Maximizing the Shale Gas Opportunity in Europe

Influence on the world gas market

Even prospects for shale gas in Europe can make waves

Following insights by Schlumberger’s Vice President, Shale Gas, Chris Hopkins’ remarks, and a some skeptical food for thought from Russian energy analyst Konstantin Simonov, they and other participated in a keynote panel discussion at Shale Gas World 2010. Tomasz Maj, General Manager of Talisman Energy Polska Sp. z o.o., and Onursal Soyer of Lambert Energy Advisory joined them onstage.

The topic was Maximizing the shale gas opportunity in Europe.

“In the US the experience was drill bit led,” began panel moderator Onursal Soyer, “but in Europe we may not be able to do that. It may be about adaptation and innovation. Also, how can seismic be used to speed up exploration phase?”

Schlumberger’s Chris Hopkins replied: “It’s fair to say that we’re not going to recognize shale gas in Europe as not a drill bit-related issue. What kind of activity levels are you going to see here? Shale gas will absolutely be in Europe, but will it be like in the US? Who knows?”

“They never had to use seismic in the US because there was penetration,” he recalled. “Now inversion routines are being used to hunt the sweet spot like in the Bakken, Marcellus, etc. You’ll see 3D seismic shot here in Europe as they focus in on some of the areas. There’s going to have to be a technological breakthrough regarding the water. I guarantee that we won’t be pumping all the water here that we are in the US.”

Mr. Soyer made a statement addressed specifically to Konstantin Simonov.

“If we’re talking about price levels, today the price in Europe remains linked to the oil price – it comes very close to the $13 that you mentioned, and Russia’s maintaining of contracts may be giving life to shale gas”

“Officials have been speaking about 10 years of cheap gas,” replied Simonov. In the market until 2020 there will be enough gas, reforms of price, and Europe is waiting for a spot system, so there may be less correlation with the oil market.”

“How can you produce shale gas if you also want to have cheap gas? It’s a serious challenge for Europe: what will its policy be? If you want to increase the production of gas you need to calculate the price,” he concluded.

Simonov noted Qatar’s cheap supplies of gas to Europe, and the building of new LNG facilities to buy gas from Qatar. “You must invest in infrastructure,” he said. “If you have locally produced gas, then there’s no need to build pipes from Azerbaijan, etc. Gazprom and Russian Prime Minister Vladimir Putin have no other possibility than to be more flexible on price – we see they have made changes in these contracts. But what will the final choice be? Brussels seems to want everything, but it’s not possible.”

How to speed up shale gas production in Europe, was a question raised by the panel moderator.

Talisman’s Tomasz Maj piped in. “On the technical side, clearly there is a monumental amount of work to be done. At the moment seismic is being acquired. Were at the stage of poking holes in the ground, not at the rocket science stage. It’s not like the Eagle Ford shale, a huge proportion of which is covered by seismic. We’ll be drilling horizontal wells, seismic, etc. to get a grip on what’s out there.”

“The signals coming out of Brussels are so mixed because there are so many differing opinions in the EU,” he said. “This discussion will continue for a long time. For Poland, producing domestic gas is a no brainer. It’s going to be a long process of negotiation and bedding down.”

Onursal Soyer asked panel members whether they thought Polish shale gas might eventually be exported as liquefied natural gas (LNG).

“This has been a question raised several times in the US,” said Chris Hopkins. “The US exports a small amount of LNG out of Alaska. There have been some people trying to obtain permits. There will be some political issues involved in a substantial export, but a bigger issue is the economics: the cost of export and getting it to markets. I’m not sure it can be a reality for Poland for several reasons.”

Mr. Simonov said LNG exports could become a burning issue – a real opportunity -next year for the US.

“LNG exports would mean it must increase production. If it wants to do this we must see an increase in production. I’m not optimistic about this process, but one can read about it. Even now we see the impact of the shale gas revolution on Russia, and on Qatar’s LNG, which it wanted to sell to the US, but came to Europe instead.”

He said that Gazprom’s Shtokman field project, a joint venture with Statoil, had also been affected.

“They’ve postponed the final investment decision and it’s still a question as to whether or not it’s necessary. We know that Statoil wanted to increase exports to the Atlantic market. Information about shale gas can be a driver of changes in this situation,” opined Simonov. “Even speaking about LNG exports from America can have a serious impact on gas projects.”

The panel recognized the tremendous glut of natural gas in North America produced beyond US needs, and that money had been spent preparing for importation; they also noted the actual disparity between the price of natural gas in the US and the price of oil.

The question of Gazprom’s flexibility was raised: just how flexible was the Russian gas producer?

The final conditions of the Polish contract with Gazprom were not so binding, according to Konstantin Simonov, who said a sign of changes in the Russian position was visible in contracts with Gaz de France and others, despite denials from the Kremlin.

“There’s no other way for Gazprom than to do it,” he said. What will the spot prices be in Europe in 2015-20– they think spot prices means cheap, but if we see the situation in the US, spot prices can be unpredictable.”

Simonov continued, “The Kremlin is attempting to establish better relations with Qatar who’s stopped investment into new LNG plants. Next year the two of them want to announce a big gas site in Qatar and announce new relations between them. The strategy is simple: more flexibility but better relations with Qatar to try and introduce a spot market in Europe.”

“Mid and downstream are controlled by a state-owned monopoly in Poland,” explained Tomasz Maj, “so strategy here comes down to a political decision. Much of the shale basin is in northern Poland, which has a deficit of power, so there’s clearly an opportunity for players in the power sector to invest in power plants, chemical refineries and so on.”