Europe & Unconventional Gas: Where We Are Now

Europe is set to have a pretty substantial supply deficit of natural gas in less than a decade.

In a presentation at the European Unconventional Gas Summit in Krakow, Poland, Wood Mackenzie’s Head of New Ventures, Alan Murray showed the European supply/demand gap - 150 BCM of natural gas by 2020.

Then, he showed exactly where piped gas goes in Europe, explaining, “A large proportion of Europe’s gas comes from outside: Russia, Algeria and lots of other sources as well. It’s expected to continue to do so.”

He noted that contracts were being renegotiated. “These are changing times and these events have an influence on those.”

Competition, he said was where unconventional gas would have a knock on effect.

There were a number of different gas resources, explained Mr. Murray, who showed a number of them that could come into play, like in Siberia. He also mentioned the Barents Sea and deepwater potential in Norway.

“LNG would increase,” he said, “but would likely rather go to Asia, where it made a better margin. There have been huge gas discoveries in the eastern Mediterranean, which are probably too large for Israel to absorb. And obviously we have unconventionals, so I want to move on and talk about how they can compete.”

“It’s a rapidly changing picture,” he said of a map of unconventional activity in Europe. “The Bowland shale is particularly exciting; in France it’s still okay to drill wells; and there is unconventional exploration in Germany, Austria, Romania, Hungary, and Bulgaria.”

He said there was clearly the most activity in Poland.

Even in the base case, Murray said, there would be a 10-fold increase in the number of drilling rigs in Europe. “In the high case 150-200 rigs would be active in Europe, drilling about 2,000 rigs per year in 2030.”

He offered up what he said were the key factors: the cost of a well and the geology and said that a well in Europe cost about $14 million, producing about 3.4 BCF.

He showed that North American cost reductions were supporting overall industry optimism, asking “What is needed to bring European costs more in line with the US?”

Rig rates and equipment, according to Mr. Murray, were red lights.

“The fiscal terms could move in either direction,” he said. “In Poland they’re very positive. We could see Poland outsupplying the UK by 2020, which would be a very positive news story for Poland and unconventional gas across Europe.”

Mihai Tomescu, Chief Economist of Impact Assessment & Evaluation, European Commission DG ENV, admitted, “There is a role to discuss shale gas in a medium- to long term carbon budget.” 

He said that his unit had looked at the environmental issues and reported: “We have little experience with it in Europe, as it is relatively new. Not all the lessons are available for the time being. There’s a big need for information, in particular because this is a new industry, things must be communicated: chemicals, emissions, etc.”

Tomescu said there was a need for more transparency and information on unconventional gas. Shale gas, he said, was spreading very fast in Europe, with several member states having given out concessions. Commercial production was likely by 2014, according to him.

“The potentials still need to be proven, technically as well as economically. It might be buried far deeper underground than other places where it has been proven commercially exploitable.”

He noted the varying positions, from very positive, to careful to skeptical on shale gas. Mr. Tomescu offered: “I’m sure you’re aware of the law in France prohibiting hydraulic fracturing.”

“Part of growing public concern is lack of information, the complexity of exploration and extraction processes,” he explained. “Let’s not forget that there are multiple interactions with the environment. Aspects such as water, biodiversity issues, chemicals and waste management must all be looked at carefully.”

He said the interaction of fracturing fluids underground must be looked at carefully, and the accompanying geological reactions in target formations.

According to Tomescu, in certain states in the US the average number of wells drilled per year was about 2,000. “What are the cumulative risks of waste water management, as an example of some of the associated risks?”

He also posed the question: “Can tech advances happening right now outpace existing regulations?”

Among the European Community key environmental objectives, he said, was to ensure that any hydrocarbons operations, including shale gas activities, comply with all applicable and EU legislation and offered a high level of safety for humans and the environment. Tomescu added that the current Acquis applied to all hydrocarbons projects in the EU.

In terms of the European Union’s REACH Regulation on certain chemicals, Mr. Tomescu noted concerns about operators buying substances from suppliers, who had or had not disclosed their fracking fluid contents.

He added: “There’s a clear need to improve the knowledge base, improve communication and information sharing.”

That’s a sentiment shared by Florence Geny, Principal Business Developer, Global New Ventures Shale Oil and Gas at Statoil.

“Europe could have enough in the ground to be self sufficient for next 30 years,” she explained. “We don’t hear this in the media, but rather that shale gas is suspicious and difficult to extract.”

She recalled her study done at he Oxford Institute for Energy Studies at the end of 2009, which was available for free download.

“At that time there was very little know, but since then so much has changed,” she said, noting that the debate in Europe still had not had time to develop.

Mr. Geny noted the operational concerns surrounding unconventional gas, as well as incidents in US and statements on tightening regulations.

“These are grounded on emotion and not facts. It’s a big communications dilemma for the industry. Ideally we’d like to have an objective debate. Yes, hydraulic fracturing has been done for 60 years, but public doesn’t understand that,” she said.

“The arguments of energy security, or natural gas as a bridging fuel don’t get must traction in Europe.”

The solution, she said, was to transform the debate into one based on facts rather than emotion: the industry should gather the evidence together with policy makers to make their case to the public as a strategy.

She reinforced the looming gap in natural gas supply that Europe would likely face.

Geny said: “It looks like Europe will have a gap (333 BCM, technically recoverable resources) that can be filled by new gas resources by 2030. Why don’t policy makers pick that up?”

She said it was because policies were the result of very complex interactions and member states had their own complex interests and strategies.

According to her, there were three drivers determining eagerness to embrace unconventional gas: resource base, the hydrocarbon history of the country, and the perceived import dependency of the country in question.

She showed that the UK, for example, had no import dependency, while Poland, had a history of hydrocarbon production, and was100% dependency on Russia.

“It has the ingredients,” said Ms. Geny, who said there were opportunities for public/private corporations to transform the debate on unconventional gas in Europe.

She concluded, “Cooperate and do it well in Poland and you might get the rest of the resource base in Europe.”