BMI View: Given policy uncertainty, the likelihood of sustained opposition even after the outcome of the election and the questionable economics of gas-fired power generation, we continue to see a number of challenges to the near -term progress of shale gas exploration and production in Germany. However, with its sizeable potential and growing support from politically influential corners, we may yet see a more supportive policy in place. Nonetheless, we highlight even with a new framework, the outlook for shale gas remains uncertain.
T he German government will delay plans to regulate hydraulic fracturing (fracking) until after its elections on September 22 . In February, the government released a draft bill which would have imposed tight limits on the practice but still allowed its use in tapping the country's potentially sizeable shale gas resources ( see, 'Fracking Advances But Uncertain Outlook Endures,' March 13 ) . According to a 2012 report from Germany's Federal Institute for Geosciences and Natural Resources, technically recoverable shale gas resources could number between 0.7 and 2.3 trillion cubic meters (tcm) .
After initially allowing shale gas exploration to move forward, rising concerns about the environment have seen the practice attract more scrutiny and generate more controversy. Po licy regarding the practice has been ambiguous ; there is growing opposition at the local level but strong support fro m influential industry bodies eager to see the country's energy bills reduced , and a trend toward growing openness to fracking in Chancellor Angela's Merkel's ruling centre-right coalition - comprised of the Christian Democrat Union (CDU) and Free Democratic Party (FDP) - since the defeat of a national ban in December 2012.
However , the new momentum that fracking gained in recent months seems to have stalled . The decision to postpone a policy surrounding it until after the election underscores the controversy the practice has generated in the environmentally -conscious c ountry. A number of states governed by opposition parties such as the Greens and Social Democratic Party (SPD) remain firmly opposed to the practice. Further , with the SPD and Green s comprising a majority in Germany's upper house of parliament, a fracking law would struggle to advance without provoking a political fight ahead of a national vote.
|Consumption Falls On Efficiency Gains But Imports Remain High|
|Germany Natural Gas Consumption, Production & Net Exports*|
With domestic gas production waning and growing fears that high energy bills will damaged the competitiveness of the German export machine, the odds for an eventual advancement of national legislation in support of fracking seem to have improved. Nonetheless, this is still extremely uncertain given political and environmental opposition. Indeed, a recent report from the SRU, a government environmental advisory council, warned that the risks of fracking outweighed its potential rewards. The SRU also concluded that additional supplies of gas were unnecessary and that investment should instead be channelled into wind and solar power.
While environmental advocates may question the benefits of new sources of gas that fracking could unlock, German utilities may also increasingly question the economics of new gas power plants under the current pricing environment. An abundance of cheap coal and carbon permits, alongside generous tariffs and subsidies for renewable energy have seen the profitability of gas-fired power generation collapse in recent years. This is highlighted by the growing divergence between the spark spread (which denotes the marginal profit from gas-fired generation) and the dark spread (denoting the marginal profit from coal-fired generation) in Germany, with the spark spread falling further into negative territory.
|Gas Fails To Spark Profits|
|Germany Spark Spread & Dark Spread (€/MWh)|
With only limited exploration and appraisal of Germany's shale gas potential to date , any commercial production would likely be years away. Given the setbacks to shale gas exploration in Poland and Ukraine, we note that even with supportive policy and industry investment, geology and infrastructure remain potential threats to early production . Moreover , the threat that local or state governments would independently introduce efforts to further obstruct fracking could undermine the attractiveness of Germany's shale gas exploration and production (E&P), given the draft federal regulations themselves were already tight.
However , with softening attitudes towards fracking in Europe, spearheaded by the UK as it end ed its fracking moratorium and mak es a big push to extract shale gas, we expect industry heavyweight s such as ExxonMobil , who have previously committed to big investments in Germany , will be closely watching political events in the country.