Revolution or Evolution: A Utility’s Perspective

Just how does a utility company view the future of unconventional gas?

How about a utility with over 60 million clients that is active in 23 countries in North and South America and Europe?

Representing Enel Group, Luis Deza is Head of Strategy in the company’s Upstream Gas division. At the Global Shale Gas Plays Forum he raised some questions about the actual effect of shale gas on world markets.

“What kind of animal do we have here, is it something like the US? Or do we have something incremental, or an evolution for supply?”

First, he talked a bit about Enel Group, saying it was diversifying in many countries.

“We’re the first operator on generation, for example, in Italy. We’re the leading end user in southern Europe. In 2009 we were consuming 20 BCMs per year - a demand in gas that’s comparable to Spain as a whole.”

Deza stated that in terms of its gas positioning, Enel was pursuing vertical integration, from upstream to pipline, regasification, storage and distribution.

“We have a lot of gasification, for example in Chile,” he added.

In Russia, he said, Enel had a JV with Gazprom and ENI, where 8 wells had been drilled.

“We have presence in different licenses in Italy; and have some presence in north Africa off the coast of Egypt; as well as exploration block and appraisal programs in Algeria.”

He also briefly touched on the company’s pipeline projects and regasification portfolios and said Enel was the third biggest LNG importer in Europe.

Then it was time to talk shale gas, which he noted, was why everyone was there.

He presented the strategic guidelines of Enel’s Unconventional Gas Strategy:

1) that unconventional gas was easier to find, but more difficult and more expensive to produce than non-marginal conventional gas;

2) that unconventional gas would be consumed locally unless its size overcame that of the local market and that its effect on the global market would be felt through displacement of other supply sources;

3) becoming a cost-effective player required significant scale activities in each play and experience across different regions; and

4) unconventional gas impact in the European gas market would be limited before 2020.

“We need to fully understand it - need to know if it’s going to be a revolution,” Deza stated. “If prices do not collapse, we need to look at our relationships with existing suppliers.”

He said there was a need to partner with people with broad experience on shale gas, Poland being a good example.

Mr. Deza offered what was happening with shale gas in North America as a case study.

“Look at what’s going on in the US now,” he offered. “Now there’s a shift to oil. A lot of people are moving from dry gas to liquids. Demand for services is really focusing on oil. These are contradicting forces.”

Regarding the availability of drilling rigs, he said that to really attract a supply of rigs long term, one needed a dramatic reduction in prices.

“In the long term, a rebalancing of the price of gas can be expected,” he concluded. “This year we have zero inquiries of dry gas. The fundamentals will have to align with prices.”

Deza added: “It’s not as attractive to do gas as it is to do oil.”

In terms of gas demand, he questioned what expectations could be in terms of the long-term breakeven cost.

“It could be almost twice today’s price - that’s what we see as sustainable. There are three issues that could change the price substantially: decrease in capital availability, JV negotiations and end of drilling for retention.”

He said the shift to shale oil had the potential to change the price balance, while new technology advances and the spread of best practices were expected to reduce costs.

According to Deza, Europe had shale gas potential that was comparable to that of the US. He said: “The basins are normally smaller, but quality can be better. It’s still in a very early stage.

“The well cost comparison doesn’t make any sense,” he added “which means we have a learning curve to go through and that takes a lot of money. Somebody has to pay for it; a company won’t do it because it’s nice. It will have to come from the market, if no one’s going to put in a big chunk of money, it’s going to take some time.”

He said that according to the best known example - the Barnett shale – it had taken 20 years to get to a decent production stream. “It depends on how much money industry plugs into it,” he commented.

Mr. Deza noted that domestic supply would decline in places like the UK.

“I don’t think that the market really needs shale gas, not urgently,” he said. “So it makes money to invest in it but you need 10 years. It is unique and it’s very unlikely that we can replicate the US development: the farm outs and JVs were unique. People were willing to pay a premium to learn.”

Shale gas development, he said, would be relevant for supply but not dramatic.

“Everyone should be rational in the end game,” concluded Mr. Deza. “Out of shale gas you should get a big discount in gas from Russia. The price they are charging Poland today is unrelated to the cost. Poland will not have to invest a great amount of money upfront, so it can happen gradually.”