Looking to replicate the numerous North American successes in recovering natural gas reserves from unconventional shale plays, a number of oil and gas majors are eager to take the new drilling technology across the pond to Europe, but Raymond James analyst Pavel Molchanov warns that while the resource potential is “definitely there,” the process “will be a marathon and not a sprint.”
Citing Energy Information Administration data that shows shales contributed 2.4 Tcf (9.1 Bcf/d) to U.S. gas supply in 2009 — nearly 15% of the total, up 10 times from the segment’s contributions in 2000 — Molchanov said Europe, as the world’s largest gas importing region, “would seem to be a natural candidate for shale gas development, particularly considering the fact that around 40% of Europe’s gas imports (equating to 25% of its total gas needs) come from Russia, a country with a history of using energy as a political weapon.”
The analyst warns that while there is no doubt that shale gas exists in Europe, the resource estimates to date are shaky at best because there has been no commercial development yet. He noted that a 2006 paper published by the Society of Petroleum Engineers provided a high-level estimate of 549 Tcf for European shale gas-in-place.
“While only 14% of the North American figure (3,842 Tcf), it’s still a very sizable number,” Molchanov said. “Furthermore, basin-specific estimates would lead to a much larger total for Europe. For example, OMV (Austria’s integrated major) estimates 200-300 Tcf for the Vienna Basin alone. Of course, gas-in-place must be heavily discounted to arrive at recoverable gas, but even with a conservative 20% recovery factor, 100-plus Tcf is nothing to sneeze at.”
Molchanov highlighted seven main shale plays that have been identified in Europe. They are the Silurian Shale (Poland), Posidonia Shale (northwest Germany/Netherlands), Alum Shale (Denmark/Sweden), Cheshire and Weald Basins (UK), Paris and East Paris Basins (France), Vienna Basin (Austria) and the Mako Trough (Hungary).
Because integrated majors were “late to the U.S. shale party,” Molchanov said they don’t want to miss out in Europe and are currently engaged in a land grab. “The integrated majors have, as a rule, missed out on the early stages of the North American shale gas bonanza. Over the past year, they’ve been atoning for that mistake by acquiring shale acreage at multiples that are obviously far higher than they had been when the shale boom was just getting underway in the middle of the past decade. In addition to the most obvious example — Exxon’s acquisition of XTO — there has been a surge of shale-focused joint ventures between majors and independents.”
As an example, the analyst notes that no less than three majors — BP, Statoil and Total — have partnered with Chesapeake alone. Pioneering on a new frontier has its benefits and challenges, however. In some European basins, Molchanov said land can be leased for barely 10 cents an acre per year, but in the negative category it’s difficult to know in advance which areas will turn out to be economically viable.
The analyst said approximately 40 companies are in the European shale mix — many of them exploration and production micro-caps — conducting seismic surveys or just starting to drill. He noted that only a few wells have been actually completed thus far, but no production is flowing. He added that companies with North American shale experience are able to leverage it in Europe.
In the Alum Shale, Molchanov said Shell spudded its first well (Lovestad A3-1) last November, completing it in February 2010. “No results have been announced thus far by Shell, which is not surprising: Given the competitive landscape in the race for the best acreage, most operators are being very tight-lipped about their progress (or lack thereof),” he said. “Conoco is likely to be the first U.S. major to commence drilling in a European shale play, with its first Silurian well spudding in 2Q10.”
Molchanov said even if it were obvious where the optimal drilling sites are located, it would be “entirely unrealistic” to expect any significant surge in European shale gas production over the near term (next two to three years). The biggest hurdle is the rig count. In the U.S., the analyst said there are around 1,500 onshore rigs, while there are only 100 in Europe. “Similarly, skilled labor for drilling crews is harder to come by, and production infrastructure is present in some areas but not others,” Molchanov points out. “Intense environmental regulation is another hurdle; if hydraulic fracturing were to ramp up in Europe, it would likely draw more negative attention than it has historically in the U.S.”
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