Apples and Oranges

Replicating shale gas success in North America depends on several issues

North America and Europe are completely different continents in a variety of ways. Whether the New World’s “shale gas bonanza” can be repeated on the Old Continent was the question tackled by Enrico Cingolani, Senior Vice President, East Europe Program at ENI E&P.

In his talk at the Global Shale Gas Forum in Berlin, Germany, entitled Realizing Margins in European Shale Gas, Cingolani spoke of the critical factors affecting the commercial viability of shale gas projects: production profiles and cash flow.

“We must take into consideration that they are different in shape and form,” he said of shale plays. “Secondly, we can say that once a play is assessed there is a lower geological risk. Maximizing the efficiency of all operational levers, while taking advantage of market upsides is crucial.”

The major constraints were above surface, he emphasized.

“Production profiles are vastly different between conventional and shale,” explained Cingolani. “Shale leads to a fast recovery of costs compared to conventional cumulative cash flow. We cannot approach an unconventional play in a conventional way.”

Exploration, he said, should happen through development. “We consider geological risk once a play is assessed, once the sweet spots have been identified. Development takes place very early in the game. Success rates in the beginning are very high.”

A smaller percent of the total capital is dedicated to exploration, according to Cingolani. “It’s model that can be replicated – which is something seen in the US. You should start with the well. The level of standardization needs to be high and you need to utilize a lean, efficient and flexible procurement process.”

Maximizing facilities’ upload capacity, from a single well to an overall field profile, are also important. Cingolani explained that drilling completion costs have been a topic of debate regarding the viability of shale gas development in Europe.

He also spoke about the potential big differences in drilling and completion costs on the two different continents: “Will drilling cost significantly more in Europe than in the US? It will not be rig rates that will drive the increased costs, but the costs of services. The main contractors will need to adapt as more players enter the market and competition is created.”

Practically, another point needs to be taken into consideration, according to ENI’s Cingolani: the learning curve.

“This is another aspect that will drive the economics of this development. After the first drilling and completion, the increasing number of wells drilled allows us to exploit the learning curve, which will acquire even more significance,” he explained.

Early entry also has value. Cingolani said that early entry was a fundamental tool to maximise returns; he noted how the value of acreage in the US has climbed, like at Marcellus where costs per acre doubled from 2008 to 2010.

“The development costs will no doubt be high in Europe,” he said. “The margins in the US are very tight, but in Europe the market makes for a different story. I have no doubt that we will need gas for the future in Europe, and it’s no doubt that it will be an importer in the years to come. If we take into account the sharp decline in gas production, we can have no doubt that this will be utilized.”

Cingolani added, “We may not see it in the immediate or even medium term future, but it is viable.”

He noted the major constraints above surface for drillers in Europe.

“Population density is above average. Also, US law provides private people with the ownership right, which greatly facilitates the shale gas industry.”

“There is a very important environmental issue for which more can be done: water management. This will be more critical in Europe than in the US. Water can be managed in an efficient and stable manner,” he contended.

“From one side, we’ll face higher costs at the beginning. We need to take advantage of all of the technological aspects and need to be more efficient than conventional development.”

Finally, Cingolani read his conclusion, which he said was the gist of his talk: “An ‘unconventional mindset’ based on identifying and efficiently exploiting the levers which form the DNA of the play is required to sustain the commercial development of unconventional gas in Europe.”

Meanwhile, he reported in Berlin that ENI had recently completed an alliance with Quicksilver Resources at the Barnett shale. “This joint venture has been influential in our exploration in the European market. We are also exploring tight gas in Pakistan,” he said.