Is the UK the best shale bet in Europe?
With exploration stalled in mainland Europe, the UK government's unconventionals push has opened a new frontier for investors and E&P companies alike.
THE UK has become the crucible of Europe's shale gas hopes, helped by a combination of as promising reserves estimates, strong government support and interest from major energy companies. In January, France's Total became the first of the big six major energy companies to buy into UK shale-gas acreage, acquiring a 40% stake in two exploration licences, PEDL 139 and 140, in central England. Announcing the move, Patrice de Vivies, Total's senior vice president for Northern Europe, said the deal "opens a new chapter... in a promising onshore play".
Total will team up with a number of independents to develop the licences. GP Energy, a subsidiary of Dart Energy Europe, has a 17.5% stake in the licences. Other interest holders are Egdon Resources (14.5%), IGas (14.5%) and eCorp Oil & Gas UK (13.5%). IGas will act as operator for the initial exploration programme, with Total taking operatorship once the exploration work programme is completed. Total will pay $1.6 million in back costs to the partners and fund a fully carried work programme of up to $46.5 million. The deal is expected to complete by 30 June. Andrew Austin, IGas' chief executive, said Total's entry into the UK shale sector is "a further endorsement of the potential that exists" in developing the country's unconventional gas resources.
In June last year, IGas said it could have as much as 172 trillion cubic feet (cf) of shale gas in place across 777 square kms of its acreage in northwest England. Some of IGas' licence area covers the Bowland Shale, where, in 2011, Cuadrilla Resources said it had found reserves estimated at an initial 200 trillion cf of shale gas.
While Total is the biggest company so far to have joined the UK's shale-gas hunt, the country's potential has already seen a number of big deals. In October 2013, Total's compatriot GDF Suez bought a 25% share in 13 of Dart Energy's UK onshore licences in Cheshire and the East Midlands. The licences are also centred on the Bowland Shale, which in its high-end scenario, the British Geological Survey estimates could hold as much as 2,281 trillion cf of shale gas. The GDF Suez deal follows one in June 2013 in which Centrica bought a 25% stake in Cuadrilla Resources' Bowland acreage. Didier Holleaux, the chief executive of GDF Suez E&P International, told Petroleum Economist the UK is now the best bet for investing in European shale gas. "We've looked at opportunities in at least four different countries and some of them we have left because the geology just wasn't giving us the right signals or there wasn't enough shale gas there to build an economic case," he said. "Or there are cases like France where changes in the regulation made it impossible to do anything. At the end of the day, the Dart opportunity did appear to be the best one in Europe for the time being."
Despite strong UK government support for shale gas development, it remains a contentious issue with the public. A group of anti-hydraulic fracturing (fracking) campaigners have been protesting at IGas' Barton Moss site, near Manchester, since November. IGas is planning to start exploration drilling at Barton Moss in the first quarter of the year. The Barton Moss demonstrations follow a six-week protest outside Cuadrilla Resources' drilling site in Balcombe, southeast England, last year. Holleaux said the public's misunderstanding of shale gas development was one of the biggest threats to the industry's development across the continent. "It's always a concern when the public doesn't really understand what we're doing and they believe we're jeopardising their environment when we know for sure that fracking, when it's done following good practices, is completely innocuous," he said. "It was very surprising that the French public reacted so emotionally to fracking when you think that between the 1970s and 2009 there have been (around) 200 (hydraulic fractures) done (properly) in France without any problems, environmental issues or reaction from the public."
France is thought to have some of the largest shale gas reserves in Europe, around 690 trillion cf in the Paris basin, according to US Energy Information Administration estimates. However the country's government banned fracking in 2011 following a wave of environmental protests.
The UK could also have huge offshore shale gas reserves, but high production costs could halt exploration before it has even begun. Holleaux said costs between $1 million and $4 million to drill an onshore shale gas well. This is compared to [a minimum of around] $16.5 million for an offshore well. "It's probably uneconomic (to go offshore to look for shale gas). You could maybe have marginal offshore (shale) production close to the coast (with a deviated well) but it would (be difficult to make it work)," Holleaux said.
On top of this, there is also a risk that shale plays could fail to deliver on their initial promise, as Poland's experience shows. Four years ago, Poland was the focus of Europe's shale gas hopes but disappointing drilling results coupled with a lack of clarity over the fiscal regime saw a number of the country's major shale investors walk away.
Canada's Talisman Energy closed its Warsaw office and sold its Polish shale assets to UK independent San Leon Energy last year, after it had drilled just one vertical well in each of its three Baltic basin blocks. ExxonMobil abandoned its concessions in the Lublin and Podlasie basins last year after drilling just two wells, saying it could not find commercial-scale quantities of shale gas. Italy's Eni has also allowed two of its three license areas in Poland to expire. Holleaux told Petroleum Economist: "We have looked at five opportunities in Poland and we haven't found any which were attractive enough to put money into."It's a combination of geology and costs. We came to the conclusion (shale gas) production would be very expensive which couldn't compete with the price of gas in Poland. But we may be wrong. Very serious players are still investing in Poland because they have a different belief about the potential."
However, not everyone is optimistic about shale-gas development in the UK. A recent Chatham House paper said despite there being a strong potential domestic market for UK shale gas, several factors will prevent the industry's development. A lack of data, uncertain production costs and an insufficient service sector won't help, the think tank said. Any hope of UK shale gas cutting European gas prices is also "optimism (which) is very much misplaced", the report said. "The UK is physically linked into the European gas market via the Bacton Interconnector," the report said. "Therefore, if UK prices fall, once the gap with higher European prices is large enough, gas begins to flow to the higher price market, pushing up UK prices."
BP's latest Energy Outlook, which predicts energy supply and demand trends over the next 20 years, estimates that shale gas will account for 21% of total global gas production by 2035. However Europe will have "every limited prospects" for developing the unconventional fuel in that time, BP said, because of infrastructure constraints and political opposition.
Holleaux said GDF Suez won't know how successful its shale gamble will be until the company has drilled at least at least six wells and started test production. Despite the degree uncertainty over the UK's onshore shale potential, GDF Suez is confident in the country's offshore play, with Holleaux reiterating the firm's commitment to the country's mature plays, the Southern Gas basin in particular.
In January GDF Suez announced first gas from the Juliet field, a subsea development on the western flank of the Southern Gas basin. The field, discovered in 2008, is thought to hold 70 million cf of gas. "Juliet is a relatively small field but it's important to us because it's a demonstration that it's not yet time to give up the Southern Gas basin," Holleaux said. "There is still money to be made; there is still gas potential to be produced to supply the European market."
GDF Suez is also operator of the Cygnus field, in the southern North Sea. The field is thought to hold gas reserves of around 636 billion cf and is considered one of the most important undeveloped fields in the North Sea. The company expects first gas from Cygnus in late 2015. "We strongly believe that Europe is a major area for exploration and production is still an area where (big) discoveries (like Cygnus) can be made and where companies like ours can make significant profit by exploring and producing," Holleaux said. "Even in countries like Germany we are still developing new fields. There's still a lot of potential in Europe and we want to be one of the significant players to tap these fields."