The Rational Evangelist

Europe’s energy sector needs familiarity with unconventional gas

With over two decades of experience in the energy sector, these days James Elston, Director of Palladian Energy Advisory, has been spending his time helping small energy companies raise money by working with small investment banks and private equity firms. He is also working on several startups.  Not long ago, he was the CEO of Realm Energy, which has been a trailblazer in unconventional gas in Europe.

Recently Mr. Elston spoke to delegates at Flame, a week-long conference in Amsterdam for energy industry players, the largest event for the downstream gas business in Europe.

Given his background, he said his goal at the conference was getting the delegates in attendance up to speed on how unconventional gas was developing in Europe.

“I call myself a rational evangelist,” he admitted. “And that’s what I was trying to get across at Flame. There were very important energy businesses there from across Europe, and I just wanted to inform them of the rational basis for shale gas and help them, too, to become rational evangelists.”

He said he hoped the result was an understanding of the potential benefits of shale gas, with the end result being more evangelists for it.

“Because I think all we ever hear about shale is largely misleading, but very strongly held opinions on the negative possibilities for shale. Nobody ever talks about the tremendous positives that there can be,” he commented.

According to Elston, the event hosted about 800 attendees, among them representatives of major European utilities that bought gas on the wholesale market and distributed it through pipelines to homes and industrial customers for consumption. “So it’s like the electricity business - the people that generate power and distribute through grid networks - very large companies which are very important for every country in Europe because they provide the energy.”

“I don’t see it as a threat to the gas/utility incumbents,” he said of unconventional gas. “It’s just another potential source of gas, and perhaps one where you can get a better margin. Or you can participate and benefit from the value created in the upstream. There are just opportunities here as I see it.”

He said that shale was often mentioned as an interesting topic in Amsterdam, was mentioned last year and there was a lot of interest in it again this year, despite it being early days for shale exploration in Europe. Elston reported that while those in attendance mostly had an open mindset about shale, there was talk of the continent’s greater population density and the immature state of the play.

“In gas companies you need to understand your potential sources of gas, so you need to keep a close watching eye on it, because it can rapidly change gas markets, and as we’ve seen in America, if there’s a particular success in a particular area, it can have a massive effect on the gas prices. So they’re naturally watching and generally have half-formed opinions, which is definitely the right place to be at the moment in Europe, because I think the biggest effect of shale, aside from gas exports from North America, but more particularly the fact that LNG has been backed out of the North American market and has been through the recent slump in gas demand, effectively dumped on Europe, further affecting the wholesale gas prices in the floating bits of the European market, in the areas where there is a proper spot price for gas.”

He explained that most gas in Europe was bought and sold on long-term contracts, but presently countries tied into those we’re paying more than if they had just bought gas on the spot market, like in Northwest Europe and in the UK.

“The main concern was the fact that if you buy gas from Norway or Russia on a long-term, indexed contract and yet many of your customers are actually defecting and buying their own gas on the spot market, you’re left with a tremendous overhang of expensive gas that you then have to sell at a loss.

“The European utilities together are losing billions of dollars a year at the moment,” Elston added, “given the fact that there’s been a big slump in the gas market because of the recession, and that’s exacerbated the effect, so that is front and center the most important issue and quite a contentious one with a lot of different views on when it’s going to unwind – the glut of gas – and to what extent, and whether the oil price link has just changed forever.”

One of the slides in his presentation offered a “reality check” on shale gas.

“What I mean is, you see an awful lot of hype about shale, hype in a negative sense about gas leaking into people’s water supplies. But you also see tremendous hype in the opposite direction, that, you know, ‘shale gas is the savior of the world,’ ‘shale gas will massively reduce gas prices in Europe.’ So, you’ll see hyperbole in both directions and it was my concern really to talk soberly about certain things that I saw as realities that we face at the moment.”

In another slide, Elston had written “critical success factors need to align.”

He explained: “A number of things need to happen before you have the opportunity really to develop a shale play, and obvious the most important of those is discovery of the right geology through exploration, but also having the right markets, and access to the markets for the oil and gas that you produce, which are generally there in Europe; relatively attractive fiscal terms in terms of the taxation, which, again, are generally there in Europe; and then the ability to drill your wells and develop the field, which is service company provision, which is going to develop rapidly in Europe.”

According to him, stakeholder management was most critical: “The ability to convince the various stakeholders in the country or region where you’re operating, that shale gas is a good idea and its development can be pursued in a way that satisfies all the stakeholders, be they the national or local governments, the populace, or even special interest groups, etc.”

“So there are a lot of things that need to align and I think, most importantly, the rocks must talk. So you must go out and drill wells, gather exploration data, but that’s time consuming and expensive, and it’s going to take years in most countries in Europe to be at the stage where you’re confident the shale play is going to work.”

He said, given the scale of the activity by different companies in Poland, it was clearly the first place where this would happen in Europe.

There were some concerns over shale gas, Elston admitted, explaining that he had spent quite a lot of time in the Barnett shale, in the Fort Worth basin, and around Shreveport in Louisiana, where the Haynesville shale was.

“The Haynesville area’s very wooded, while the Barnett area is really open farmland. Obviously a lot of activity is going on. There’s a tremendous amount of debate about gas leaking into water tables or frack fluid leaking up from wells and polluting water tables – these will be confirmed in due course as non issues,” he said.

“Now the treatment and use and recycling, disposal and sourcing of water for frack operations – those can all be done in a very safe and environmentally sound fashion, as is the case in North America, relative to the million wells that have been fracked in the 60 or so years that hydraulic fracturing has been in operation in the world. There have been almost no incidents of any kind, even related to spillage on the surface. So I think all of the issues to do with frack water are either non issues or ones where if you just operate in a safe and environmentally sound fashion, those issues are mitigated.

“Nonetheless,” he said, “developing shale gas and oil using hydraulic fracturing involves the drilling of a lot of wells and fracturing of a lot of wells, and to do that you need to move around quite a lot of rigs, you need to drill a lot of wells and you need to fracture them with some very powerful pumping equipment. There are a lot of truck movements to do with moving rigs, fracturing equipment and proppant. Those issues are real, but we never really get to the discussion of those issues because of the issues related to fracturing as a concept, which are just due to misunderstanding.”

What were real, he said, were truck movements and the temporary stay of rigs and their effects, for which solutions did exist.

“You can mitigate noise by really having your whole drilling area with sound baffles outside the drilling rig. Equally, you can very much control your use of light during the night so as not to disturb the surrounding environment. The movement of trucks does create load upon existing infrastructure, but I think in most places in Europe, certainly in Poland where there aren’t many roads, there will be tremendous improvements to the road network anyway just to facilitate shale development.”

Moreover, he said a development could create competition for economic resources.

“When a shale gale moves to a given rural area,” he said, “there are tremendous benefits to those who run hotels or are in the service industry - restaurants, shops, etc. – from the people coming into town associated with the shale business.

“Not everyone can be a winner. People may be priced out of accommodation and things like that, so you have to be very careful to keep an eye on those issues and make sure that you don’t end up with people being disenfranchised when an area booms. I think this has been done quite effectively in places like Pennsylvania at the moment.”

Elston said that his key statement in Amsterdam was, if one were lucky enough as a nation to have the choice, the correct pace and style of shale development could be decided play by play to reap benefits for all stakeholders.

“What I mean is ‘we’ve got to have this exploration to know if there’s the choice.’ And to be honest, in the majority of places in Europe where they’re trying to develop shale, it simply won’t work because of the geology. But where it can be made to work, I think the engagement with stakeholders by oil companies and particularly national and local governments that have to be proactive here to help the process move forward, you can get to a place where you have the correct pace and style of development for your area.

“It’s not going to look like it does in North America,” continued Elston, “because technology keeps improving and they’re drilling more and more wells from single sites with longer and longer laterals and therefore reducing the need for drilling pads and having them separated further and further apart.

“Who knows where we’ll be in 3 or 4 years’ time when large scale development is taking place in Poland? Technology will have moved on so much.

The rational evangelist had some parting thoughts.

“If you’re very lucky, the geology can be made to work,” Elston added. “But you’ll never know that if you don’t explore.”

James Elston is Director at Palladian Energy Advisory and can be contacted at  advisory@palladianenergy.com