BMI View: The recent appointment of Ségolène Royal as the Minister in charge of ecology, energy and sustainable development further underpins our view that we are unlikely to see a shift in government policy on fracking in the short-term. That said, we maintain our view that given the energy security needs of France and the macro-economic realities facing the country, the current ban could be revisited by future administrations.
A massive cabinet reshuffle has seen Ségolène Royal named the new head of France's Environment, Sustainable Development and Energy ministry. This move confirms our view that despite the attempts by President François Hollande to rebrand his administration as more business friendly, the country's policy on fracking is unlikely to change in the short term. That said, we also maintain our stance that we could see the country's current ban on the practice lifted in the future given both the benefits to energy security and promises by the government to reduce the proportion of energy derived from nuclear power.
Little Scope For Immediate Policy Change
We see little chance for any immediate changes to France's current policy on fracking in the wake of the appointment of Royal as Minister of the environment, energy and sustainable development. Namely, we believe Royal's selection represents an attempt to soothe some of the friction between Hollande's Socialist Party and the Green Party in the wake of the recent cabinet reshuffle which saw the appointment of Manuel Valls as Prime Minister. Specifically, as Valls is a somewhat polarising figure on the left, we see Royal as meant to act as a concession to the Greens given her more left-leaning policies, including her strong anti-fracking stance. While her appointment is unlikely to fully bring them back into the fold, it may help Hollande's party to carry the Green Party's support in some of the important tax votes coming up and keep them from completely shifting alliances. As such, this suggests that even in the wake of the poor results obtained by the Socialist Party in the recent local elections - the catalyst for his decision to shift his party's rhetoric toward the centre - we are unlikely to see a change in his position on fracking, as it would risk further driving away the Greens.
Longer Term Policy Change Looks More Likely
However, while fracking is currently banned in France, a position reinforced by an October 2013 ruling by the Constitutional Court ( see 'Ruling Latest Obstacle To Stalled Shale Gas Efforts', October 14, 2013), we remain unconvinced that this position will remain unchallenged over the medium term.
|Europe - Technically Recoverable Shale Gas Resources, tcf|
In this regard we note that earlier this year, the Minister for Industrial Renewal, Arnaud Montebourg, had endorsed the use of fluoropropane for shale gas extraction. Specifically, the Minister indicated that he would back a proposal to allow local governments to individually decide whether to allow fracking using an experimental 'clean' technique, which would use very little water and rely on the injection of fluoropropane instead of injecting the mixture of chemical, water and sand. While he found himself largely isolated within the government, this represents a first significant 'crack' in the Hollande administration's strong stance against the practice.
Moreover, we see several factors which support a potential move towards unconventional shale gas exploitation in the future:
First, we believe that over the medium term the country will come to increasingly rely on natural gas as an alternative to nuclear power. This suggests we are likely to see an increased desire for domestic production of gas, both to constrain energy costs in the country and ease France's import burden. Earlier in his term, Hollande promised to reduce France's reliance on nuclear energy from around three-quarters of the power mix to just 50% by 2025. While our Power team continues to believe that Hollande will backtrack on the scope of his ambitious promise, even a more moderate shift is likely to see the country turn to natural gas-fired power given the lack of viable and cost effective alternatives. Namely, despite promises to put renewables centre stage, their costs and the fact that renewables may not be sufficient to take the load that would be required means increased potential for natural gas reliance.
Second, the desire for greater energy security could act as another factor supporting the development of its unconventional resources. Despite its sizeable resource potential, with the EIA reporting that France holds as much as 3.6trn cubic metres (tcm) in technically recoverable shale gas, the country continues to rely on imports to meet domestic demand. Indeed, the country is currently one of the region's largest importers of natural gas, at 45.2bcm in 2012. However, recent events in Eastern Europe have driven home the potential danger of such exposure. Namely, while less reliant on Russian gas than its Eastern European counterparts given France's ability to import in LNG, the country still sources more than 15% of its gas from Russia, such that we could see greater support for some domestic exploration in the medium term.
|Not The Most Exposed, But Still Vulnerable|
|Europe - Pipeline Imports From Russia (bcm) and Percentage of Total Pipeline Imports|