With natural gas prices in Europe more than double costs in the U.S., Ineos Group AG has a novel solution: start fracking.
The world’s fourth-biggest petrochemical manufacturer bought a license last month to look for fuel around its refinery in Grangemouth, Scotland. That complements a deal by Ineos to import gas from the U.S., a step followed by other chemical companies in Europe such as Borealis AG and Saudi Basic Industries Corp. (SABIC) Scotland will next week vote on whether to stay in the U.K.
Producers of everything from fertilizers to plastics are looking for new energy sources at a time when options are limited. Shale exploration has helped boost supply and depress prices in the U.S. In Europe, the U.K. and Poland have embraced fracking — blasting water, sand and chemicals to harvest fuel embedded deep underground — while most of the rest of the continent, citing environmental harm, has not. The challenge has become urgent given the European Union’s dependence on Russia for 30 percent of its supplies, much via pipelines in Ukraine.
“If Europe doesn’t develop indigenous shale, then it will not have an energy-intensive industry in the next 20 years,” Tom Crotty, an Ineos director, said in an interview in London. “It’s that black and white. We will kill the industry.”
Scotland, which on Sept. 18 will hold a referendum on independence from the U.K. after more than 300 years as part of one country, may hold 80.3 trillion cubic feet of shale gas, according to the British Geological Survey. The Scottish government proposes “a cautious and considered approach” to unconventional resources, as opposed to the U.K. government’s plans to allow drilling below people’s homes and land, according to the Scottish National Party, the largest in the region’s parliament.
Scotland’s Bid for Independence
The EU faces the risk of industry drain due to lower energy prices in the U.S., Energy Commissioner Guenther Oettinger said in June. Thirty million jobs in energy-intensive industries are in peril, according to the Paris-based International Energy Agency. The bloc’s share of sales in the 3.1 trillion euro ($4 trillion) global chemicals industry dropped to 18 percent in 2012 from about 30 percent in 2004, according to the European Chemical Industry Council.
Natural gas prices in the U.S. fell from as high as $13.69 a million British thermal units on the New York Mercantile Exchange in July 2008 to $3.95 a million Btu yesterday as the shale gas revolution boosted output by 27 percent in the six years through 2013, according to IHS Inc., an Englewood, Colorado-based research firm. Prices in the U.K., Europe’s biggest market, have dropped from 87 pence a therm ($14 a million Btu) in September 2008 on ICE Futures Europe in London. The benchmark traded yesterday at 49.45 pence a therm, or more than double the price in the U.S.
EU gas output fell 58 percent between 2001 and 2012, Eurostat figures show. The conflict between Russia and Ukraine threatens to disrupt supplies this winter, echoing similar disputes that caused shortages in parts of Europe in 2006 and 2009.
Shale gas output in the U.K. and Poland won’t be enough to reverse the decline in European domestic gas production, the IEA said in June.
“We’re not developing indigenous gas supplies,” Crotty said. “We’re massively dependent on Russia, and the political instability is growing and not diminishing. All of that points to gas prices in Europe increasing.”
U.K. gas will average 52.5 pence a therm in 2015, compared with 48.2 pence a therm this year, Citigroup Inc. said in a July 14 report.
The U.K.’s support for shale exploration enabled Ineos, based in Rolle, Switzerland, to consider fracking. Other projects are hampered by national restrictions. Shale gas requires millions of gallons of water laced with acids and other additives, and environmental groups including Food & Water Watch in Washington and Amsterdam-based Greenpeace International have sought bans because of concerns about drinking water contamination.
Energy costs are reducing the EU’s ability to attract investment in everything from chemicals to steel, said Steinar Solheim, an official with the International Federation of Industrial Energy Consumers and vice president of energy sourcing at fertilizer maker Yara International ASA (YAR) in Oslo.
“Nobody will even think about investing in a new ammonia plant in Europe these days,” Solheim said. Ammonia is used to make fertilizers.
Since 2009, the majority if not all the investments to develop new ethylene projects have been outside Europe, said Elena Nadtotchi, a senior credit officer at Moody’s Corp. in London. Ethylene is a gas that helps make chemicals used in plastics and detergents.
Energy accounts for more than 50 percent of the cost of making petrochemicals, according to the IEA. Ludwigshafen, Germany-based BASF SE (BAS), the world’s largest chemical company, said it will for the first time allocate less than half of its investments to Europe over the next five years. Ineos won’t build any new facilities on the continent, Crotty said.