The European Parliament has rejected a proposal to ban new hydraulic fracturing operations on European Union territory, but while opportunities abound, they won’t be revolutionary just yet.
Europe’s decision was necessary. There was simply too much at stake: Russia’s grip on the market has gotten too strong; EU natural gas production is on the decline; and consumers have not benefited from the US natural gas boom.
Worse, if Europe does not embrace its shale potential, expensive energy could eventually drive energy-intensive industries elsewhere (like the US) and this would spell Europe’s economic doom. Industries in Europe pay on average three times the price for gas as their US counterparts.
While Europe has serious environmental concerns about fracking, it will have to figure out how to address these with the appropriate regulations. The environmental resistance to fracking has led to an increase in European imports of polluting coal from the US to fill in the energy gap. In the end, the anti-fracking campaign is doing nothing for the environment—in fact, it may be harming it with the uptick in coal use.
Still, the 27 member countries of the EU can take their own decisions on how to proceed with their shale reserves—and while some are on board, others are under no small amount of political pressure to bow to environmental concerns.
There will be a number of complications for those who would like to see a shale revolution in Europe, from prohibitive environmental regulations and land ownership rules to extraction complications.
Environmentalists, for their part, are concerned about fracking triggering earth tremors, about the potential for fracking chemicals to pollute ground water, and about the amount of water needed for fracking.
How much shale are we talking about?
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In Eastern/Central Europe, the shale reserve leaders are Poland, Romania, Ukraine, Lithuania, Hungary and Bulgaria, with France, the UK and Germany leading Western Europe.
• estimated 346 billion-768 bcm in Poland
• estimated 5 trillion cubic meters in France
• estimated 480 bcm of shale gas reserves/120 bcm of recoverable reserves in Lithuania
• estimated 150 bcm (onshore) in the UK; potential 1,000 tcf offshore
• up to 2.3 trillion cbm of technically extractable shale gas in Germany
• estimated 538 bcm of shale gas reserves jointly in Romania, Bulgaria and Hungary
• estimated 5.5 tcm/1.18 tcm recoverable in Ukraine
What about the regulatory environment?
• Austria allows fracking, but has set up a largely prohibitive regulatory environment, and investors have pretty much given up on shale here
• France has banned fracking altogether, so its massive Paris basin is off limits for now. The ban is the result of protests that erupted when the public learned that the government had issued hydraulic fracturing permits in the south to Total and others.
• Bulgaria placed a moratorium on fracking in January 2012, after reversing a decision to award Chevron an exploration license. Still, Chevron is doing its best to force a change of heart in Bulgaria, and all is not lost
• Romania has placed a moratorium on shale-gas exploration, and the Czech Republic is considering the same
• While the UK placed a temporary ban on fracking in 2011, there are indications this will be reversed
Where do we see opportunity?
Interesting things are happening in Ukraine and we like where things are going because the country is showing a sudden bravery in the face of Russian bullying, which we think will reverberate in the shale sector.
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For one, for the first time since its independence, it has begun buying gas from Europe (Germany) in an effort to cut its dependence on Russia’s Gazprom. This came about earlier this month after Russia refused to cut a deal with Ukraine to lower gas prices. It also comes as Russia uses the South Stream pipeline to reduce its own dependence on Ukrainian pipelines. Russia has positioned itself to further increase its negotiating power vis-à-vis Ukraine. Ukraine saw the writing on the wall and looked to Germany. In November, Ukraine began buying gas from Germany’s RWE at a lower price. It will be a slow weaning off of Russia, reducing gas imports from Russia by only 4% this year, but by as much as 16% next year.
This is only a temporary resolution, however. The long-term objective is to boost Ukraine’s own deep-water gas extraction in the Black Sea, to which end it is investing in new drilling rigs. Right now, that gas is transporting through Poland, and as of January 2013, it will also come through Hungary. But it could also be routed through Slovakia, Romania and Bulgaria.
Importantly, Gazprom is losing power in Europe, however slowly. This year has been a bad one for the Russian giant. It is facing an EU investigation into its market practices and has lost price disputes with a number of companies in Germany, Italy, France and Poland. All of this has emboldened Ukraine.
In terms of shale gas, in August Ukraine awarded a consortium led by ExxonMobil with rights to explore a Black Sea oil and gas field. It has also invited Chevron and Shell in. TNK-BP Holding (a BP-Russian joint venture) has announced it will invest $1.8 billion in Ukrainian shale projects. Italy’s ENI SpA has also acquired a stake (for an undisclosed amount) in Ukraine’s LLC Westgasinvest, which owns shale-gas territory. Chevron Corp. is currently negotiating a production-sharing agreement with Ukraine as well.
Poland has been a bit of a rollercoaster of ups and downs, but it’s all a matter of perspective. Earlier estimates of shale reserves have been downsized to 187 trillion cubic meters. It’s still pretty attractive. But furthering the disappointment, ExxonMobil pulled out of its Polish shale exploration operations, but not everyone has. France’s Total SA, Royal Dutch Shell PLC and ConocoPhillips (US) all have exploration rights in Poland and show no sign of withdrawal.
Significantly, Poland has fought tooth and nail (and sometimes dubiously) against the EU’s anti-fracking activities. There are frequent reports that the government has unleashed its secret police to target environmental groups publicly opposing fracking.
Lithuania is also promising. Chevron has recently bought into a Lithuanian shale-gas venture. Poland’s Lotos Group and Warren Buffet’s CalEnergy Resources are also in bed with Lithuanian shale gas.
The bottom line is that there are emerging opportunities, but any shale revolution in Europe will not be on the scale, or with the speed, of the US. Firstly, environmental concerns have not been erased with the European Parliament’s rejection of the fracking ban. Secondly, the geology is less favorable in Europe than in the US, making fracking more complicated and expensive. Thirdly, while sub-surface land rights for shale deposits in the US were largely in the hands of private owners, in Europe these tend to be the purview of governments.
This doesn’t mean the opportunities are not vast. You just need to be a bit cleverer to pinpoint them.
By. Oilprice.com Analysts