The Business Case for Shale Gas in Europe
Thumbs up, thumbs down, or somewhere in between?
Although low natural gas prices have recently thrown the business case for shale gas production in North America into question, that situation is likely to return to normal and the success of the shale gas revolution will no doubt continue there.
In Europe, though, basic questions remain unanswered, things like: What’s in the ground in Europe? Can it be harnessed economically? How will it affect gas prices on the European market?
In the first interactive session at the European Unconventional Gas Summit Paris 2011 , conference speakers addressed those and other pertinent questions about the prospects for shale gas drilling in Europe.
Elixir Petroleum’s Managing Director Andrew Ross offered his perspective, first predicting “violent agreement” amongst the panel members.
He told delegates in attendance that Elixir was a relatively small company with an acquisition in the East Paris Basin onshore in North-eastern France.
“We’ve seen the fundamental transformative effect that shale gas has had on the global natural gas market,” said Ross, who offered a distinction.
“With conventional gas you ask, ‘is it actually there?’ When you turn to unconventionals, ‘it’s there but how do you get it out?’ The US experience shows there’s no dry holes, but the difficult issue is the economics,” explained Ross.
He said that while the geological risk was low, knowing whether or not it was commercially developable is something that comes to light after drilling 10-20 wells.
“It’s not exploration,” argued Ross, “it’s manufacturing.” He went on to speak about the low cost manufacture of wells.
“If you’re going to set that up it’s important to take lessons from where that is actually occurring. It was an encouraging situation in the US with gas prices above $6/million cubic feet in 2007-08. Shale gas had a ‘Eureka’ moment, and now it’s a primary source of domestic gas production in the US.”
According to Ross, shale gas in the US is now having a “whoops” moment.
“Over investment to enable lease capture has resulted in an oversupply and a recent gas price weakness – can we return to a breakeven price?” he queried.
“What does the future hold in the US? Supply should tighten up by the end of 2011 and things will move into a more predictable manufacturing mode. Producers have shifted their attention away from dry gas to liquids-rich gas shales like Eagle Ford or Granite Wash,” explained Ross, who added that Europe could learn from the US experience, and there was no need to reinvent the wheel.
“Europe as a market has strong market fundamentals, an established oil and gas industry and robust historic gas prices.”
He noted, however, the conspicuous absence of unconventional gas in European policy – barely a mention.
Ross said, “It appears to be somewhat missing in the debate at the moment in the European context, but with conferences like this that’s changing.
He explained that the International Energy Agency had published 4 core factors for the success of shale gas: good geology, companies, costs and country. According to Ross, the geology has received a check, but cost gets a red tick for now.
“On balance there is a business case and it will improve with political support, and gas gathering networks. He outlined the assets, markets and risks. We need to get behind those countries that are taking the first brave steps,” concluded Andrew Ross, who offered a mobile phone analogy for the three possible future scenarios for European shale gas.
Total success, he said, would be like the iPhone, some success would equate with an old style Nokia phone, and total failure would look like a huge “brick phone” from the 1980s.
John Corben, Senior Technical Advisor at the International Energy Agency, also weighed in on whether shale gas will make it or break it in Europe, given the current outlook.
“The economics were good, but not as good now,” he said, adding that both high gas prices, and a developed and competitive service industry were necessary to rectify that situation.
“Entrepreneurs led the way,” explained Corben of shale gas in North America. “Now we see much more the longer term players, the big players are there looking at these resources for 20-30 years to come which will add a natural slowing down effect.”
As to whether there were “good” resources in Europe, Corben contended that there was some uncertainty about that, and that their accessibility was also a question; social acceptance, he said, was also a great challenge.
“The US has accepted the oil and gas industry, it’s part of the society, and there are knock on effects for the economy at large.”
He noted that shale gas exploration was happening around the world because the resources were so huge in places like Australia, China, India and Indonesia, even potentially in Latin America.
“Will some of these other places beat Europe to it?” asked Corben, who noted that unconventional drilling was not occurring as quickly in Canada as in the US, because of questions in the former over who owns the resource.
He said that the IEA projected that one third of global natural gas will come from unconventional resources by 2035. “This is resource based, risk based around the world. How much will come from Europe is a question.”
Corben continued: “The resource base is unquestionably large, but what about the quality? How does local opposition stack up in Europe compared to China in terms of the environmental issues, access to land, cost and availability of rigs and personnel? If shale gas is proven to be economic, those will follow.”
He said the cost of production in Europe could be slightly higher, or even slightly lower.
“In the US it’s only break even today. And sustainability is a growing voice,” said Corben of the sensitive environmental and water usage issues involved with shale drilling. “I have no doubt that we’ll be using shale gas in the future in Europe, but we won’t be producing in the same way, but will use less water, and fewer resources.”
“Unconventional gas has already affected Europe,” he stated. “The result of oversupply has pushed prices down. Our view is that production is unlikely to be large before 2020 and should be in the few tens of BCM.”
In concluding Corben offered a final thought: “There is larger potential in other parts of the world and if it moves faster, what could that mean for development in Europe?”
Head of New Ventures Research at Wood Mackenzie, Alan Murray offered his two (euro) cents on whether shale gas bore a robust business case in Europe, or not.
“The access situation is very different than that in the US,” he said. “It’s controlled by governments rather than private land owners. Most concessions have been licensed up, and those encouraged by higher gas prices in Europe have taken up large land concessions.”
“At this stage,” opined Murray, “there are too few wells for this to be considered a geology play, so that points to a cost reduction play.”
But then, Corben shot that idea down.
“Typical well costs are at least double and some 4-5 times compared to some of the cheapest wells. The high costs have a direct impact on the returns.”
According to him, European shale plays were offering at or under a 10% rate of return, while in the US the rate stands at 20%.
Murray said, “It’s difficult to model any large reductions in cost. There’s a shortage of onshore drilling equipment and capacity. Looking at the size of the plays it’s difficult to see that developing.”
He said there were some companies that had a business case, like national oil companies concerned with security of supply; large utility companies looking for an advantage within their broader portfolio; and smaller companies pioneering across Europe with unconventional gas possessions.
“Around the world small companies stick with it,” he explained, “driving down costs in order to get a profit and a return on their investment. They have the potential to create a solid business case in Europe.”
Murray attempted to make an overall supply case for unconventional gas in Europe.
“Europe shale plays could be expected to get to 10 TCM/year by 2020,” he said. “But we also ran an upside case if supply chain issues are eased, and costs are driven down - then we see 60 TCM, and we’d expect it to displace gas from Russia and LNG.”
Finally, Mr. Murray said unconventional gas presented big threats to European conventional gas. “How will global unconventional gas impact the European gas market? It could provide a stern competitor to European conventionals. The implications and finer points deserve a panel session of their own.”