Chevron Optimistic on European Shales

Can European Shale Gas become the next “game changer”?

That was the question posed by John Claussen, Poland Country Manager of Chevron Polska Energy Resources, who did not give a definitive answer – but remained optimistic at Shale Gas Eastern Europe 2011 in Warsaw, Poland.

In late 2009/early 2010, Chevron acquired four shale gas exploration concessions in its first entry into shale gas exploration in Europe – Zwierzyniec, Frampol, Krasnik and Grabowiec, in the Lublin Basin.

“Let’s compare what we’ve seen in North America and contrast it with what’s here in Europe,” he suggested. “We’ve heard the term game changer, and if that’s the case in Europe, the answer is ‘maybe’ if the resource is there. Europe will have differences from the US experience,” he said.

Claussen said there were similarities, for example, in terms of the timelines: “It could be years.”

“A desire for energy security and a diverse energy mix is common,” he continued, “along with concerns for water, communities and the environment, which can be addressed via the availability of proven technologies and operating best practices.”

Differences, however, were also apparent between the continents, things like the diverse shale basins and hydrocarbon resource potential.

“We’re here because we’re optimistic. The gas business is very different here,” he said of Europe, adding that there were questions over available rigs, equipment, and skilled staff, as well as interstate pipeline infrastructure.

Showing a map of the US from the Energy Information Administration (EIA), he said that over 20 established shale plays existed in North America, where over 20,000 wells had been drilled.

“There’s a lot of information related to the potential resource size,” he said, citing 150 billion cubic meters for 2010 production. “Europe won’t have to repeat the learning curve, but there will be some other things to deal with.”

Claussen said that in Europe 10 shale plays had been identified, and 10 exploratory wells had been drilled thus far. “We’re about three years down the road,” he said. “It’s early days.”

One of his presentation slides pointed out “North America was a 30-year overnight success.”

“The development of that resource play took a lot of effort,” he said of the Barnett shale. “The first Barnett well was in 1981. In 2000 there was a significant increase in the gas price in the US, and in 2003 there were significant improvements in fracking technology and horizontal drilling - then there was a rapid increase in activity as a result.”

What about Europe? he asked.

Claussen said the quest for shale gas in Europe had started in about 2008, and that actual production would take 10-15 years. “But some of the difference we’ll see is that the technology is already developed. A few tens of rigs were available in Europe last year, but we’re starting with a different level of activity.”

The gas business environment is another difference. “The US had in 2000 a single pricing mechanism and an active futures market. Also it had over 300,000 kilometres of interstate pipelines, a single regulator and open access with only 14% of imports to the market.”

Europe, he said, was not yet working as a single market, with 70% oil-linked contracts, and only 58 BCFD of interstate connectivity. It was developing open access, said Claussen, and had emerging hubs. But there was a lot less trading activity occurring in Europe, he pointed out.

“When you look at the size of the prize, of the potential, it could be significant, and that’s why we’re here,” Claussen said of Chevron and others.

“Probably over 8 million acres have been leased,” he continued. “Chevron has 1.1 million acres in four licenses,” he said.

What might happen in Europe if there was a shale gas boom? What to consider going forward? Claussen showed a global gas model from Wood Mackenzie.

“North American costs are generally lower, and costs in Europe much higher at the moment. We had to make some assumptions that there was open access to pipelines. If there was gas produced, there was no limiting factor in terms of access to pipelines, that it was an efficient market and that there was access to service companies.”

Claussen explained: “We did this for Poland, trying to assume a reasonable size of production that has some optimism. We allowed the market to take that gas and for production to increase. We assumed there were markets that would take that gas, what was in excess of what Poland would need.”

It was a question, though, whether or not the market could take that supply earlier than 2016.

“In the later years, there would be a significant market delay. Cost will be a feature in how quickly gas can hit the market,” he said.

Claussen said that if the market could accept large volumes of gas, a boom in production could have far-reaching effects in Europe.

He explained: “It could catalyze stakeholders to address pipeline interconnectivity, reduce gas imports, influence the pricing mechanism and facilitate convergence of US and European shale gas costs.”

He said it could also aid in the creation of a continental hub(s). “If the gas is available there will be other opportunities for the use of natural gas.”

Claussen reported that Chevron had opened an office in Warsaw, and was expected to open an office in Bucharest this year. He said the company’s values were a top priority in Europe.

“We have a commitment to protecting people and the environment. Chevron is a leader in safety and environmental performance. Globally we prepare an environmental social and health impact assessment for all phases of work, a process which continues throughout the lifetime of a project,” he explained.

“In Poland, we’re attuned to the challenges of water resources, waste disposal, and environmentally sensitive areas. Engaging communities is vital,” he said. “They’re the touchpoint of where our people operate.”

Claussen continued: “Acceptance of our company and the support it is receiving in Poland has been overwhelmingly positive. As you saw we’re preparing for drilling later this year, so we’re just starting engagement. Communities are the touchpoint, as I said, and we intend to talk to them, engage them and get their thoughts and understanding, we’re going to give people the opportunity.”

He made mention of Chevron’s activities in the Lublin Basin in Poland, describing 2D seismic that was being shot and said that exploration drilling with NAFTA Pila was set for the fourth quarter of 2011.

“It’s anybody’s guess,” he said, addressing the question of whether shale gas would be a game changer in Europe. “We’re here because we’re optimistic it will have a significant impact on Poland and the other areas we’re interested in.”