Demand: Good News for Shale Gas

Davide Calcagni, Vice President of Unconventional at Italy’s oil and gas firm ENI S.p.A. had a number of “good news items” for delegates at the European Unconventional Gas Summit in Krakow, Poland: conventional gas was declining, each government wanted gas to secure electricity production, and a more balanced energy mix and reduction of emissions.

With those factors top of mind, his talk was focused upon future gas demand in Europe and what that meant for the development of unconventionals.

“We know that the demand is growing, but there are many factors that play a role in how the gas market will change in Europe,” he said.

Mr. Calcagni spoke of the EU’s “20/20/20” targets for reductions of 20% of greenhouse gasses and implementation of 20% of renewables by year 2020. He said he thought it would have a great effect in the next decade, especially for demand.

“Sooner or later it will affect all the countries that are leveraging on the production of electricity with coal, because it won’t be suitable for producing electricity.

“Renewable sources are intermittent in the way they are producing,” he added. “Regarding nuclear, we know what’s going on in Japan and at least one third of the nuclear power stations will be shut down. Different sources will fill in for that, which means that gas is likely to play a role in the situation that’s opening up in front of us.”

According to Mr. Calcagni, unconventional gas in Europe would not play the same role of ‘price cooler’ as it had in the US as Europe was much more fragmented.

He recalled, “Since 2004 when we had a peak in conventional gas production from the North Sea it is now quickly declining and opening up a gas demand that is quickly becoming massive. The first answer to that demand is import. 

“We don’t feel that even in the latter case, that unconventional gas will represent a solution for European gas demand – probably complementary, but not filling in the gap.”

He said the scenario could be completely different if Europe was looked at on a country level.

“We know that gas import is set to grow,” explained Calcagni. “Europe is already importing 65% of its natural gas and if you look at the projection, it will continue.”

He continued: “In the last three years we’ve had 12 major events drastically changing the scenario. It seems that we are accelerating the changes, making it less predictable and changing the profitability. One thing is clear that Europe will need about 80% of gas imports to meet demand by 2020.”

The competition with Asia, he noted, had had an effect, with Europe paying three times the Henry hub price. 

“The fact that there are huge reserves in Norway, Russia, and North Africa is coming back,” said Calcagni. “These governments will need to establish a cash flow very quickly. And LNG is coming back: Qatar is bringing LNG into the European market, and it’s likely to play a significant role.”

It was a competitive scenario, he said, that competition on unconventionals was set to grow. 

“That will trigger mergers and acquisitions activity,” he said. “We have impact factors that can influence the evolution of the gas business. It’s important that exploration be successful.

“The advantage is that the time to put a shale gas asset to market is definitely quicker, so this is a positive,” added Calcagni, who touched upon the capability of operators to produce at low costs.

He said the presence of governments to put together a regulatory framework was of utmost importance.

Surveying the situation around Europe, he made his observations.

“Poland is the hotspot, and Germany has potential for CBM. In the UK shale gas is accepted but lacks materiality. Romania has limited activity; Hungary has tight gas but not too much at the moment. In the Scandinavian region it needs to be proved.”

Calcagni said: “Proving it in Poland will make everyone confident about the profitability of shale gas.”

“Shale gas has a high resource potential. It’s important to have access to very large acreages,” he said. “The presence of infrastructure, markets and an efficient supply chain, as well as the existence of a regulatory framework are all crucial.”

Adaptation and innovation, he said, were also important. 

“Shale gas projects must be quick lean and effective,” said Calcagni. “It is a capital and operational intensive business, and it’s mandatory to reduce the operational footprint. You have to pre plan this at the early stages. The margins are coming but only if these are in place.”

He said that ENI was ready to learn by doing, and was going very swiftly up the learning curve.

He noted the sustainability challenges in shale gas exploitation, with the need to focus on the acreage with the highest potential. 

“It will become only become reality if operators are able to produce at low cost,” Calcagni said. “If these are not proven, the future of shale gas is uncertain. 

“The public acceptance, capability and willingness of government in establishing incentive frameworks and competition of conventional gas import and the coal lobby – these are the main factors that are playing against the success,” he said.