How the EU can

benefit from the

American shale gas

revolution

D I S C U S S I O N P A P E R

J U N E 2 0 1 4

Mels de Zeeuw

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How the EU can benefit from the American shale

gas revolution

New Direction discussion papers are designed to

encourage debate on public policy in a European

context. They do not reflect the views of New Direction

or its members. New Direction receives funding from the

European Parliament and is also required to raise a

proportion of its funds from additional sources. The

views expressed in this publication do not necessarily

reflect those of the European Parliament.

June 2014

Printed in Belgium

ISBN: 978-2-87555-084-2

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New Direction Foundation

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www.newdirectionfoundation.org

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Abstract

The US shale revolution has caused a large increase in US natural gas production and a

sharp decrease in its natural gas price. This has significant economic and environmental

effects for the EU. The EU natural gas price is now approximately 2.5 times as high as its

US counterpart, and this has caused a cost competitiveness gap for energy-intensive

manufacturing industry. The European Commission estimates that many energy-

intensive manufacturing firms, particularly in the chemical industry, are opting to

expand their business in the US, and choosing to shift operations from the EU to the US.

Additionally, the cheap natural gas price has led US coal exports to the EU to almost

double since 2009, hurting the European Commission’s CO2 reduction goals.

This paper argues that the EU can mitigate, and even benefit from the US shale

revolution by making greater US natural gas exports a provision in the TTIP (Transatlantic

Trade and Investment Partnership) negotiations. By arguing for ‘Free-trade agreement’

(FTA) status, under the US’ 1938 Natural Gas Act, US natural gas exporters avoid an

arduous export authorization application process, allowing for easier and increased US

exports of LNG to Europe. Although increased US exports of natural gas in general are

more likely to flow to Japan due to higher export margins, this is still in the EU’s interest, as

this would:

1. Lower EU, and raise US gas prices, improving the EU’s industrial manufacturing cost

competitiveness.

2. Reduce US coal exports to the EU, which aids CO2 reduction goals.

3. Open up new natural gas trading partners for the EU to reduce reliance on Russian

gas.

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Introduction

Following the ‘shale revolution’, the US has now overtaken both Russia and Saudi-Arabia

to become the world’s leading energy producer. As a result, American residential and

industrial consumers have seen their gas prices plummet, and the American

manufacturing sector enjoys a significant cost competitiveness advantage over its

European counterpart.

The effects of the American shale revolution are not limited to North America, it strongly

impacts economic and climate policies in the EU. European industry now faces up to

four times higher energy costs as its US rivals, raising concerns over industrial

competitiveness.i Europe now imports more cheap US coal, hurting its plans to reduce

CO2 emissions. With the first US natural gas export facility to start in 2015, this creates

new trade options and trading partners for the EU, which would alleviate its

dependence on Russian gas imports. The American developments offer both

challenges and opportunities for European policymakers, but EU policymakers should

act now to mitigate the negative, and enhance the positive impacts of the US shale

revolution.

This paper will first briefly examine the economic and environmental impact of the

American shale revolution on the EU. It will then argue that EU policymakers should utilize

TTIP (the Transatlantic Trade and Investment Partnership) negotiations to ensure greater

US natural gas exports, and to grant the block Free-trade agreement status under the

US’ Natural Gas Act. This would allow the EU to mitigate the negative, and benefit from

the positive economic and environmental impacts of the American shale revolution.

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The impact of the US shale gas revolution on the EU

The past eight years have seen a dramatic change in the fortunes of the American

energy industry. Once thought to be in an inexorable decline, the US energy industry

has now overtaken both Russia and Saudi-Arabia to become the world’s largest

producer of oil and natural gas. This newfound surge in US energy production is caused

by recent improvements in horizontal drilling and hydraulic fracturing, or fracking, which

has made the exploitation of large reserves of shale oil and gas, found in organic rock

(shale) formations deep below the surface, economically viable. The technique consists

of blasting such formations with large quantities of water (mixed with sand and

chemicals), which creates fractures that release natural gas.ii Geographical and

institutional factors, such as sparse population, a strong tradition of private property

rights, a largely decentralized regulatory structure, and a well-developed energy

industry and infrastructure, have ensured that the technological improvements led to an

energy revolution.iii

The impact of the shale revolution has been most noticeable in production data.

US natural gas production has increased by 25% between 2008 and 2013. Shale gas

now composes 30% of US natural gas production and the US Energy Information

Administration estimates it will produce 46% of US power supply by 2035. Similarly, US oil

production has increased by almost 44% between 2008 and 2014.iv

Economic Impact

Throughout the US, the development of shale gas has caused significant economic

benefits. In 2010, the shale gas industry supported 600,000 jobs, contributed $76 billion to

US GDP and brought in a total of $18.6 billion in federal, state and local government tax

revenues.v As a result of the production increases, natural gas prices for American

manufacturers have fallen by 36 percent between 2006 and 2010, and the natural gas

spot price has now largely stabilized between $4 and $6 per million BTU.vi This stands in

sharp contrast with European energy prices, which have increased by 4% a year for

residential consumers and by 3.5% a year for industrial consumers between 2008 and

2012. The EU’s industrial energy costs are now two times as high as the US’, and the

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International Energy Agency estimates that this disparity could last for another two

decades.vii

US natural gas trade policies have worked to ensure the low US gas prices and

this disparity with the rest of the world. Under the 1938 Natural Gas Act, as amended in

1992, the US Department of Energy subjects companies looking to export natural gas to

countries without a free-trade agreement to a rigorous export authorization process.

Only 7 out of the more than 30 applications have so far been granted (conditional)

authorization, and this process often takes over 800 days to complete. The first US export

facility in Louisiana won’t start exporting liquefied natural gas (LNG) until 2015, and

others will likely not follow until 2018. Without a less restrictive export authorization

process, greater US LNG flows won’t reach the global gas market for years to come,

and gas prices are unlikely to converge (allowing for transportation costs), maintaining

the US’ gas price edge.

The price

divergence has had

particularly beneficial

effects for US energy-

intensive manufacturing

industry, in which natural gas

prices compose a large

percentage of

production costs, and this has

led to improvements in the

US’ manufacturing cost

competitiveness

ranking.viii By 2017, the

lower prices are estimated to increase industrial production by 2.9%, and by 2035 it is

estimated to be 4.7% higher.ix Natural gas feedstock provides a particularly significant

portion of production costs in the chemical industry, and as a result of the low price of

natural gas, several large chemical companies, like Dow, and Royal Dutch Shell, have

chosen to move to- or announced an expansion of their operations in the United States,

investing tens of billions of dollars in new or expanded plants and equipment.x Close to

Source: World Bank Commodity Markets. The

Washington Post, April 1, 2013.

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100 additional chemical sector projects have been announced and the sector is

estimated to create 123,000 additional (direct, indirect, and induced) jobs per year by

2020, and bring in an extra $2.5 billion in annual tax revenue for federal, state and local

governments, as a result of renewed US industrial competitiveness.xi

This price divergence has negatively impacted the EU’s manufacturing industry.

The European Commission estimates that: “medium-sized industrial consumers in the EU

paid four times as much for natural gas as industrial consumers in the US, Canada, India

and Russia and about 12% more than those in China.” As a result, some firms, particularly

energy-intensive industrial manufacturers, have decided to shift operations, investments,

and occasionally entire plants from Europe to the US.xii Gordon Moffat, director-general

of Eurofer, the main lobbying group for European steel manufacturers, has said: “It’s

become clear, with the drop in gas and electricity prices in the United States that we

are, at the moment, at a significant disadvantage with our competitors”.xiii

Top officials from German chemical giant BASF added that: “unless Europe allows

a more aggressive approach to energy production, including broader use of hydraulic

fracturing, or fracking, even more manufacturing will move to the United States.”xiv The

International Energy Agency’s top economist, Fatih Birol put the competitiveness

problem in even starker terms: “There may be a narrowing of the gap, but if no new

policies are put in place, Europe will still have two to three times higher gas prices than

the United States for 20 years. […] Competitiveness will be more of a problem for many

countries. Today it's a headache. Tomorrow it will be a migraine for the European

economies if no policies are put in place.”xv And a recent report by the Boston

Consulting Group on industrial manufacturing cost competitiveness showed that gas

prices are partly to blame for reduced industrial competitiveness in several European

countries like Italy, France, Poland, and the Czech Republic, while the US is almost

edging out China for the top spot.xvi

Environmental Impact

The surge in natural gas production, and the resulting lower price of natural gas in the US

has gradually decreased the share of coal in US power production. Coal provided 37%

of US electricity generation in 2012 down from 52% in 2000, whereas gas now makes up

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30%, up from 16% in 2000, and US coal consumption has declined by 11% between 2009

and 2013.xvii As a result of the reduced need for and consumption of coal, US exports of

the resource have increased dramatically, by almost 110%, between 2009 and 2013,

and US CO2 emissions have fallen by 10% between 2008 and 2013.xviii In the EU,

however, coal consumption increased by 6% between 2009 and 2013, and its US imports

to 47 million tons, almost double the 2009 numbers. The EU’s CO2 emissions declined by

just 8.5% between 2008 and 2013, despite more policies geared towards greater

development of renewable energy and CO2 reduction.xix Through its increased coal

exports, the US is de facto exporting higher CO2 emissions to Europe, hurting the

Commissions climate change goals.

The US shale gas revolution and its impact on the EU:

- US Natural gas production increased by 25% between 2008 and 2012

- US export restrictions have contributed to EU’ industrial gas prices being double the US’,

creating a cost competitiveness challenge for EU industry

- Cheap natural gas doubled US coal exports to the EU since 2009, hurting the EU’s CO2

reduction goals

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EU Policy Recommendation:

Utilize TTIP negotiations to allow for increased US natural gas exports and achieve

Free-trade agreement status under the US Natural Gas Act

The restrictive export authorization process for US natural gas, in combination with the

natural gas production increases have caused the US natural gas price to decrease

significantly, and to diverge from prices in other international regions. It has caused a

large disparity in gas prices between the US and Europe. This has caused a twofold

effect: an increase in US industrial manufacturing competitiveness, and greater exports

of US coal, which has been replaced by cheaper natural gas. By including natural gas

exports in TTIP negotiations, the EU can demand its status as an FTA zone, as recognized

by the American Department of Energy, under the US’ Natural Gas Act. This ensures that

exporting American firms will not face such obstacles, and natural gas can more easily

be exported from the US.

TTIP

European policymakers should negotiate with the US government to lift its restrictive

natural gas export policy. Ambassadors from Eastern European countries, including

Hungary, Poland, the Czech Republic and Slovakia have already reached out to

leaders in the US House of Representatives and the Senate, so far without success.xx By

including natural gas exports in the TTIP free-trade negotiations, the EU could ensure

success. The EU should negotiate that it will be designated a free-trade zone under the

US’ Natural gas act. This will ensure that US natural gas exporters looking to export gas to

Europe will no longer have to go through an arduous, time-consuming export

authorization process administered by the US’ Department of Energy. Europe’s LNG

import capacity (such as the Rotterdam facility), and its higher prices would incentivize

US exporters to sell natural gas in the European market, bringing down prices in the EU. It

should be noted that it will take several years for US exporting firms to construct or

finalize export or LNG facilities.

Broader reforms of the export-authorization process by the US Department of Energy,

and the resulting increased natural gas exports to other global regions, will still carry

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benefits for the EU in freeing up new trade partners. Easing the US export authorization

process on natural gas will cause a closer convergence in the international price of

natural gas. European governments, and the EU as a whole, will find allies in the US oil

and natural gas industry, as well as representatives of districts in which the natural gas

industry is represented and more free-market oriented politicians, a coalition that is

heavily Republican, but has some Democratic legislator support as well.

Benefit 1: Lower natural gas prices and improved industrial competitiveness

A less restricted US export authorization process will increase US natural gas exports and

reduce US natural gas prices. A study by the US Energy Information Agency showed

moderate increases in the price of natural gas resulting from exports. The price increases

range from 3.2 to 8.3 percent for residential and commercial users, and from 7.2 to 18.7

percent for industrial customers, over a 20-year timespan (2015-2035).xxi A Deloitte study

bolsters these results, and predicts that US gas prices would increase by some $0.15 per

Million BTU and decrease European gas prices between $0.20 and $0.70.xxii US LNG

exports would reduce global gas prices. These dual price movements, both a price

increase in the US, and a decrease in the EU, will narrow the industrial manufacturing

competitiveness gap between the US and EU. It will mean improved industrial

competitiveness in the EU.

Benefit 2: Reduction in US coal exports and reduction in EU CO2 emissions

Increased US exports of natural gas, and higher US natural gas prices will make coal

relatively more attractive to US power producers, and thus increase the demand for

and consumption of coal in America. As the demand for coal increases in the US, its

exports to Europe will likely decrease, and the price power producers in Europe pay for

coal will increase. Combined with lower natural gas prices for European power

producers, this would cause a shift in power production in Europe, away from coal and

towards natural gas. This would reverse the trend of increased EU coal consumption and

the shift towards cleaner forms of energy production, including natural gas, will aid the

Commissions CO2 reduction goals.

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One challenge to these potential developments is the US’ regulatory situation for

coal-fired power plants. The American Environmental Protection Agency (EPA) has

announced stricter regulations that would limit the construction of new coal-fired power

plants, and might force the closure of some 300. These regulations might serve to

disincentive coal power production, and might actually depress future US demand for

coal.xxiii The political consequences of the 2014 US midterm election results might alter

these EPA plans, but this is still uncertain. This scenario would likely lead to increased

exports of cheap US coal, and would exacerbate the EU’s coal import problem.

Policymakers should then look to other alternatives, such as encouraging the EU’s own

shale resources.

Benefit 3: Improved Natural gas trading options

Although US natural gas exports are unlikely to flow directly to Europe, they could still

contribute to a diversification of the EU’s natural gas sources, and a reduction in the

EU’s dependence on Russian gas imports. The Asian, and particularly Japanese markets

will entice US natural gas exporters with higher prices and higher export margins (the

margin to export to Japan over Europe was approximately 3 times as large in 2011).xxiv

Eastern European countries that are currently clamoring for relief from US LNG are

unlikely to find it. However, increased US natural gas flows to Asia will still carry benefits

for the EU. They will depress global natural gas prices and restructure trade flows.

Increased US LNG to Japan will force current exporters to divert LNG flows, making them

potential trading partners to Europe. Additionally, recent shale gas finds in the Eastern

Mediterranean and East Africa, as well as Iraqi gas might prove additional sources of

natural gas for Europe.xxv

Furthermore, although Japan and other Asian countries currently see higher

natural gas spot prices, there are reasons to believe this might alter drastically in the

future. China possesses 31.5 trillion cubic meters of shale gas, the world’s largest

reserves, almost double the technically recoverable US shale reserves.xxvi Exploitation of

Chinese shale gas, in combination with development of unconventional gas in

Argentina and Australia, and future pipeline connections between Central and South-

Asia and China, and Russia and China would all free up additional LNG resources for

Japan.xxvii This would reduce the need for US LNG exports to Japan in the future, and in

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turn open them up as an additional export option for Europe. In any case, increased

exports of US LNG open up additional trading options for natural gas for the EU.

In Summary:

- The EU should use TTIP negotiations to ensure increased US natural gas exports

- Benefit 1: lower natural gas prices and improved industrial competitiveness

- Benefit 2: reduced US coal exports lead to reduced EU CO2 emissions

- Benefit 3: Improved Natural gas trading options

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Conclusion

With its shale gas revolution, and cheap natural gas prices, the US has created a

significant competitive advantage for energy-intensive manufacturing industry.

Additionally, its coal exports to the EU have doubled since 2009, increasing the EU’s

consumption of coal, and hurting its CO2 reduction policies.

To mitigate the effects of the US shale revolution, the EU should make increased

US natural gas exports a provision in its TTIP negotiations. By achieving ‘Free-trade’

agreement status, US exporters avoid a difficult export authorization process, and this will

allow for increased exports of LNG to the EU. Increased US natural gas exports will

narrow the price gap and improve EU industrial cost competitiveness, will reduce US

coal exports and aid the European Commissions CO2 goals, and will open up new

trading partners to reduce its reliance on Russian gas.

By getting the US to trade its wealth of natural gas with the world, the EU can

ensure that it too benefits from the American shale gas revolution that has transformed

the world’s energy landscape.

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References

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xv Lewis, B., Europe's energy price headache becoming a migraine - IEA, Reuters,

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analysis of the changing cost competitiveness of the world’s top 25 export economies,

April 2014.

xvii U.S. Energy Information Administration, AEO2014 Early Release Overview, December 16, 2013. xviii U.S. Energy Information Administration, International Energy Statistics, 2014.

URL: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm xix Olivier, J.G.J., Janssens-Maenhout, G., Muntean, M., Peters, J.A.H.W., Trends in global

CO2 emissions: 2013 Report, PBL Netherlands Environmental Assessment Agency, the Hague, 2013. Miller, J.W., Dirty U.S. coal finds a home in Europe: Low costs outweighs high-sulfur

content as exports to continent surge, The Wall Street Journal, May 5, 2014. xx Barron-Lopez, L., Europe calls for more US natural gas exports, March 10, 2014 xxi

U.S. Energy Information Administration, Effects of Increased Natural Gas Exports on

Domestic Markets, January 2012. xxii Choi, T. and Robertson, P.J., Exporting the Renaissance: ’Global Impacts of LNG

Exports from the United States’, Deloitte Center for Energy Solutions, 2013. xxiii

SOURCE xxiv

Medlock, K.B. III, U.S. LNG Exports: Truth and Consequence, Rice University: James A.

Baker III Institute for Public Policy, August 10, 2012. xxv Ibid. xxvi De Zeeuw, M., Gas in the Middle Kingdom, April 2014. URL: http://www.quidnovi.nl/news/6/61/Gas-in-the-Middle-Kingdom xxvii

Medlock, K.B. III, U.S. LNG Exports: Truth and Consequence, Rice University: James A.

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