Exploring European shale gas development

Exploring European shale gas development: A Transaction Costs perspective

Huijsmans, M.P.

Correljé, A.F. (mentor)

Technology, Policy and Management

Economics of Technology and Innovation

2016-06-27

The rise of shale gas production, has been the greatest revolution in the U.S. energy landscape since WWII and it is argued that market governance facilitated the process. This study analyses the feasibility of EU shale gas development. The publicly available shale gas analyses are inconclusive about the impact of future market design on shale gas feasibility. As the current EU governance structures are expected to change under influence of the GTM, it is interesting to examine whether they fit the prospect of EU shale gas development. The aim of this thesis is to gain a better understanding regarding the feasibility under EU future gas market design, by analysing the alignment of shale gas transactions and GTM governance structures. TCE identifies the transaction attributes of EU shale gas exploitation and GTM governance structures by looking at technical characteristics and by analysing GTM key characteristics. These transaction attributes, together with GTM governance structures form the basis of the alignment analysis. A desk research is performed that applies TCE theory and compares the EU gas market developments with the U.S. and U.K. market conditions. By analysing, the degree of (mis)alignment of the shale gas transaction attributes with the characteristics of the future market design (GTM), the limiting and/or enabling factors for EU shale gas development are clarified. A synthesis of these factors provides an indication of EU shale gas cost efficiency (feasibility). Specific shale gas transactions are characterized by a stochastic production profile. This leads to the requirement of flexible and transparent trading and more complexity that needs to be bridged by balancing mechanisms. The EU gas grid is extensive and storage facilities are numerous, so required shale gas infrastructure investments are minimal. Possible new investments are characterized by high asset specificity, high costs and hold up problems. The analysis of governance structures shows that the GTM combines market governance forms to create and connect markets, with hybrid governance forms to realize security of supply and infrastructure investments. This provides trade flexibility but limits infrastructure investments. EU shale gas development has the potential to be feasible depending on the requirement of infrastructure investments and the way infrastructure investments are organized. With minimal required infrastructure investments, the most likely scenario given extensive EU gas infrastructure, shale gas can be developed and subsequently flexibly traded at European gas markets. However, if infrastructure investments are required, it is expected that shale gas producers will be hampered in exploitation, as a consequence of the hybrid GTM infrastructure investment mechanism that results in inefficient expensive long-term contracts. A deeper analysis of the required infrastructure investments (potential locations) and a better understanding of the way infrastructure investments are organized (extent of hierarchy), contributes to a robuster conclusion on European shale gas feasibility under EU future gas market design.

European shale gas development
Gas Target Model (GTM)
Transaction Cost Economics (TCE)
desk research
alignment

http://resolver.tudelft.nl/uuid:3170eb0c-d8c3-41ed-9d61-3fda6a4bf66d

2016-06-27

Student theses

master thesis

(c) 2016 Huijsmans, M.P.