In Pursuit of Shale Gas

There is a slow evolution in Central and Eastern European energy supply and Poland is pushing hardest to ensure that shale gas is at its centre. Rather than pursuing a policy solely of energy independence from Russia though, the pursuit of shale is also part of a broader move to cope with European Union environmental policy.

The extraction of shale gas, still a relatively controversial process that involves injecting pressurised liquid deep into ground rock is a new method in Europe. It is rapidly becoming the next capital investment for countries in the East though, who are desperately seeking to reform outdated, coal based and import reliant energy sectors. By exerting pressure within the European Union, Poland is slowly establishing the necessary conditions to use shale gas to promote growth within the constraints of the EU's climate targets.

Loosening Russia's noose

Russia's influence over much of Europe's energy is hardly disputed. In 2009, during a 22-day dispute between Ukraine and Russia, Gazprom, the Russian owned gas supplier, managed to cut supply to 18 European states. As well as wiping out Ukraine's supply, supply to Bulgaria and Moldova dropped by 100 per cent; Poland by a third, and Germany by 10 per cent, with Slovakia declaring a state of emergency as supply through the Ukrainian pipeline faltered.

The establishment of the Nord Stream pipeline, a gas link that runs directly from Russia to Germany, may have quelled fears in Berlin of any future shortages, but has heightened pressure on those transit countries cut out of the loop. Gazprom's ability to squeeze or halt supplies to Ukraine and Poland in particular, without angering its western customers, has given Russia the strongest economic leverage to use on Eastern Europe since the fall of the Berlin Wall.

Deep political enmity aside, Poland still imports two-thirds of its natural gas consumption, 90 per cent of which comes from Russia. The Polish state has repeatedly complained that its pays above market rates for its gas and recently called for Gazprom to be forced to a European market rate. Through its use of long term national contracts, Gazprom has segmented national markets, restricted supply flows and linked the price of gas to that of oil, so that rising oil prices have forced the flexible contract gas price far in excess of the relative European market value.

The geopolitical argument is always a compelling but the more mundane, less made argument, is that by diversifying Poland's energy mix now, Poland can expect to secure a better deal with Gazprom when it renegotiates its major gas contract in 2020. After recent strong growth, Poland finds itself in a place to to take the initiative and lay down the foundations for its future long-term energy stability.

Shaping European environmental policy

Gas remains just one dimension of Poland's energy mix, and traditional coal burning factories contribute 95 per cent of Poland's electricity production. This is in stark contrast to the Western European energy market, which are increasingly reliant on renewable energy sources. The pursuit of shale and diversification of Poland's energy mix must therefore also be placed within the context of the “Europe 2020” sustainable growth policy, which set out (amongst other targets) a reduction in carbon emissions by 20 per cent. Poland has not yet managed to match pace with countries in Western European who have moved a long way forward with developing renewable energy.

Poland’s has vigorously opposed such measures. Conscious of its problems reaching the initial “Europe 2020” targets, Poland also vetoed the proposal of an extension of the 2020 goal to 30 per cent, as well as the “low carbon roadmap” to make 85 to 90 per cent reductions in carbon emissions by 2050.But with the introduction of tighter carbon trading allowances in 2013 Polish companies are now in great financial danger

Shale gas therefore represents a necessary intermediary energy source on the now inevitable European path to sustainable energy. Konrad Szymański, a Polish MEP involved in drafting the Environment Committee's shale gas report recently called it “an enormous potential to provide economic benefits and reduce our dependence on Russian energy supplies” and drafted a report that asserted the right of each state to regulate its own environmental safeguards when extracting shale. The Energy Committee also adopted a report in October which outlined the right of each EU country to decide for itself whether to exploit shale gas. Despite France's ban on extracting shale gas then, the EU has largely abnegated large scale EU regulatory measures in this area; a fact that will contribute to its popularity in the Eastern states.

Poland's new energy

Poland's energy problem remains how can a state so reliant on coal and another state's gas develop its industry whilst cutting emissions? The Polish Geological Institute's research, which found 24.8 trillion cubic feet of shale gas in Poland, or enough to supply the country's gas needs for the next 100 to 200 years, may provide one answer..

The government is rapidly exploiting this resource, having licensed shale gas development for 90,000 square kilometres of the country, an astounding 29 per cent of the country’s landmass. China, a country with seven times more gas reserves than Poland has only already drilled three times as many shale gas bores, and the state has only just begun to establish the steps needed to create both a financial and regulatory space for the long-term pursuit of shale.

The Treasury Ministry, headed by Mikolaj Budzanowski, will run the newly established National Energy Minerals Operator (NOKE), which will pay its net profits to the Polish state and to a Hydrocarbon Generations Fund designed for long-term investment in shale. Prime Minister Donald Tusk has suggested that Polish companies will invest 5 billion zlotys (about 1.2 billion euros) in shale gas exploration by 2016, and a favourable tax regime has been established this year to compel that shift, with levies on oil and gas in 2015.

The early steps Poland has taken has caused it to leap ahead of the rest of Europe. The potential for a shale evolution in Eastern Europe to follow is high; according to a leaked EU report, Estonia, Lithuania and Latvia all lie on so called “gas islands”, although currently lack the insufficient infrastructure to extract or distribute it.

The pursuit of shale is following two distinct, but concurrent, logics. In the first, the long held desire for energy independence from Russia drives at the heart of Poland's policy, but it is as much for financial reasons than deep historical and psychological leanings. The second, however, reflects more the environmental framework developed by the European Union. Pressured by severe carbon emission reduction targets, Poland, backed by Britain and other shale rich countries, has found a way to shape a cleaner energy policy aside from the Western European model of pure renewable energy, and is investing in shale, full steam ahead.

Mathew Shearman is a London based editor of the transnational life magazine Europe and Me. For more, follow him at @shearmanm

This text is published as part of an ongoing cross-publication partnership with Europe & Me magazine. The text also appears as a bimonthly column here.