Europe Needs a Roadmap for Unconventional Gas

As the unconventional gas “revolution” was quietly unfolding in the United States, its potential to transform the U.S. gas market, and the country’s national energy discourse, was not apparent until recently. It has now become clear that shale gas development is perhaps the biggest energy sector innovation for the United States in recent decades. For Europe, however, the role shale gas will play in transforming energy markets is far from certain. The old continent’s unconventional gas reserves are substantial, but the question is how fast and to what extent Europe will develop them.

Europe needs a clear roadmap for the prospects of unconventional gas in its energy future. The current situation calls for an approach that is based on realistic expectations about the pace of shale gas development, as well as a strategy that is well-informed about potential costs and benefits. Continuing uncertainty could not only hamper the flow of investment into potential unconventional gas reserves, but could also impede the development of informed plans about Europe’s energy security and ability to fight climate change.

To begin with, it is worth recognizing Europe’s limitations. The combination of factors that led to the unconventional gas “revolution” in the United States—favorable geology, developed gas markets, and until recently, limited regulatory and public constraints—is not easy to replicate. Geologically, knowledge of unconventional gas in Europe does not go much beyond rough estimates. Where exactly are the shale deposits located? At what depth? And in what type of formations? At what cost could they be extracted? Europe still needs to start mapping out its shale gas reserves—a process that started almost three decades ago in the United States. At this point all that is known is that there are sufficient reserves to transform Europe’s gas market. Estimates vary but they consistently put the European Union’s unconventional reserves well above its conventional ones. Knowing this alone, however, is not enough.

The cost of developing shale gas reserves will be a principal factor in determining the future of unconventional gas in Europe. The sharp growth in shale gas output in the United States owes much to the considerable cost reduction witnessed over the past decades. Europe stands at the beginning of that process. Lack of comprehensive geological knowledge about shale precludes a precise estimate, though costs are expected to be high not least because of the scattered nature of reserves in Europe. The absence of a vibrant services sector for the gas market presents another bottleneck. The European gas sector’s limited capacity to provide cost-effective equipment for shale gas development along with a shortage of qualified labor will undoubtedly lead to higher development costs than in the United States. Costs can certainly go down, just like they did in the United States, as the industry gradually reacts to the needs of the market. But initial costs will pose a challenge.

In its quiet “revolution,” America’s unconventional gas industry outpaced both the regulators and the public. By the time stringent environmental demands became part of the national energy discourse, unconventional gas had already assumed its transformative role in the U.S. gas sector.

In Europe, if this revolution is ever to be repeated, it will not be a quiet one. The rigorous environmental regulations that are already in place—particularly with regard to water use—are prompting investors to think twice about managing costs before they commit. With their high population density, many European governments are less willing to embrace shale gas before its environmental impacts become apparent. In many countries, particularly in Western Europe, governments ignore environmental movements at their own peril. More investment in shale development will almost certainly have to confront calls for even stricter ecological requirements.

The EU’s energy and climate policy needs to recognize these constraints. It would be unrealistic to expect shale gas to be a panacea for the Union’s growing concerns on energy security and climate mitigation. This is true at least in the short and medium term.

And yet, discounting the potential role of unconventional gas in Europe’s future would be a mistake. It is in the EU’s long-term interest to maintain a role for shale gas development. Most industry insiders argue that unconventional gas will not contribute in any significant form to Europe’s energy supply until at least the end of this decade. Its role beyond that point, however, is anyone’s guess. How fast Europe develops these resources depends on today’s policy choices.

European policymakers should give shale gas development a chance. First, as a latecomer compared to the United States, Europe is more likely to find a way to develop its unconventional resources in an environmentally friendly fashion. Stricter regulations and low public tolerance for potential environmental risks may slow the pace of shale gas development. They can, however, also ensure that Europe develops these resources in the right way, avoiding some of the mistakes witnessed in America.

Second, the benefits of shale gas development could be disproportionately large. European gas supplies are in decline, while demand is expected to continue to grow. The EU’s ever growing need for imported gas is compounded by its dependence on a rather small number of external suppliers—Russia, Norway, and Algeria account for nearly three quarters of Europe’s imports. It is not certain that unconventional gas can reverse the decline in domestic gas output. However, it could certainly enhance the position of European importers when bargaining with their limited number of suppliers. Most recently, gas sold at spot markets, which constitutes only a fraction of total gas imports in Europe, effectively served such a role. Even Gazprom, known for its firm bargaining position, felt the need to revise a portion of its contracts. Shale gas could play a similar role for European importers in the future by enhancing competition. Increased liquefied natural gas (LNG) imports could potentially have a similar impact. But, they will be need to be sourced from outside the EU, maintaining Europe’s dependence on global LNG market trends.

Even if unconventional gas is not a “game changer” for Europe as a whole, it could be a “game changer” for a select group of EU members. Ironically, some of the countries with greater prospects for shale gas development—Poland, Hungary, and Bulgaria—are among the most dependent on Russian gas.

At this point, the future of shale gas in Europe is very much in the hands of national governments. Legal competence for hydrocarbon development is mainly within the domain of these governments rather than Brussels. What they need is a well-informed national discourse on unconventional gas that involves all the main stakeholders. In effect, they need to avoid what France recently did—a rushed decision outlawing hydraulic fracturing—and instead attempt to fully assess the potential for developing shale gas while complying with strict environmental standards.

Brussels, on the other hand, does have a role to play. In addition to ensuring higher environmental standards, it could attempt to bring greater clarity about the future of natural gas in Europe’s energy balance. Mixed signals about its expected role have understandably preoccupied investors. Also, it could elaborate investment mechanisms for shale gas development that would serve its long-term decarbonization objectives by displacing more carbon-intensive sources of energy. Ultimately, Brussels should make certain that Europe does not miss this opportunity to seize the strategic potential offered by unconventional gas.

Adnan Vatansever is a senior associate in the Energy and Climate Program at the Carnegie Endowment. This article was originally published on Carnegie Europe’s website

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Analysis: Bulgaria’s Shale Gas and the Wider Geo-Economic Game

In mid-2011, the Bulgarian government announced it would provide shale gas exploration licenses to Chevron for the Northern part of the country.  Under the terms of the agreement the company would pay around $30 Million USD in order to begin its project. Initial findings pegged assumed reserves anywhere from 300 BCM up to 1 TCM. These prospects presented for shale gas were quite significant, not just for Bulgaria but for the whole of Europe.  It should be noted that reserves likely extend to the neighboring state of Romania, which is just a few kilometers from the country’s Northern borders.

Nevertheless, soon NGO‘s and various environmental and citizen’s groups started campaigning against shale gas exploration, citing the dangers of hydraulic fracturing (hydrofracking). These campaigns took the form of street protests, Internet broadcasts and intense lobbying of local councilors and politicians, which eventually forced the government to retreat from its original plans that spoke of making Bulgaria the shale gas champion in Europe.

The Center Left party (Socialist) in Bulgaria that is often perceived by outsiders as pro-Russian took a leading role in opposing shale gas research. In the Bulgarian Parliament two judicial initiatives were submitted with regards to this.

The first was drafted by three members of parliament of the Socialist party that proposed a complete ban on research and exploitation of any shale gas reserves in the country. The second initiative was drafted by the incumbent government and called for a moratorium on the exploration of shale gas until a new environmental-friendly method is found.

Media reports from Bulgaria have often mentioned the initiatives both by the Socialists and the environmental NGO’s to be linked to the interests of Russian gas companies, namely Gazprom. In fact the Minister for Economy and Energy, Traicho Traikov, went as far as saying in public that behind all protests, powerful energy import interests are to be found, indirectly pointing the finger at the Russians.

It is important to note that Ivaylo Kalfin, a leading Socialist politician, organized the local movement against shale gas in Northern Bulgaria where Chevron was to explore. Moreover, two out of the three Socialist MP’s that drafted the judicial initiative against shale gas had signed in the past when they were in government important energy deals with Gazprom. The third MP has business collaborations with a consultancy that supports the construction of the Belene thermonuclear power station, which was awarded to the Russian company, but has been “frozen” as a project over the past two years.

Furthermore, it is widely known that the current Bulgarian government is seen as anti-Russian under Premier Boyko Borizov, who has effectively frozen many bilateral agreements with Moscow, ranging from Burgas-Alexandroupoli oil pipeline to the South Stream pipeline gas project to the Belene nuclear station. Thus, the question arises: why did the Bulgarian government decide to stop a project that may eventually lead to the diversification of its energy dependence from Russia?

The answer is that Bulgaria has already started a whole range of initiatives in order to decrease its dependence by interlinking its system with that of Greece and Turkey and by bidding for a pipeline route in the Southern Corridor through its territory. Also, Russia exerts considerable influence in Bulgaria and it is likely that Borisov’s government decided that it is the best not to oppose Russia any further, bearing in mind that the opposition against shale gas exploration in the country was not solemnly coordinated by Moscow and really had strong domestic social support against it.

A third answer is that strong domestic energy interests, that are anti-Russian but also pro-natural gas, have played their role in undermining shale gas explorations. These interests are in favor of importing natural gas from markets such as Azerbaijan, thus they viewed shale gas as their opponent as they have traditionally viewed Gazprom as well.

The story though does not end in Bulgaria alone. On the 26th of January, Borislav Sandov, one of the leaders of the opposition against shale gas, made statements in the Bulgarian media and supported protests against shale gas exploration in Romania as well. There was a protest at the Romanian Embassy in Sofia and it seems that Bulgarian and Romanian NGO’s are coordinating their activities. In parallel, the government in Romania is battered by an ongoing wave of protests by state unions and workers against its economic policies, and the ability of Bucharest to resist yet another campaign against its policies is decreasing. Lastly, the especially harsh winter period in both Bulgaria and Romania with temperatures in major cities reaching minus 32 degrees Celsius and with a considerable number of casualties, has increased significantly the natural gas imports from Gazprom, which seems in any case to be the only sure winner from all of these developments and the current failure of shale gas explorations in these particular countries.

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Soc Gen Says China May Look for US LNG Deals in Future

China may look to buy US LNG volumes in the future as an alternative to buying more gas from Russia, one European gas analyst said.

Soc Gen analyst Thierry Bros said in a report Tuesday that, with US Gulf Coast LNG expected to materialize in 2016, China will likely first look into a potential US LNG deal before signing a gas supply agreement with Gazprom.

The bank estimates the minimum breakeven cost for US Gulf Coast LNG delivered into China, taking shipping into account, would work out at around $11.6/MMBtu. This allows plenty of room for negotiations between companies selling US LNG and the Chinese from $13.50/MMBtu — which would allow a minimum of 15% return on investment — and $22/MMBtu — which takes into account full oil indexation — Societe Generale added.

“The $13.5 to $22/MMBtu negotiation range translates into a price of oil between $77/b and $133/b, or an oil-indexation formula with a slope between 0.10 and 0.17. This is large enough to match a Russian pipe-gas oil-index price,” Bros said.

As a result, Societe Generale believes China will prefer to look further into US LNG rather than rely on securing an agreement with Gazprom, which could further delay negotiations between Russia and China.

“Judging by the seeming lack of any progress in the gas pricing issue during [Russian Prime Minister Vladimir] Putin’s recent visit to China, it seems Beijing is in no particular hurry to sign the contract,” Bros said.

In 2006, Moscow and Beijing signed an initial agreement on gas supplies, when they agreed to construct two pipelines to transport a total of 68 billion cubic meters/year of gas from Russia to China over 30 years. Gazprom and China’s state-owned CNPC in 2010 subsequently signed a legally binding agreement on the supply of up to 30 Bcm/year.

Negotiations since then have not gone as smoothly and have been bogged down by pricing disagreements. Putin’s recent visit to Beijing in October didn’t resolve any of those issues although he said the parties were “on their way to the final stage of negotiations.”

The report published by Societe Generale comes in response to the latest agreement between Cheniere Energy Partners’ Sabine Pass Liquefaction unit in the US and Gas Natural Fenosa announced on Monday.

Under the LNG-sale-and purchase agreement, Gas Natural Fenosa would buy as much as 3.5 million mt/year of LNG. The deal is expected to help facilitate the construction of the first two liquefaction trains at the site, which would produce 9 million mt/year of LNG in the first phase. Construction of the two trains at Sabine Pass is estimated to begin in 2012.

(platts)

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Russia: Gazprom Discovers New Offshore Field Near Sakhalin III

As a result of geological exploration, Gazprom discovered a new field within the Mynginskaya geological structure in the Kirinsky prospect of the Sakhalin III project.

Gas and condensate inflow was reported in the prospecting well during the exploration operations. The well testing will be followed by the reserves estimation.

The new field was the second discovery in the Kirinsky prospect.

Background

Gazprom carries out geological exploration in the Sakhalin shelf as part of the state-run Development Program for an integrated gas production, transportation and supply system in Eastern Siberia and the Far East, taking into account potential gas exports to China and other Asia-Pacific countries. The Program was approved by the September 2007 Order of the Russian Federation Industry and Energy Ministry. Gazprom was appointed by the Russian Federation Government as the Program execution coordinator.

Gazprom holds subsurface use licenses for the Kirinskoye field, the Kirinsky prospect (including Yuzhno-Kirinskoye field) and the Vostochno-Odoptinsky and Ayashsky licensed blocks within the Sakhalin III project. Natural gas produced by Gazprom within the project will be delivered into the Sakhalin – Khabarovsk – Vladivostok gas transmission system.

Based on the results of the geological exploration performed between 2009 and 2010, Gazprom increased the Kirinskoye gas and condensate field reserves from 75 billion cubic meters of C1+C2 gas to 137 billion cubic meters of C1 gas. The recoverable condensate reserves rose from 8.6 to 15.9 million tons. It is projected to commission the field in 2012.

In September 2010 Gazprom discovered the large Yuzhno-Kirinskoye field in the Kirinsky prospect. The field’s C1+C2 gas reserves make up 260 billion cubic meters, the recoverable condensate reserves – 29.9 million tons.

Gazflot (a wholly-owned subsidiary of Gazprom) acts as the geological exploration operator.

Original Article

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Gazprom to Get Tax Break for Oil Exported from Arctic Offshore Field

OAO Gazprom, Russia’s biggest company by market value, may get a 10-year tax exemption for crude oil exported from its offshore Prirazlomnoye development in the Arctic where production is set to start next year.

The government is waiting for Gazprom to provide economic forecasts before granting the break, said two government officials, who declined to be identified before the exemption is approved. The project will probably not be able to turn a profit without the tax relief, they said.

Prirazlomnoye is Russia’s first major offshore oil project in the Arctic. The project has received a temporary exemption from the mineral extraction tax.

Production drilling on the offshore project is planned for about the first quarter of next year, with output planned to peak at about 6 million to 6.5 million metric tons a year in 2019. The project’s platform and 40 wells may cost $7 billion in total, Nikolay Kabanov, a Gazprom deputy department head, said in St. Petersburg on Sept. 13.

Gazprom spokesman Sergei Kupriyanov didn’t immediately answer calls to his mobile phone.

By Alena Chechel and Stephen Bierman (Bloomberg)

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