Atlantic Council Energy & Economic Summit: “New Opportunities in a Dynamic Region”

Session 2: The Debate About Unconventional Gas

John Lyman,
Energy and Environment Program,
Atlantic Council

Fatih Birol,
Chief Economist,
International Energy Agency (IEA)

Melanie Kenderdine,
Executive Director,
Massachusetts Institute of Technology Energy Initiative (MITEI)

Ian MacDonald,
Vice President,
Europe, Eurasia, and Middle East Exploration and Production,

His Excellency Piotr Wozniak,
Chief National Geologist and Under Secretary of State,
Ministry of Environment, Republic of Poland

Lausanne Room
Swissôtel, The Bosphorus
Istanbul, Turkey

10:30 – 11:45 a.m.

Friday, November 16, 2012

Transcript by
Federal News Service
Washington, D.C.

JOHN LYMAN: OK, good day. Is everyone settled in? This is a subject which we just keep hearing about every day. It’s a fascinating subject. It’s also exceedingly complex. There is a – fortunately today we have probably some of the best experts in the world on different aspects of this subject, but I should also tell you that probably everybody on the panel, all of us could talk on all the aspects. So what I’ve had to do is to divide the topic up a little bit, to address it in a little bit different ways.

Everybody I think knows everybody from the panel. I’m not going to introduce people because you can look in the bios, but what you’ve got here an incredible depth of experience. And I’m going to start – we’re going to start with Fatih on a general overview of shale gas. Melanie is then going to talk a lot about what really went on in the U.S. so people have a better idea of how complicated it was to develop this technology, but also what impacts it’s having on the U.S. economy. I think people have read about it a little bit but you don’t really understand the depth of the changes that are happening in the U.S. economy as a result.

We then have Ian is going to give us some perspective of an oil and gas executive who has to worry about how do you take this technology into a country, how you deal with the people, how you deal with the issues of getting it accepted. And then I’m going to end up with the Honorable Mr. Wozniak, who is in charge of trying to understand how to make it work within his country and how Poland is a little different from some other places on a geological basis, and also on implementing it.

And then we will open it up for an inter-panel discussion, if there’s any, but I think there’s a lot of people I see here on the floor who have a lot of knowledge as well, so we will definitely open it up for general discussion. Fatih, why don’t you take it away.

FATIH BIROL: Thanks a lot, and good morning once again. And you said a lot of experts are here, but I see the colleagues that are more expert on the floor than here perhaps. Definitely, so there is a lot experts. OK, let me just try to give the general, the broad picture about gas.

First of all, some of you may know that a few years ago research in our world energy outlook talk about the golden age of gas, that the gas is entering a golden age. And in fact, the name of our report was, “Are We Entering a Golden Age of Gas?” with a question mark. Some of the colleagues didn’t like the question mark, but that was a question mark because there were some conditions to see a golden age of gas worldwide.

For me, gas – before the unconventional gas revolution, gas was already going up, very – (inaudible) – natural gas demand worldwide, but to see a golden age of gas we need to see a significant growth from unconventional gas which would, A, increase the availability of gas, and B, would make gas much more affordable for the consumers. This is the important thing.

So then we see in the last few years we saw an increase in United States, Canada, Australia – let’s don’t forget Australia, a growth there – and I know that there are some concerns by some, saying whether or not this growth is really going to happen. And I would like to mention too just one number. The shale gas production in the United States in the last few years, about five years, reached about 200 bcm, which is the current exports of Russia. So we aren’t talking about peanuts. This is real – (happened already ?).

There are five major projects in Australia and they are all going on, which would make Australia in a few years of time the largest energy exporter of the world catching up Qatar. So these are real things going on, not only the slides or not on books. These are real things going on.

But there is one issue, and I have colleagues here who work on the shale gas, and I am not. The issue is, the exploration and production of shale gas may have some consequences on the environment and the local communities. This is for sure. And I believe that some of the concerns raised by the local communities, NGOs, some of them are legitimate concerns in terms of the issue of water, in terms of chemicals, in terms of the methane leakage and all of these issues.

So therefore, what I would say is that if the gas, the shale gas operators would like to see a golden age of gas, they have to apply golden rules to their practices. If they do not do so, an incident may have unintended dramatic implications on the reputation and the viability of the shale gas. Therefore, it is very important that the right regulations are there, the strict regulations are there and they are followed very closely by the governments, and that the operators get a social license to operate. This is crucial.

So our expectation is that shale gas will grow substantially, mainly driven by U.S., Canada, Australia, China, and other provinces. About half of the production growth, we believe, in the next 20 years will come from the unconventional gas, shale gas and also I mean the Australian coal bed methane as well.

So what are the implications of this? A bit on that and I will leave it to the other colleagues. First of all, I think the traditional gas exporters will be negatively affected, so we have to be clear here. For example, Russia. Russia is and will remain the largest gas exporter of the world, but I expect Russia, compared to before the shale gas revolution, Russia will lose volumes, and second, Russia will have pressure in terms of the pricing.

Both the value of how it is price, the gas prices and the current contracts will be under discussion. I think the shale gas revolution was, to me, the end of – the beginning of the end of the oil index gas pricing. So it will take some time to change, but it will change. It will not be the main pillar of the gas pricing.

Another one is the implications on the economy. Here, today, when you look at the gas prices worldwide, the three regions, Europe consumes gas more or less five times more expensive than United States, and Asia eight times more expensive than the United States. And this is a huge number, 500 percent, 800 percent. And even more striking, as I said this morning, more striking is to me five years ago these prices were more or less the same. There were only one or two dollar difference between these three regions, three gas prices, and within five years there’s a huge change.

I think the companies who turned the eye of the shale gas developments, who were in denial about the shale gas developments are now suffering in terms of their business strategies.

And when we look at the electricity prices in Europe, electricity prices are set to be about 50 percent higher than the U.S. electricity prices and about three times higher than the gas prices, electricity prices in China. So Europe will be, as a result of these developments, as a result of Europe not acting wisely – which I will come in a minute – Europe will be a high-cost energy region, especially when compared to United States and China, and will have significant consequences for the competitiveness of Europe with higher electricity and gas prices.

I am often in Brussels. I discuss with my colleagues in Brussels and the point that I make them is that in Europe many colleagues think that in Europe, except for Poland, there may not be an increase on the shale gas, it will affect Europe. It is wrong. It is completely wrong. But completely wrong because it is only affecting Europe.

I can give you at least three examples and I finish there. The first one is in United States, after shale gas has started to penetrate the electricity generation in the last five years – and this is a phenomenal thing. Five years ago the share of coal in the U.S. electricity generation was higher than 50 percent, and today in five years of time it is just a bit higher than 30 percent. So 20 percentage point down in five years in an economy like the United States.

And what about implications for Europe? Very substantial. What happened is that the coal, which was dominating the U.S. energy generation system, left United States for exports. Went several places. One of them was Europe, and collapsed the European coal prices. And since the carbon price in Europe is so low, many people switched to coal in Europe.

I don’t know if I would make a survey here, that which we see the highest growth of coal consumption in the world how would the colleagues say, but I wouldn’t tell (ph 11:15) what the 2011 numbers show. In the year 2011 the highest coal consumption growth in the world was China, and the second to that was Europe, 7.2 percent, which is unbelievable. It’s a historical growth, highest growth in European history. And this is mainly because of what happened in the United States, the shale gas revolution. This is the point of departure. It affects everybody, even you don’t have the production.

My final point is on climate change and the role of shale gas. In Europe again, Europe is the only country, or only region, EU, which has a climate policy. The climate policy is designed to reduce the CO2 emissions. But when you look at the numbers, in the last five years the largest reduction in CO2 emissions in the world was in the United States. Much higher reductions than it is in Europe. And it is mainly natural gas replacing coal.

And in Europe we have targets, we have mandates, we have legislation, and it is not happening. So therefore – but I should also tell you that I don’t want to be seen too close to shale gas or natural but I have the same – (inaudible) – all the fuels. I can tell you that natural gas cannot bring gas alone to a two degree trajectory that we all would like to see, but can make many major progress in terms of reducing CO2 emissions.

So to sum up, it is a big change happening, already happened and yet to happen, and it will affect everybody. Even where you don’t produce one BCM of shale gas, it will affect the traditional gas exporters in a negative way and it provides a major opportunity for gas importers like Turkey to have better negotiation grounds with the major gas exporters. Thank you.

MR. LYMAN: That was a great lead-in, talking about the complexities of this subject and some of the unintended consequences which people don’t always appreciate, and changing developments. Melanie, you’re going to talk about the U.S. situation?

MELANIE KENDERDINE: I will, and Fatih has already stolen half of my talk so it will be short. (Laughter.) Natural gas in the U.S. has been a game changer. I think the misimpression that has been put out to the public is that this happened overnight, and one thing, as the world is looking at developing its shale basins, I would like to give you a little bit of history as to how shale gas technologies actually were developed and how much time that took.

And we did a future of natural gas study at MIT. We worked on it for three years. Dawon (ph) in the audience here was a member of – was one of our students on the team. And as part of that we looked at the history of the R&D and how that worked. And it took about 20 years. It started in about 1978, right after the U.S. Department of Energy was formed, and the federal government put a lot of money into characterizing shale basins. That was basically the sum total of its activity.

It then – the R&D was picked up by an organization called the Gas Technology Institute. Some of you may not know that, some of you may. The Gas Technology Institute was an organization that was essentially chartered by the federal government but it was private dollars. It was money collected at the pipeline on volumes of pipeline gas that was to be used for R&D.

George Mitchell, the CEO of Mitchell Energy, was on the board of the Gas Technology Institute. He had a conventional field in Texas, had all of the infrastructure. He knew that the shales would produce and then they would stop producing, and he came to GTI and asked them to do a research project to see if they could get continuous production of the shales in that field.

That field was the Barnett shale. That was about 15 years of research, 10 (million), 12 million (dollars) a year from GTI matched by industry. And so over that period of time they developed the technologies to produce shales continuously. And at the same time there was a federal tax credit for unconventional gas, OK. That was a time-limited tax credit. It disappeared in 1992. However, volumes that were – wells that were already producing before 1992 were grandfathered.

So you had a combination of early federal characterization. The Gas Research Institute that came through and put in steady, assured, year-after-year funding, something you don’t get from our federal government if you’re relying on them for research dollars, assured funding over time, and a targeted, time-limited tax credit. And that essentially gave us the shale technologies that we have today.

One thing I would say, even though those technologies were developed, the floor price of natural gas in the U.S. doubled in the early 2000s, so I think without the doubling of that floor price, it still would have been uneconomic to use those shale technologies, but there was just a shift upward in the floor price of natural gas in the U.S. So it was a game-changer. It was a game-changer that took place over a long period of time.

Let me say one other thing about the structure of the U.S. industry, which is very different than what you have in Europe and other parts of the world. I worked in the Clinton administration. The big, big gas production was super-majors offshore, Gulf of Mexico. The super-majors left onshore U.S. in the ’90s, OK, essentially for a long time.

And so the developers of the shale technologies were the smaller, independent producers onshore. They were members of the Gas Technology – Gas Research – I keep confusing them because they changed their name – Gas Research Institute. They became part of that team and that technology was transferred to the smaller independents, who were the ones who then went out and developed the Barnett shale and the Marcellus.

The super-majors have now come back onshore U.S. because it’s incredibly profitable. I think that because of the structure of the industry in the U.S. and who is doing the original production, there was not as much care taken in drilling in the development of shale gas, and so you have seen problems, environmental problems early on, and that I think is actually kind of naturally diminishing as super-majors come back onshore and start doing more shale production onshore U.S.

Having said that, there are environmental issues. When we worked on the future of natural gas study, 19 faculty and senior researchers were involved in that study. We fought for two months over whether our conclusion was the environmental issues were manageable but challenging, or challenging but manageable. That’s what academics fight over.

I think we ultimately concluded that they were manageable but challenging, the thinking being that these are engineering issues. It’s not rocket science. We know how to manage them if we have – and we have the technologies to manage these environmental issues if we have regulations that require them. So we see these as serious issues, certainly nothing to stop the development of shale in the U.S.

Fatih mentioned the game-changing – some of the game-changing aspects in the U.S. One has been the total turn-around of a policy in the Bush administration to expedite the siting of LNG import facilities. I can give you data on that. It’s pretty shocking. That was a policy. In 2001 the U.S. had 2.3 BCF a day of import capacity. In 2010 we had 22.7 BCF a day, so we increased our import capacity by an order of magnitude, and last year we imported less than 1 BCF a day.

I do not think – so that’s all sitting there. That’s stranded assets and stranded investment based on a policy that got its information from super-majors, not small producers. The super-majors had left onshore U.S. a long time ago, so bad policy. Good luck, bad luck. We are now looking at exporting gas. I can’t believe in my lifetime that we are doing that.

I can’t believe in my lifetime the shift in the generation mix. Fatih mentioned it. Coal has typically been over 50 percent of U.S. generation, and in 2012 gas was 31 percent, coal 37 percent. And there were a couple of months this year where they were equal. So that’s another shocking statistic.

And then I would just – Fatih also mentioned the climate change benefits of using natural gas in generation. We looked at that in the gas study. Fundamentally, just by using our surplus NGCC capacity in the U.S., which we have a huge over-build of NGCC capacity due to another bad policy – we always get gas policy wrong. Just by using that we could reduce CO2 surplus. Not building any generation we could reduce CO2 emissions by 20 percent.

In my view climate change is a much more intractable and serious problem than the environmental issues associated with shale production. So you pick your poison, you manage the engineering issues associated with shale production, and you get enormous climate benefit.

Two more points. There’s been a lot of – numerous issues raised about water use in shale production. Water use in shale production compared to other uses is very, very small. And one thing you would find in the gas study, this is in the Marcellus, and this is a percentage of barrels of liquid. For public uses in the Marcellus it’s 12 percent. Mining is 72 percent. That’s a heavy, heavy coal mining area. Shale is less than .1 percent in terms of percentage of water used.

The issue that people need to understand is you use the water all at once. That’s where the problem comes in. That’s what disrupts the communities, that’s what overwhelms your water treatment facilities. It’s not a huge amount of water overall over the course of a year; it’s just that you’re using it all at once. So that needs to be managed in a very different way and can be managed.

And then let me close by giving you some data on the impacts of shale on the U.S. economy. They expect by 2015 870,000 jobs in the U.S. will have been created. Its contribution to the U.S. GDP in 2010 was 77 billion (dollars). In 2015, $118 billion, and in 2035 $231 billion. Enormous contribution to the GDP, and in the next 25 years the shale gas industry will provide $933 billion in revenues for the state, local and federal government. And finally, it saves, in 2012 each household $926 a year, and by 2035 it will save each household $2,000 a year. So it is a game-changer in many respects.

MR. LYMAN: Thank you. Ian’s on the other side of this now. Ian has got the responsibility of trying to get this technology into place within countries, so Ian’s going to talk to us a little bit about what the issues are related to that, and I’ve asked him not to concentrate on the rocks themselves as much as to concentrate on the problems of digging the holes in the ground and getting the production up.

IAN MACDONALD: Good. I’m not a geologist so I wouldn’t want to concentrate too much on the rocks. But good morning, and my thanks to the Atlantic Council for inviting me to talk to the panel today. We’ve heard a lot about the impact of unconventional gas and oil in the U.S. in particular and the energy world in general, so I’m not going spend my time repeating the enormous economic and energy security benefits that the development of this resource has brought. I think most observers don’t doubt these benefits.

I would like to talk about the prospects for the development of unconventional resources in Europe. Before I do that, I want to stress again – I know it’s been said, but just trying to understand the enormous competitive gap that’s now opened up between North America and the rest of the world, particularly Europe, and the price of gas in Europe is four to five times that of the U.S.

This is something which I think has now been really recognized by European industrialists as they realize that what they’re working with, particularly in the petrochemical industry. And as was said before, the USA, a non-signatory to Kyoto, has actually achieved a greater reduction in CO2 emissions than Europe, which has put enormous effort into this policy.

Chevron is optimistic about the geological conditions for unconventional exploration in Central and Eastern Europe, but it is different in many, many ways from the U.S. The shales in the U.S. were essentially discovered in oil field country, source rock that exists in locations where there’s been a century of oil and gas exploration and development. So no question that the source rock reserve, no question it was hydrocarbon bearing and the petroleum systems were working.

That is to a large extent less true in Eastern Europe. What we’ve targeted is a belt of silurian shale which stretches from the Baltic through Poland, Ukraine, Rumania, Bulgaria into the Black Sea, may possibly extend into Turkey as well. But most of this area, the exception being Romania principally, is not petroleum – historically petroleum producing area. So there’s somewhat more geological uncertainty.

The shales were also at a significantly greater depth, typically targeting 3,000, 4,000 meters in Eastern Europe. From an environmental point of view that’s significant because the risk of contamination of ground water from fracturing itself is actually zero at those depths but it does make it more expensive and more complicated.

Over the past few years we’ve basically placed our bets in Central and Eastern Europe. We’ve been awarded lease exploration positions in five countries covering some 6 million or so acres and we’re probably the largest position of any company in Europe in unconventionals.

We’re probably another two to three years away before we have indications that the right geological conditions really do exist, and proably several more years after that before we have any possible commercial production. The pace of development in Europe has been much slower than in the U.S., for a number of factors that really should be of some concern to European political and business leaders because if Europe is to obtain even some of the economic and environmental benefits of North America, a different approach to unconventional exploration will be required.

On a leadership level, in the countries in which we operate, in Poland, Romania, Ukraine, there is a clear desire and vision to seek energy diversity and potentially energy independence. To some extent this view is then shared by lawmakers and some regulators, but at an administrative and bureaucratic level I’d have to say the vision is not necessarily always shared.

It can typically, and in fact does typically take two years to permit a single well, one location. If we decide, having drilled a well, that the seismic and the drilling data don’t exactly tie up and we need to maybe deepen a well that we’ve already drilled down to 3,500 meters, we need to deepen it another 300 meters, we need to go through the same process again and treat it as a brand-new well.

As a consequence, where we might have planned to drill six wells in a particular country this year, we in fact were only able to manage just about two. For Chevron, we’ve come to terms with the different challenges that we face in exploring for unconventional resources in Europe. We undoubtedly recognize that the communities deserve to have comprehensive explanations of everything that we’re doing, that unconventional exploration can and should be undertaken safely in an environmentally sensitive manner.

We do battle a great deal of misinformation that’s put out for a variety of different reasons, and I could list all of the different groups that might oppose shale gas. There are the genuine environmentalists who often fundamentally are opposed to hydrocarbons in any sense whatsoever, and shale gas concerns them because that’s – even though it’s an environmentally better hydrocarbon or fossil fuel than many others, it’s simply perpetuates the use of hydrocarbons and therefore should be opposed on that ground.

But there were many other lobbies represented by industries that are threatened by shale gas and by countries that are threatened by shale gas. We go to a great deal of trouble to explain the position. We try to bust all of the myths that are around. We do disclose the chemicals that are used in fracking. These are chemicals that are in general use in many household products today. We’re working through the International Oil and Gas Producers Association to develop data sheets on every single well, put it online, make it available to the general public so they can see exactly what we’ve done in every well in terms of water, sand, chemicals used, et cetera.

We do plan for careful water management and disposal. We always explain that at depths of three or four kilometers there’s no possibility of contamination of groundwater. We have taken two of the communities in which we operate now a cross-section of a well to demonstrate, you know, that eight layers of steel and concrete provide an effective insulation between the well bore and the formation. We work to ensure that drilling sites are left as we find them, and indeed generally speaking the surrounding roads and so on are greatly improved and because we explain the benefits that unconventional gas can bring in terms of jobs and energy security and so on.

We’re committed to the long term in European unconventional exploration. We work closely with governments and their representatives. I do believe that national governments in the areas we’re working are recognizing that they have a responsibility to ensure leadership. Privately they are very enthusiastic about what we’re doing. We’d like them to be a bit more public about that and explaining to their populations the benefits of gas and shale and the precautions that we’re taking and perhaps allow us to move a little quicker. Thank you.

MR. LYMAN: Thank you, Ian. We will now turn to the Honorable Mr. Wozniak, who has got the responsibility for Poland as the top geologist worrying about how these wells go in and how they should be regulated and monitored, et cetera. Thank you.

PIOTR WOZNIAK: Thank you for inviting me for this distinguished panel. I have to say there is nothing left for me because everything has been said before, so I was just skipping my notes, listening to my predecessors.

I would like to focus on some differences because we are – for me it’s a unique opportunity to compare something with the United States or North America and Europe, and there are obvious differences, starting with the ownership of resources, which in North America they belong to private owners, all of them in fact. While in Europe – not in Poland only but in Europe they all belong to the state. So every single sand (ph 34:53) deposit or every single oil deposit or every single gas deposit has the state ownership. So it has to be managed in a way by the state, it’s more or less practical that some governments are more instrumental than doing this. Some others are not.

However, setting aside for a moment the differences between the U.S. or North America and Europe, let’s look at Europe. Chevron and other companies – we are witnessing activities of several super-majors in Poland and throughout Eastern Europe, and also small companies. They focus on – let’s focus on differences we have within Europe. We are all talking, for example, for water contamination, potential water contamination, taking care of it, of course, very much. Which as a subject, as an issue is very different in different countries.

When you look, when we look at France and the Paris basin, we certainly – most of you may know, some of you – (inaudible). Let me explain quickly. The water level, drinking water level in France is below 1,000 meters up to 3,000 meters below the surface, while in Poland drinkable water is within the layer of 300 meters from the top. It certainly makes a big difference for any techniques applied, for any technology to be applied, and there is no reason in Poland for so focusing on water level and drinking water protection because the shale gas and the shale formation lays deep down three and more thousand kilometers (sic) from the ground.

So what really matters in Poland is to seal the surface and what really matters in France is to seal the bottom. The difference in techniques and in taking care of it is really fundamental. I can quote these examples for hours and hours because I just studied it through the last year. But the differences are obvious.

So we need individual approach in every country, and that leads me to the very fundamental statement that we should not look for universal regulations throughout Europe, but individual world-targeted issues which are best targeted by each country at a time, say. So the only common thing we have is oil and gas, or hydrocarbons, if you wish, which appear in different types of rocks, whether it be conventional, if we call it, we call them unconventional. We have licensed several companies in Poland for both conventional and unconventional just for hydrocarbons. So this is the approach we should have.

The thing mentioned by a few of the speakers before was the European Union approach or the Brussels approach to this issue. Well, I should say in Europe we have an elephant in the room, and in some countries like Poland we have decided to say we have an elephant in the room. In some other countries they do not. That’s equally good. As I said, every country should shape its energy mix and managing its resources according to their needs, of course meeting the environmental standards.

So – (inaudible) – again about environment, what should we focus on is rather procedures than regulations because it’s obvious that we have to protect air, we have to protect water, we have to avoid noise, we have to avoid any pollution possible. This is the regulation, or how to do it and to what extent should be still left within the administration of every country.

When I look to the publication of today, or yesterday, whatever, its recommendations, and I looked at the recommendations on transatlantic operation, what should it focus on, and these are basically only two things. Dialogue means communication with public, and water. As I said, water as such is a different story. Communication is the issue.

In Poland we can witness different approach of local communities to the drilling operators, to the operators on site. Some of them are enthusiastic. For some of them it’s irrelevant. Like for example in the south of Poland where we mine a lot of coal; we are still a coal-based country. Or in the north of Poland where the people are protesting in a way we have never witnessed before.

What is my observation after one year in an office and posting as chief geologist of the country? The most protesters are not the local communities. The most protesters are the holiday people who have cottages, holiday cottages outside, who are escaping from the city to the country for two days a week, or one day a week, or temporary citizens.

Another observation, which is very sad, is that all legitimate protests we have witnessed and we have noticed and we deal with are immediately after, within days, overtaken by big international groups of environmentalists who take it over, keeping aside these local protests where they are and making a big issue, which is a strange thing in Poland.

In really remote places of Poland we can listen to Belgian, German, French speakers who have to be translated, talking to the villagers and farmers about the real concern they have. As I said, keeping apart the local interest, which is absolutely legitimate in some cases, just leaving them alone. So that’s a different, that’s a very strange experience I wanted to share with you.

On the background of very general remarks I would like to make, first, prices. Dr. Birol mentioned prices and divergence of prices. As you look at it, as we look at it in Europe, as we do not compare Asia with the United States and Europe. That’s your perspective. But our humble perspective is what is the spot price. And the pipe gas price. That’s what we look at. And this we can see flattening and smalling with – (inaudible) – very, very quickly since one year so far. So we can hardly say it’s a trend or not but we will see in the future. I believe it is a trend.

When you compare the prices with the United States, there is nothing to compare. Poland is paying seven times more for 1,000 cubic meters than United States, spot price. Now it’s probably lower because of the small deal with the major supplier of gas to Poland.

Sorry. Oh, that’s not me. (Laughter.)

But what we look as a good benchmark is the average import price of Germany. They, like Germans always, they note it and publish it openly every single month, and the established price, it’s round about 3 ½ to 4 times more than spot price in the United States. However – and this is the pipeline price, and the spot price is higher, European spot price, not – (inaudible) – but TTF, MBP, is about 40 (dollars) to $50 more only, while it used to be a huge difference before.

So I certainly would like to support and to underline what has been said. Yes, there will be a tremendous impact on the market. Whenever the United States start import-exporting, yes, throughout the world, the sheer consequences, a big chunk of it will come to Europe of LNG, a big chunk will go to somewhere else. I don’t know where. But certainly if concurrently China will start producing, they will not of course export. They don’t export very much any more energy in any form, but they will stop importing. And then again it will be multiplied and this will, during our generation, my generation at least, it will still happen. I do believe it strongly.

What is the purpose we are so strongly in Poland – we are a bit different than other countries, but three major reasons we are looking for domestics – (inaudible) – is that, first of all, we would like to have a market for gas, which we don’t have. We are just importing and that’s it, and selling it over regulated prices. The second of course is security of supply. But the third is industrial development, and very – (inaudible).

In many countries in Europe we do not generate power out of gas, not only because we are missing it, we have not enough of it, or it’s too expensive, because that’s obviously a reason, but also because the supplies are unreliable. We cannot double the risk. We can probably live with some shortages of gas imported from the east, but we certainly would not stay alive if we, in case of shortage, we have to curtail supplies to the market of gas and of power alike. That wouldn’t be possible.

Now with reliable supplies, whether it be oil and LNG or whether it be from domestic sources, then we can develop the industry for power generation over gas, and for other industries of course alike. So there will be a session of questions, I understand, but again, we have an elephant in Europe, please do remember, and this elephant can appear in times to come. Thank you.

MR. LYMAN: Thank you very much. I think that lays a good groundwork for opening up for discussion. I would have two questions I would like to have the panel address a little bit because I think you got a feel right away that at the EU level – and we have the same problem in the U.S. at the federal level – there are broad regulations in place for how you go about the oil and gas business. And I think the EU has pretty well agreed that most of the rules that they have are appropriate and in a pretty good place and they are turning it over to the individual countries and nations to write the detailed rules. And I think you got a good explanation already of why each nation needs to do that.

So my question to you is, how’s it coming along in writing the individual regulations in the various nations to deal with the oil and gas, and especially the unconventional gas production, and oil production if it’s available? Because that is a long process in its own right. And the U.S., state by state this is being done as well and there are differences between states, just like there will be in Europe.

But how is that process coming along, and is there a need for additional assistance in doing that because of the complexity of the issues? Would anyone of you like to tackle that one? Ian, do you want to?

MR. MACDONALD: On an EU level I think they’ve taken the view that during the exploration phase of looking for shale gas and oil, the regulations are adequate for the time being. I think they’ve made it clear that – and they haven’t said they’re going to leave it to the local countries. That would be very unlike Brussels. What they’ve said is they will want to get involved in regulation at a later date.

Our approach in the different countries in which we operate has been to sponsor seminars that invite over academics and regulators, particularly from North America, to speak and to start to work with local regulators. And I believe that in all the countries we’re working at they are beginning to build knowledge about this and develop a regulatory framework. We want these countries to develop robust regulatory frameworks. We want them to be able to demonstrate to the populations that they have this in place and it’s effective. It’s very much in our interest.


MR. BIROL: I think the question in Europe is not there, I’m sorry. I think the question is a political issue in Europe. In many key countries you have people think the shale deposits are – take a political stance. France, Germany, Bulgaria, and it is – (inaudible). So we are not in the situation where we are discussing this type of regulation, strict regulation or not. The question is whether or not it is at all allowed to produce – is to produce, to explore the shale gas production.

In France, where I live, it is not. There is a shale gas ban, without knowing if there is really shale gas or not. This is crazy. So we don’t know. Ban something which you don’t know if it exists or not. But it is France’s – there are very strong voices in France and the discussion is whether or not to relax that ban and to look at some alternative options. And there are very strong voices within the French government.

So the question is, for me it’s a political issue in Europe whether or not shale gas is considered as a sustainable energy source or not. It is where we are, unfortunately. And this will every day Europe takes this position, continues with this position is becoming a disadvantage for the European economy, vis-à-vis mainly U.S. economy. I wouldn’t be surprised in a couple of years of time some key European industries, heavy industries would leave Europe and look for other destinations for relocation.

MS. KENDERDINE: A few things about what’s going on in the U.S. New York has banned – talking about state regulations – New York has banned shale production and fracking, although I think that the governor looks at the numbers that I just read and would really like to see some revenues generated for the state of New York, so they are working through that in New York and I think ultimately that ban will be lifted.

The federal government has, in my view, kind of inexplicably decided that it is going to regulate methane emissions at the production stage. That – I think that was generated by a study coming out of Cornell that suggested that natural gas was a worse CO2 emitter or greenhouse gas emitter than coal. And so EPA got into action and is going to regulate methane emissions in production. That doesn’t go into effect until 2014 or 2015, and I don’t think it will have a major impact. The industry knows how to capture it. There are technologies to do it. It’s not hugely expensive, so that’s not a problem.

They are also looking at water contamination. The existing laws, federal laws that regulate water tend to regulate for continuous contamination of water. And again, as I mentioned earlier, with fracturing it is episodic and so the existing laws don’t really cover the type of water contamination you might get, and so they are looking at that. That’s another 2015 date, and in the gas study we didn’t pick and choose between federal and state. The industry wants state. The environmentalists want federal regulation.

We do see a need for regional regulation because there are regional water basins that have nothing to do with states. So I personally think we’ll end up with more federal regulation.

MR. LYMAN: Rather than have me ask more questions –


MR. LYMAN: Sorry. Yes, yes.

MR. WOZNIAK: I want just to short notice on what is the state of play in the European Union. Not in the European Commission but the European Union. There are two levels of discussion, first on the parliamentary level, European parliamentary level there is discussion. And the second, strange to say, on the European Commission level. Again, this is one subdivision.

The second is vertical. Of course the are proponents and opponents, and there is a series of documents called reports which are – it looks like kind of competition. We have two competing groups of the – in the parliament. One is gathered under ETRA (ph), industrial and transport, including energy. The second is environment and climate, and they compete over reports. So every one, every single report which is issued by one committee is immediately counter-weighted by the report by another committee. But the discussion is still levelized. I should say it’s counter-weight.

The same description applies to the commission, where we have directorate of energy which is pretty much in favor of any energy developments in Europe, saying we don’t need any special regulations, let’s leave it under the Lisbon treaty as it is. Every country has a sovereign right under article 194 and 192 of the treaty to shape their mix as they wish. And the environment – on the opposite side, the environment, which is saying, no, we need new regulation over unconventional gas and oil.

The discussion is, as I said, on both levels and between the parties is pretty much counter-weighted so far, and it is ongoing. But what is certainly – should be certainly, an exchange of good practices. We can then in Europe, we can be taught by Americans, but I think also Americans can be taught by us. I do remember, you mentioned chemicals which Chevron displays every single well is drilled. That’s the thing which is a formal requirement in Poland is 60 years. Every single chemical used when drilling should be disclosed first by name, second by volume. This is the precondition to have a drilling permit.

And that’s not a new invention. That’s the thing which we’ve followed since years, and I would like to stress that the first drilling well for oil was done in Poland in the Carpathian Mountains, 157 years ago. So we have got the record of this. Thank you.

MR. LYMAN: OK, at this stage I’d like to open it up to the room. I see a number of hands, so we’ll get you all. Go ahead, sir.

Q: Yes, I’m Amit Mor from Eco Energy, Israel. I’m not – I don’t know if you are aware but Israel has more oil than Saudi Arabia, and I’m not kidding. This is in the form of unconventional oil, in the form of oil shale, so I’d like to open the discussion possibly.

More than 400 billion tons of oil shales, more still under these days under demonstration in – (inaudible) – technology, in which you heat, a similar way to production of oil sand in Alberta in Canada, drill through the layers, 200, 300 meters of the rock and heat the rock for after three months the oil started pouring. So it’s 60 percent oil, 40 percent gas. It’s not shale gas, it’s shale oil and oil shales and gas which is being produced.

The major problem, we want to study about $35 to $40 most likely break-even price of barrel of oil of production, very high cost of production. The major problem is NIMBY, not in my back yard problem to development. Those resources in area not so far from Jerusalem and so on. Also the Palestinian Authority has such large resources.

So basically the issue for discussion, the development of known conventional resources, not only – (inaudible) – but possibly oil and the possibility that due to domestic public debate, those resources will never be utilized.

MR. MACDONALD: John, can I just comment on that –

MR. LYMAN: Yes, go ahead.

MR. MACDONALD: — in one sense. One of the challenges we face in explaining to the public about why oil, shale oil or shale gas is safe is that they think about shale in Canada, which is mined just below the surface. It is then essentially cooked and the oil extracted. And it’s probably not – there’s no question that it’s from a greenhouse gas perspective it’s not a user-friendly process.

Oil from shale and gas from shale in North America and Central Europe is completely different. It doesn’t involve any of this process, but it is something that we continually have to explore. I think the majors are probably going to stay away from further involvement in shallow shale development.

MR. LYMAN: Thank you, Ian. We had another question over here. There’s two of you over there but Matt, go ahead.

Q: Thank you. Matt Burrows, U.S. National Intelligence Council. I was wondering if the panelists could talk about the prospects in China, particularly as we hear, you know, I’d say contradictory analysis, you know. I think earlier the IEA was fairly optimistic about the prospects. A lot in America are not for the reasons that shale formations are different, there are problems on the water side in China, and also of course it takes, as we’ve heard here, quite a bit of time actually to develop the specific technologies for that particular formation.

MR. LYMAN: Yes, why don’t we take another question too and then –

Q: I’m Obie Moore, based in Geneva and an Atlantic Council board member. I’m interested in, from an investor’s perspective, the prospects for economic and pricing model for development of shale gas. Given the – take the U.S. by comparison, given its geographically dense public grid system. To what extent is the pricing and business model for developing shale gas in Europe deterred by the additional cost to tie into the what I believe are considerably less dense grid systems?

MR. LYMAN: Excellent questions. Why don’t we first talk with the China question and then move on to the infrastructure requirements and the impact on the cost and the profitability of the business.

MR. BIROL: First of all, before going to China production, let me tell you something about China consumption. In the world natural gas is about 25 percent shale in the energy mix of any continent on average – in Europe, in the U.S., in many developing countries. And in China it is today only 4 percent, very, very low compared to the entire world more or less.

And in the eleventh five-year plan – and for China five-year plans are very crucial – the eleventh five-year plan the Chinese government has two major objectives. One, to put a cap on coal and second, to increase the production of shale gas. And they not only said that they want to increase the production but they put subsidies on the production of shale gas, and I think a very handsome amount of subsidies if they are produced. This is definitely a major incentive.

But it is very, very new in China, the shale gas development. Companies are just starting exploration work, it’s just happening. Therefore, our expectation is around 2020, in the next seven, eight years there will not be major growth in the shale gas and coal bed methane production in China, but after 2020 it may increase substantially, the shale gas and coal bed methane production in China.

Having said that, we believe China will remain a gas importer despite this code (ph) because the consumption is very, very strong, especially in the coastal region.

MR. LYMAN: I’ll take the moderator’s prerogative, saying I just spent three days in a meeting with GTI in China, specifically on shale, where the producers were all there, everyone was there. I think you summed it up very well, Matt, and so did Fatih. It’s off in time. They’re just drilling their first wells. They have much more complex geological structures.

They have tremendous problems with the Indian subcontinent moving over, pressing against the China continent, which is causing different stress levels, which means they have – the surface contractors are having to find all new technologies in order to how to frack because when you frack, they get different structural breaks in the rocks.

It will happen but it is not something that their plans, which talk about big production in two or three years, I think that’s going to get stretched out. But they’re going to go after it and it’s going to take some time. But they have such an incentive, as Fatih points out, that they’re not going to give up on this one. They’re willing to spend the effort.

MR. MACDONALD: To address Obie’s question, it’s a big factor. The reason why Central Europe is attractive is it’s in the middle of the market and it’s criss-crossed with pipelines and so on. Europe still has quite a way to go to really integrate its gas market across the countries, but that’s what makes Europe attractive. I daresay the source rocks and shale in Saudi Arabia are probably very prospective. Economically they’re not going to be very attractive, so it does have – proximity to market or ability to sell your product is critical.


MS. KENDERDINE: I wanted to – I understand that the infrastructure is not as well developed and not integrated, but the EU 2020, by 2020 the policy on renewables suggests that you’re going to probably need gas generation for back-up anyway because you need gas generation to back up intermittent renewables. So there’s an incentive there to develop a gas infrastructure in order to back up your renewables.

And we’ve been looking a lot at MIT at the issues of intermittency and the requirements for natural gas back-up in order to do that. So if you meet those renewables goals, you’re actually going to drive some gas demand, or certainly gas peaking demand in order to do that. And I wouldn’t – the use of natural gas in the U.S. has naturally gone to electricity. I’m not sure that’s where it would go everywhere either. Might not be the best place, best use of gas.

MR. LYMAN: Yes, Piotr?

MR. WOZNIAK: I don’t have an overview – (inaudible) – we can witness in Poland because we have 19 companies from all over the world investing. No one producing yet. But the simple question I was asked by my students – well, we are not talking about is price. It’s just price. When you invest in the stock of the super-major, where would you like him to invest? Where the market dictates the price of $100 per thousand cubic meters, or 400 (dollars)? That’s a good incentive, if I may say so.

Of course there are – sorry to say this so cynically but that’s the fact. It’s strange that students are needed to ask this question, but anyway that happens.

Now the infrastructure is not so bad in Europe because we’ve – I’ve just looked into my figures, which I noted. In United States on average you have 35 – 32 kilometers of transmission pipeline for gas over 1,000 square kilometers, while in Europe you have 50.

However, locally, especially in Eastern Europe, of course there is missing infrastructure and there is an ongoing debate what to do with the gas extracted on the spot. Would it be better to send it to the grid, or just to use it on the spot and produce, for example, power or heat and power?

So I strongly support what you’ve said just about different ways of using this source. As I said, we don’t have any production well in Poland. We expect it next year, late next year or even later, but not yet. So this is just theoretical remark, not the real thing. Ask me one year later from today, I will be more clever. Thank you.

MR. LYMAN: We’re getting close to running out of time. Is there any more questions?

If not, I want to thank the panel and it is time to move on to the next break. (Applause.)