Europe’s Changing Energy Landscape

The energy scenario in Europe is very different now to that of a decade ago. Yet, just as a future dominated by a new generation of offshore wind power and new nuclear investment beckoned, two game-changing events have pushed energy policy into more new directions – the discovery of shale gas in northern Europe and the Japanese nuclear crisis.

Historically, Europe’s power generation sector has been dominated by coal. Plentiful reserves lay beneath most of the continent’s industrial nations and the energy mix of its generation sector reflected this. The 1970s saw the emergence of the North Sea as Europe’s fossil fuel engine. Oil and gas in the Norwegian, Dutch and British sectors of the North Sea, in particular, provided an indigenous supplement to oil imports from the Middle East. Even though the oil reserves are now on the wane, 2011 sees North Sea gas, particularly in the Norwegian sector, as a valuable and profitable residual resource.

During the 1990s though, the accepted twin drivers of energy policy – security of supply and affordability – were increasingly challenged by a third – that of carbon reduction. As the climate change and emissions reduction agenda grew in strength, European policy makers and investors looked towards more carbon-friendly generation options – first gas and then renewable energy, particularly, wind power.

Nuclear power, which had fallen out of fashion, also seemed likely to make a renaissance in Europe after 2000 as its low-carbon credentials came to the fore. Advocates of Europe’s coal and gas resources promoted untried carbon capture and storage technology as a way of keeping fossil fuels in the energy mix in a low-carbon energy future.

The first sign that a mix with a growing wind and nuclear element might be challenged came a few short years ago with the emergence of shale gas. As O&G has reported, shale gas first emerged in North America, with the development of “fracking” techniques which made this hitherto marginal resource economical to extract. Shale gas in North America has transformed the global gas market and looks like it will turn the U.S. from a net-gas importer to an exporter.

Now shale gas has been found in large quantities in an arc, stretching from Poland in the east across the Baltic to the Netherlands. Further reserves may be exploitable in other countries across Europe too. Given that gas has a far lower carbon-emission footprint than coal as an electricity-generation fuel, the European gas market, hitherto dominated by the finite North Sea and imports from Russia, looks set for a rapid revival at coal’s expense.

Shale gas has another appeal in Europe. For decades much of the continent without direct access to the North Sea has been reliant on imported gas from Russia and beyond. Shale gas could provide a secure alternative to imported gas, which has often been subject to price fluctuations and, in the case of Russia and Ukraine, disputes which have sometimes interrupted supply.

While the North Sea is set to remain a gas hub for some years yet, it has recently seen another role emerging as a European energy resource – that of offshore wind power. Electricity from wind, generated offshore is expensive, and the logistics around maintaining assets in hostile waters is challenging, as the oil and gas industry has found for decades now. Nevertheless, with limitations as to how much of Europe’s landscape can be turned over to wind turbines, the North Sea countries of Europe – Britain, Belgium, the Netherlands, Germany and Denmark – have all embarked on ambitious plans to expand their offshore wind, from initial wind farms just off the coast out into deeper waters in the southern North Sea.

With this emerging mix of gas and wind energy, nuclear, which has for so long provided baseload generation in countries like Britain and Germany, and dominated the mix in France , looked set for a second revival, with French and German energy giants like EdF, Eon and RWE looking to invest in new-technology PWR plants of up to 1500MW each. Nuclear’s timer appeared to have come again.

Then came the Japanese earthquake and tsunami, and the crippling of Japan’s coastal nuclear power stations. Overnight, nuclear suddenly went back to being, in the eyes of investors and policymakers, a high-risk energy technology.

Although Europe’s planned new generation of nuclear power stations were not planned to be sited on earthquake fault lines (although Italy, another country planning new nuclear stations has been prone to seismic activity), the inevitable call for a revised look at nuclear safety, with its attendant cost implications, and the threat of negative pressure from already skeptical European electorates could mean that nuclear’s new European dawn is stalled. What then for the energy mix?

The obvious beneficiaries of a nuclear setback would be gas and wind. But another might be carbon capture and storage, which although unproven at a commercial scale, and expensive, might provide a way back for fossil-fuel baseload generation if nuclear power becomes unavailable to fill that gap. Carbon capture is initially seen as a way of mitigating the impact of coal generation, but could also be used in conjunction with gas plants, making an already lower carbon fossil fuel lower carbon still.

What is clear is that Europe’s electricity needs will increase as the continent’s transport becomes increasingly electrified. That electricity will have to be substantially low carbon, both to meet Europe’s 2020 renewable, low- carbon and energy-efficiency targets, and to meet further, more ambitious targets for carbon up to 2050. The question now is how big a role gas will play? Gas from either the North Sea, from new shale gas deposits or imports through new east-west pipelines or LNG terminals are the primary gas plays to be considered.

Whatever the final scenario, an increasingly electrified Europe with a lower-carbon footprint and a firm hand of energy security could provide good opportunities for the gas industry, with or without carbon capture.