CEE shale gas development 'inevitable'
Shale-gas development has been slowed across much of Central and Eastern Europe (CEE) by protests from a wary public, but the lure of increased energy independence for the region makes a push for the development of those resources “inevitable”, KPMG has said in a new report
“There is no doubt that development of the shale-gas industry is inevitable in this region; there are proven reserves in several countries, and all, without exception, are eager to diversify their energy supplies,” said Steve Butler, a co-author of the report and a director at the company.
Although Butler reckons that shale-gas development is inevitable, that does not mean that it will be easy.
Financing will be one of the biggest hurdles faced by the industry as it eyes the region’s shale-gas potential, KPMG says.
“State-owned gas exploration and production companies in CEE – especially those with high levels of debt – are unable to fulfil their drilling commitments. The need for capital is often the most important driver of joint ventures in the CEE shale gas segment,” Butler said.
The financing challenge is compounded by the higher production costs seen so far in the CEE region, the report notes. A Schlumberger executive said last year that horizontal wells in Poland cost as much as $11 million each, compared with an average of $3.9 million in the US.
Explorers active in Poland such as San Leon Energy and 3Legs Resources have recognised that costs have been much higher there and elsewhere in the CEE region than in the US. But they argue that, as in the US, those costs will come down over time and higher natural gas prices in the region and more favourable fiscal terms more than justify the stiffer drilling costs.
Shale-gas producers would also face difficulties gaining access to markets. Progress towards liberalisation of the region’s gas markets has been uneven, meaning that independent producers may have trouble accessing crucial transit infrastructure and markets in some countries. Moreover, many potential buyers for new shale-gas volumes are locked into long-term take-or-pay contracts with Russia’s Gazprom. The terms of those deals make it legally challenging and costly for buyers to turn to new sources, though shale-gas production could offer a cheaper alternative when the take-or-pay contracts expire.
Environmental concerns, which have fuelled protests across the region and led to moratoria on hydraulic fracturing (fracking) in Bulgaria and France, will also continue to be a potent issue across the CEE region, the report notes.
Nevertheless, the combination of increasing demand across the region, declining conventional gas reserves and a desire to cut the region’s heavy reliance on Russian gas imports means that ultimately governments will push ahead with shale-gas development.
The potential is strongest in Poland, Ukraine and Romania, according to KPMG’s analysis. With more than 100 licences awarded and around 20 shale-gas exploration wells drilled, Poland has been at the centre of the region’s shale-gas hunt, and could provide a model for the region.
Ukraine, too, has recently taken steps to encourage exploration of its shale-gas resources. The country has issued exploration licences to Shell and Chevron for two shale-gas prospective fields where it expects the companies to invest as much as $375 million over the coming years.
Hungary, Bulgaria and Lithuania are also seen as having strong prospects for shale-gas development, though with more modest potential than its larger neighbours. KPMG sees continued interest in these countries in spite of teething problems. ExxonMobil’s initial shale tests in Hungary were not successful, and protests led the Bulgarian government to ban fracking, for now at least.
“The opportunities to develop shale gas are simply fantastic. As such, the decision to overcome the challenges and develop these resources can only be a matter of when, not if,” said Marcin Rudnicki, a partner at KPMG in Poland.