Even Low Shale Production A European Game Changer

As a research fellow, Florence Geny, whose talk at Shale Gas Results in Europe 2011 in Warsaw, Poland was entitled Economic evaluation of shale plays in Europe, had a tough task in offering her insights to a conference hall filled with drillers and service providers who were clearly more “gung ho” on the prospects of shale development in Europe.

First, she noted the gas supply revolution in the US, and how in recent years a reversal of reserves and production declines was occurring. Then Ms. Geny showed the European shale gas provinces, with big splotches covering parts of places like Poland, France and the UK; she noted that many times the shale basins crossed state borders.

A slide in her presentation entitled “Growing industry interest for Unconventional Gas in Europe - A rapid race for acreage” showed that the number applications for land concessions in Europe last year had shot up like a weed to over 70,000. By country, Poland and France towered over most other countries where unconventional gas exploration had taken place in Europe.

“What kind of level of production would we need to see to change the game?” asked Geny, who looked at the demand side and supply side and showed production scenarios. “I also looked at European gas consumption – even if it covered 5% of it, it would be a game changer.”

“Let’s say it covered 30% - then it would be in the same situation as the US 12 years ago.”

She contended that for Europe, production of 1 TCF/year minimum from 2020 would truly be a game change; at a national level it could change countries’ gas supply mix significantly.

However, Ms. Geny also presented some surface issues potentially hindering shale development in Europe, which she said were high, like the water challenge.

“The water costs will be at least 10 times the cost in the US: EUR 3.4 /cubic meter. It will be a cost driver,” she contended. “Access to land surfaces is also challenging. Poland is actually scoring quite well on the population density scale.”

She reported that different reactions were being seen from the public across Europe in regards to drilling for unconventionals: “We see Poland really pushing for developing the resource, while in France we just instituted the ban on fracturing.”

Regarding ownership of the underground mineral rights, she emphasized that Europeans don’t get a share of the profits.

“It will depend on the project,” said Geny. “There are many variations in every country, in every region. Local knowledge of the concession is important. But these factors translate into high costs.”

Costs was by far the biggest challenge, she said, although her presentation listed factors like shale and tight gas wells being deeper, translating into more frack stages, as well as Europe having a limited supply of suitable rigs.

“In Europe you have a lot of constraints. My view is that drilling and completions cost will be at least twice those of the US. The main reason being that the geological structures are more complex in Europe.”

Geny contends that a drilling operation costing costing $4-10 million in the US would cost $10-15 million in Europe.

“The cost of doing business is in general higher in Europe,” she noted, mentioning labor laws as yet another consideration.

Her slide was entitled “Relative poor economics of shales, Higher costs than new alternative gas supply.” On it, a graph showed the breakeven prices for other sources of natural gas like LNG from Algeria or Qatar or through the Yamal pipeline.

Whereas LNG from Qatar or Algeria costs approximately $4-6/MCF, Ms. Geny’s calculations for Polish shale and German shale are estimated to run around $8-10/MCF. Worst cases could have that figure running as high as $16/MCF.

She contended that a European response was necessary – that a new business model needed to emerge to tackle some of those challenges.

“Operators need to adopt a sweet spot approach as they won’t be able to buy land. On the governmental side governments need to support E&P and fiscal regulations; and a home-grown, trained workforce needs to be developed,” she said.

Geny also suggested that there should be an increased focus on shallow tight gas in Europe in addition to shale gas.

In her conclusions, she pondered unconventional gas’s macro implications on gas markets. Game-changing effects, she said, were more likely at a national level. In terms of price, she expected there would be competition with alternative sources of natural gas supply and a capping effect on the pricing of new marginal projects.