Something Smells Expensive

How to cut costs for shale gas in Europe

Several oil and gas operators from Europe and abroad weighed in on the prospects for shale gas development in Europe and how to deal with the potentially high costs of exploration and production at the second day of Shale Gas World 2010 in Warsaw, Poland.

Menno Koch, Director at Lambert Energy Advisory kicked things off, saying “Not that I’m not bullish on shale gas but I think it takes time.”

“Over 10 years ago it was insignificant in the US, but after it cracked at the Barnett shale gas production has grown exponentially, now making up approximately 12% of the US gas supply. Would a similar scenario be possible in Europe?”

He noted the limited geophysical and geo-mechanical data.

In Europe, Koch said, there was an imminent threat: high drilling and completion costs.

Saponis Investments Sp. Z o.o. has estimated that its upcoming Wytowno S-1 well, with a TVD of 3315 m, will have an AFE cost of US$10MM to drill, case, hydraulic fracture complete and test the Ordovician/Silurian gas shale formation deliverability.

“Smaller companies simply do not have the capital to test the shale. Although it would have the benefit of transport costs, it’s all a price game in the end.”

“Europe lacks a developed onshore service sector,” he said. “In contrast the US has a vibrant well service industry. There are 1,000 wells operating at the moment, and in the 2008 boom there were 1,600.”

Koch added, “The highly competitive atmosphere is contributing to lower break even costs for shales.”

“Does Europe need that same entrepreneurial spirit?” he asked. “Complex geology laws mean that you can’t apply the same economies of scale. Can you apply the sweet spot approach rather than being driven by the drill bit?”

“How can we break out of what appears to be a vicious circle?” was Mr. Koch’s final question to the audience.

Karoly Kiss, Senior Exploration Geologist, Unconventional Projects at Hungary’s MOL brought in a European perspective to the discussion. He talked about the company’s management of a joint venture with Exxon-Mobil and Falcon Energy to complete an exploration operation in Hungary’s Mako trough.

He told delegates that MOL was a Hungarian based oil company with a strong intention to explore the country’s resources, and that it had identified shale basins in Hungary about 40 years ago.

Kiss reported that MOL was lacking in experience for such types of plays, so combining with others gave it a chance to learn.

“After an extensive evaluation program of two and half years – testing wells – we did not touch the shale gas,” he reported. “In this year the partnership terminated and the project is pending now.”

Kiss said MOL had learned many things from this experience and was in a position to evaluate subsequent basins.

“We are going to another basin,” he explained, “and have not fracked but have drilled and proved the presence of the gas in the basin. We’d like to get some behavioural characteristics of the rocks.”

Access to the land, according to Kiss, was more and more problematic in Hungary, because it was mostly agricultural area and the remainder was natural, protected area. But he said Hungary was in a good position from the water use aspect of hydraulic fracturing.

In terms of costs, Kiss said Hungary’s couldn’t compare with those of US companies. “We believe we have a cost efficient operator. With a special measurement, and program it’s not higher than before.”

Now, he reported, MOL was studying shale basins in Hungary, including Mako, Bekes and Derecske, in the south-eastern section of the country.

“What we’ve seen in previous operations has been promising,” said Kiss. “Everyone agrees we need to reduce the costs, but the initial costs are very high. What chance do we have? We need to fit the technology to the given environment.”

Hungarian mining law has a lower royalty which is very promising for us.

Open mind to see differently

Chris Faulkner, CEO at Breitling Oil and Gas, offered up his insights on Europe based upon his company’s activities in the Woodford and Haynesville shales in North America.

He said shale gas in Europe would require a longer-term horizon: “In Europe we’re talking about two decades before were going to see any production of shale gas,” contended Faulkner. “Lane Energy will have access to a lot of data. Our focus has shifted to the wet gas and oil plays, and we’re waiting for the price to rebound a bit.”

Faulkner said he would refrain from repeating arguments typically leveraged against shale gas’s chances in Europe, things like lack of water and infrastructure, and the exorbitant price of drilling. “Cheap costs don’t occur until high drilling costs have occurred,” he retorted.

“I’m excited to see how the technology will evolve. Good and bad things we’ve learned in North America will translate here. It involves trial and error and bringing technology that will work here.”

Gordon McCullough, Business Development Manager for Halliburton in Europe, likened the development of shale gas in Europe to a “set of steps without a handrail.”

“As we begin to work in these new countries and start to set up operations, we’re going to have to make sure that we follow our requirements,” he explained. “It’s all about how we can get a better deal from service companies. It’s all about cooperation. When I see it written in the International Herald Tribune that ‘service companies didn’t have the capacity,’ that’s a personal challenge to me.”

McCullough continued, “We’ve got to determine where were going to send our resources. That’s a global challenge for us. Does it go to the Woodford, Algeria or Poland? We’re making those types of investments at the moment, so you’ve got to have the availability.”

He said once the equipment and technology were there, though, qualified workforce were needed to operate it. “The best way to teach people is to send them to the US, and it takes 2-3 years to build that up.”

“We need to know where you’re going to be working,” McCullough explained, “and what sort of technology you’re going to be looking for, so we know where to allocate those funds. The supply and demand aspect is a big issue. How do we reduce that cost?”

He said there would be a need for competition in the form of multiple rig companies, fracturing companies, and horizontal drillers.

“I would highlight the communication between an experienced company and a local partner,” added MOL’s Karoly Kiss, referring to operations with Exxon-Mobil and Falcon. “The costs were higher than expected, but our practice was better in that we were cheaper, we could manage this and could see the costs going down as we move to other basins.”

“The biggest cost we see is reducing the cost of mobilization,” said Halliburton’s McCullough. “We need to have a base here in country, so we’ve got the equipment on site. We’re making a bet on this and getting inventory to see a 20-25% reduction in costs.”