Shale Gas is Rolling in U.S.  - Although shale gas extraction has been known and performed to a limited extent for decades in the U.S., exploitation has become competitive only in the past 10 years. The main reasons:

• Substantial advances in drilling and fracking technology
• High global oil and gas prices, as the amount of low-cost oil and gas has decreased drastically, and demand - especially in the emerging markets - has increased steeply
• Political and regulatory support in countries strong in unconventional energy resources in order to strengthen U.S. energy security

Consequently, the U.S. gas price has decoupled from the oil-indexed gas prices and, at $4 per million British thermal units, is well below the prices in Europe ($10/MMBtu) and East Asia ($16/MMBtu). The spread, although forecast to decrease somewhat because of international trade in the short term, will remain significant until 2020. Furthermore, as the U.S. possesses large basins of wet shale gas (sample composition: 85% methane, 6% ethane, 9% other natural gas liquids), the U.S. has achieved a competitive advantage not only in energy, but also in certain chemicals such as methane-derived fertilizers, ethylene and tightly connected downstream derivatives such as polyethylene and PVC.

Europe's Train Waiting to Depart

In light of these developments, it is not surprising that the industry in Europe is increasingly keen to look at this region's shale resources' potential. This requires a somewhat differentiated perspective: Although shale gas can be found in numerous European countries, the main commercially viable basins are expected to be in the UK, Poland, Ukraine and France, among others (fig.1). Russia also has large resources, but its massive cheap conventional gas reserves have led Russia to sidestep shale gas thus far.

It is frequently stated that European shale gas is not as wet as in the U.S., based on preliminary geological knowledge and initial exploration. However, shale exploration is not advanced enough to substantiate this statement, and there are already indications of natural gas liquid (NGL) deposits in selected areas, such as in Lancashire in the UK. So while NGL opportunities in Europe should not be excluded, any scenario based on European NGL production is still visionary.

Given that Europe is sufficiently rich in shale deposits, why has the European shale gas train not started to move? Simply because the tracks have not been laid.

The crucial element that will enable a shale gas future in Europe is the existence of strong, structured and flexible regulatory frameworks. In the recent past, these have lacked clarity, and there has been little political and public determination to reform them. However, there have been some changes in selected European countries, and by analyzing the most recent trends, we have come a step closer to forecasting shale developments and their potential future effects in Europe.

Over the past two years, drawing an accurate picture of the national prospects and regulatory environments of those European countries ready to open up to the exploration of unconventional gas has appeared equally challenging. A surge of conflicting information and slow-moving regulatory reforms has contributed to the false impression of a fading dynamic. Pioneering countries such as the UK, Poland and Ukraine have been polishing policy instruments in order to welcome investments in the exploration of unconventional gas resources and their future production.

Officially, these countries' policymakers regard the development of onshore domestic natural gas resources as an energy security priority. In June, the Polish treasury minister indicated that shale gas was a matter of "national interest," and the UK's and Ukraine's governments issued similar statements. Governments have created and reorganized departments and assigned new duties to design strategies and positive actions on licensing, hydrocarbon taxation and the streamlining of regulatory requirements.

Regulatory Progress

Ukraine and Poland have taken legislative action toward new, improved licensing regimes in order to create more confidence for investors. In Poland, even if national regulatory frameworks still require adjustments, exploration licenses should, by 2014, include a right to go toward production without the need for operators to be fully reassessed by the licensing authority. The new law in Poland will also authorize operators to start building works, but not drilling, before finalizing environmental permits. Permits for subsoil activities and licenses in Ukraine are expected to gradually open up to foreign investors with the vote of the revised Ukrainian Subsoil Code, possibly in 2013. Foreign investors are also invited to enter into production-sharing agreements (PSAs). In the case of Ukraine, the local law on PSAs was revised in November to include unconventional gas resources while automatically granting a subsoil license to investors contemplating PSAs. The United Kingdom has no plan to introduce a specific licensing regime for unconventional resources. The existing landward licensing regime will, however, be revised to include new terms and durations for onshore licenses. Licensing and planning procedures should also be streamlined for onshore developments.

The speeding up of reforms aimed at attracting investments does not mean that the governments of Ukraine, Poland and the United Kingdom are ready to compromise on environmental or climate-change issues. Environmental and planning permissions remain standard conditions to any activity. In each country, governments are determined to improve collaboration between agencies and bodies involved in licensing and environmental permitting to develop smarter regulation processes. This ambition was realized in the UK in March with the introduction of the Office of Unconventional Gas and Oil within the Department of Energy and Climate Change. According to its mission statement, the role of this office is notably to "administer, create and promote an efficient and accessible regulatory process." It is expected to coordinate with other interested offices.

EU Welcomes Possibilities

As figure 1 indicates, certain European countries still have bans or moratoria on hydraulic fracturing, thus preventing even test exploration for unconventional resources. But even in this handful of European territories, policymakers have been looking carefully at how to better approach exploration for unconventional hydrocarbons. The European Union's commission and parliament's overall positive views on unconventional resources also invite national governments to look at this resource with less skepticism. Some national parliaments have also sought to obtain the official opinion of their respective national science academies on unconventional resources and fracking. They have publicly asked industry representatives to identify whether sustainable forms of extraction would be available as an alternative to hydraulic fracturing.

These scientific and public statements are now accessible through public conference proceedings from, for instance, the French Académie des Sciences, the parliament and official reports from the UK's Royal Society and Royal Academy of Engineering, all available online. These high-level initiatives show that despite some still strong public opposition to hydraulic fracturing, policymakers in Europe are determined to identify whether their industries could develop unconventional gas to include more domestic resources in their energy mixes and reduce their external energy bills. Reforms also show positive public support in favor of future investments, R&D and the development of new local onshore upstream and downstream sectors.

Chemical Industry Outlook

Despite all the outstanding hurdles for shale gas production in Europe, the regulatory dynamic looks clearly positive. It is widely accepted that the development of unconventional gas resources in this region will not be as sizeable as the one experienced in the United States. However, there are numerous indications that it won't be negligible either.

Also, once the first larger projects are announced in selected countries, it seems reasonable to assume that regional gas prices will tend to stabilize. As shale gas will be only a small part of the whole energy mix, significant gas and energy price drops across Europe are unlikely, but sharp gas price increases and volatility will be abated. Furthermore, a larger regional market fuel competition will affect the sourcing of energy. Companies buying gas from Russia will have a stronger bargaining position toward Gazprom.

According to our analysis, managers of chemical plants in Europe have to plan to at least 2020 without significant supportive effects of regional shale gas production. In the midterm to long-term perspective, those plants with direct access to shale gas producing areas may have energy and possibly feedstock advantages. Shale gas production in Ukraine, for example, could fuel the country's fertilizer and amine compounds business, based on cheap methane as feedstock and energy carrier.

It will certainly be sensible to keep a close eye on the progress and policy changes in pro-shale gas countries, such as Poland, Ukraine and the UK, to be better positioned to identify raw material and energy opportunities before competitors do.