While most aren’t eyeing the Eastern European shale potential with too much excitement, Chevron stands out for its decisive buy-up of acreage in this region. Chevron has acquired millions of acres in Poland, Romania, Ukraine, Lithuania and Bulgaria. So far discoveries haven’t been as good as hoped; some explorers have pulled up stakes and others may soon get rid of their assets here. There is a great deal of uncertainty surrounding the regulatory environment while protests continue unabated across the region.
Under the current conditions in Eastern Europe, it will be hard to turn a profit. When the US began exporting gas, it caused global prices to fall and made unconventional drilling less profitable overseas. A KPMG study hits this home, saying that shale extraction costs in Europe will be around 40% higher than in the US. Geologically speaking, Europe’s shale is generally trapped about 50% deeper than US shale and the temperatures are typically higher. These countries would also need very expensive gasification facilities and other infrastructure that is not in place and will add exponentially to the costs of production and getting product to market.
The regulatory framework for shale extraction in the US is favorable. Elsewhere, the fiscal terms aren’t nearly as attractive for unconventional development. These terms were made for conventional oil and gas and translating this into unconventional drilling means that the costs can’t be recouped easily.
There are also some property problems. While the US allows individual land owners to lease the oil and gas rights on their property to E&P companies, this doesn’t usually work overseas. Overseas you have to go directly to a country’s Energy Ministry—sometimes this is easier, but sometimes the doors are closed immediately.
The expertise for fracking is pretty much concentrated in the US, so carting experts and tech back and forth is another cost that adds to the final tally.
Europe’s population density is also much higher, and this is the key aspect contributing to the strong opposition to fracking in terms of related health risks to those living nearby. This is keeping the regulatory environment from developing in favor of exploration and development.
No one’s really sure if the scale of shale gas production could be big enough to make it successful on a “revolutionary” scale, or whether these countries will be able to build the infrastructure necessary to make shale gas an actual industry.
Exploration is underway, but for now—no fracking. Chevron’s only hint is that fracking could begin “over the next few years”, while full commercialization could be 10-15 years away. Chevron is pursuing a policy of patience here, but is it worth it? Probably for a supergiant will millions of acres--but less so for others.
The regulatory environment is getting there, but it’s really still plodding along. Earlier this year, the European Parliament rejected a ban on shale gas. Late last year, the European Commission issued a report hinting that shale gas production in Europe could help the EU maintain a stable dependency on energy imports, though only under ideal conditions.
On 27 March, the EU executive released a green paper, setting out Europe's energy and climate aims for 2030. It took a fairly favorable position on shale gas. But the EU does not dictate policy for its member states—it only provides guidelines.
Here’s what the playing field looks like, and it’s dotted with pitfalls:
Lithuania is estimated to have up to 60 billion cubic meters of shale gas reserves.
Last year, Chevron acquired 50% of LL Investicijos and was the only company to bid on a January shale gas exploration tender. Still, the signing of the exploration deal has to wait a bit as the Baltic country holds out for its parliament to implement stricter environmental policies. Now we’re probably looking at May before things get under way.
The new policy would see the requirement of an additional environmental impact study specifically for exploration and separate from the impact study for shale gas production once discoveries are made.
Lithuanians are protesting the potential shale boom in their country by targeting Chevron specifically, but there seems to be slightly less pressure on the government than in Bulgaria and Romania.
In an interview with the Baltic Times, Dr. Ramunas Vilpisauskas, Director of the Institute of International Relations and Political Science, Vilnius University, notes that while some members of parliament are concerned about environmental issues and that some local communities have increased their lobbying against shale drilling, the government seems “determined to proceed with exploration, and if this is done properly and people are better informed, they might become more positive about this source of energy.”
The Lithuanian government is being very aggressive in pursuing its independence from Russia, which now provides 100% of the country’s gas. Those plans include a floating LNG platform to be in place by 2014.
Romania has two key prospective shale gas basins: Pannonian-Transylvanian Basin in Hungary and Romania, and the Carpathian-Balkanian Basin in Southern Romania and Bulgaria. There is no accurate assessment yet of the shale gas reserves in these basins, but overall, Romania, Hungary, and Bulgaria together are estimated to hold about 539 billion cubic meters of shale gas.
The Pannonian-Transylvanian Basin is a large, Neogene-age, extensional basin covering a 200,000 square kilometres area largely inside of Hungary, Romania and Slovakia. The Carpathian-Balkanian Basin is a geologically complex basin in Southern Romania and Bulgaria. Another area that borders the Carpathian-Balkanian Basin, the Moesian Platform, may also have prospective shale gas areas.
As we noted in last week’s Intel Notes, Romania has lifted its moratorium on fracking. Shale gas exploration will begin in Vaslui, in the country’s east, and work its way southward.
Chevron will begin exploration in its Barlad concession. In July 2010, Chevron secured three shale gas exploration blocks in the Romanian portion of the Carpathian-Balkanian Basin, totaling 675,000 acres. The supergiant began shale gas exploration in 2010 and completed seismic work in 2011, but was forced to halt operations under the moratorium. Chevron now plans to drill an exploration well in Romania during the second half of this year.
There is still a lot of uncertainty here. Opposition remains both in terms of environmental concerns and issues of land reclamation for exploration. As we noted last week, the Romanian government remains convinced that if Chevron makes any big discoveries, the necessary environmental permits will follow and public opposition will wane in favor of the country reducing its dependence on Russia. It will have to be a big find, though.
Bulgaria’s ban on fracking remains in place under strong public pressure. Chevron, of course, could begin traditional drilling while it waits for Bulgaria to lift the ban on fracking, but it would ultimately be a waste of money if the ban is never lifted.
In January 2012, the Bulgarian Parliament adopted an indefinite moratorium on hydraulic fracturing following a wave of environmental protests. That same month, the government revoked a shale gas exploration permit granted to Chevron for deposits in Northeastern Bulgaria.
And this is where a new development is emerging: Eastern Europeans are supporting each other against fracking, making it a cross-regional issue and further strengthening the protest movement. In Bulgaria, protesters are gathering to support their counterparts in Romania under the motto "Two Countries, Same Water - Two Nations, One Fight." Indeed, their concerns overlap. Now that Romania has decided not to extend its moratorium on fracking, Bulgarians living near the border and sharing the same water resources are concerned it will affect them as well.
There was a lot of hope pinned on Poland, but the initial enthusiasm has been dampened. While the US Energy Information Agency had earlier estimated that Poland’s recoverable reserves were around 5.3 trillion cubic meters, Poland has since conceded it is more likely around 1.9 trillion, or more likely still in the 346-768-billion cubic meter range. Drilling could reveal greater reserves, however, and the newest estimates are based on data from a few dozen wells. This lower-end estimate still could put Poland third in terms of shale gas reserves, behind Norway and the Netherlands; or possibly fourth, behind Ukraine.
In total, 109 licenses to drill have been awarded for Poland’s Baltic Sea basin. Fewer than 20 exploration wells have been drilled to date, many of them with disappointing results. So far, Chevron has drilled 3 wells in Poland, with exploratory drilling to continue throughout this year.
Poland is in a tight spot between its need for Russian gas and its shale gas potential, for which the timing just isn’t quite right. Russia is trying to get Poland to agree to the construction of a new pipeline that would carry natural gas from Russia through Polish territory. Poland is playing hard to get here, saying it doesn’t need any more Russian gas. Still, Gazprom late last week said it had signed an MOU with Polish pipeline operator Europol Gaz, which is a joint venture between Gazprom and Polish state-run gas firm PGNiG SA. Polish officials say they know nothing of this deal and insist that Gazprom is putting its own spin on the story. The truth lies somewhere between these two stories, as it usually does. Polish officials also noted in their denial that Poland would continue to be a prominent transit country for Russian gas. While Gazprom says this second planned segment of the Yamal-Europe gas pipeline has been green-lighted, Poland says they are simply conducting a feasibility study and there is no obligation to actually go through with the investment. This segment of pipeline, if carried through, would traverse Poland en route to Slovakia and Hungary.
But Poland’s shale gas drive, which it launched in earnest in October 2012, has so far been disappointing. The country announced late last year that it would invest some €12.5 million to develop exploration by 2020, but Chevron aside, the enthusiasm isn’t shared across the board. In mid-2012, ExxonMobil pulled up stakes in Poland after its exploration efforts failed to yield the hoped-for results. In mid-March, Talisman Energy Poland said it was considering withdrawing from the country. To wit, ExxonMobil said it was losing its shirt in Poland.
Ukraine has an estimated 1.2-1.5 trillion cubic meters of shale gas deposits, and 2.5 trillion cubic meters of technically recoverable shale gas. This makes it the third largest in Europe, depending on what Poland settles on.
In January, a Ukrainian regional council voted to approve a deal with Shell to develop a shale gas field. The deal gives Shell exploration rights in the Yuzivska shale gas field in eastern Ukraine using hydraulic fracturing technology. Shell could invest as little as $10 billion or as much as $50 billion in this project, according to Ukrainian officials. (For now, Shell has committed to investing $400 million in 2013). Drilling will begin this year and production, Shell hopes, will begin in 2015. Do not underestimate the politics here, or how it breaks down regionally: Shell’s acreage is in the Donetsk region, where the dominant political force is the Party of Regions. When Chevron signed an exploration agreement for drilling in Western Ukraine, where the Svoboda Party dominates, it hit a few snags because the party has supported environmental opposition to fracking.
This is what Ukraine’s officials are hoping will happen: Over the next decade, Ukraine’s shale gas reserves will be developed to the extent that the country becomes entirely independent and even becomes an exporter of gas, leaving Russia out in the cold, while foreign direct investment is revived despite the resounding level of corruption.
Can it happen? Yes. Here the population doesn’t have nearly the power that it does in Bulgaria, for instance, to pressure the government to rethink fracking or even to ensure a modicum of environmental checks and balances. This is oligarch land.