Divided on shale
Poor data, bans on fracking and regulatory confusion are hurting prospects for European unconventional gas
Tensions between Russia and Ukraine have reinforced Europe's long-term plans to develop its own domestic reserves of unconventional gas. On paper, at least, Europe has a good chance. Recoverable shale gas reserves amount to 470 trillion cubic feet (cf), according to the US' Energy Information Administration (EIA). But developing this trove is taking longer than people hoped. Complex geology, inadequate data and contrasting attitudes towards hydraulic fracturing (fracking) are to blame.
Disappointing test results from the first wave of exploration, coupled with uncertainty over rules governing future investment and - in some areas - resounding public opposition have also forced some major companies out of promising plays. Take Poland. Four years ago it was seen as the likeliest major shale gas producer in Europe. But several drillers have already abandoned the country.
Uncertain estimates of the country's technically recoverable reserves have weighed on confidence there, too. In a June 2013 report, the EIA revised down its best guess of Poland's shale gas reserves from 187 trillion cf, its 2011 figure, to 148 trillion cf. A downgrade of the estimated resources in the Lublin basin was the main factor.
By unveiling changes to its regulatory and fiscal regime, Poland is hoping to tempt back operators with amendments, which need parliamentary approval, to the existing upstream framework. It was the terms under the present regime that prompted a number of international energy companies, including Total and Eni, to quit the country's unconventional sector. The government proposed a number of changes to the fiscal regime last March. The tax rate of 40%, including royalties and a special hydrocarbons levy, which was due to take force in 2015, will now not apply to shale gas production until 2020. The amendments in the draft Bill on Special Hydrocarbon Tax should give companies certainty about what to expect in the long term, and includes details of specific tax rates including royalties, hydrocarbons and corporate income taxes. However, the proposed draft law does not stipulate that total taxation levels will be capped at 40% - an assurance given to the industry by the Polish government.
Total pulled out of Poland in April, deciding not to renew its only shale exploration licence, saying it had not discovered enough gas for commercial-scale extraction. Marathon Oil, Talisman Energy and ExxonMobil have all left too. Companies including Chevron, San Leon Energy and 3Legs Resources remain.
Activity has been slow. In August, Polish environment minister Maciej Grabowski said just 80 to 85 test wells would be drilled this year, down from a previous estimate of 100. In another blow to Poland's shale gas sector the European Commission (EC), the European Union's Brussels-based civil service, began legal proceedings against Poland for amending its national laws to allow shale drilling at depths of up to 5,000 metres without first having assessed the potential environmental impacts. If Warsaw fails to convince the EC that it has thoroughly assessed the environmental impact of amending the laws, the case could reach the European Court of Justice.
Chevron's experience in eastern Europe shows that Poland isn't the only country struggling to get its shale gas business off the ground. The US firm, one of the first to bet on eastern European shale, has suffered setbacks due to disappointing data and fierce public opposition to fracking.
In June, Chevron confirmed it had pulled out of its Bulgarian shale gas project and closed its office in Sofia. Like other investors, it couldn't be certain it had political support for shale gas development in the country. The Bulgarian government banned fracking in 2012 following widespread public protests and environmental concerns over the process. In 2011 the previous government granted Chevron a five-year permit to explore for shale gas in Bulgaria's Novi Pazar field. The government later said Chevron could still look for oil and gas in the field, which lies in the country's northeast, but it could only use conventional drilling techniques. Then in July Chevron left its prospective shale gas acreage in Lithuania, divesting a 50% equity interest in LL Investicijos that it had bought in 2012. Investicijos is a local company and owns the Rietavas oilfield in northwest Lithuania. Chevron has also seen setbacks in Romania, where environmentalists protested against the company's test drilling in the Silistea-Pungesti area, in the northeast of the country.
Non and nein
It isn't just eastern Europe that seems reluctant to unearth its unconventional resources. France has potentially vast shale gas reserves. The EIA says two main formations in the Paris basin - the Lias Shale and the Permian-Carboniferous Shale -- hold 690 trillion cf shale gas. Around 129 trillion cf of this is considered technically recoverable. This dwarfs the country's 200 billion cf of proved conventional gas reserves. The basin is also thought to hold 118 billion barrels of shale oil (4.7 billion recoverable), too.
But France banned fracking in 2011 following protests. The government revoked exploration licences it had awarded to several companies, including Schuepbach Energy and Total. US-based Schuepbach unsuccessfully challenged the fracking ban in French courts, arguing it was unconstitutional and there was no evidence fracking caused environmental damage. France does allow exploration of shale - as long as fracking is not part it. Companies such as ZaZa Energy and Canada's Vermillion Energy have held onto their exploration licences by saying they won't frack. Despite the ban in France, French firms such as Total and GDF Suez are entering other European shale plays. Total took a large position in the UK's shale scene in January, buying into two exploration licences in central England. It also plans to drill test wells for shale in Denmark in December or January 2015. Germany is also thought to have large shale gas reserves but, there too, slow regulatory approval for drilling permits, amid environmental concerns over fracking, have stalled development. The EIA estimates the Lower Saxony basin could have 80 trillion cf of shale gas in place, with around 17 trillion cf thought to be recoverable. Germany's Federal Institute for Geosciences and Natural Resources thinks this is too low, estimating that the basin hosts between 24 trillion cf and 81 trillion cf of recoverable shale gas. By contrast, the country's conventional gas reserves stand at just 1.7 trillion cf, according to Cedigaz.
But Germany hasn't been keen to tap this resource. The government stopped granting drilling permits in 2012 after a federal study recommended shale gas exploration shouldn't be allowed in areas where drinking water could be affected. The study didn't call for an outright ban, but said the process should only be allowed with strict regulation in place and should be accompanied by intensive administrative and scientific supervision.In July, the German government went further, proposing a partial ban on fracking for the next seven years while environmental studies were carried out. The measures would only allow fracking at depths greater than 3,000 metres and banned in areas where drinking water is thought to be at risk of contamination.
If passed, the ban will be reassessed in 2021 after studies have been carried out into the environmental effects of fracking. The government will draft regulations by the end of the summer, and aims for them to be enacted by the end of the year. Local firms are frustrated. Rainer Seele, chairman of Wintershall, said that Germany's reluctance to embrace shale gas was causing domestic gas output to plummet. Others are leaving. Canadian firm BNK Petroleum recently handed back five of its eight concessions in Germany because of the country's changing rules. BNK Petroleum is now focusing on Spain, one of the continent's few bright spots for frackers. In October, the government amended its oil-exploration law to include guidelines for fracking, signalling its support for the technique. The EIA thinks Spain could have more than 8 trillion cf of recoverable shale gas. Others are more optimistic. Spain's oil and gas trade group, Aciep, believes the country could hold almost 70 trillion cf of shale gas in the Basque and Cantabrian regions alone.
Spain wants to diversify its energy mix away from liquids-rich and high-carbon forms of electricity generation, such as oil, by expanding its use of natural gas and renewable energy. Its promising reserves have attracted companies including BNK Petroleum, Repsol, San Leon Energy and Heyco Energy. San Leon is also in the process of acquiring 10 exploration licenses in Spain, two of which have been formally awarded, with eight pending final approval.
BNK Petroleum plans to drill one well per year on each of its Arquetu, Sedano and Urraca concessions, in the Cantabrian basin, between 2015 and 2017.