO2 emission caps (III).
I – Costs of shale gas against imported natural gas
Before examining the potential costs of shale gas, it is useful to recall the current natural gas picture in Poland. It is small to say that it looks hardly favourable, both for political and economic motives. In addition of being dependent for imports on nearly a single supplier, Russia’s Gazprom, the Polish public monopoly PGNiG pays for gas a relatively higher price than other utility companies in Europe. While precise data have not been made public, it is generally estimated that Gazprom charges PGNiG over $500 for one thousand cubic meters, i.e. 20% more than the price paid by German E.ON Ruhrgas. This difference has obvious impacts on Polish industry competitiveness, even if at the end of the day the gap between final prices may not be so large due to various taxation rates. It remains in any case that higher prices charged by producers are tantamount to a gross value transfer from the consumer country, with little if any economic gain.
In comparison, the United States, where the shale gas industry is probably the most advanced, are right now enjoying prices up to three times less than the average on continental Europe, mainly supplied by pipeline gas priced according to oil-indexed formula. Since Poland belongs to this group, again, her industry is penalized. Yet one can also deduce that were Poland be able to produce shale gas under the same conditions as the United States, she would effortlessly find neighbouring markets. The central question is therefore whether this is likely, despite substantial geographic differences.
While it may be too early to provide definitive answers, preliminary assessments tend to be rather negative. Greater depth, more stringent regulations, less competitive services to the industry and insufficient infrastructures could lead Polish shale gas to be twice as expensive as its American counterpart. At $300 per 1000 m3, it would still be competitive for domestic use against Russian gas, however export perspectives become much narrower since this price does not integrate the cost of building facilities such as pipelines or LNG terminals in order to sell the gas abroad. These projects, very capital-intensive, would require long-term commitments with buyers at a moment when the market is oversupplied and spot prices record low. By consequence, incentives to take such commitments are currently quite limited on the buyers’ side. Last but not least, Gazprom will certainly not remain inactive in front of a rising competitor and even with discounts offered to its Western European clients, it would retain very comfortable margins — albeit on decline, Russia’s ‘super giant’ gas fields allow costs of production to be around $132 per 1000 m3 and export equipments are already in place. In conclusion, Poland has few chances to become a European energy champion at this point. Can she turn nonetheless energy self-sufficient thanks to shale gas?
This time, one must look at the wider picture of the world natural gas market. Shale gas exploitation in the United States does not only imply that prices have tremendously fallen there, it also means that LNG production formerly destined to the United States has been made available for other customers. PGNiG already signed in 2009 a contract with the national company QatarGas, under the auspices of the two countries’ public authorities, to receive annually 1.5 billion m3 of LNG from 2014 to 2034. Though price is for the moment expected to be close to the price for Russian gas, glut on the market may allow PGNiG to renegotiate it like Econgas, GDF Suez, Singerie Italiane, SPP and Wingas successfully did with Gazprom. Supposing LNG price would then come closer to spot prices observed elsewhere on the European market – slightly above $300 per 1000 m3 –, competitiveness of Polish shale gas looks once again relatively frail whereas increased reliance on LNG would also significantly enhance Poland’s energy security. True, diversification is not equal to independence, yet one may think climbing to the next step comes at too high a price for other policy objectives.
II – Shale gas substitutability in Poland’s energy mix
Having said so, in the case Poland would be ready to make this sacrifice, how much independence can she obtain in exchange? In 2009, households and services on the one hand and industries on the other accounted each for around 40% of natural gas demand when power generation and large heating facilities represented merely 10%. For oil – Poland’s main source of external vulnerability –, transport was responsible for 60% of total consumption and industry around 20%. Interestingly, contrary to most European countries, electricity generation is not an issue in Poland from the angle of energy security thanks to abundant, indigenous coal production. Shale gas substitutability shall therefore only be examined in relation with oil and thus, in the transport and industry sectors.
Because studies are still missing to precisely answer this question, the current paper shall limit its ambitions to provide estimations. In the transport sector, natural gas has been used as a fuel for almost a century and this remains true today, especially for public transportation means such as buses. However, the market share of NGVs (natural gas vehicles) in the total Polish fleet reaches a mere 0.01%, and 0.31% for buses. In theory, all vehicles, including individual cars, are able to run on natural gas. One would then have to count not only the cost of transition, which is tremendous, but also the deployment of adequate infrastructures like fueling stations. Last but not least, could Poland’s indigenous production of shale gas meet such a booming demand?
Calculation shall be again relatively gross and focus on passenger cars, which make up the majority of the fleet. In 2009, the total number of vehicle-kilometres driven by this category reached in Poland 153 509 million. Assuming that a standard compressed natural gas (CNG) car consumes 7 m3 per 100 km, total consumption for the whole fleet of private vehicles would be around 11 billion cubic meters. In comparison, gas demand for the entire Polish economy was in the same year over 13 billion cubic meters. This means natural gas consumption would be expected to almost double in order to cover the needs of the transportation sector, and in this scenario oil would not yet be eliminated altogether since most current CNG vehicle models are bi-fuel.
These figures must now be put at the light of estimated Polish shale gas resources. Last month, the Polish Geological Institute (PGI) released its first report “on shale gas and shale oil resources”. Though it covers only certain regions of the country, it is of particular significance since contrary to previous studies carried out by American public organizations or private industries, this report is the fruit of a Polish, public institution. One may in consequence expect the document to be less influenced by geopolitical or economic interests. The PGI calculates at current consumption levels, Polish reserves would be sufficient to cover domestic needs during 35-65 years. Were they to double, this length would be accordingly divided by two: energy independence would then be not only very expensive, but also rather short living.
III – Obstacles of EU environmental policy to shale gas development
Before concluding this paper, it is necessary to inquire another theme, namely relations between environmental policy of the EU and shale gas exploitation. The goal here is not to review safety concerns connected with extraction processes, but to take into consideration wider environmental policy objectives that Poland agreed to endorse by joining the EU. This notably includes reduction of greenhouse gas (GHG) emissions in the proportions set by the so-called Climate and Energy Package. Polish emissions e.g. must not exceed in 2020 their 2005 level + 14%. According to projections realized by the European Environment Agency, Poland is on track to respect this target. Such previsions however ignore the possibility of shale gas exploitation in the country.
A study carried out by the Tyndall Centre for Climate Change Research for the British case study shows that techniques employed to extract shale gas are relatively carbon intensive and that the overall GHG footprint of shale gas is very close to the one of coal. In other words, even in the hypothesis coal would be substituted with natural gas in order to cut Poland’s GHG emissions, the final outcome will be a net increase of emissions since shale gas would also be used to replace imported, conventional gas.
Restraining the field of investigation to import substitution, one must calculate additional emissions caused by indigenous production of over 8 Mtoe a year (figure in 2009), i.e. 335 000 TJ. Tyndall findings provide a range of additional 3.01 – 16.9 tCO2e/TJ in comparison with conventional gas, whose extraction and production are estimated to emit 57 tCO2e/TJ. Even if the lowest number is retained for a sum of around 60 tCO2e/TJ, Polish annual emissions would rise by 20 million tCO2e. In regard with the 2005 base – approximately 400 million tCO2e –, this is tantamount to a 20% increase, clearly incompatible with political commitments taken in the course of the fight against climate change.
Due to space limitations, the present paper only concentrated on partial illustrations of broader issues like economic competitiveness, technical feasibility and legal constraints linked with environmental policy. Nevertheless, it appears at this stage that in spite of initial hopes ignited by the discovery in Polish soil of large unconventional gas resources, they are unlikely to make Poland energy independent, at least at a socially acceptable cost. If politics is the art of conciliating divergent policy objectives, one possible recommandation to draw from this paper is energy security may not only be enhanced by self-sufficiency, but also by diversification and strengthened interdependence. This would at the same time help Poland to reduce her vulnerability vis-à-vis her main oil supplier at a more reasonable cost than entering a new energy revolution.
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