Replicating the Shale Gas Revolution: Getting Real
Just how realistic were the prospects for Europe to be able to replicate the shale gas revolution in the United States? That was the question that Professor Paul Stevens, Senior Research Fellow (Energy) at international affairs think tank Chatham House, attempted to answer.
His diagram showed both proven resources and what he said was a lovely expression, technically recoverable resources.
“Which basically says nothing about the economics, price costs, environmental issues or community reactions to it,” Prof. Stevens commented.
“One of the first things I discovered about shale when I started to investigate it three or four years ago, is that the definition of a fact is anything that appears on the Internet is 83.42% of statistics are made up on the spot,” he quipped. “So it’s actually quite difficult to get hold of hard information on this.”
Still, he said there was clearly actual shale gas resources in the European context.
“The methodology is based on a report I published for Chatham House in September 2010,” he recalled, saying he was in the process of updating that report. “Since then, a great deal has happened, but not a lot has changed.”
He said his methodology was simple: Prof. Stevens had created a checklist of why the shale gas revolution had occurred in the US: “What we’re the drivers, factors in the US and then ask to what extent these conditions can be replicated.”
“The geology in the US was extremely favorable. My geologist friends tell me ‘in Europe the rocks are very different,’” he explained. “The shale plays in Europe are deeper, more fragmented, smaller, less material and tend to be clay rich; if you think about the concept of fracking, then the more brittle something is the easier it is to fracture it.”
Stevens noted that ExxonMobil had come out with a statement in March, basically saying that the formations in Europe were not working in the same way that they were hoped to in terms of the drilling techniques that had opened the reserves of gas and oil from Texas to Pennsylvania.
He commented: “The crucial bit of this quote is ‘new methods and tools will need to be invented.’ The reason why I advertise that is to say basically the people doing the R&D have to start all over again. The crucial part of the shale gas story in the US was the fact that the US government put millions and millions of dollars into R&D into low permeability operations over the course of a very long period of time and the results of that R&D were then made available.
“Now the question in my mind,” said Stevens, “is who’s going to fund that R&D in a European context?”
The previous day, he reported, the European Commission had released a message in which it had said it was the industry’s responsibility. “But traditionally, major R&D tends to be funded by governments rather than private companies – it goes back to a long argument about where research money comes from, but nonetheless I have some doubts that we will be able to see the sort of funding for R&D in Europe that may be needed.”
Another big difference: Prof. Stevens pointed out that in the US unconventional plays tended to be above or below conventional plays.
“There’s a huge amount of drill core data in the US to help the geologists when they’re trying to find those sweet spots. In most of Europe, that doesn’t exist,” he explained. “In fact, a year ago I was talking to some of the operators and they were saying that they know somewhere in Poland there is core drill data that would be really useful to them in trying to establish where the plays are, but nobody knows where they are. They’ve been sort of lost, as it were. So this, again, is another problem.”
He also mentioned problems with the regulatory framework in Europe: “Nowhere is unconventional oil and gas even mentioned in the legislation. I don’t want to make a big deal out of this, because it’s not terribly difficult to create certain regulations. In Pennsylvania they had to re-do the regulations; all you need to do is get a bunch of lawyers in the room, throw a lot of money at them and low and behold you will get a regulatory framework. The point is, it takes time to do this.”
Traditionally, he said, in Western Europe when onshore exploration had been undertaken, it had been on small areas with fairly strict work programs.
“If you’re going to run a shale gas operation you basically need large areas and very flexible work programs, so that particular aspect is likely to change,” he said.
Not to forget about the stricter environmental regulations in Europe, according to Prof. Stevens, especially when it came to water issues. He was able to come up with yet another obstacle.
“Finally, outside of Hungary there are no tax breaks. An important part of the story in the US was the fact that in the 1980 Energy Act there was a very generous tax subsidy for unconventional oil and gas, amounting to about 50 cents per Btu at the time when the gas price was $2-2.50, so it was a considerable incentive for people to go and start thinking about unconventional gas. That came of in 2002, but nonetheless it was an important part of the story.”
Another important issue was that North America was a commodity supply market where pipeline market was accessed by terms of common carriage. “What this means is, it is very easy in the United States to sell gas. At the moment you have a supplier market, a lot of buyers, a lot of sellers, you have good transparency and therefore knowledge about gas prices.
“Because the pipeline network operates on the principle of common carriage, if I am a gas producer in the US I can go to my local pipeline company and demand access and I will get access – not necessarily all I want – because if the pipeline is full, other users of the pipeline have to reduce on a pro rata basis, making some room for me.”
He said, that in Europe, by contrast, there were relatively few sellers and buyers of gas, little transparency and access was via third party access. If the pipeline were full, a gas producer might have to build its own pipeline.
Or, just take the limited capacity of the service industry in Europe: take the number of drilling rigs in the US versus in Europe: “In the US there were a lot of mom and pop entrepreneurial operations that used the dynamic and competitive service industry to do the work for them.
“My favorite statistic,” he said, “comes out of the Barnett play. In 2008, at the height of their operations there were 199 rigs drilling; last month in Europe there were 69 land rigs and 24 of those were in Turkey. If shale gas becomes profitable, people will go out and build rigs – markets work, markets respond. But you have to think in terms of the time factor here. What is the lead time on building a rig? To go from 69 to 199 is going to take quite a few years.”
He continued, “Access to water is also an issue, although for me one of the most fascinating things about the shale gas revolution in the US is the peed of technological change that has been really dramatic. In particular the amount of water that is needed for fracking has been reduced significantly and the number of times you have to frack has also been reduced.”
Prof. Stevens also gave mention of environmental concerns in the US, that the “Cheney-Halliburton loophole” in the 2005 Energy Act had excluded fracking from the EPA Water Act. He said that this meant a lot of shale gas operations in the US had not had proper environmental impact assessments. “And of course now it’s too late, because if you’re going to do an impact assessment you need to start with a baseline; if you don’t have that and you start operations you can’t do a proper assessment.
“As the water comes back to the surface it could be contaminated with a certain degree of radioactivity – now that may be so small as to be silly and trivial. But I can assure you, certainly in the Western European context, nothing like a little talk of radioactivity to stir the horses. People are concerned about that.”
He said that when the environmental impact assessments in America started to produce a lot of results, fracking would probably receive a clean bill of health. “My understanding is, that many of the problems associated with it are to do with poor well completion rather than with fracking itself.”
Property rights, of course, were another major difference between the US shale landscape and that of Europe. Landowners offered huge sums of money in America were much more willing stakeholders than citizens in Europe.
“If you come to me and I’m a landowner in the Marcellus and you want to ‘mess up my backyard’ to look for shale gas. I would say ‘with great pleasure. Here are my bank account details, because if you find any gas, it’s mine.’”
When benefits went to the state, there was a different response, Stevens said.
“Shale gas will eventually play a role in European energy,” he offered. “The key word is eventually. “The prospects of any major impact within the next 5-10 years have been grossly oversold – it’s simply not going to happen. If we’re going 15-20 years out, I think it becomes a very different story.”