Sizing up the Competition (for shale gas)

In his assessment of whether or not European shale gas would be a game changer at Shale Gas World Europe 2011 in Warsaw, Poland, Lambert Energy Advisory’s Menno Koch looked at what the emerging fuel source’s competitors were, like coal.

He said, “Coal is cheap but a dirty fuel. It would be an obvious choice to replace it with gas.”

Yet he noted that carbon capture storage technology was expected to be retrofitted to coal plants. But that, he said, was decades away. “In the meantime we’re stuck with dirty coal plants.”

How does shale gas stack up from the security of supply aspect, he asked. Was it a reliable source of gas?

Following Fukushima, noted Koch, climate targets in Europe were even more ambitious. He explained: “Angela Merkel’s government turning it’s back to nuclear with the closing down of the nuclear power fleet. The end result was a jump in gas prices.”

Mr. Koch said that the UK seemed to have remained committed to nuclear power.

“Putting gas into a matrix, it ticks all the right boxes,” he explained. “It’s relatively cheap and clean, especially compared to other fossil fuels; it’s reliable for its diversity of supply. Shale gas would help import dependency.”

There was the small “not in my backyard” (nimby) effect, he said, of shale gas.

Gas was affordable, he said. “Gas could be the lowest cost, most secure and lower CO2 energy source all while rivals are costing over $100 per barrel of oil equivalent.”

He outlined the relative costs of fuels, and said, “Looking at European gas supply, it’s well diversified. These are all long-term suppliers and some of them are in decline, like Holland. In Norway there’s still an upside, and Russia could increase production.”

According to Koch, natural gas supplies in the Atlantic basin could be limited in the future. Gas was entering a period of uncertainty, he said, despite all its plusses.

Regarding the transformation of the European gas market, his slide showed that the breaking up of long-term gas contracts created opportunities in the midterm. “We see that as a positive development,” he commented.

He showed a new gas demand line according to the International Energy Agency’s scenario.

“More gas is needed in Germany due to the nuclear phase out. It assumes constant 2010 import levels. The gap by 2020 could be as high as 175 BCM rising to 250 BCM – the equivalent of eight Nabucco’s,” explained Mr. Koch, referring to the planned natural gas pipeline.

“We do not see an oversupply situation post 2050,” he added.

Then it was time to move on to shale gas in his talk. He began by noting that Europe’s shale gas in place was roughly 73 TCM.

“It’s very early stages and difficult to say what recoverable resources will be,” he said, adding that Poland and France head the list of technically recoverable resources among countries in Europe.

He noted the moderate increase in acquisition prices paid per acre, in cases like the San Leon Energy’s acquisition of Realm Energy. “We definitely believe it will go up once those wells are drilled and there’s proof that the completion techniques are advancing.

“It’s not if it happens but when it happens.”

According to Mr. Koch, Europe had limited data available at the moment. “It needs time to mature,” he explained. “Maybe four years but maybe double. Eleven wells have been drilled in Poland compared to the Barnett where 15,000 wells have been drilled.”

There were challenges, he said of global population density.

“We need smarter approaches. It’s in Europe’s favor that we have more time to learn from the US experience.”

Koch took note of France’s decision to ban hydraulic fracturing, which he contended was probably political. He said citizens were more sensitive to such issues in Western Europe, while people in the east were more sensitive to the uncertainty of Russian gas imports.

“It’s in everybody’s interest if there were an industry-wide approach to an ill educated population,” he said.

Costs for shale gas E&P, he said, would come down over time as the service sector matured in Europe.

“It’s competitive to other future sources for supply, Mr. Koch said of shale gas. “We believe LNG will go to the East. Liquid rich projects will also be competitive against other sources. This will determine whether shale gas comes in at a large scale, and whether or not it’s competitive.”

Gas prices were at an all time low, he explained. “We don’t feel this is a sustainable level and it will go up. In the end it is a low gas price environment that has been made possible by this shale gas revolution,” he concluded.