Poland's Shale Gas dilemma for Europe

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Earlier this month, the Prime Minister of Russia, Vladimir Putin, and the former German Chancellor, Gerhard Schröder, ushered in what was widely seen – for better and worse – as a new era in the European gas market. On 6 September, at a ceremony outside St Petersburg, they inaugurated the Nord Stream pipeline that takes natural gas directly from Russia to Germany under the Baltic Sea.

Bypassing Ukraine, Poland and the Baltic States, the new pipeline is also designed to bypass the disputes that have periodically halted the flow of Russian gas to the rest of Europe.

Even as the new gas started to flow, however, there were the first signs that the European gas market could be in for even more radical reshaping within less than 10 years – in energy terms, a mere twinkling of the eye.

At an economic forum in Poland which happened to coincide with the opening of Nord Stream, the hottest topic – in the conference halls and in the corridors – was of the potential for shale gas, a resource that has quietly altered the balance of energy provision in the United States and helped bring prices there down by a fifth in the past five years.

Initial surveys indicate Poland has enormous reserves of shale gas. One from the US Department of Energy, suggests Poland could have as much as 5.3 trillion cubic metres – equivalent to 300 years' domestic consumption.

But drilling for shale gas is controversial, especially among environmentalists. Although the technique – which involves extracting the gas by blasting the shale rock layers with high pressure sand, water and chemicals – has been known for a century, it is only in the past decade that it has become economically and technologically viable. But many fear that such "fracking" causes subsidence and contaminates ground water, and it has been banned in France, Switzerland and some US states. The recent discovery of shale gas deposits near Blackpool has also prompted calls for a UK ban.

The Green movement also fears that new, and exploitable, supplies of gas could reduce prices to the point where investment in alternative energy sources, such as wind and wave power does not make economic sense.

In Poland, however, the exploitation of shale gas is well on the way to becoming something of a national mission. Poland's Prime Minister, Donald Tusk (below), has described shale gas as his country's "great chance" to turn Poland from an energy importer to a major exporter within a generation. And the subtext for Warsaw is that shale gas could not only make Poland into an exporter, but also end its age-old energy dependence on Russia.

With a general election on 9 October, Mr Tusk's ruling party is already capitalising politically on the issue and has published a four-year programme, which promises, among other things, the creation of a special fund for the proceeds from shale gas, to be used to pay future pensions. It may not be coincidence that this month the Polish energy conglomerate, PGNiG, torched the first flare on one of its rigs at Lubocino in the north of the country. Commercial shale gas production is projected to start in 2014. Not least because his is one of the few governments in Europe to escape the effects of the financial crisis, Mr Tusk's government is confidently expected to be re-elected.

Not everyone, though, shares Poland's enthusiasm for shale gas. For obvious reasons, some of the fiercest critics are to be found in Russia, which cannily cast itself among the eco-warriors at the economic forum in Poland, playing down the economic repurcussions.

Poland and Russia have had a difficult relationship, albeit one that has recently undergone a modest improvement. But a Poland that became self-sufficient in gas would take quite a chunk out of Russia's exports. And if Poland became a net exporter, other markets – Ukraine, the Baltic States and others – could also be lost to Russia. The entire business model of Russia's mega-conglomerate, Gazprom, would be called into question.

In fact, to an extent this is already happening. Almost without anyone noticing, the European gas market has been changing, and not in Russia's favour. When Ukraine stopped the flow of Russian gas westward in the winter of 2009, a combination of existing European contingency plans and emergency cobbling-together soon replaced almost 90 per cent of the gas that would have come from Russia. This showed both Russia and Ukraine that their leverage was not what it once was.

There is also more gas on the market. Britain, where the Russia-Ukraine crisis served to highlight the dearth of gas storage, now has a state-of-the art terminal for Liquefied Natural Gas at Milford Haven. And reduced demand for imported gas in the US, thanks to the development of shale gas there, has increased stocks of LNG for delivery elsewhere. Even if Europe is not experiencing an actual gas glut, it is no longer threatened by a shortage.

The opening of Nord Stream adds a further dimension. With the potential to increase reliability of supplies and keep prices down, it can be seen as enhancing Europe's, and more particularly Germany's, energy security. This is why Berlin has always been enthusiastic about it. But it can also be seen as part of Russia's post-Soviet energy strategy – which is why Poland and Ukraine, as transit countries, have been so hostile to it. They feared being left – literally and figuratively – out of the loop, with no transit fees and no leverage. Shale gas comes, for Poland, as a form of salvation.

Whatever reassurance the opening of Nord Stream offers Russia, however, the prospect of competition from Polish gas within Central and Eastern Europe can hardly be welcome either to Gazprom as a company or to Russia. And as Poland dreams of untold wealth and power from gas exports, Russia faces a nightmare combination of lower prices and fewer customers.

So far, the cognoscenti quip, Poland's shale gas is 10 per cent gas and 90 per cent politics. Even if its reserves are as high as hoped, that balance will not necessarily change. But the politics and configuration of Europe's gas market will both be unrecognisable from today.