Economic Realities Facing Shale Gas in Europe
Specifics Under the Microscope
While recent events in France have focused Europe's nascent shale gas community on political and environmental aspects, exploration and development continues in other parts of the continent.
At the recent Shale Gas Eastern Europe 2011 in Warsaw, four experts in a roundtable workshop to discuss the economic realities of unconventional gas in Europe.
One question posed was whether there would be a change of ownership in the shale gas acreage in Poland?
The General Manager of Talisman Energy Polska Sp. z o.o., Tomasz Maj said he honestly didn’t know, explaining that it was a gradual process of weeding out the smaller players in Poland.
“The process of development is extremely expensive and you’ve got to have deep pockets,” he said. “It’s going to take 2-3 years. Once plays become de-risked, we’ll see a second wave of the big European utilities coming in, with deep pockets, and a different view of the costs of capital. I do see there being changes in ownership, and quite a heavy churn over next 3-5 years.”
Marek Karabula, Vice President for Oil Mining at Poland’s PGNiG added: “Definitely we have some big guys and I hope they are willing to stay. Developers came here to sell, not to stay. There will be some transfers. It’s not as complicated as in the US.”
RAG Rohol-Aufsuchungs AG’s Hans-Jurgen Handler, Area Manager of Poland said he shared those opinions. “We’re at a very early stage,” he said. “The task now is to de-risk and this will be the job of smaller companies. From a strategic view, plays can be developed economically. Smaller companies will be out and larger companies will be in to develop. (Read Poland Giving Away Gas Riches HERE)
Conference Chair James Elston, Director of Palladian Energy Consultancy asserted he thought there was a possibility for utilities to earn quite higher returns for not that much risk, compared with investments in conventional oil and gas which, according to him were much more binary. (German utility RWE has since been reported as showing interest in Polish shale - Read HERE)
“Being or becoming an authorization for expenditure (AFE) ‘blackbelt’, like Talisman is a key challenge for shale players; bringing costs down, attacking them from day one. The completed well cost estimates in Poland are quite inflated: $14-15 million according to some sources. My guess is you could do it for significantly less than that. And vertical wells to date have cost of $5-6 million”
Vice President of Strategic Planning, Al Holcomb recalled that his Lewis Energy Group was handling big price collapse in 2008 and how things turned around via shale.
“We’re a private company focused in South Texas, and were primarily drilling some tight resource plays we’d been working for a long time, and we were not shale players,” he explained. “The price collapse surprised us, we were bullish and failed to see what it would do to demand. We did not see the shale gas revolution and how it was bringing on new reserves at the same time. It was a tough moment for us. We were drilling horizontal wells but hadn’t started using hydrofracks. Our production curve was poor and we were nervous.”
Then, said Holcomb, Lewis Energy began using hydrofracks in a shallow tight formation which had liquid rich gas.
He continued: “This allowed us to become familiar with using hydro frack technology, which was easier than for a shale well and it worked well. Secondly, we sold some of our older production. As prices were collapsing, we still got a pretty good price for it. Third, the Eagle Ford play emerged right in our own back yard and we happened to hold 300,000 acres in the play. This put us in a big, emerging shale play, without having to pay premium prices.”
Fourth, Lewis was lucky enough to enter a JV with British Petroleum, said Holcomb. “They liked our position and we sold about 100,000 acres for a bout $200 million.”
He reported that the company was shifting its drilling schedule to include more liquid rich wells, and in the Eagle Ford as well, as liquids prices have held up compared to natural gas. “With a liquid rich well you get that additional liquid component selling at a good price.”
“We work hard at this black belt approach, trying to cut costs. We’ve been a low cost operator, and also have our own drilling rigs, we do all our own side roads and post production work. We acquired frack fleets, we’re doing it ourselves and this helps us control costs on our wells. That was a big step for us,” Holcomb concluded.
Indeed, it was easy to lower costs when one had their own operations, according to Hans-Jurgen Handler, who said “We need to have an established base of activity. Money matters, but it’s more about gaining information and what’s the value for my future development. What will the level of continuous activity be – when it’s constant, you have a learning curve for comparison.”
“If there’s a break, what do you do with all these activities, all the services?” he queried. “How can we manage the cost, if the activity is fluctuating? We’ve managed this in the past but we know from a few years ago that when the oil price was low, we shut down drilling rigs.”
He added that RAG used a modular step approach with containerized equipment.
“When looking at our company, we used to have one general contractor providing all the services,” explained PGNiG’s Marke Karabula. “Now we are actually changing our philosophy. It is simply better for us to look at every stage of drilling separately and put pressure on every step we can. Our guys have international drilling experience. The second problem is the frack and then the completion. Technically speaking we are okay but we are looking at the costs.”
Regarding the costs of drilling in Poland, Karabula contended that players needed more information disclosed by US companies. He explained: “When I try to get some deeper knowledge, I get nowhere. Now fracking fluids are public domain. We need to be more open about the costs in Poland. If you try to make too much money on Poland we are going to kill the chicken.”
Talisman Energy Polska’s Tomasz Maj noted how in the US costs had come down. “Talisman in the Marcellus shale became fairly black beltish and we hope to repeat that in the Eagle Ford. The gradient to the slope in Poland is full of unknowns. We need more rigs, better rigs and there’s also a shortage of manpower. We’re in the process of bringing some of those talented Poles home who left about 10 years ago.”
He explained that for a long time the press he been reporting that shale gas was something to think about in 10-15 years’ time, which he said was nonsense.
“The issue now for us is Poland will hopefully mirror the experience of North America and progress will be very rapid, and we will produce some quantity of gas in 3-5 years. This triggers a debate about the need for infrastructure, clients for the gas, the future of the power industry in Poland – instead of a mañana type approach, I sense there’s discussion, which is hugely positive.”
Marek Karabula offered a plea of sorts for cooperation in Poland. “Don’t wait for me. I’m not going to drill another 15 wells and provide you all this information, but support me. I cannot be on my own, I need your support. Make competition, make tenders and drill, drill, drill. We are waiting, we have the capabilities, have the capacity. I can do it at competitive rates.”
“If everyone has a serious answer – it’s all about expectations and assumptions,” concluded Hans-Jurgen Handler. “Maybe we have some advancing knowledge – we will be technically ready in a few years’ time, which means we will have tested and know the technology to produce in an effective way.”
He added that the big question that remained for participants at the conference was how they could get access to local people, and assuage their fears, otherwise shale gas would not be accepted in Europe.
“It’s about how to have as little impact as possible to nature and show locals that our activity is to their profit as well.”