3 Legs CEO: Europe - The New Frontier

Independents and O&G majors taking initiative in Europe regarding shale gas

Alex Fraser, CEO of shale gas developer 3Legs Resources Plc., described the very beginnings of the shale gas business in Europe.

In his speech to delegates at the Global Shale Gas Forum in Berlin, Germany, entitled Early Stage Shale Gas Exploration in Europe, Fraser pledged to offer 3Legs’ experiences as an independent operator in Europe.

“We’re one of a number of companies active in Europe,” he remarked, “where the industry is in its very early stages. In the US independents created a very successful industry, but here the majors are trying to develop shale gas. Poland has seen the most activity to date with players like ConocoPhillips, ExxonMobil and Chevron, among others.”

Fraser said that 3Legs was also present in Poland as well as Germany, and noted that Cuadrilla had also drilled a well in northern England.

But how to make a case for pushing forward on the development of shale gas in Europe?

He said, “We see a major plus as the strategic angle, as now we’re dependent on Russia and North Africa for natural gas.”

Fraser showed a graph depicting that while domestic gas production looked to remain a constant into the coming two decades, imports could increase by 250 billion cubic meters, mostly coming from Russia and Africa. “On current trends that proportion is likely to increase in the next decades, the uncertainty on gas supply gives governments an incentive to develop domestic assets.”

Fraser showed the audience a chart of gas prices, specifically their long-term outlook Europe. “We’ve got effectively two prices in Europe: the price traded at the hubs, $4-6 per cubic meter, and the border price at $8-9 dollars per cubic meter (the so-called ‘Henry Hub’ price). We expect that the spot price is going to trend up to the long-term price in Europe,” he said.

But in terms of the “show me the money” aspect, Mr. Fraser had a chart depicting the value of acreage at shale plays in the US over the last year. The maximum value at the Haynesville play reached $25,000 per acre, while the minimum there was around $10,000. His chart also showed how the market cap/acreage of selected shale gas drillers in the US, Chesapeake and Petrohawk, greatly outpace two operators in Europe, BNK and Toreador.

He explained, “From an investor standpoint, they’re drawn to opportunities in the US, as these companies are drawing attention on the stock market (via the strength of the investment case).” Fraser noted that the acreage prices at Haynesville had gone down since 2008 when there was much more enthusiasm.

As for 3Legs, Fraser said it was privately owned company, focused on shale and unconventional resource exploration and production in Europe. He talked about its presence in the Baltic basin in Poland with ConocoPhilips, and near Krakow, and the firm’s Baden-Wurttemberg project in southern Germany, for both of which the company is seeking farm‐out partners. He said an IPO was planned for 2011.

His presentation included a Polish concession map showing the dramatic swarm of increasing concessions and players that had entered the Polish market in the last two years. “We were lucky we got in there first in late ’07; the picture changed hugely in the East European Craton,” Fraser commented.

“The very thick, predictable section has been attracting so much interest. We think we’re in a key part of the play,” he said. “Our pay zone is in the 2500-3500 meter range. The bulk of our acreage is expected to be in a lower risk dry gas window.”

Fraser reported that 3Legs had signed a farm-out agreement with ConocoPhillips for 3D seismic and three wells: two vertical and one horizontal on 3Legs Baltic Basin acreage. “Lane Energy Poland is acting as our operator in the initial phase and we’re working to de-risk it.”

He said that in June at the Lane Energy Łebien‐1 well in Poland drilling had reached a total depth of 3100 meters in 30 days which was ahead of schedule and within budget. “We’re in a stage of analyzing the results,” explained Fraser. “The next step is likely to be a frac and a test at the end of September, beginning of October. We were quite encouraged by our achievement with Polish drilling contractor Nafta Pila, as cost assumptions in Poland tend to be a bit exaggerated.”

“We’ve carried out a seismic sheet and spudded a well there, we’ll core the well and frac and test it. It’s our long-term goal to de-risk both eastern and western sides,” he said.

In Krakow, Mr. Fraser said that 3Legs held three licenses for three contiguous blocks comprising over 600,000 acres. “We plan on drilling a vertical evaluation well and shooting some 3D seismic for our exploration program,” he said, adding that one of 3Legs targets there was carboniferous dolomitic limestone with reservoir potential.

“In Baden-Wurttemburg (in Germany) the target is Paleozoic shales in the Bodensee trough, comprising lacustrin shales and coals,” he said. “The gross thickness of the organic rich section is 100 meters. We’re currently seeking partners on those concessions as well.”

“In terms of our experience,” said Fraser, “we think that going forward we expect to see strong gas price support driven by energy security and attractive royalties and/or fiscal regimes like in Poland. The political agenda favors natural gas amongst fossil fuels -  this is likely in the UK. We may not be the US but we have access to developed markets and infrastructure.”

He added, “The market for oilfield services is underdeveloped, but we’ve been able to drill at much better costs than we anticipated. The limited availability of data – we don’t have a strong tradition of onshore exploration as in the US. In Germany it’s particularly difficult to get your hands on data.”

“Importing equipment from outside the EU can be slow, but there are some issues about certification if EU equipment is brought in to Poland. There may be issues but not something Poland can sustain against the rest of the EU.”

“It’s being argued that the political imperative to reduce our dependence on non European gas is likely to prevail when the issue of environment emerges, so this is very encouraging,” concluded Fraser.