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U.S. shale gas revolution throws down the gauntlet to Europe

By Alexandra Hudson

MUNICH (Reuters) - The United States is enjoying an energy bonanza thanks to shale gas, making it a magnet for industry, reducing import dependence and challenging Europe as it battles to dig itself out of recession, energy officials say.

Panelists at a weekend security conference in Munich warned Europe must develop a strategy on how to tap its own resources in order to keep energy costs competitive, or risk seeing power-intensive industries locate elsewhere.

"The shale gas and oil boom is already underway. As Europe continues to debate it, North America is reaping the advantages," said Jorma Ollila, Chairman of Royal Dutch Shell .

Just a week ago Shell signed a $10 billion shale gas deal with Ukraine - the biggest contract yet in Europe - which could help Ukraine ease its reliance on Russian gas imports.

Ukraine is said to have Europe's third-largest shale gas reserves at 42 trillion cubic feet (1.2 trillion cubic meters), according to the U.S. Energy Information Administration.

Its reserves are dwarfed by those of France however, estimated to be Europe's largest at 180 trillion cubic feet.

France has banned the procedure, known as fracking which is used to extract shale gas and which involves pumping vast quantities of water and chemicals at high pressure through drill holes to prop open shale rocks.

Environmentalists fear it could increase seismic risks and pollute drinking water. U.S. officials question this and say that thanks to the higher proportion of gas use the United States has had its lowest carbon dioxide emissions in 20 years.

"Observing this from across the Atlantic it is really quite remarkable that there should be a ban or a go-slow on this development in Europe, really without any facts," said Daniel Yergin, Vice-Chairman of IHS Cambridge Energy Research.

Fracking is used to produce a third of U.S. natural gas he said, showing the environmental impact can be managed.

SHALE SCRAMBLE

World energy market flows already reflect North America's scramble to exploit shale oil and gas and highlight the potential prize Europe is ignoring.

"The U.S. internal energy revolution and the radical increases in production of oil and gas have boosted gas production by 25 percent and seen oil import dependence drop from 60 percent to 40 percent, and expected to decline further to 30 percent," said Carlos Pascual, the U.S. special envoy for energy affairs.

While Europe retains deep environmental concerns it also acknowledges that with the price of gas in the United States just a third of that in Germany, its industry is already suffering the effects.

German Economy Minister Philipp Roesler said: "Many German firms have opted for (relocation to) the United States, saying energy prices were the decisive factor...We are already seeing that we are suffering with our higher energy prices…it affects our own competiveness."

Addressing the panel in Munich European Union Commissioner Guenther Oettinger said Europe should be in a position to produce enough shale gas to replace its depleting conventional gas reserves, so as not to become more dependent on imports.

RUSSIA UNAFRAID

A greater abundance of gas could threaten the dominance of Russia's gas exports and pressure prices. The United States seized Russia's spot as the world's largest gas producer in 2012, and is due to produce significantly more from 2015.

"I believe that the shale revolution is something positive, a chance for all of us to launch technologies, intensify competitiveness, make our countries more energy secure, and reduce costs," said Russian Energy Minister Alexander Novak.

Russia is focusing on boosting exports to energy-hungry Asia and developing infrastructure to transport gas eastwards.

A recent confidential study by the German intelligence agency (BND) suggested the United States could turn from being the world's greatest energy importer into an oil and gas exporter by 2020, reducing its dependence on the Middle East and thereby giving it much more freedom in policy making.

China by contrast would become much more dependent on Middle East oil to fuel its rapid expansion.

Illustrating just how rapidly the shale revolution has taken hold, shale gas accounted for just 1 percent of gas production in 2005, whereas today it is a third, and by 2040 it will be 50 percent, U.S. special envoy Pascual said.

"Developing a greater capacity to reduce import dependence does not diminish our commitment to stability," he stressed.

"It will not affect our engagement for global security, peace and security in the Middle East."

(Additional reporting by Andreas Rinke; editing by Keiron Henderson)

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