Shale gas no game-changer for Europe
The disruptive impact of unconventional gas on North American gas-market dynamics will not be replicated in Europe
THE growth of unconventional gas production in North America, and to a lesser extent Australia, has already had a huge impact on the global gas market. Outside these regions, there is in excess of 11 trillion cubic metres (cm) – or 400 trillion cubic feet – of unconventional resource potential.
Import-dependent Europe’s unconventional resource potential of at least 3 trillion cm is reasonable, but as yet unproved. How this supply potential is developed could change national markets and reduce their reliance on Russia. But compared with the US, Europe has low levels of upstream activity for a number of reasons, including: limited supply chain availability; difficulties gaining access to land; and tough environmental controls. Developments are focused in countries such as Poland, Austria, Sweden, Germany and the UK (see box below).
Europe is well supplied by large quantities of relatively accessible indigenous conventional-gas resources and imports, but with regional production in decline, supply security and diversity will be the main drivers of unconventional-gas development in individual countries. With government support, these factors may influence advances, despite cost constraints. But limited unconventional production can be expected in the near term.
Production in Europe could be as high as 60 billion cm/y by 2030, with Poland accounting for as much as 30 billion cm/y of supply and the rest coming from Sweden, Germany, France, Austria and the UK. Poland’s upside is dependent on the success of pilot projects under way, which would lead to a subsequent drop in costs as a strong supply chain is established and new technologies are applied.
If drilling and development of unconventionals in Europe is a success, there could be a significant impact on gas markets in some European countries, particularly on the supply mix in Poland, Austria and Sweden – representing over 75% of demand by 2030. Such production volumes, particularly in Poland and Austria, would significantly reduce reliance on pipeline imports from Russia.
The issue of how unconventional-gas volumes would be marketed is yet to be fully established. Much of Europe’s gas supply is delivered on a long-term contract basis, often indexed to oil prices. Because of the nature of unconventional project development, producers might initially have uncertain gas-production profiles, which they would need to balance against existing contracting methods, particularly in eastern Europe where access to liquid, traded markets is likely to be limited.
The greatest potential lies in shale-gas development, but Europe’s petroleum systems seem to be smaller in size compared with successful US plays: shales are often deeper and there has been a far greater degree of tectonic activity. Although it remains highly uncertain whether high volumes of shale-gas production will be viable in Europe, exploration drilling over the next few years should provide a much clearer indication of shale gas’s potential contribution.
While the potential for unconventional-gas development in Europe is significant, it is at a very early stage and there are many challenges to be overcome – and not only in understanding the sub-surface geology. Disappointing results from tight-gas exploration in Hungary’s Mako Trough in 2009 demonstrate the below-ground risk associated with Europe’s unconventional resources – ExxonMobil and Mol withdrew from the development in early 2010.
A wide range of companies have interests in pilot projects that broadly fit into two types: larger, more established operators, such as ConocoPhillips in Poland and ExxonMobil in Germany, which are taking a methodical approach to potential developments and have the luxury of not having to act quickly in the interest of their shareholders, because they have many other upstream projects under way; and smaller, independent companies – such as Lane Energy – many of which have based their entire business plan on a particular unconventional play, similar to the models seen in North America.
But land access will be more challenging than in the US, as mineral rights are not held by individuals and the land is more densely populated, and costs will be higher. The high costs reflect some of the geological differences specific to European plays, not least deeper well requirements and a conservative view of high services industry expenses, based on forecast drilling costs. Consequently, breakeven costs for some plays are higher than European oil-indexed gas contracts, rendering them uneconomic.
Another crucial uncertainty is the availability of drilling crews and rigs: there are only three hydraulic fracturing crews active in Europe and this level of services-sector support would have to increase to between 20 and 70 rigs by 2020. The pace at which the supply chain develops could constrain unconventional supply. In low-case prediction, a slow build in production, would see volumes rising from less than 1 billion cm in 2015, to 13 billion cm by 2030, when it would meet only 2% of European gas demand – this slow growth also reflects uncertainty relating to resource quality and costs.
The breakeven-cost evolution of unconventional gas in Europe will be crucial for its potential to be realised, the retention of relatively high prices under oil-indexed gas contracts should give sufficient incentive for many plays to be supported by the market.
Upside and downside
A number of other circumstances might lead to a much more positive outlook for Europe unconventional development, such as:
Very successful results from pilot wells in Poland, including high production rates and lower-than-expected unit costs;
A supply shock from one of Europe’s main suppliers, which would heighten security-of-supply fears and encourage development;
Growing concerns over nuclear power, following Japan’s Fukushima disaster
and subsequent decisions by Germany and other EU member states to phase out nuclear generation, which could prompt a greater need for supplies of secure, low-risk energy in Europe; and
Difficulties securing funding for megaprojects from Russia and other large potential suppliers could see investors preferring European unconventional developments.
But a number of circumstances might lead to a more pessimistic outlook, including:
Wells in Poland proving less productive and/or smaller than expected, raising unit costs to unacceptable levels;
The market space for unconventional gas doesn’t develop as quickly as expected, because of greater than expected energy-efficiency gains on the demand side and low economic development; and
New supply projects from beyond Europe are sanctioned that could see, new lower-cost imports easing security-of-supply concerns: for example, the Nabucco project
, opening up pipeline supplies from the Caspian and Middle East; and additional liquefied natural gas (LNG) projects.
If European unconventional output reaches the upper forecasts, it will affect the supply mix of some countries more than others. There is likely to be more support for unconventional gas in countries such as Poland and Austria, where production will help to meet long-term policy objectives of supply security and diversity. In addition, unconventional production will accelerate gas’s market penetration, particularly in countries where opportunities are limited by a reluctance to increase import reliance.
In tandem with European development, unconventional production in China and India would increase LNG availability to the Atlantic basin. As much as an extra 47 billion cm/y of unconventional supply in Europe by 2030 could be supplemented by 60 billion cm/y of additional LNG. Such an increase in volumes would place pressure on European pipeline imports, which could fall by around 90 billion cm/y in 2030.
The replacement of pipeline gas supplies from Russia and North Africa would ease supply security and diversity concerns, but would not alter the overall dynamics of the European gas market to the same extent that North America’s has been transformed in recent years. Europe will not produce sufficient unconventional gas volumes to offset its growing import requirement.
For unconventional gas production to reach 60 billion cm by 2030, upstream costs would have to fall significantly, but security-of-supply concerns may play a significant role in encouraging development before such cost reductions are achieved. Successful drilling and development could have a significant impact on some national markets in Europe, particularly Poland, Austria and Sweden, but northwest Europe (France, Germany and the UK) is unlikely to see a significant shift in the overall gas supply/demand balance.
Europe’s unconventional-gas development
Austria – OMV (the play’s only operator) is conducting various studies and seeking a partner with shale-gas experience.
France – the Lorraine basin has coal-bed methane (CBM) potential, although the play is at a very early stage of development. There is a moratorium on hydraulic fracturing while its environmental impact is assessed. Companies with, or looking to take, a position are Total, Schuepbach, GDF Suez, Ecorp Oil & Gas and Eagle Energy.
Germany – ExxonMobil has targeted shale-gas in the country since 2008, but results remain confidential. CBM wells have been drilled in the Lower Saxony basin.
Poland – a consortium of ConocoPhillips and 3Legs Resources drilled for shale-gas in August 2010. Horizontal wells and fracture testing are planned for 2011 and 2012. Eagerly awaited results may be significant enough to either slow or accelerate the momentum of unconventional-gas exploitation in Europe in the next five years.
Sweden – Shell has taken a large position in the country’s shale-gas play. It had completed three inconclusive exploration wells by March 2011.
UK – activity has focused on CBM in Cheshire and Midland basins, but investor interest has begun to shift towards shale-gas potential. The focus in 2011 is on the Bowland shale in Lancashire and Cuadrilla Resources’s activity there. Dart Energy is planning CBM development in Scotland.
Graham Freedman is senior European gas-research analyst; and Stephen O’Rourke global gas-research analyst for Wood Mackenzie.