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Energy security in Europe: selected aspects in position of EU, Poland and Germany in gas market

 

 

Mariusz-Orion Jędrysek, Ph.D., full professor of geology, has initiated shale gas and oil exploration in Poland (and Europe) granted first licenses in 2006/7 being state chief geologist and deputy minister for the environment (2005-7). In 2006-7 President of the Council of theInternational Seabed Authority (United Nations). Now Member of Parliament (Sejm) in Poland, head of the Parliamentary Team for Raw Minerals and Energy, and vice-chairman in the Commission for the Environment, Natural Resources and Forestry.

 

 

Introduction

It sounds trivial to say that security of supply is to built up by reliable deliveries, but on the other hand, the common wisdom is that most reliable delivery on any goods are own managed resources. This is in contrast to volatile and politically driven variations in prices of imported energy-bearing raw materials what is definitely observed in Europe. In this paper the author intends to stimulate debate and launch the question of self-sustainability of European Union with respect of energy sources.

Numerous discussions and number of documents are yearly released, regarding energy security in European Union. For example, one of the last one is theVilnius Memorandum (Central Europe Energy Partners, 10th of May, 2013), which by the way supported the Bratislava Report (prepared by Roland Berger, Germany). From most documents it seems that EU drives toward a internal EU energy market with common gas market, what is in turn in agreement with the recent Visegrad Group concussions. The European Union Commissioner for Energy Günther Oettinger, said last month, that shale gas would play a major role for decades and that energy policies have a significant geopolitical dimension. He has argued in favor of indigenous shale gas as part of a European Energy Mix. Important role promoting shale gas exploration in UE plays Niki Tzavela, member of the European Parliament and reporter for ITRE Committee’s accepted (Feb 2012) report “Industrial, energy and other aspects of shale gas and oil” (by the way - she has participated in a shale meeting held in Polish Parliament on 28 May 2012 - organized by the author of this paper). The well known in Poland similar report by B. Sonik (Polish MEP) has been prepared (accepted by the Comm. Environment) half year later after Tzavela's one and show environmental security of shale gas exploration with respect to European requirements. Nonetheless, both reports have been accepted by the EU Parliament at the end of the last year.

Despite that all these activities are so late, it seems that EU officials including European Commission, slowly understand, that the only reasonable goal for EU, is to support new technologies in order to use energy sources which are tailored to own potential i.e. reflects conditions and potential of individual member states (see Jędrysek 2012.01.24http://biznes.interia.pl/wiadomosci/news/polska-moglaby-sie-stac-energetyczna-szwajcaria-europy,1746255,4199). The shale gas and oil is the topic chance definitely -This can be transformative, but there are needs to be a larger geostrategic perspective especially on Polish shale gas which is "on the frontier". It is potentially game-changing for whole Europe. Environmental limitations and technological gaps are short term and often artificial obstacles in Europe. It is reliable to say that not only Poland, Great Britain, Ukraine, Bulgaria or Romania but also Germany will develop its own unconventional gas sector within several years.It is also impossible to not agree with Rolandas Krisciunas (Deputy Minister of Foreign Affairs of Lithuania) who state that there cannot be energy security without appropriate infrastructure, diversification of supply, transparent and independent energy market and stable regulations discussed the political aspect of energy security in EU.  Likewise, there is no way not to agree with Tzavela who said that shale EU members  need a protective, flexible umbrella from the Commission that will facilitate them to legislate nationally. Finally, we cannot honestly and fully ensure European energy security without Ukraine within it. The recent ties of Ukraine with Russia is embarrassing, but on the other hand, seems to be rational and desperate reaction on UE irrelevant and sluggish behavior.

It also seems to become clear in European Commission mind that CO2 reduction in the EU would be sensible only if main global emitters particularly the United States, China, India, Brazil, and Russia will implement similar CO2 policy. The CO2 policy side effect is, that EU have been just replacing domestic production by importing carbon-bearing fuels, carbon-based energy and goods based on carbon-emitting production, from elsewhere beyond EU.

Both issues, namely shale hydrocarbons and CO2 policy are crucial for European energy security and industrial competitivness - thiscan be positively-transformative or self-destructive for EU.

 

Polish shale gas 2005-13: Welcome we so say - we act Go away, or standard for other EU members

The author of this paper was probably the first who actually initiated shale gas and oil exploration in EU (first prepared (2005-6) and awarded (2007) the shale gas and oil licenses. Shale exploration in Poland has been ignored or being unknown in EU for several years. Afterwards, negative environmental opinions arose, but since two yearsthere are increasingly more opinions of experts (e.g. A. Michta - Twitter 2013.06.05) who state that Poland (and Europe) has historic opportunity to develop shale gas and in the process redefine the regional security equation.The optimism,likewiseto G. Oettinger, regarding chance, that Polish or UK companies will start shale gas exploitation, is probably not more than in half-true, as at least his knowledge on Polish advances comes possibly from Polish officials, particularly Prime Minister D. Tusk or Minister for Intern. Affairs R. Sikorski, who both show little knowledge but instead much PR-performance regarding shale gas.

Two weeks ago, a major daily in Poland "Rzeczpospolita" revealed apparently a secret note reporting discussion on March 8th this year. This discussion was between the State Chief Geologist (SCG) and foreign investors (mainly US companies) regarding planned legal regulations. In Poland, the SCG (deputy minister for the environment) on behalf of State Treasury, grants geological licenses according to Geological an Mining Law. Several months ago two legal models were proposed by the government: one dealing with taxation (by Ministry of Finance) and the other dealing with exploitation (by SCG) of hydrocarbons including unconventional gas and oil deposits in shale formations. The government is planning to set up the National Operator for Energy Resources (NOKE - Polish abbreviation). Its aim is to guarantee Polish interests in future production of the shale gas. This is nearly a copy of the regulations prepared in 2006/7 and repeated in 2011 (by the author of this paper), with several but one crucial difference: the NOKE is supposed to be a limited company, not the state agency (with much wider activity and responsibility i.e. Polish Geological Survey).

Serving in a capacity (position) of the SCG, between 2005 - 2007, the author of this paper awarded first licenses, thus initiated exploration of shale gas and shale oil in Poland (first in Europe probably). It was done under a very strict regime: I granted 11 (i.e. c.a.10% of licenses available, in a very dispersed fields), to four different companies. Afterwards, granting licenses was halted, and meanwhile we were preparing Poland to new investments: setting up a new special state agency and advisory controlling governmental bodies, new Geological and Mining Law, developing new own technologies and know how, etc. In my opinion, the State Treasury should have a direct stake in each license, and shares should depend on quality of the deposit. The crucial problem is that in contrast to governmental agency planned in 2006/7, the shares of NOKE Ltd. can be sold any moment. One cannot exclude such action to be carried out in the future and the political situation of Poland can have a bearing upon that.

Both the role of NOKE and the financial model, are highly criticized by investors in Poland. This resulted in strong tensions between the investors and the government. In my opinion the taxes should be as low as possible while the state should create its revenue via a fixed stake (sometimes flexible) in each of the license. The induced economic benefits from shale gas and oil are the most important. Fiscal regulations are important from the point of view of investors, while transparency of licenses ownership and exploitation process, are crucial from the point of view of the state. The above mentioned confidential report, contained serious accusations that the goal of the SCG, hence it was the policy of the government, was to squeeze out all US shale gas companies from Poland. However, the present SCG called US companies to stay and promise to treat all NATO state companies equally to all the European Union companies. Sluggish or rather no activity and total mess regarding preparation of legal background increase political risk to extremely high level, far beyond expected profits. This is in addition that gas in Poland is 7 fold more expensive to produce than in the USA and the only beneficient is Russia.

It seems that the main reason for leaving by ExxonMobil, Talisman and Marathon Oil, is the lack of regulations in Poland. This is due to the fact that surprisingly, new government, at the very end of 2007, has waved all measures prepared by me and granted all licenses (116) without any sensible guarantees to control of exploration, expected exploitation and trading (selling) licenses. The licenses were mostly handed out to foreign firms, at around €100 per square kilometer (one license covers up to 1200 km2). Beside many other negative effects of release of all licenses, important also is the fact that abundant and valuable geological information has been distributed without any control mostly in digital form for less than its 106 value. No doubts that some companies acquired licenses just for speculations (including geological information). Licenses have been granted without any control of reliability and owners. Poland lost billions of dollars and control over licenses.  Therefore, there is double trouble with licenses as no exploration is taking place and once licenses are sold on, Poland have no knowledge or control over the ownership. Although low price was good and safe at the early stages (when 10% of licenses awarded), granting all licenses in the same system was very unwise. This is especially true, when exploration licenses granted oblige the State to grant exploitation licenses on the same conditions as it was done before, so practically for free (the Geological and Mining Law was tailored for state-owned companies, thus author of this paper prepared 2 new Laws in 2007). As a matter of fact, Polish government collected about €10 mil. instead of well over € several billion for all the 116 licenses. I warned Polish Prime Minister on June 2010 (when less than 50% of licenses has been awarded) about destructive licensing, 2007 planned Geological and Mining Law and potential hostile takeover), but this warning has been ignored and the remaining rest of the licenses has been granted under the same inadequate State conditions (see Nikkei Business, 2011 August, and Global shale gas loop enfold Asian consumers "Nikkei Asian Review" 2012.05.20, Japan - www.jedrysek.eu). Consequently, Poland lost its benefit of being the leader (after US-Canada), and is walking backwards, after such a promising start 6 years ago when the first license for shale gas exploration in Poland, and Europe, was granted.

Granting of licenses in Poland was accompanied by corruption scandals in the Ministry for the Environment and State Geological Institute (Jan. 2012). Thrust to the authority of the state collapsed completely. Summing up, not only catastrophic financial loss but also broad economic and social negative effects have been resulted.

 

European perspectives on Germany-Russia gas business versus shale gas in EU

It is obvious that European demand for natural gas increases and will increase, especially when CO2 emission has to be limited and renewable resources are not as convenient and efficient as it would be required. It concern particularly Poland and Germany. Te first is still based on hard coal and lignite (thus the climate policy in European Union is a profound bias for Polish economy.) while the second one is stepping back from nuclear energy electric plants. In contrast to Poland, Germany isone of the richest countries in the EU and have very high energy consumption, thus production, per capita. Nonetheless, both Poland and Germany will not switch from their present energy sources instantly and cheap. For both countries shale gas seems to be the best, and by now the only reliable, and fast source of own energy-bearing raw material. As a matter of fact, Europe posses large deposits of organic-rich shale beds, which potentially generated abundant amounts of hydrocarbons. Substantial parts did not left the system, thus potentially may be the source trillions of cubic meters of gas and billions of ton of oil. Much below expectation exploration in Poland and extensive debate about shale gas exploration in Germany take place, but Polish and German deposits are probably comparable.

Obviously, Russia is the main supplier to EU and extremely reach in gas, nonetheless potential/possible tensions in EU-Russian relations may sooner or later result in catastrophic energy-ignited crisis in EU. Significant if not total (in case of some EU members) dependence of energy and chemical sectors from imported gas from Russia, is not the firm basis of EU energy security. On the other hand, decreasing global prices of gas followed by that of oil, may result recession in Russia, unless this country make something to monopolize gas supply to EU. The crucial role in that building of such monopoly is to construct numerous large capacity gas pipes. The Nord Stream, South Stream and so called Jamal2 - Europe, seems to be main parts of that strategy. Unfortunately for Central European Countries, the role of Germany was crucial in the Nord Stream which has been constructed several years ego - it was just forced, on the EU basis, exclusively by Germany. This is obviously in conflict of interests in EU-Germany-Russia relations - one have to choose. Today, large portion of gas is delivered to Poland from Russia but surprisingly via Germany which earn significantly on that activity (so Poland pay and has no diversity in gas supply). Delivery of energy-bearing resources must create predictability of supply and price over the long term - it has to confidence. As the past experience show, Russia may use the gas supply as a tool of political and economic violence, especially in central and eastern Europe. Germany, as the UE member cannot ignore it, because this definitely will not support security, economic grow and integration of European Union. And, to be honest - this is nothing emotional - just cold judgment based on recent developments of political and economic relations, by knowledge on geological potential of Europe and political tools.

Cheaper gas, transported via large capacity pipelines, may give chance to manipulate with prices especially when long term agreements are obligatory for UE gas importers. Beside other consequences, this would make the shale gas exploration and exploitation in Europe, less or rather not beneficial. Obviously, shale gas will not be extracted when low-price obligatory conventional gas import take place. Therefore, having own gas, Europe will be increasingly dependent on Russian import. This confirms the opinion of a well known expert Grzegorz Pytel wrote two years ago, with reference to gas from Russia, calling it a Yalta - 2 scenario. Nonetheless, when consider the role of Germany and Russia together, the Yalta-2 is not relevant parallel - what would be relevant then?

Fortunately, Europe seems to slowly appreciate energy partnership with USA, what definitely contradicts to Russia-Germany ties expressed by North Stream. Nevertheless, the Roadmap EU-Russia Energy Cooperation until 2050, signed in February 2011 seems rather suspicious. The European Commission and the Russian government agreed to establish a long-term perspective to their mutual energy relations. The relevant document specified that the Roadmap should concentrate on an analysis of different scenarios and their impact on EU-Russia energy relations, look into their consequences for the energy sectors, elaborate long-term opportunities and risks of the overall energy supply and demand situation and investigate the potential for long-term cooperation in the field of energy. After approval of this Roadmap by the Coordinators of the Dialogue, the EU and Russian sides should provide for using the respective potential for long-term cooperation as one of the priorities of their energy policies. It seems that sluggish and messy activity in shale gas in Poland, confirms that the Roadmap is perfectly put into reality. The chapter on gas, in this Roadmap, has nothing to do with own EU deposits. It seems however that EU is on the road to consider the EU-Roadmap as a dead-end road, especially when consider recent statement by Oettinger: Europe needs more options and shale gas can be a good option to avoid high level of dependency from Russian gas.

From European perspective the approach to accept NATO state companies (stated recently by State Chief Geologist of Poland) make sense, because there is a hard geopolitical competition in which artificial limitation in access to fossil fuels is used as an important tool of political and economic violence. According to MEP Tzavela, Europe has to benefit from the extensive North American know-how, avoiding long test phases that would slow down the exploitation of indigenous unconventional gas. In my opinion, hence European shale rocks show remarkably different geological parameters (broad meaning) as compared to North America, the technologies developed in the USA have to be modified on own, and the role of CCS (CO2 utilization) is important. The European Union has to significantly support countries willing to explore and exploit shale gas.

Stabilization on EU gas market will start soon, in that reason that export from USA became the fact, and a large portion of the globe posses extremely rich deposits of shale gas and oil. Russia is seaking new gas importers (Japan, China, Korea, Vietnam) and will accept joint gas exploration in those countries. Eventually, we (Europe) will attain that stage, that the gas prices will became predictable, low and stable. This trend is already observed, since several years in large-scale in LNG market- CNG is on the way and then oil - for sure. It is reliable that oil may dip in prices to 50$ per barrel in several years, and the gas cold cost in EU close to 150 $ per 1000 cubic meters. The price can be even lower, when technology develop, as in general, at least gas in Poland, are in deeper and more compact rocks - this needs new developments but gives more expectations regarding recoverable deposits. On the other hand, this process can be accelerated by gas hydrates exploration which contain much bigger amounts of carbon when compared to joint all the other sources together including coal, soil and biosphere. All will probably show up before 2020, several years after the International Seabed Authority (United Nations) will probably start with awarding licenses probably (in 2015) - exciting indeed. 

In fact, recent advances in geological exploration and mining technologies proves that there is no global problem on energy resources, and Europe is rich in shale gas and oil, enough to be self-sufficient and independent by far. This is very dangerous for Russian economy. Hence Russia would do as much as it can, by any available method, to ensure high price and monopoly for gas supply to Europe (incidentally, contracts forecasted by me one year ago with Japan seem to be fixed now see "Nikkei Asian Review" 2012.05.20, Japan). The North Stream and South Stream (Balkan states, Hungary and Ukraine are close to join) gas pipelines surround Europe, and long terms contracts (30 years or so) make position of Russia stronger. In this context, Central Europe gas common market that would span, according to plans, from the Baltic sea to the Adriatic, seems to be unrealistic in predictable future. Peculiarly, all newly gas pipelines show much higher capacity for gas flow than needed in the predictable future. Russian companies show also strong interest in purchasing shares in major gas consuming companies, especially chemical ones. Such activities have occurred in Poland recently. An alleged lobbying by an ex-prime minister(Bielecki) and an ex-president (Kwaśniewski) shows that this game is of the first importance. This suggest (if true) the view that major politicians became a kind of well paid tool of the Russian interests (compare the role of Germany ex-canceller Schroeder in Nord Stream). Anyway, rich gas and oil unconventional deposits, including shale gas and gas hydrates, evidence that the energy temblors, often experienced in Europe, are due to Russian near monopoly gas supply, and have little to do with energy availability and potential of the globe in general. Europe has to act fast and reverse the trend. Surprisingly, the first step did the Ukraine - namely due to tough negotiations, Ukraine stopped overpaying for the Russian gas and implements diversification projects involved with Germany, Poland, Slovakia, and Hungary. There is enough green papers released by the European Commission which usually presents a range of ideas or contribute views. We need white papers now, official sets of proposals followed by new law.

It is odd that since the first license in Europe has been granted 6 years ago, there are still no regulations in this matter and they are definitely needed, especially in Poland where the law is still tailored for state controlled geological and mining companies. This is due to the fact, that all measures done in 2006-7 has been abandoned by new (and present) government (PO-PSL). It has to be kept in mind that in Poland literally all geological deposits are state owned, regardless who owns the soil. Nobody in their right mind would grant all licenses to foreign or private companies, without any control and for free. It can be done only under certain conditions, on a very limited scale and in order to attract investors at the very early and extremely risky stage, to gain time and urgently get first information on geological potential.

 

Major N.American companies abandon Europe

Likewise, nobody sane would invest when regulations do not make the business reliable, profitable and safe. Consequently, beside one state controlled company PGNiG, other companies show little or no activity in exploration. Consequently, any details regarding efficiency, geology, appropriate technologies are still not known. We still have no clue how much oil and gas and where we have. Four horizontal wells have been drilled up to now, instead of around 100 expected (and 45 core-drillings instead perhaps 500). Obviously, until now, there is no service market in Poland, no standards, no SWOT analysis etc. thus nobody can prepare any reliable estimates.

Therefore, ExxonMobil, Talisman and Marathon Oil after altogether several drillings, abandoned their licenses. Talisman since 2 years is in a very bad financial situation (apparently sold its licenses to San Leon) but ExxonMobil moved to Ukraine and Russia. Marathon Oil probably has enough licenses in USA (paid 20 000 $ per 1 acre). By the way, a large activity in Ukraine shows ExxonMobil, Shell and Chevron now - this is probably accepted (controlled?) by Moscow. Probably one of the largest up to now, in a global sense, energy sources deal is between ExxonMobil and Rosnieft signed around one year ago in New York. According to the agreement, the companies will exchange 30% of their potential. In the beginning they share the Arctic vast oil and gas deposits, leaving behind Canada, Norway and Denmark which apparently also claim to be owners of large parts of these deposits. On the other hand, the American company will share with its Russian counterpart their shale gas deposits. This is not clear which one, but it is possible that this could be ExxonMobil's shale gas and shale oil fields located in Poland. Such scenario can be copied in other shale gas licenses granted in other European countries.

 

Conclusions

1.     Shale gas and oil is the reliable chance for fast save energy security and CO2 policy in Europe.

2.     Shale oil is more valuable part of shale unconventional hydrocarbon deposits than shale gas

3.     Decreasing volume of critical voices, regarding environmental and financial aspects, are accompanied by shale-optimists who are convinced by the economic and geopolitical judge.

4.     Till now on European Union level there are still abundant dialogs - converting that dialogue into legal regulatory and exploration actions are critical issue not only in Poland.

5.     There are still no risks or opportunities assessment regarding shale gas and oil, therefore a prudent approach is highly recommended - the risk (as it has been done in 2007 in Poland) has to be left for investors side.

6.     Decrease and predictability of gas prices in Europe are required - this can be attained only by fast shale gas and oil indigenous exploitation.

7.     Hence European shale beds show remarkably different geological parameters (broad meaning) as compared to North America, the technologies development in the USA have to be modified on own. The European Union has to significantly support countries willing to explore and exploit indigenous shale gas and oil.

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