how the eu can benefit from the american shale gas revolution
TRANSCRIPT
How the EU can
benefit from the
American shale gas
revolution
D I S C U S S I O N P A P E R
J U N E 2 0 1 4
Mels de Zeeuw
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How the EU can benefit from the American shale
gas revolution
New Direction discussion papers are designed to
encourage debate on public policy in a European
context. They do not reflect the views of New Direction
or its members. New Direction receives funding from the
European Parliament and is also required to raise a
proportion of its funds from additional sources. The
views expressed in this publication do not necessarily
reflect those of the European Parliament.
June 2014
Printed in Belgium
ISBN: 978-2-87555-084-2
Publisher and copyright holder:
New Direction Foundation
Rue d'Arlon 40, 1000 Brussels, Belgium
Phone: +32 2 808 7847
Email: [email protected]
www.newdirectionfoundation.org
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Abstract
The US shale revolution has caused a large increase in US natural gas production and a
sharp decrease in its natural gas price. This has significant economic and environmental
effects for the EU. The EU natural gas price is now approximately 2.5 times as high as its
US counterpart, and this has caused a cost competitiveness gap for energy-intensive
manufacturing industry. The European Commission estimates that many energy-
intensive manufacturing firms, particularly in the chemical industry, are opting to
expand their business in the US, and choosing to shift operations from the EU to the US.
Additionally, the cheap natural gas price has led US coal exports to the EU to almost
double since 2009, hurting the European Commission’s CO2 reduction goals.
This paper argues that the EU can mitigate, and even benefit from the US shale
revolution by making greater US natural gas exports a provision in the TTIP (Transatlantic
Trade and Investment Partnership) negotiations. By arguing for ‘Free-trade agreement’
(FTA) status, under the US’ 1938 Natural Gas Act, US natural gas exporters avoid an
arduous export authorization application process, allowing for easier and increased US
exports of LNG to Europe. Although increased US exports of natural gas in general are
more likely to flow to Japan due to higher export margins, this is still in the EU’s interest, as
this would:
1. Lower EU, and raise US gas prices, improving the EU’s industrial manufacturing cost
competitiveness.
2. Reduce US coal exports to the EU, which aids CO2 reduction goals.
3. Open up new natural gas trading partners for the EU to reduce reliance on Russian
gas.
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Introduction
Following the ‘shale revolution’, the US has now overtaken both Russia and Saudi-Arabia
to become the world’s leading energy producer. As a result, American residential and
industrial consumers have seen their gas prices plummet, and the American
manufacturing sector enjoys a significant cost competitiveness advantage over its
European counterpart.
The effects of the American shale revolution are not limited to North America, it strongly
impacts economic and climate policies in the EU. European industry now faces up to
four times higher energy costs as its US rivals, raising concerns over industrial
competitiveness.i Europe now imports more cheap US coal, hurting its plans to reduce
CO2 emissions. With the first US natural gas export facility to start in 2015, this creates
new trade options and trading partners for the EU, which would alleviate its
dependence on Russian gas imports. The American developments offer both
challenges and opportunities for European policymakers, but EU policymakers should
act now to mitigate the negative, and enhance the positive impacts of the US shale
revolution.
This paper will first briefly examine the economic and environmental impact of the
American shale revolution on the EU. It will then argue that EU policymakers should utilize
TTIP (the Transatlantic Trade and Investment Partnership) negotiations to ensure greater
US natural gas exports, and to grant the block Free-trade agreement status under the
US’ Natural Gas Act. This would allow the EU to mitigate the negative, and benefit from
the positive economic and environmental impacts of the American shale revolution.
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The impact of the US shale gas revolution on the EU
The past eight years have seen a dramatic change in the fortunes of the American
energy industry. Once thought to be in an inexorable decline, the US energy industry
has now overtaken both Russia and Saudi-Arabia to become the world’s largest
producer of oil and natural gas. This newfound surge in US energy production is caused
by recent improvements in horizontal drilling and hydraulic fracturing, or fracking, which
has made the exploitation of large reserves of shale oil and gas, found in organic rock
(shale) formations deep below the surface, economically viable. The technique consists
of blasting such formations with large quantities of water (mixed with sand and
chemicals), which creates fractures that release natural gas.ii Geographical and
institutional factors, such as sparse population, a strong tradition of private property
rights, a largely decentralized regulatory structure, and a well-developed energy
industry and infrastructure, have ensured that the technological improvements led to an
energy revolution.iii
The impact of the shale revolution has been most noticeable in production data.
US natural gas production has increased by 25% between 2008 and 2013. Shale gas
now composes 30% of US natural gas production and the US Energy Information
Administration estimates it will produce 46% of US power supply by 2035. Similarly, US oil
production has increased by almost 44% between 2008 and 2014.iv
Economic Impact
Throughout the US, the development of shale gas has caused significant economic
benefits. In 2010, the shale gas industry supported 600,000 jobs, contributed $76 billion to
US GDP and brought in a total of $18.6 billion in federal, state and local government tax
revenues.v As a result of the production increases, natural gas prices for American
manufacturers have fallen by 36 percent between 2006 and 2010, and the natural gas
spot price has now largely stabilized between $4 and $6 per million BTU.vi This stands in
sharp contrast with European energy prices, which have increased by 4% a year for
residential consumers and by 3.5% a year for industrial consumers between 2008 and
2012. The EU’s industrial energy costs are now two times as high as the US’, and the
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International Energy Agency estimates that this disparity could last for another two
decades.vii
US natural gas trade policies have worked to ensure the low US gas prices and
this disparity with the rest of the world. Under the 1938 Natural Gas Act, as amended in
1992, the US Department of Energy subjects companies looking to export natural gas to
countries without a free-trade agreement to a rigorous export authorization process.
Only 7 out of the more than 30 applications have so far been granted (conditional)
authorization, and this process often takes over 800 days to complete. The first US export
facility in Louisiana won’t start exporting liquefied natural gas (LNG) until 2015, and
others will likely not follow until 2018. Without a less restrictive export authorization
process, greater US LNG flows won’t reach the global gas market for years to come,
and gas prices are unlikely to converge (allowing for transportation costs), maintaining
the US’ gas price edge.
The price
divergence has had
particularly beneficial
effects for US energy-
intensive manufacturing
industry, in which natural gas
prices compose a large
percentage of
production costs, and this has
led to improvements in the
US’ manufacturing cost
competitiveness
ranking.viii By 2017, the
lower prices are estimated to increase industrial production by 2.9%, and by 2035 it is
estimated to be 4.7% higher.ix Natural gas feedstock provides a particularly significant
portion of production costs in the chemical industry, and as a result of the low price of
natural gas, several large chemical companies, like Dow, and Royal Dutch Shell, have
chosen to move to- or announced an expansion of their operations in the United States,
investing tens of billions of dollars in new or expanded plants and equipment.x Close to
Source: World Bank Commodity Markets. The
Washington Post, April 1, 2013.
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100 additional chemical sector projects have been announced and the sector is
estimated to create 123,000 additional (direct, indirect, and induced) jobs per year by
2020, and bring in an extra $2.5 billion in annual tax revenue for federal, state and local
governments, as a result of renewed US industrial competitiveness.xi
This price divergence has negatively impacted the EU’s manufacturing industry.
The European Commission estimates that: “medium-sized industrial consumers in the EU
paid four times as much for natural gas as industrial consumers in the US, Canada, India
and Russia and about 12% more than those in China.” As a result, some firms, particularly
energy-intensive industrial manufacturers, have decided to shift operations, investments,
and occasionally entire plants from Europe to the US.xii Gordon Moffat, director-general
of Eurofer, the main lobbying group for European steel manufacturers, has said: “It’s
become clear, with the drop in gas and electricity prices in the United States that we
are, at the moment, at a significant disadvantage with our competitors”.xiii
Top officials from German chemical giant BASF added that: “unless Europe allows
a more aggressive approach to energy production, including broader use of hydraulic
fracturing, or fracking, even more manufacturing will move to the United States.”xiv The
International Energy Agency’s top economist, Fatih Birol put the competitiveness
problem in even starker terms: “There may be a narrowing of the gap, but if no new
policies are put in place, Europe will still have two to three times higher gas prices than
the United States for 20 years. […] Competitiveness will be more of a problem for many
countries. Today it's a headache. Tomorrow it will be a migraine for the European
economies if no policies are put in place.”xv And a recent report by the Boston
Consulting Group on industrial manufacturing cost competitiveness showed that gas
prices are partly to blame for reduced industrial competitiveness in several European
countries like Italy, France, Poland, and the Czech Republic, while the US is almost
edging out China for the top spot.xvi
Environmental Impact
The surge in natural gas production, and the resulting lower price of natural gas in the US
has gradually decreased the share of coal in US power production. Coal provided 37%
of US electricity generation in 2012 down from 52% in 2000, whereas gas now makes up
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30%, up from 16% in 2000, and US coal consumption has declined by 11% between 2009
and 2013.xvii As a result of the reduced need for and consumption of coal, US exports of
the resource have increased dramatically, by almost 110%, between 2009 and 2013,
and US CO2 emissions have fallen by 10% between 2008 and 2013.xviii In the EU,
however, coal consumption increased by 6% between 2009 and 2013, and its US imports
to 47 million tons, almost double the 2009 numbers. The EU’s CO2 emissions declined by
just 8.5% between 2008 and 2013, despite more policies geared towards greater
development of renewable energy and CO2 reduction.xix Through its increased coal
exports, the US is de facto exporting higher CO2 emissions to Europe, hurting the
Commissions climate change goals.
The US shale gas revolution and its impact on the EU:
- US Natural gas production increased by 25% between 2008 and 2012
- US export restrictions have contributed to EU’ industrial gas prices being double the US’,
creating a cost competitiveness challenge for EU industry
- Cheap natural gas doubled US coal exports to the EU since 2009, hurting the EU’s CO2
reduction goals
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EU Policy Recommendation:
Utilize TTIP negotiations to allow for increased US natural gas exports and achieve
Free-trade agreement status under the US Natural Gas Act
The restrictive export authorization process for US natural gas, in combination with the
natural gas production increases have caused the US natural gas price to decrease
significantly, and to diverge from prices in other international regions. It has caused a
large disparity in gas prices between the US and Europe. This has caused a twofold
effect: an increase in US industrial manufacturing competitiveness, and greater exports
of US coal, which has been replaced by cheaper natural gas. By including natural gas
exports in TTIP negotiations, the EU can demand its status as an FTA zone, as recognized
by the American Department of Energy, under the US’ Natural Gas Act. This ensures that
exporting American firms will not face such obstacles, and natural gas can more easily
be exported from the US.
TTIP
European policymakers should negotiate with the US government to lift its restrictive
natural gas export policy. Ambassadors from Eastern European countries, including
Hungary, Poland, the Czech Republic and Slovakia have already reached out to
leaders in the US House of Representatives and the Senate, so far without success.xx By
including natural gas exports in the TTIP free-trade negotiations, the EU could ensure
success. The EU should negotiate that it will be designated a free-trade zone under the
US’ Natural gas act. This will ensure that US natural gas exporters looking to export gas to
Europe will no longer have to go through an arduous, time-consuming export
authorization process administered by the US’ Department of Energy. Europe’s LNG
import capacity (such as the Rotterdam facility), and its higher prices would incentivize
US exporters to sell natural gas in the European market, bringing down prices in the EU. It
should be noted that it will take several years for US exporting firms to construct or
finalize export or LNG facilities.
Broader reforms of the export-authorization process by the US Department of Energy,
and the resulting increased natural gas exports to other global regions, will still carry
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benefits for the EU in freeing up new trade partners. Easing the US export authorization
process on natural gas will cause a closer convergence in the international price of
natural gas. European governments, and the EU as a whole, will find allies in the US oil
and natural gas industry, as well as representatives of districts in which the natural gas
industry is represented and more free-market oriented politicians, a coalition that is
heavily Republican, but has some Democratic legislator support as well.
Benefit 1: Lower natural gas prices and improved industrial competitiveness
A less restricted US export authorization process will increase US natural gas exports and
reduce US natural gas prices. A study by the US Energy Information Agency showed
moderate increases in the price of natural gas resulting from exports. The price increases
range from 3.2 to 8.3 percent for residential and commercial users, and from 7.2 to 18.7
percent for industrial customers, over a 20-year timespan (2015-2035).xxi A Deloitte study
bolsters these results, and predicts that US gas prices would increase by some $0.15 per
Million BTU and decrease European gas prices between $0.20 and $0.70.xxii US LNG
exports would reduce global gas prices. These dual price movements, both a price
increase in the US, and a decrease in the EU, will narrow the industrial manufacturing
competitiveness gap between the US and EU. It will mean improved industrial
competitiveness in the EU.
Benefit 2: Reduction in US coal exports and reduction in EU CO2 emissions
Increased US exports of natural gas, and higher US natural gas prices will make coal
relatively more attractive to US power producers, and thus increase the demand for
and consumption of coal in America. As the demand for coal increases in the US, its
exports to Europe will likely decrease, and the price power producers in Europe pay for
coal will increase. Combined with lower natural gas prices for European power
producers, this would cause a shift in power production in Europe, away from coal and
towards natural gas. This would reverse the trend of increased EU coal consumption and
the shift towards cleaner forms of energy production, including natural gas, will aid the
Commissions CO2 reduction goals.
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One challenge to these potential developments is the US’ regulatory situation for
coal-fired power plants. The American Environmental Protection Agency (EPA) has
announced stricter regulations that would limit the construction of new coal-fired power
plants, and might force the closure of some 300. These regulations might serve to
disincentive coal power production, and might actually depress future US demand for
coal.xxiii The political consequences of the 2014 US midterm election results might alter
these EPA plans, but this is still uncertain. This scenario would likely lead to increased
exports of cheap US coal, and would exacerbate the EU’s coal import problem.
Policymakers should then look to other alternatives, such as encouraging the EU’s own
shale resources.
Benefit 3: Improved Natural gas trading options
Although US natural gas exports are unlikely to flow directly to Europe, they could still
contribute to a diversification of the EU’s natural gas sources, and a reduction in the
EU’s dependence on Russian gas imports. The Asian, and particularly Japanese markets
will entice US natural gas exporters with higher prices and higher export margins (the
margin to export to Japan over Europe was approximately 3 times as large in 2011).xxiv
Eastern European countries that are currently clamoring for relief from US LNG are
unlikely to find it. However, increased US natural gas flows to Asia will still carry benefits
for the EU. They will depress global natural gas prices and restructure trade flows.
Increased US LNG to Japan will force current exporters to divert LNG flows, making them
potential trading partners to Europe. Additionally, recent shale gas finds in the Eastern
Mediterranean and East Africa, as well as Iraqi gas might prove additional sources of
natural gas for Europe.xxv
Furthermore, although Japan and other Asian countries currently see higher
natural gas spot prices, there are reasons to believe this might alter drastically in the
future. China possesses 31.5 trillion cubic meters of shale gas, the world’s largest
reserves, almost double the technically recoverable US shale reserves.xxvi Exploitation of
Chinese shale gas, in combination with development of unconventional gas in
Argentina and Australia, and future pipeline connections between Central and South-
Asia and China, and Russia and China would all free up additional LNG resources for
Japan.xxvii This would reduce the need for US LNG exports to Japan in the future, and in
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turn open them up as an additional export option for Europe. In any case, increased
exports of US LNG open up additional trading options for natural gas for the EU.
In Summary:
- The EU should use TTIP negotiations to ensure increased US natural gas exports
- Benefit 1: lower natural gas prices and improved industrial competitiveness
- Benefit 2: reduced US coal exports lead to reduced EU CO2 emissions
- Benefit 3: Improved Natural gas trading options
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Conclusion
With its shale gas revolution, and cheap natural gas prices, the US has created a
significant competitive advantage for energy-intensive manufacturing industry.
Additionally, its coal exports to the EU have doubled since 2009, increasing the EU’s
consumption of coal, and hurting its CO2 reduction policies.
To mitigate the effects of the US shale revolution, the EU should make increased
US natural gas exports a provision in its TTIP negotiations. By achieving ‘Free-trade’
agreement status, US exporters avoid a difficult export authorization process, and this will
allow for increased exports of LNG to the EU. Increased US natural gas exports will
narrow the price gap and improve EU industrial cost competitiveness, will reduce US
coal exports and aid the European Commissions CO2 goals, and will open up new
trading partners to reduce its reliance on Russian gas.
By getting the US to trade its wealth of natural gas with the world, the EU can
ensure that it too benefits from the American shale gas revolution that has transformed
the world’s energy landscape.
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xv Lewis, B., Europe's energy price headache becoming a migraine - IEA, Reuters,
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analysis of the changing cost competitiveness of the world’s top 25 export economies,
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xvii U.S. Energy Information Administration, AEO2014 Early Release Overview, December 16, 2013. xviii U.S. Energy Information Administration, International Energy Statistics, 2014.
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SOURCE xxiv
Medlock, K.B. III, U.S. LNG Exports: Truth and Consequence, Rice University: James A.
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