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Moscow will do everything in its power to prevent shale developments for those perched close to its borders. Obviously this is all being couched in ‘environmental’ terms, but the underlying political reality is that CEE and South East European states are buckling under Russia pressure, most of whom remain entirely dependent on Moscow to keep warm in the winter.

When we discuss European shale, the typical questions that tend to crop up are which markets, how much can be had, and how fast? All perfectly valid thoughts, but they rarely bother to ask the broader international question; does it actually matter? That’s the single most important question for the EU to ponder, precisely because the downside risks to developing European shale remain more formidable than anywhere else on earth. Simply put, shale gas isn’t going to be a serious prospect on Charlemagne’s turf any time soon. Europe needs global gas fundamentals to go its way elsewhere, or it risks ending up back at square one, bent over a Russian pipeline.

Russia's President Vladimir Putin (R) and Exxo...

Russia’s President Vladimir Putin (R) and ExxonMobil Chairman and CEO Rex Tillerson Wayne (L) attend at the ceremony of the signing of an agreement between state-controlled Russian oil company Rosneft and ExxonMobil in the Black Sea port of Tuapse on June 15, 2012. (Image credit: AFP/Getty Images via @daylife)

Let’s put aside the fact that European rotary rig counts only number around 120 compared to 2,000 in the US, 700 in Canada and 450 in Latin America, or that Europe has no serious in-house fracking expertise, ropey corporate finances, unclear mineral rights and ‘nimbymania’. A 10% fall in European gas demand (2011-12) hardly helps either, but it’s in the political realm that most concern rests to get shale going across Member States.

Despite sitting on 180tcf of shale, France buried the shale idea deeper than their nuclear waste sits in the Champagne region. The Netherlands doesn’t need to bother with shale given they still have Groningen fields to play with. Germany remains clinically schizophrenic on energy, splitting its energy mix between lots of wind and even more lignite coal, using Russian gas to fill any residual (Nord Stream) gaps. That doesn’t leave much room for North-Rhine Westphalia shale plays. Over in the UK, it’s only a handful of Conservative parliamentarians who think shale might offer a British version of the US shale revolution in North West England. Sweden has no such delusions despite sitting on larger (41tcf) prospective reserves. Further North, Norway has played with a very conventional bat so far keeping its 83tcf of shale under wraps; Southern Europe hasn’t even bothered looking. Spain remains plugged into Algerian production, while Italy has been oversupplied with Russian and on-going Libyan deliveries.

Even where the political desire to develop shale for those closer to the Russian border is supposedly more pressing, the geological viability of shale plays remains deeply circumspect in Poland, Austria, Romania, Hungary and Ukraine. Go to any energy conference in the East, and you’ll hear a barrage of political bluster as to why Russia’s gas stranglehold is about to be broken. Two minutes after you get ‘off stage’, you’ll be pulled to one side by industry players telling you a more concerning reality – ‘we’ve been looking at the rock formations for years; they’ve never looked convincing.’ Even Eurogas, the gas industry lobby in Brussels, remains very cagey as to how much credible shale potential it thinks EU27 has.

The ‘market’ solution to this was to enlist US majors to replicate the shale revolution in America, most of whom seemed pretty happy to pay seriously over book for shale assets in 2008/9. Chevron andConocoPhillips went into a number of CEE markets,Marathon Oil went into Ukraine, and Exxon Mobilturned up in Hungary and Poland. You’d think with that kind of firepower knocking around, the shale ground would rapidly start moving, but the blunt fact shows that as quickly as they entered new markets, many have since left. Some might come back if wildcatters and clapped out national European entities manage to strike serious shale, but a gaping IOC absence wasn’t supposed to be part of the CEE script. They were supposed to be the guys doing the ‘heavy drilling’ and ‘shale lifting’.

Marathon was first to leave Ukraine’s supposed 1,120bcm of gas in the ground in 2008, citing an ‘uncertain legislative environment’. Even now, Kiev is struggling to entice new oil majors back in through governmental memoranda of understanding. Royal Dutch Shell and Chevron have signed up, but question marks remain as to the long term commitment given deep seated domestic pricing problems. Exxon didn’t take long to leave Hungary in 2009, with initial tests around the Mako Basin yielding disappointing results. More worryingly, Rex Tillerson has just pulled exactly the same stunt in Poland after drilling a total of two wells in search of Warsaw’s 346-768bcm of recoverable reserves.

Exxon’s move raises two very awkward prospects for CEE states to consider. The first is that Poland’s shale geology might prove to be genuinely useless. That would be a major blow to CEE shale prospects, given that Poland was supposed to be the ‘shining shale light’ in the region; it’s now up to smaller players such as Hutton Energy and San Leon alongside PNGiG to prove Exxon wrong. The second, more sinister factor is that Russia still casts a very long political shadow across all CEE and South East European states. No sooner had the Houston based super-major signed agreements to develop West Siberian tight oil plays in Russia, than it pulled the plug on Poland. Exxon clearly decided it has far bigger Eurasian fish to fry going after Russian Arctic oil. Poland wasn’t going to get in the way.

As Shell is no doubt about to find out in Ukraine, developing CEE shale andRussian upstream reserves isn’t going to be an either / or option. You either do business in Russia or business in CEE – not both. Moscow will do everything in its power to prevent shale developments for those perched close to its borders, a logic that Bulgaria seems to have understood by killing any shale developments on first sight of domestic opposition. Things are going pretty badly in the Carpathian-Balkan Basin (538bcm) straddling joint reserves of Bulgaria, Hungary and Romania. Bucharest has actually followed ‘Sofia’s suit’ and imposed an outright moratorium on any further shale developments within its borders. The new centre-left Ponta government is far closer to Russia than its Basescu predecessor; over in Prague, the Czech upper house is the process of pushing through a shale ban having cancelled previous overseas contracts.

Obviously this is all being couched in ‘environmental’ terms, but the underlying political reality is that CEE and South East European states are buckling under Russia pressure, most of whom remain entirely dependent on Moscow to keep warm in the winter. That’s creating major policy consistency problems for the likes of Chevron, who’ve been far more patient and resilient sticking to European shale plans than most. Irrespective of on-going Russian needling, every time the ballot-boxes are opened in CEE / SEE states, you face the very real risk of Muscovite poodles being elected. Shale moratoriums inevitably follow; a very costly (and tedious) pattern for IOCs to bother with – particularly as most of them are more than happy to take a leaf out of Exxon’s book and follow the ‘Eurasian money’. That means putting Russian oil first, Russian oil second, Russia oil third, with European shale coming in as a miserable consolation prize for those who missed President Putin’s Arctic opening.

But the real culprit in this story isn’t so much the low hanging political fruit of Central and South East Europe facing an uphill geological and geopolitical shale challenge, but the raft of Western European states that have taken shale off the table. That’s the last thing they should be doing to maintain any serious optionality over Russian supplies – not just for their own resource base, but to keep feeding spot market liquidity that has done some much damage to the Russian supply model (and pricing) across Europe of late. What started off as a mild wholesale ‘NBP irritation’ for Gazprom in the UK, has spread all the way to the Russo-German (oil indexed) border price by letting new players take market share, undercutting their more cumbersome ‘oily’ elders in Europe all the way. With nearly 50% of physically traded gas in Europe being done on spot market formulas last year, gas prices were actually starting to be based on gas fundamentals in Europe. So much so that Gazprom finally agreed to contractual revisions with Germany’s E.On.

But that’s precisely what’s so disappointing here. By shunning shale domestic shale developments, what most North West European markets are banking on is global gas fundamentals keep going their way. That means squeezing out whatever’s left in conventional North Sea plays, and far more importantly, LNG tankers keep docking at European ports to prime wholesale liquidity. In no way can you say that Europe is the master of its own gas destiny.

Who knows, it might still get lucky. Asia might develop its own domestic shale in India and China; Australia might come good on its LNG potential to make sure Qatari LNG can keep supplying European hubs. East Africa might add extra depth to LNG suppliers; West Africa might up its game directly in response. The Black Sea might hold promise; the Southern Corridor might deliver more gas than many currently think from multiple sources. Most importantly of all, the US might develop serious LNG export potential, sending tankers full steam across the Atlantic putting gas benchmarks on ‘fast track’ global convergence.

But that’s a lot of ‘might’s’ to make sure European liquidity remains a credible prospect. Developing indigenous shale could have been the final nail in Russia’s gas dependency coffin, developing far deeper, liquid and more mature wholesale hubs across Western Europe, reaching all the way to the Baumgarten hub in Austria and NCG in Germany. That would have given CEE and SEE states a real shot at negotiating ‘cost reflective’ contracts with Russia, not to mention create serious political options.

But by failing to take the free European shale pass, Russia now stands every chance of winning a new long terms lease of life. When they do, they’ll start thinking about developing their own enormous shale reserves that some think are around ten times larger than the entire European map. And as it just ‘so happens’, Exxon et al are already working on exactly that prospect in the giant Bazhenov and Achimov Russian fields. Phew; European shale doesn’t matter after all. We’ll have tonnes and tonnes of expensive Russian gas to keep us warm instead.