A Question of Trust: Why Europe Misses a Shale Energy Revolution

The current crisis in Ukraine focused attention on Europe’s 25–30% dependence on Russian natural gas. Europeans pay three to seven times more for their natural gas than Americans. Prices vary according to level of dependency on Russia and the discounts it grants for political loyalty or denies for disobedience. The recent agreement between China and Russia will not release Russia from dependence on exporting to the European market. The Putin regime will continue to depend on exporting energy to Europe for paying for the Russian state and the patronage “vertical of power” that sustains it, since the Chinese would not have agreed to pay Russia anything approaching the European price, and Russia will have to make massive investment in infrastructure (to which it is necessary to add the costs of the inevitable embezzlements and corruption) in the short term before reaping any profits.

Europe wants a free trade agreement with the United States to allow exports of unconventionally produced American liquefied natural gas and crude oil from shale to substitute for Russian imports. But Europe has another route to energy security: follow the United States in developing domestic shale gas and tight oil resources.

The shale unconventional energy revolution in the United States made it natural gas independent and is quickly moving the economy in the direction of oil independence by the end of the decade. It reduced the price of natural gas by about 80% and allowed a revival of chemical industries that use gas as feedstock. The United States is now selling the coal it does not need anymore for power production to Europe because it is much cheaper for power production than Russian gas. Yet, coal is three times as polluting as natural gas. Europe subsidizes renewable technologies while burning more of the most polluting fuel.

Policies, laws, and public attitudes towards unconventional technologies and resources in Europe vary from total ban on hydraulic fracturing in France and the Netherlands, through moratoria in Bulgaria and the Czech Republic, German government neutrality and different licensing policies in each Lands, to tax incentives in the UK and enthusiastic support in Poland.

The European debate appears to be about the safety of hydraulic fracturing, the technology that releases shale gas and tight oil by fracturing the rock formations that trap them using high volumes of high pressured water, sand and chemicals. Regulations should mitigate risks. Yet, concerned Europeans do not trust regulations, the regulators, the experts who explain how the technologies can be used safely, and the politicians who tout the benefits of the shale revolution for job creation, economic growth, the balance of trade, the public budget, and for lowering the cost of energy for consumers.

In the United States, trust arrives regularly in the bank accounts of landowners and coffers of local authorities as mineral royalties and local taxes. In Europe, the state owns subsoil mineral rights. In most European countries, this is legacy of the nationalizations of the thirties and the Second World War. The Nazis appropriated natural resources, especially strategic energy. After the war, new governments, whether democratic or Communist, did not return mineral rights to private owners. The state gets all the royalties. Land owners and local government must assume all the risks. With no reward, any risk seems excessive, unless there is trust in government.

Communist governments were indifferent to industrial environmental destruction. Citizens of postCommunist countries may suspect that corrupt politicians would do the same to enrich themselves. Yet, fear of a greater external enemy, Russia, may trump distrust of politicians. Almost all the postCommunist countries allow the development of unconventional energy; in Western Ukraine and urban Poland, it is popular. The two postCommunist countries that banned hydraulicfracturing do not fear Russia: Bulgaria has been friendly with Russia since the 19th century. Though Russia invaded the Czech lands in 1968, Slovakia and Ukraine separate now Russia from the Czech lands. Many Czechs, Bulgarians, and other Europeans are not aware of the price elasticity of Russian natural gas, the extent to which they pay more than other countries and how the price can decline with reduced dependence.

In France and the United Kingdom, policy decisions about science and technology were traditionally taken by apolitical technocrats. During the nineties, they lost their citizens’ trust following a series of bad decisions about the Mad Cow Disease, HIV contaminated blood, nuclear waste and so on. Technocratic elites did not assume responsibility for their mistakes, resisted democratic scrutiny, and closed ranks. This created a rift between technocratic elites that believe in progress, science, state, and technology and populations that distrust them and consider their Faustian zeal dangerous. The legal expression of this populist distrust is the Precautionary Principle that considers all new technologies to be dangerous unless proven otherwise. It is now French law.

French elites have given up attempting to reason with their citizens. Instead they have been trying to take crucial decisions behind their backs. The granting of licenses for shale gas exploration a few years ago resembled in that respect the admission of genetically modified foods a decade earlier; elites make decisions about technological policies without public discussion, expecting nobody to notice. Somebody does notice. A populist protest movement emerges. The politicians are scared and order the technocratic elites to back off. They make a tactical retreat. Instead of attempting to communicate and explain policies to citizens who distrust them, they wait for an opportune moment when they are distracted, like the world cup football championship, to reintroduce the same policies under a different name perhaps.

Recently, the British government offered “communities” that allow exploration of unconventional gas and oil L100,000 per wellsite and 1% of revenues if exploration leads to exploitation. I doubt this offer is sufficiently well targeted and generous to build trust with local stakeholders, especially individuals.

Obviously, attempting to introduce hydraulic fracturing by stealth backfired. Better for the energy companies and allied politicians and civil servants to initiate the discussion before their opponents do. Returning at least some mineral rights to landowners and communities can be a quick and cheap way to build trust in the long term. Government transparency in the process of granting concessions and distribution of mineral income is essential. The citizens must understand how much money is coming to the state and where it is spent. Democracy is the solution and not the problem for building trust in new technologies and achieving European energy security.