European Shale Gas hurdles need to be overcome – Analyst

It’s still too early to tell whether European shale gas will prove the game-changer that it has been in the US. But Bernstein Research analyst Oswald Clint, after a trip to Poland to meet companies operating there, remains unconvinced that the various hurdles already identified will be easily overcome — and adds a few more concerns of his own.

And if it does work, he says, the theoretical production rate could have difficulty ramping up.

The brief peak flow of shale wells could prove more of a difficulty than in the US, because well costs are much higher available rigs are limited — Europe, says Clint, has only 74 operating land rigs compared to the US’ 1499; and just seven of those are in Poland:

However, even if we assume Europe’s 67 land rigs are moved to NW Poland and consistently
drill 10-11 wells per year with an average first year production of 3mmscfd, then plateau production would reach 2.2Bcfd (803Bcf, 22.4Bcm) by 2020 (Exhibit 34) or 4.5% of current annual European consumption. While this would solve the supply gap in the Polish market, if PGNiG demand estimates and trends are correct then long term gas sustainability will not be achieved unless more and more rigs are added [...]

However Clint believes that density in rigs is not likely, and uses uses satellite maps to compare the density of farms around the basin with that of well-known US shale plays. The relatively high density of farms, he writes, could prove difficult for exploration and production efforts. In fact Poland’s relative lack of renewable water supplies and land compared to the US (on a per-head basis) could also be problems, he adds, particularly around environmental concerns.

Moreover, sourcing new rigs and equipment from outside Europe could be difficult; an issue that Clint says two of the companies active in Polish shale (PGNiG and BNK Petrolelum) have also flagged. US rigs use different measurement denominations and certification for imports both from Polish and EU authorities could prove time-consuming.

To top it all off, there are questions about the geology - European shale is generally deeper and more expensive to drill - and even in the Baltic Basin, which he believes could be commercially viable, the scope is limited.

Furthermore, we believe production from shale’s south of the TTZ fault which are deeper will struggle to make economic sense. Indeed, even in NW Poland we see risks that full scale horizontal wells with multi-stage hydrofracturing struggle to make cost of capital.

South of the fault, he says, shale is about wells may cost about $10m to drill, as the shorter depths to the north cost about $5m.

While gas pipeline infrastructure and the persistence (in some cases at least) of oil-linked gas price contracts are advantages for Europe, Clint points out that Poland’s own gas tariffs are low, and there is no guarantee that royalties would not be raised if drilling proved successful.

Also, knowledge is very thin — only five wells have been drilled in the Baltic Basin in Poland’s north-west, the most promising area. Clint says the first real data on Europe’s shale gas should come from some of the Polish players and from Shell’s play in Sweden in late 2010 or early 2011; but it may take another year to make much sense of it.

Source: Financial Times