In the context of the EU #EnergySecurity Strategy presented on May 28, I recommend our text "Energy security policies as a driver for European shale gas and oil development?" published - conveniently - in the May issue of International Shale Gas and Oil Journal thanks to Izabela Albrycht. Very timely, maybe slightly controversial.

1. Bartosz Kwiatkowski1
CEC Government Relations
Michał Koczalski2
CEC Government Relations
1. Introduction
Poles got used to the ubiquitous shale gas fever, but a
stranger coming to Warsaw (or Gdansk, or Lublin) when
scanning pages of any mainstream daily paper may get
an impression that modest sedimentary rocks hidden
below the surface of Polish plains contain a geologi-
cal equivalent of the Holy Grail. Since 2008, when the
public opinion heard about shale gas, almost everybody
became an expert on unconventional hydrocarbons. In
United States John Deutch presented a convincing and
comprehensive explanation of benefits related to explo-
ration of shale gas in his famous article “The Good News
About Gas”3
. But why unconventional hydrocarbons are
supposed to be so profoundly important for Europe in
general and CEE region in particular?
2. Geopolitical game changer
Many comprehensive studies and reports are already
available concerning landslide development of uncon-
ventional hydrocarbon resources in the United States.
1 Bartosz Kwiatkowski is economist, Advisor to the Board at CEC
Government Relations, expert of the Rapid Response Instrument
project. Rapid Response Instrument is a tool designed jointly by the
Cracow University of Economics and Polish Agency for Enterprise
Development to provide an early warning mechanism to predict
symptoms of economic crises
2 Michał Koczalski is Head of Energy and Environment Practice at
CEC Government Relations, Co-chair of the Energy and Environ-
ment Committee at Amcham Poland
J. Deutch, The Good News About Gas. The Natural Gas Revolution
and Its Consequences, Foreign Affairs, January-February 2011
3 J. Deutch, The Good News About Gas. The Natural Gas Revolu-
tion and Its Consequences, Foreign Affairs, January-February 2011
Sometimes it is good to look at such critical junctures
from the bird’s eye view – not only at the microeco-
nomic level, but also from the standpoint of global
macroeconomics. In 2014 the U.S. is likely to become the
world’s largest producer of both natural gas and oil. And
incumbent players of the hydrocarbon markets do not
share enthusiastic assessment of the shale revolution.
We’ll talk about Russia below, but first let’s look at the
Middle East, land of deserts, natural gas and crude, a
cradle of OPEC led by Saudi Arabia. In the past, the
sheikhs were able to keep the firm grip on the supply of
oil for the world market, including the major consumer
– the U.S. That Qatar tops the World Bank 2012 ranking
of wealthiest nations (GDP per capita) with UAE climb-
ing into 16th place ahead of Belgium, and Saudi Arabia
leaving behind South Korea is not a result of developed
market economies. Export of petroleum and natural
gas made a group of essentially feudal, highly unequal
states immensely rich with almost entire wealth going
into coffers of the local royal families. Simultaneously
they enjoyed protection against local rogue regimes,
particularly Iran, offered by their powerful clients, who
turned blind eye on their iron grip of own societies. That
blessed time lasted roughly 30 years, allowed them to
transform Gulf metropolises into glowing hubs of real
estate and financial services, and now is coming to an
end due to the shale revolution. Here is the main reason
why kingdoms of the Middle East are making efforts to
realign national economies to reduce its own depen-
dence on crude. Construction of the Barakah nuclear
plant in UAE, possibly to be followed by the Saudi nucle-
ar program, puzzling at first sight, is a clear signal of the
need to diversify away from omnipresent oil.
With America becoming increasingly self-sufficient in
hydrocarbons, Washington will gradually lose interest
in supporting Middle East royal houses and ultimately
reduce costs of military presence in the region propor-
tionally to dwindling interests in Persian Gulf. With the
U.S. abandoning unconditional support for the House of
Sauds, a détente with Tehran may follow in the pre-
dictable future. Currently the export capabilities of Iran
are restricted by the embargo, but in the moment the
Energy security policies
as a driver for
European shale gas and oil development?
37
2014/2ISG&OJ

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EnergysecuritypoliciesasadriverforEuropeanshalegasandoildevelopment?2014/2ISG&OJ
Persian fields are allowed to supply the market freely,
global oil prices are likely to collapse. In the long run, Iran
is destined to rise as a dominant power in the Persian
Gulf region, filling the void created by likely withdrawal
of American forces. That is not to say that US bases will
pack up overnight. Rather, that the U.S. military contin-
gent in the Middle East will be ultimately dramatically
reduced as soon as the rationale for maintaining 35 000
troops in the region ceases. As of today, the U.S. Depart-
ment of Defense pledges to retain an enduring pres-
ence in the Persian Gulf, but keeping all existing basis is
probably out of the question.
Emergence of shale oil may be truly disastrous for
Venezuela unless the country secures contracts for other
export markets. According to Daniel Yergin, country’s
ordeals in recent decades demonstrates perfectly the
“resource curse”, a fate of a country with weak institu-
tions, unable to leverage the mineral wealth for the
benefit of the nations (essentially, the antithesis for
Norway). Now, the Bolivarian Republic, for decades an
important supplier of the U.S. market, is on a verge of
collapse. With oil revenues accounting for 95% of export
earnings, hydrocarbons creating 25% of GDP, political
void caused by death of Hugo Chávez and civil unrest
triggered by dire state of the economy, losing American
market due to the shale revolution is probably last thing
that Venezuelan leaders need in 2014.
Also Canada, the U.S. closest ally, who invested in de-
velopment of oil sands, are likely to be affected heavily
by shale revolution due to higher break-even point for
tar sands oil. It already contributed to delay of Keystone
XL pipeline, as political support for the project once
proclaimed the lifeline for American energy security
becomes less enthusiastic in the wake of increasing
domestic oil output. On the other hand, adverse impact
on Canada’s oil sands is often ignored by geopolitical
analysts, as it is unlikely to lead to such profound conse-
quences for the national economy as in case of coun-
tries discussed above.
While America becomes self-sufficient, emerging China
is becoming more vulnerable to possible internal insta-
bility of OPEC members4
. Global players are flocking to
China to help unlock its allegedly vast shale reserves,
but the progress is still disappointing, with 2013 produc-
tion barely at 200mcm. Given the Asian dragon’s pace
of growth, IEA predicts that in 2030 China will need to
import 80% of its oil consumption. Quoting Ian Brem-
mer, over 50% of all money China lends to Latin America
goes to Venezuela. Chinese state-owned enterprises are
also investing heavily in African resource-rich countries
like Angola and Nigeria, without any inconvenient
preconditions like introduction of the rule of law. It is
certainly not a coincidence. We are observing a global
shift of alliances, and Realpolitik in decades to come will
force Beijing to play a more active role in international
affairs and, unfortunately as it may be, drag China into a
few ugly factional conflicts across the world.
3. Ukraine and its neighbors: the hydrocarbon
deterrence
While the shadow of Russia looms large over Europe,
one may seek for links between the rediscovered asser-
tiveness of Moscow and the resource base. The largest
oil producer last year, previously topping also the table
of natural gas producers, is expected to be overtaken
by the United States in 2014-15. More importantly, the
day American LNG terminals start supplying overseas
markets with blue fuel, Russian market power – indeed a
foundation of the Putin’s doctrine – will inevitably shrink,
undermining foundations of the Russian foreign policy
in recent years. As Leon Aron put it clearly, the Russian
president consistently pursues an objective of “the
recovery of economic, political, and geostrategic assets
lost by the Soviet state in 1991”5
. As Putin ascended to
power in 2000, Russia was an semi-anarchic state ruled
largely by oligarchs, with weak central government and
demoralized army. 14 years later Putinist Russia stands as
an ominous threat for Europe, an increasingly authori-
tarian power with modernized military, battle-hardened
during 2008 blitzkrieg in Georgia and capable of imple-
menting swiftly a complex operation of Crimea annex-
ation. Putin will rather pre-empt global trends leading to
blunting edge of the major Russian tool of foreign policy
influence and implement his imperial plans right now
than peacefully realign the economy to diversify away
from hydrocarbon dependence.
Events in Eastern Ukraine startled the Western world
and ultimately proved the naivety of the “end of history”
theory. In particularly, some EU member states, which
for many years wanted to see Moscow as a strategic
partner, started to recognize the true nature of the Pu-
tin’s regime. They would be better prepared if they drew
4 I. Bremmer, K.A. Hersh, When America Stops Importing Energy,
The New York Times, May 22, 2013
5 L.Aron, The Putin Doctrine, Foreign Affairs, March-April 2013
“The shale revolution,
like any other,
has its winners and victims.”

3. EnergysecuritypoliciesasadriverforEuropeanshalegasandoildevelopment?2014/2ISG&OJ
right conclusions from the past. Ukraine crisis is a man-
ifestation of the pursuit for regional hegemony, which
“(...) has led Moscow to strive for the political, economic,
military, and cultural reintegration of the former Soviet
bloc under Russian leadership.”6
When in January 2009 Gazprom cut gas supply to
Ukraine – and just a few days later to other offtakers –
amidst severe winter – it became clear that use of gas
supply as an instrument of political pressure just shifted
from the domain of academic theory to practice, to
illustrate President Putin’s agenda laid out in 1990s. The
impact was particularly damaging in case of coun-
tries most reliant on Russia. Ukraine with its inefficient
economy consumes more than 50bcmof natural gas per
annum, roughly three times the volume used in smaller
and less populous Poland, with domestic production
covering 40% of domestic demand. Given no supply di-
versification to think of, Ukraine became a perfect target
to test the new form of unconventional warfare – war
waged by oil and gas. Not only Kyiv was literally frozen
into submission, but many EU members received a stark
warning about the methods, which Moscow is prepared
to apply to secure its political objectives. In particularly,
Czech Republic, Slovakia, Hungary, Bulgaria and Greece
were the most affected.
“The gas weapon”, however, is a double-edged sword
and may be used also in defensive. In Poland, domestic
production of natural gas from conventional deposits
explored by PGNiG, already covers ¼ of the domestic
demand of over 15bcm. There are limited options to
increase domestic exploration of conventional gas
deposits, but other sources are more capable to have a
more profound impact on the structure of domestic gas
consumption. Domestic shale gas production, even ac-
cording to conservative estimates, can bring to the mar-
ket 2,5-3bcm per year within a decade. The LNG terminal
in Swinoujscie even after completion of the first stage of
the investment will have a capacity of 2,5bcm. Add new
interconnectors with Czech Republic and Germany as
well as estimated domestic production and you reach
the conclusion that in early 2020s, even adjusting the
6 Ibid
demand to gas according to forecasts of the Kosciuszko
Institute7
, Poland may become capable to deter any
hostile activity of any given natural gas exporter – use of
the “gas weaponry” could simply become less efficient
given the related costs adjusted against the expected
impact. The chemical industry, the single most inten-
sive consumer of natural gas, even in the future would
certainly suffer in case of a possible cut, but the entire
economy should weather the storm relatively well.
4. Why Europe is not America
The shale revolution shook the foundations of the geo-
politics, leading to the age of cheap energy and revival
of manufacturing in the U.S., increasing convergence of
three historical natural gas markets – in North America,
Asia and Europe. Russia, manifestly skeptical towards
shale gas, now realized that resulting technological lag
and went on purchasing and developing know-how
necessary to explore own shale oil deposits. Moscow is
determined not to repeat the mistake. Apparently the
vast Bazhenov Formation located in the West Siberian
basin is capable of catapulting the Russian Federation
back to the top of the petroleum ranking, not unlike
during the Sochi Olympic Games.
Amidst this scramble for resources Europe demonstrates
an uneasy feet-dragging, torn between the dream of
restoring competitiveness and preaching about leading
the world in climate protection.
Ongoing negotiations of the Transatlantic Trade and
Investment Partnership (TTIP) only complicate the
picture further. Given the dramatic disproportion in
energy prices on both sides of Atlantic, many American
manufacturing companies have now a competitive ad-
vantage. Europe’s old industrial powerhouses – primarily
representing chemical and petrochemical industry –
already disadvantaged by the instability of the Union’s
climate and energy policy, will experience hard time if
TTIP comes into force. According to a report by Centre
for European Policy Research8
e.g. Polish chemical indus-
try would lose 5% of export markets as a consequence
of TTIP.
When unconventional hydrocarbons are considered
for full scale exploration in Europe, it is drilling intensity,
what creates the most serious challenge9
. Texas with its
vast sparsely populated plains is hardly an analogy for
Central Europe. It makes more sense to draw similari-
7 Impact of shale gas extraction on the socio-economic devel-
opment of regions – an American “success story” and potential
opportunities for Poland, Kosciuszko Institute, June 2012
8 Reducing Transatlantic Barriers to Trade and Investment. An
Economic Assessment, CEPR, March 2013
9 L. Maugeri, The Shale Oil Boom: A U.S. Phenomenon, Harvard’s
Belfer Center for Science and International Affairs, June 2013
“Ukraine became a
perfect testing ground
for energy warfare.”
39

4. 40
EnergysecuritypoliciesasadriverforEuropeanshalegasandoildevelopment?2014/2ISG&OJ
ties with Marcellus Shale in Pennsylvania and Europe,
which required much more work with local population
and more efficient technologies than Texan fields. The
scale of drilling on a single field is unknown in Europe –
according to the U.S. Energy Information Administration
since 2010 on average more than 100 rigs is continuous-
ly involved in drilling. That is very close to total rig count
in entire Europe (126 in January 2014). In comparison,
total number of rigs exploring for oil and gas in the
U.S. during the 2014 Easter holiday week reached 1831.
Further to that, while more than 90% of rigs in U.S. are
capable of horizontal drilling, the figure for Europe bare-
ly exceeds one half.
As a result, European operators are currently not able
to maintain full scale exploration without involvement
of American partners. They frequently lack agility of
overseas counterparts, the risk propensity necessary on
the competitive U.S. market and experience in manag-
ing stripper wells – a set of skills very different from one
required for operating conventional fields.
Worse still, taking into consideration population density
and environmental restrictions in Europe, if exploitation
of unconventional hydrocarbons is expected to achieve
commercially viable levels, multipad drilling has to be
adopted increasing the need for advanced rigs. After all,
it is hard to imagine in Europe an operating well every
kilometer. Only Americans and Canadians are used
to such a scale, e.g. in 2012 Canadians brought online
almost 3500 oil and gas wells and to maintain the stable
level of output from a big field, one may need to launch
few dozen wells per week. That is the reason why most
European studies delay the perspective of commercially
significant shale gas exploration beyond 2025-2030.
Worse still, it seems evident that, despite political risk,
oil and gas operators find it easier to develop projects
in Russia than in the European Union – there is less
stakeholders, laxer regulations and it decision-making
process is more centralized. In absence of the Europe’s
natural resources strategy, lack of commitment to indig-
enous energy sources and unilateral pledge to climate
protection, a strong political signal would be required
to reverse marginalization of the European Union as a
global player on the hydrocarbon market.
At the same time, the next stage of the shale revolution
is in the offing. According to IEA, from mid 2020s signif-
icant amounts of shale oil, or light tight oil, is going to
hit the market, to exceed 10% of global oil supply in mid
2030s. For the last 5 years shale oil exploration in the
United States is experiencing the exponential growth,
following the earlier shale gas boom that made this new
revolution possible. This year the U.S. may become the
world’s second largest petroleum producer.
5. The new vision for Europe?
As the Chinese word for crisis translates roughly as “the
critical juncture”, 2014 Crimea crisis frames a decision
point for the European Union. One path would be
to adopt a Business As Usual approach and stick to
principles of the energy policy shaped by DG Climate
Action. The other, to return to the roots of the common
energy policy based on objectives of job creation and
energy security. Part of this vision, as revealed in 1996 by
Christos Papoutsis, the then-Energy Commissioner, was
significant reduction of costs of imports of hydrocar-
bons. According to IEA, in 2010 EU Member States spent
over €350 billion on oil imports. In particular, European
countries import 84% of Russia’s total oil exports, and
about 76% of its natural gas.
The Crimea crisis revealed imbalances of current EU en-
ergy policies, with contradictory objectives and limited
capability to address external shocks. Since 2009 Jerzy
Buzek, fm. Polish Prime Minister and fm. President of the
European Parliament, has called for full introduction of
the Third Energy Package. In July 2013 the EP passed the
most comprehensive report on state of the EU energy
market “Making the internal energy market work”10
.
Events in Ukraine pushed energy security up the Euro-
pean agenda, what we observed during the European
Council meeting in March. The Council, concerned by
the crisis, requested the Commission to conduct a study
of EU energy security and to present a comprehensive
plan for the reduction of EU energy dependence, what
Commissioner Oettinger is expected to do in June 2014.
In that context the call for creation of the European
Energy Union laid out by the Polish Prime Minister
Donald Tusk11
needs to be seen as a timely attempt to
propose a new vision for the European energy policy,
the vision based on solidarity of Member States in the
context of new old challenges which Europe is facing.
Tusk’s six points plan, including a mechanism for jointly
10 European Parliament’s Report on making the internal energy
market work (2013/2005(INI))
11 D. Tusk, A united Europe can end Russia’s energy stranglehold,
Financial Times, April 21, 2014
“The political will could
not be substituted,
but the new approach
to energy policy in Europe
is gaining momentum.”

5. EnergysecuritypoliciesasadriverforEuropeanshalegasandoildevelopment?2014/2ISG&OJ
negotiating energy contracts with suppliers and making
a full use of locally available fossil fuels, is obviously not
a ready solution for the realignment of the EU energy
policy, as critics would want. It is more a set of direc-
tions that the EU Energy Commissioner is expected to
include in his policy recommendations from the Warsaw
perspective.
While proposing more intensive use of locally avail-
able fossil fuels, Tusk singled out coal and shale gas. By
pointing out that “no nation should be forced to extract
minerals, but none should be prevented from doing so
– as long as it is done in a sustainable way”, he merely in-
dicated limits of powers of the European Commission in
terms of influencing national energy mix. More import-
ant that final wording, however, is the wind of change
blowing through some Brussels corridors, refreshing
memories of long shelved-priorities of the energy policy.
Just in January 2014 the European Commission present-
ed a set of documents framing a discussion on revision
of the European energy and industrial policy, in partic-
ular Communication For a European Industrial Renais-
sance12
, and Communication on the exploration and
production of hydrocarbons (such as shale gas) using
high volume hydraulic fracturing in the EU13
. Some claim
that Industrial Renaissance is just a catchphrase, an elec-
tion campaign exercise for Eurocrats timed to precede
the European Elections. Whatever the grounds are, this
new rhetoric alongside with the Crimean crisis, it created
the pivotal point for the European policy, a much-need-
ed critical juncture capable of unlocking the potential of
European shale resources.
The challenge ahead of the industry is not to be under-
estimated. Shortage of skills and equipment may be
partly solved by broader co-operation with experienced
American companies. What could not be substituted
is the political will. The oil and gas industry needs a
12 COM(2014) 14
13 COM(2014) 23
transparent, stable legal framework and commitment
of national governments to address key country-spe-
cific barriers. Obviously Poland, today appealing for
support for broader use of indigenous fossil resources,
could hardly be seen as a paragon of unambiguous
commitment to shale resource exploration if one takes
into consideration pace of regulatory process. However,
the annexation of Crimea changed it all: according to a
recent survey by the CBOS pollster, 47% of respondents
claim that Polish independence is under threat (the
highest figure since the collapse of communism) and
80% is afraid of resurgent Russian empire. In that context
energy security in Poland immediately rose to the top of
the political agenda. The impact of the crisis may be less
visible in the Western Europe, but it is evident to affect
the direction of a debate on the future of the European
energy policy. As soon as on November 29, 2012, UK
Department of Energy and Climate Change published
a comprehensive Energy Security Strategy defining key
challenges and policy responses. The Ukrainian crisis
only proved that the UK approach to be right and that
the European Union should really take a closer look at
the Energy Market Reform being introduced by Her
Majesty’s Government.
Decision makers in Europe need to fully understand that
the energy security will always be delusory unless it is
based on principles of diversity, competitiveness and
solidarity. The roadmap to secure that principles need to
embrace full implementation of internal energy market,
variety of sources – including renewables, nuclear, coal
and shale deposits – and energy efficiency. If European
Union decides to ignore opportunities offered by de-
velopment of shale gas and oil, the Shale Age will dawn
in Russia and in another decade citizens of Europe will
be buying oil and gas from brand-new unconventional
resources in West Siberia.
41