Shale Gas and The Economy

Shale Gas and the Economy

Europe needs a secure and affordable energy supply that meets public demand and powers its industries.  Business also requires access to a regular and dependable supply of energy that it can afford in order to remain competitive in an increasingly global economy.

These are the broad economic principles that governments need to manage alongside Europe’s commitment to a more sustainable future, to continue to lower its carbon footprint and to preserve, protect and improve the quality of the environment.

The economic impact of shale gas

There has been much speculation about the potential economic impact shale gas could have on Europe’s economy. The success of shale gas development and production in the United States has led to significant benefits in terms of:

  • Lower energy prices
  • Improved security of supply
  • Additional employment
  • Community benefits
  • A more competitive manufacturing base
  • Foreign investment

However, the scale of this opportunity may not be repeated in Europe.  This depends on the scale and commercial viability of its resources, which have yet to be determined.  This is why various energy companies are undertaking important exploratory drilling in countries around Europe.  Once we know how much shale gas there is, we will be able to confirm its potential economic impact.

Energy prices

The European Commission has stated that “energy price rises are a major political concern” since they create additional cost burdens on hard-pressed households and industry and affect Europe’s global competitiveness..

Electricity prices

The European Commission has plotted comparative energy prices (excluding tax)

There has been much speculation about the economic impact of shale gas on energy prices; the nature of the European gas network and the long term nature of the contracts for the gas Europe imports from abroad mean that we are unlikely to see the kind of impact on price that we have seen in the United States.

Any increase in domestic production will however decrease the need for more expensive imports and strengthen Europe’s ability to negotiate more favourable terms for future contracts. This could lead to price suppression in terms of future price rises, if not direct energy price decreases.  Other industry reports suggest that, depending on the size of Europe’s reserves, potential wholesale gas prices could reduce between 6% and 14%, and wholesale electricity prices by between 3% and 8%.

Security of supply

Domestic production of conventional national gas is declining in Europe and dependency on external supply is growing. This leaves Europe vulnerable in the security of its supply and to fluctuations in global energy prices. The less Europe spends on energy imports, the more it can invest internally, stimulating national and local economies.

Several studies, such as that carried out by the European Commission’s Joint Research Centre (JRC), have suggested that a positive development of the EU’s domestic shale gas reserves will allow any increase in import dependency to be averted. Instead, new contributions from unconventional sources, such as shale gas, could broaden Europe’s domestic energy mix, improve energy security and price stability.

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European industries are heavily reliant on natural gas transmission from Russia

In addition, the International Association of Oil and Gas Producers (IOGP) commissioned Poyry Management Consulting and Cambridge Econometrics to examine the impact that shale gas production could have on energy prices and macroeconomic indicators for all 28 countries in the EU during the period 2020 to 2050. Its report suggests that domestic production could reduce dependence on gas imports to between 62% and 78%, down from an otherwise predicted 89% of demand in 2035.

Increased tax revenues

While commercial shale gas production has not yet started in Europe, the industry could prove to be a significant source of tax revenue for governments. More exploratory drilling is required to confirm Europe’s reserves and clarify how much is commercially viable. Only then will we be able to confirm how much public revenue could be generated through direct taxation.

Indirectly, more revenue could be created from income tax from the jobs created and revenues generated by the increased in economic activity associated with shale gas exploration and production.

One example is in the United Kingdom where the Government has proposed that local authorities should receive 100% of business tax raised from shale gas projects as well as 1% of total revenues, thereby creating even more opportunities for local communities.

New employment creation

Commercially viable shale gas exploration and production could result in significant investment and economic activity at the local and national levels.  In the United States it has created about 600,000 new jobs.  This is expected to rise to 870,000 by 2035.

Through direct job creation, sourcing locally and indirect employment, shale gas could create similar opportunities in Europe, not just for those in the energy sector but also for a broad range of suppliers and contractors, creating new jobs locally.

According to  Poyry Management Consulting and Cambridge Econometrics, shale gas operations could trigger the creation of between 400,000 and 800,000 new jobs in Europe by 2035, and between 600,000 to 1.1 million by 2050.

Community investment programmes

Energy companies have initiated community investment programs in order to include local communities in the process of shale gas exploration. These programs focus on building positive relationships and understanding of the exploration process itself, but also allow the energy industry to concentrate on the needs of the local people. Providing support to educational facilities, investing in local infrastructure and sourcing locally are some of the ways that energy companies demonstrate their commitment to the communities in which they operate.

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