Developing shale gas as a viable source of energy could help Europe out of the recession. Instead, it’s still another structural disadvantage. It doesn’t have to be.
Europe’s struggles to get out of the recession are handicapped by Europe’s very high relative cost base, particularly in costs for labour and energy.
Labour rates that are more than double those in the Asian region – and about 5 to 8 times as high as in China.
There may not be much that European governments can do about the structural labour cost disadvantage, although countries such as Germany have made some progress. Labour costs are very much influenced by historical conditions and social security regulation. Labour costs in Europe are high and will remain relatively high in the medium to long term.
However, European governments can do something about the energy cost difference. And developing shale gas reserves is the most obvious.
In the past ten years, natural gas in the Gulf Region has been 8-10 times cheaper than in the US, Europe and Asia. [i] The shale gas development in the US was already in full force by 2008 and led to a natural gas bonanza, with gas prices that are roughly a third of those in Europe. And though China has neither a natural gas nor oil cost advantage, it is fully leveraging its labour cost advantage and dramatically increasing its productivity and innovation. Europe, however, continues to face the same high costs as before. [ii]
Sectors such as the (petro)chemical industry that are highly dependent on the cost of oil or natural gas (naptha or ethane) are critically exposed. By 2012, the sector employed about 1.2 billion people in Europe, a loss of 200,000 jobs.[iii] From 2006-2011, it realized one tenth of the sales growth rate of petrochemicals in Asia-Pacific (0.9% vs. 9.7%) and invested less than a third as the chemical industry in that region ($600 billion vs. $200 billion). Meanwhile the global sales share of chemicals in Europe dropped from 30% to 20% in the period 2001-2011, while the share of Asia Pacific doubled from 23% to 45%. At the same time, the Gulf region is on a massive capacity expansion drive, accounting for more than 50% of ongoing global petrochemicals capacity additions, seeking to exploit its access to cheep feedstock.[iv]
Other Countries are Investing Heavily
Between 2008 and 2012, investment in shale plays in the US totaled $133.7 billion of which joint ventures of non-US firms with US firms accounted for 20%. There were also outright acquisitions: BHP Billiton’s acquisition of Petrohawk Energy Corp.[vi] Europe, meanwhile, has only seen a modest number of explorations, primarily in Poland, though shale gas reserves on the continent are substantial.
Figure 3: Major shale basins around the world[vii]
In the US, land owners not only own the land but also the resources below the surface. This is an advantage for rapidly developing the shale gas industry. In Europe, it is the governments which own the resources below the surface, and the popular argument today opines this situation impedes fast development of shale gas production. This is a weak argument and poor excuse for inaction.
Governments Must Act
Governments can actually move the development of shale gas forward, as they have in the past with other public works: the development of a massive railway system, the impressive nuclear industry in countries such as France. With the necessary vision and willpower, governments can advance shale gas development and spur economic growth but it will entail using its legal power to expropriate land – and adequate compensation for landowners. They could also find, with concerted effort, solutions to the environmental challenges shale gas exploration generates.
Without such actions, sectors such as the European chemical industry will find themselves on the same long-term path as other sectors suffering from high costs and overcapacity, such as the car and steel industry, with consequences that are all too well known.
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