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While the world fears a new oil price shock, the entire energy market is on the verge of a revolution. Companies are using increasingly sophisticated technology to tap new sources of natural gas. Drilling is also underway in Germany, where both the potential and the risks seem enormous.

It was May when globalization came to Lebien, a small town in Poland. The telephone rang and Elzbieta Religa answered. The caller said she represented Lane Energy, a subsidiary of a British company that invests in natural resources. She said her boss wanted to speak with Religa and told her that the company had found something interesting in the earth beneath Lebien’s homes and farms.

Religa is a sturdy-looking farmer with three hectares (7.4 acres) of land, 20 hogs and three dogs. Lebien is in the northern Polish region of Kashubia, some 90 kilometers (56 miles) from Gdansk. The town has 960 inhabitants and only its main street is paved. Most of the houses were built by Germans before World War II.

“The woman said there’s gas here,” says Religa. “Thousands of meters below the earth, locked into the rock, but somehow they can get it out.” Religa is currently serving her third term as the Soltys, or mayor, of Lebien. She invited the people from Lane Energy to a meeting at town hall. They arrived in small buses, managers and engineers, Americans, Britons, Canadians and one Indian. The guests paid for a lavish buffet.

The company built its first drilling rig a few months later. One evening, Religa saw a bright light on the other side of a forested area. Lane was burning off the first of the gas being pumped out of the well. The flames were as tall as houses.

Now the drill hole has been sealed with a head-high pipe and three valve wheels. Thanks to the gas, thousands of new jobs will soon be created in Poland — and elsewhere.

Tapping Unconventional Sources

In many parts of the world, geologists are now testing the ground for natural gas trapped in shale (shale gas), sandstone (tight gas) or coal seams, gas that has been largely unreachable in the past. Using a new technology called hydraulic fracturing, or “fracking,” a sort of controlled earthquake, companies are now bringing the gas to the surface all over the globe, in Australia, China, India, Indonesia, Latin America and Europe. The entire planet is being resurveyed.

The authorities in Poland have awarded 70 concessions for exploratory drilling in the last two years. The race for the best reserves is also in full swing in Canada, where the Chinese are leading the pack. The Chinese energy company PetroChina has just spent $5.4 billion (€3.9 billion) on a Canadian project.

In the United States, however, the natural gas revolution is the furthest along. Newly discovered reserves there are already being exploited.

About half of the natural gas consumed in the United States now comes from so-called unconventional sources. The country has already replaced Russia as the world’s leading natural gas producer. “We have twice as much gas as the Saudis have oil,” boasts Texan investor T. Boone Pickens.

The euphoria is being fueled all the more by current global fears of new oil price shocks. The crisis in the Middle East makes it painfully clear, once again, how dependent the world’s economy is on petroleum reserves in the Arab world — and how sensitively prices and growth react to any changes in the region.

When the unrest began in Libya, the international commodities markets fell into a panic within hours. The oil price, which had hovered around $80 to $90 for months, broke through the magic $100-a-barrel (159 liters) barrier within hours and peaked at about $117 on Friday.

This was not so much a factor of Libya being such an important supplier on world markets. What had traders and dealers so concerned and triggered worldwide panic buys was the fear that the crisis could spread to the United Arab Emirates (UAE) and Saudi Arabia.

Together, the UAE and Saudi Arabia are sitting on the world’s largest oil reserves. Unrest with possible interruptions in delivery would drive the price of oil to astronomic heights. The most recent upturn in the global economy would come to a precipitous end — yet again.

Since the last oil price crisis in the 1970s, the industrialized nations have been trying to reduce their dependency on oil from the OPEC countries, with moderate success.

The world’s thirst for energy is massive, and there are few alternatives to oil. This could make the exploitation of the new natural gas reserves all the more important.

Part 2: Will Shift to Natural Gas Undermind Renewable Energies?

A revolution has gotten underway at a rate that has even surprised experts. US energy expert Daniel Yergin calls it “the biggest energy innovation of the decade.” Today’s estimates of the volume of gas reserves considered exploitable are several times higher than a few years ago, with prognoses ranging from two to six times as high as earlier estimates.

So far, though, engineers have not pumped a single cubic meter of gas out of the earth in most places, except in the United States. And even if the prospects are promising, there is always the risk that instead of encountering so-called “sweet spots,” or locations with high concentrations of natural gas, engineers will hit “dry holes.”

Nevertheless, the expectation is that the energy mix will soon shift significantly toward natural gas. In its latest global energy forecast, ExxonMobil predicts that natural gas will replace coal as the most important source of electricity by 2030.

A Cascade of Effects

And because only half as much CO2 is emitted during gas combustion as in coal combustion, the new boom will also have consequences for the world’s climate, and for prices in the emissions trading market. The business of trading pollution rights will likely come under pressure, which in turn will affect renewable forms of energy. The cheaper CO2 rights become, the harder it is for electricity produced with wind power or solar energy to compete in the market.

Hence, the new global gas rush is also triggering a cascade of effects that will change the world energy market and radically change companies. Corporations like Exxon, BP and Shell, which have seen themselves primarily as oil producers for generations, are now investing billions in the gas industry.

Electric utilities like Germany’s RWE have to consider whether it will even be economically viable to use coal to generate electricity in the future. And gas distributors like Germany’s E.on Ruhrgas are asking themselves whether their old business models are still viable and what they should do to prepare for the new gas age.

A few weeks ago E.on Ruhrgas moved into its new headquarters building on the outskirts of the western German city of Essen: two glass towers connected by a glittering steel bridge. Maps are provided at the main entrance to help the roughly 2,000 employees find their way around. The company’s strategists could use similar guidance, as Europe’s largest gas distributor tries to find a way out of the crisis it faces as a result of the boom in unconventional sources of gas.

Excess supply is depressing prices, allowing Ruhrgas’s competitors to undercut the German distributor. It costs Ruhrgas more money just to keep up. “The more cubic meters of gas we buy, the more we have to pay at the moment,” says CEO Klaus Schäfer. The company recently lost €500 million ($690 million) — in only two quarters.

Shakeup Expected in European Market

Schäfer has been at the head of Ruhrgas for only a few months. He was brought in to revive the business, but everyone knows that the days are gone when producers and distributors divided up the European market. Things will also change for consumers.

This is how the system has worked until now: The big European players, like Gazprom in Russia and Statoil in Norway, exploit their reserves and then transport the gas through thousands of kilometers of pipelines to deliver it to the border of Germany or other European nations. From there, distributors like Ruhrgas or Wintershall feed the gas into their networks and sell it to municipal utilities or industrial customers. It was a profitable business for everyone involved.

Prices were not even negotiated — they were dictated. Long-term agreements were in place with terms of up to 40 years, and they were based on the so-called gas-oil price link, which means that gas prices follow oil prices, only with a few months’ delay. The distributors added a healthy margin of up to 30 percent for the distribution, storage and sale of the gas. For a company like Ruhrgas, this meant that with its roughly €2 billion in annual profits, it was the most important subsidiary within the E.on group.

But ever since efforts began to tap the new gas reserves, such astronomical profits have been a thing of the past. For the first time, something resembling competition has developed in the gas industry.

The volumes being traded on the spot markets are getting bigger and bigger. New competitors are buying up gas at favorable terms, which benefits consumers, who can now choose from among an average of 31 gas providers, as compared with only eight providers two years ago. “It’s a rapid development that’s nothing short of a revolution for the international gas markets,” says Ruhrgas CEO Schäfer.

Now he and his counterparts in the industry have little choice but to renegotiate the terms of their agreements with the producing companies in Moscow and Stavanger, Norway, in the hope of at least making up for some of their losses retroactively. This is no easy task. “There is no reason for price adjustments,” says Gazprom Germania CEO Vladimir Kotenev, who points out that the excitement over the new reserves is temporary. The partners have made a lot of money together in the past, says the former Russian ambassador to Germany, and now they’ll just have to “endure a dry spell” together.

Geologists have long known that much larger reserves existed in addition to the known, easily exploitable gas wells. The problem was that there were no technologies to extract the gas from the porous rock at a reasonable cost.

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