The Potential of Spanish Shale Gas

The invasion and annexation of Crimea has EU policymakers scrambling to improve energy security. The European Commission hopes to publish a roadmap by June 2014 that will spell out how exactly Europe can rid itself of Russian gas. Meanwhile, member states are not going to wait. That means not only trying to find other suppliers around the world (U.S. LNG), but also developing Europe's domestic energy resources. Poland has been the strongest proponent of exploiting European shale gas as an alternative to imported Russian gas. British Prime Minister David Cameron has strongly favored the same approach in the U.K.

Spain is also hoping to get into the mix. Spain has been a nonfactor when it comes to energy production, largely dependent on imports. The Iberian nation is the fourth largest importer of LNG in the world, and relies upon imported oil and gas to meet 99% of demand.

But the success of the American shale gas revolution and the urgency with which Europe now wants to develop its own energy resources has the Spanish government pushing hard on shale gas. A new report from Deloitte suggests that Spain does in fact have sizable shale gas resources and could turn itself into a net exporter of natural gas if they chose to exploit them. Spain's oil and gas reserves have been tough to access using conventional drilling methods, but with the proven techniques used to tap shale in the U.S., Spain thinks it can do the same. The report estimates that oil and gas could contribute $22 billion to the Spanish economy in 2030, creating 250,000 jobs in the process.

Spain has suffered through a bad economic depression that has the unemployment rate topping 26%, and a youth unemployment rate around double that. That has the conservative government led by Mariano Rajoy desperate for anything that smells of economic growth. The European Commission does not have binding laws governing fracking, leaving governance up to member states. Rajoy's government supports drilling, but regionalism remains very strong in Spain, and several provinces have enacted bans on hydraulic fracturing. Cantabria became the first province to pass a ban on fracking last year, and Navarra followed suit. La Rioja, which produces far more red wine than it does natural gas, has also outlawed fracking. Catalonia joined them earlier this year when it passed a ban on fracking on January 30th.

But legislation published late last year in response to local bans expressly authorized hydraulic fracturing. And that legislation was passed at the national level, meaning that, in theory, it supersedes any local laws on the issue. Before 2013 Spanish law did not specifically say whether or not fracking was permissible. Now, armed with the new law, the Spanish government is challenging local fracking bans on legal grounds in an effort to kick start the shale gas industry.

The new Deloitte report will no doubt be making the rounds in the Palacio de la Moncloa. Recent oil discoveries have infused a sense of enthusiasm within the Spanish government.  

Repsol (MCE: REP) has plans to explore in offshore waters between the Canary Islands of Spain and the coast of Morocco. The company projects that, if successful, the area could produce up to 100,000 barrels per day. Repsol has plans to invest $9.8 billion in the prospect and will begin drilling in the second quarter of 2014. It estimates that the waters of the Canary Islands hold between 900 million and 2.2 billion barrels of oil equivalent. Repsol has run into local opposition on the Canary Islands. The local government opposes Repsol's plans on the fear that an oil spill would ruin the island's tourism economy. The Canarian government has called for a referendum on the matter. However, Repsol has the backing of the Spanish government in Madrid, which curtly dismissed the Canarian government's demand, declaring that only the central government has a say in the matter.

Also near the Canary Islands, but just across the maritime border in Moroccan waters is a play by Genel Energy (LSE: GENL). Led by former BP CEO Tony Hayward, Genel has made more headlines for its better known ventures in Iraq, where it is a pioneer in developing Kurdistan's oil fields. Genel leads a consortium (35% stake held by Cairn Energy (LSE: CNE), and 25% by the state-owned oil company of Morocco, ONHYM) exploring for oil in Jurassic aged rocks in the Juby Maritime field. It spudded one well so far and will continue drilling through this year. On March 10 Genel announced an oil discovery in its Juby Maritime field. It also has interests in the Sidi Moussa field and Mir Left. Genel's total acreage consists of 16,500 square kilometers in the area. Genel's recent discovery of oil in the Juby Maritime play shows some reasons for optimism, but whether or not it can be commercially recoverable remains to be seen.

While offshore oil and gas are very much in the early stages in Spain, onshore looks a bit more promising. The Basque-Cantabrian Basin in northern Spain is the richest shale play in the country, with an estimated 42 trillion cubic feet of natural gas, of which 8 tcf is technically recoverable, according to the U.S. Energy Information Administration. And while there is 3 billion barrels of oil located in the basin, the EIA only estimates a fraction of it is technically recoverable.

There are a few small companies that are well positioned to benefit from the national government's attempts to open up Spain for shale gas development. San Leon Energy (LSE: SLE) owns two licenses to nearly 3,000 square kilometers in the Cantabrian basin. It is also awaiting 8 more permits, which are pending approval. It is still doing seismic work and is in the early exploration phase. BNK Petroleum (TSE: BKX) also has a position in the Cantabrian basin. It has three concessions - two in Castilla and Leon with a total size of 333,000 acres. It also has 61,470 acres near the community of Cantabria. BNK Petroleum recently drilled a successful horizontal well in Poland in February and reported positive results. It hopes to drill in 2014.

Like other European countries with a strong environmental opposition to drilling, Spain is not the easiest country in the world to make shale gas successful. And make no mistake about it, this will not be the next Marcellus or Bakken. Yet it does offer investors a rare opportunity - to get in on a play that is largely unknown from the beginning. Spain is on no one's radar at this point. There are risks - the greatest of which comes from the political uncertainty as regional governments fight the central government. But, if the Rajoy government can beat back attempts to block fracking, Spain may yet turn into a sizable shale gas producer.