European Shale Economics - Make Your Case

Pondering whether or not shale gas production can be economic in Europe

Frank Amend, Head of Market Analysis for Global Commodities at RWE Supply & Trading showed delegates at Shale Gas World 2010 in Warsaw, Poland three charts to depict what had happened regarding shale gas development over the last 24 months.

The first comprised shale maps from the 1950s, the next showed the phase of licensing of acreage, and the last depicted the companies operating in those areas.

“You would expect bar charts of how many wells operating and how many holes have been drilled,” he commented.

But the jury may still out on whether or not shale gas can be commercially viable in Europe.

“It was a big surprise in the United States, and to analysts, as to how much production is up there,” explained Amend. “The International Energy Agency has recognized this and they can’t create additional demand. Shale has stopped the decline of unconventional, they are pricing out coal form the power sector and I’m hopeful that export of LNG from the US will actually see the light of day, so this success story will continue.”

“It could be almost nothing,” he added, “to a lot of unconventional gas being available in Europe.”

Amend said the learning curve on European unconventional gas was steep.

“In the US we have now drilled around 100,000 wells and people are now zooming into a price range of between $5 and 6. People say it will be more expensive in Europe, but I think there is a wide range of uncertainty on the cost basis: How much volume is out there and the actual cost? These are uncertain. It could be 8 dollars; if it were 15 none of us would be in this room.”

He said Poland was the place to look out for shale development.

Amend explained: “The EU demands that coal get phased out over time, that it be converted to gas. Their demand [in Poland] is rather small in comparison to western Europe, so they’re actually probably glad to pay a bit more to get this off of the ground.”

He said Poland was an interesting place if Gazprom’s opinion were taken into account. “If Nord Stream comes along, it could become an export line from Poland if shale gas takes off.”

Amend noted the price variability of natural gas in the old world.

“There’s much more seasonal demand in Europe, hence winter prices are much steeper than in summer compared with the US. You have people prepared for diversification from Russia who are willing to pay for that. There’s too much storage in the US for that effect.”

He spoke of European shale gas estimates, which ranged from between 10 billion and 300 billion cubic meters of gas.

“The game changer here is indeed the effect it will have on oil indexation,” stated Amend. “Currently, the impression is that there is a temporary excess of LNG which will go away - it will go into Asia and to upstreamers like Gazprom. By 2015 things will return to normal, demand will return.”

“This will be the next line of attack on oil indexation of natural gas, like LNG was,” he continued. “Unconventional gas, with a timeline of 2015-2020, could bring renewed pressure. It’s fair to say that oil indexation will get a cap and de-link from natural gas if oil becomes really expensive. You’re talking eight and a half dollars, unconventional gas could be 8-9 dollars. So if oil becomes really expensive again, gas will not follow and will find its own natural mark.”

“It’s a big question how much gas will be used in the power sector,” said Amend. “Estimates have been ambitious in the past and the estimate will probably come in on the down side.”

“Unconventional gas in Europe will come,” Amend reassured the audience. “What we’ve seen in the last 24 months is people are wondering why we are trading at 3 dollars and we are operating 1000 wells.”

He summed up, “I also think it’s time to move on from production data that’s 20 years old. The whole uncertainty and time range involved here tell that these are very early days. Neither volumes nor price levels can be determined with any certainty. If it comes it will get developed at a level below oil indexation.”