Bart J. A. Willigers, Palantir Solutions Ltd., Aberdeen
Although the first commercial shale wells were drilled in the early nineteenth century, shale gas production did not gain momentum until the recent development of technologies such as horizontal drilling and hydraulic fracturing. But once these new methods were available shale gas production really took off.
In 2000 shale gas production accounted for about 1% of total gas production in the United States. In 2007 shale gas production comprised 6% and last year shale gas production increased to 17% of total US production. Industry commentators are predicting that the growth will continue and that shale gas production will soar to 35% of total US production by 2020.
The incredible increase in gas production turned the US from a large gas importer to a modest gas exporter. The rapid increase in gas production and proven reserves of unconventional plays in the US has been popularized as the "shale gas revolution."
Large scale unconventional gas production in the US has already had a significant impact on global energy prices. The significant rise in US indigenous production has reduced its LNG import requirement, freeing up cargoes for alternative destinations. Although it is difficult to establish a clear relationship between increasing shale gas production and the global reduction of gas prices due to other factors, such as reduced energy demand in the present recession in many countries and the increase in LNG liquefaction capacity, one could certainly argue that shale gas contributed to suppressed global gas prices.
Shale gas development in Europe
Recently the media has speculated whether the shale gas revolution currently taking place in the US could be repeated elsewhere, notably in Europe. Although significant volumes of unconventional gas deposits are present in Poland, France, Germany, Hungary, Sweden, Turkey, and the United Kingdom, shale gas developments are running many years behind their counterparts in the US.
In January 2011 the Office of Gas and Electricity Markets (Ofgem) estimated European unconventional gas resources at around 1250 trillion cubic feet. This amounts to an equivalent of 19 years of current UK annual gas demand assuming an extraction rate of 5%.
In order to obtain expertise in shale gas, many European companies have formed joint ventures with US companies. ExxonMobil has acreage in Germany, where it plans to drill for shale gas, and in Hungary, where it has already begun drilling. ExxonMobil and Marathon have plans to explore for shale gas in Poland. OMV is exploring for shale gas in Austria. Devon Energy is exploring Denmark. There are a number of niche players in Europe including 3Legs, AJ Lucas, BNK, Cuadrilla Resources, EruEnergy Resources, RAG, San Leon Energy, Schuepbach Energy, and Sorgenia E&P.
Shale gas skeptics have pointed out that the geology in Europe is less favorable for commercial development. The tax breaks that provided an important incentive in the US are not in place in Europe. The service industry for onshore drilling is much smaller and lacks the expertise that is present for operators in the US. Europe also has much stricter environmental regulations.
Finally, there is concern that disruptions caused by shale gas developments will not find public acceptance. Population density in Europe is 100 to 200hab/km2 which is much higher compared the US with an average of just 30hab/km2.
Shale gas developments in the US are often located in sparsely populated areas. Furthermore, the public is accustomed to drilling activity due to a long history of onshore oil drilling. The US mode of shale gas developments, where hundreds of wells are drilled across a specific play, is therefore unlikely to be acceptable for most European regions. Instead a more targeted approach would have to be developed. More local opposition can be expected in Europe because the benefits of gas extraction will accrue to national governments and not local landowners as is the case in the US.
Events unfolding in 2011 seem to support some of the argument of the shale gas skeptics. After drilling three wells in southern Sweden, Shell announced in May 2011 that it was not going to renew its exploration licenses after they showed that no gas could be produced from the wells. In June, Cuadrilla Resources suspended drilling operations on the first UK shale gas well after a number of small earthquakes were detected in close proximity of the drilling site near Blackpool.
Although the first Dutch shale gas wells are planned to be drilled by Cuadrilla Resources before the end of 2011, local opposition did prevent the plans for a second drilling location in the southern Netherlands. The largest blow for the shale gas supporters occurred in May when the French parliament became the first government to vote for a ban on shale gas developments because of concerns about environmental pollution.
Other developments support a more positive outcome with respect to the development of European shale gas. The German and UK governments remain cautiously supportive of shale gas developments. The German Research Centre for Geosciences (GFZ) has received € 7.1 million (US$9.94 million) from the Ministry of Research to explore potential of unconventional gas production.
The European country most committed to unlocking its shale gas reserves is Poland. Poland has the largest shale gas reserves in Europe with estimates ranging between 187 and 350 tcf, equal to more than 200 times its annual natural gas consumption. To date, Poland has issued 86 exploration licenses. After the first horizontal gas well was completed in June, ConocoPhillips announced that gas production is expected to begin within two years.
If a US-style shale gas revolution were to materialize in Europe, it would certainly redraw the energy map across the continent. Over the past decades Western Europe has become increasingly reliant on Russian gas imports as indigenous production of conventional gas has progressively declined. About a quarter of European gas demand is now imported from Russia. The Oxford Institute for Energy Studies predicts a shortfall of natural gas of 1.8 tcf per year by 2020.
Recently, the urgency to find more gas has further increased after Germany announced its plans to phase out 17 nuclear reactors that produce 23% of the electricity for Europe's biggest economy and its plans to limit emissions of greenhouse gases.
The stakes are particularly high for Poland. Russia's Gazprom presently supplies about 70% of Poland's gas demands but the vast shale gas reserves could allow the country to become a net exporter of energy and break free of its dependence on Russian natural gas. Shale gas revenues could finance new infrastructure projects and could also help the country gain more geopolitical weight.
In this context the statement made in May 2011 by the Polish foreign minister was not surprising: "Exploration of our own resources is our chance and our obligation. Shale gas is a chance to limit Poland's and Europe's dependence on imports."
Similar opinions are voiced in Germany. Der Spiegel reported that unconventional gas resources would allow Germans to "emancipate themselves" from the "energy-hegemony of Russia." The development of new resources would also be attractive to the German energy mix, as increased power production from gas and gas-fired plants would generate only about half as much CO2 emissions as coal power plants.
The future of European shale gas
After several years and much speculation, recent developments give some insight into the future of shale gas in Europe. Although it might seem that the shale gas skeptics have the upper hand so far, progress is being made in the development of European shale gas reserves. The economic potential of shale in Poland seems to be the highest given the regional geology and the governmental support. There seems to be a consensus that the chance for a commercial exploitation of European shale gas is the highest in Poland.
Shale gas developments in other European states seem to be more uncertain given that there is more public opposition and the geological potential is lower. Whether shale gas developments in these states will take off will be largely determined by whether the development of new technologies will make shale gas exploitation cheaper and safer for the environment.
Although there is much debate as to whether a gas shale revolution will ever happen in Europe, there appears to be a consensus that unconventional gas production from within Europe is unlikely to make a significant contribution to gas supply until 2020 at the earliest.
About the author
Bart J. A. Willigers, a principal consultant for Palantir Solutions Ltd., has assisted a large number of companies in their improvement of decision-making tools and processes. His background in risk modeling and management has provided him with business insights that have directly affected strategic corporate decisions around major business spends, licensing purchases, and project sanctions. Willigers has written numerous papers on risk modeling and geology for the upstream oil and gas industry.