Unconventional gas was an almost unknown sub-set within the energy industry until little under two years ago.
A source of energy previously known primarily for antiquated and localised supply in small towns up until the middle of the 20th century, the rapid and near-exponential growth of this formerly niche part of the natural gas industry in North America over the last 18 months, after a protracted slow-burn start up, has led to labelling of the source as game changing, paradigm shifting and energy-market realigning.
The success of US unconventional gas development is, somewhat understandably, being used a blueprint for development in other regions of the world. The US is the largest importer of energy in the world, and the second largest consumer of energy.
Unconventional gas (predominantly shale) provided the Americans with an opportunity to increase energy security and reduce reliance on foreign energy imports. As of early 2010, the country became self-sufficient in natural gas, with unconventional gas representing 42% of the total gas production, and shale estimated to form 15% of daily gas consumption.
With unconventional reserve estimates of more than 8,000trillion cu ft in North America, it is somewhat difficult to not get swept along by the shale gale phenomenon.
The size of unconventionals in Europe is also key to understanding why there is such interest and support from many corners in developing this resource. Equally, the political and energy security aims of Europe mirror those of the US. Europe is estimated to have 1,500-4,000trillion cu ft of unconventionals in the form of shale gas, coalbed methane and underground coal reserves capable of gasification.
With unconventionals thought to be five to 14 times more plentiful than so-called conventional gas, little wonder this resource is so important to the European Commission and EU member states from a security of energy supply perspective.
Numerous governments and energy companies are confident the success of unconventional gas in North America will be replicated elsewhere over the coming years, with Europe widely regarded as the next region to fall to the so-called unconventional gas revolution. Europe is receptive to the notion of developing a large indigenous natural gas resource as a means of reducing dependency on conventional gas imports, especially from Russia but also North African gas, not forgetting LNG (liquefied natural gas).
There are, however, conditions deemed unique to the US that are not found in Europe. This begs the question as to how transferable the US model is to Europe?
Unconventionals continue to divide opinion within the energy and financial sectors in Europe, the US and Asia, with questions surrounding the sustainability, economics and financial feasibility of production.
Then there are environmental consequences of drilling and reservoir fracturing (fraccing) on water resources, an aspect that is being debated on both sides of the Atlantic.
However, with the unconventional gas sector still immature in comparison to other forms of energy supply, there are evolving but disparate opinions on the development and future of the sector.
As mentioned already, the strong European interest in unconventional gas stems from the drive towards greater energy security in Europe, even though this is not a stated policy aim of the EU.
Although the initial creation of the EU (formerly Common Market) was based upon shared energy competencies, energy security has been thrust into the political and media spotlight in recent years, following the disruption in Russian gas supplies, due to Moscow’s politico-energy and pricing disputes with Poland, Ukraine and Belarus.
Among a number of renewable and efficiency proposals, and supply diversification in the form of projects/proposals such as the Nabucco gas pipeline, increased exploitation of indigenous resources has been highlighted by the commission, affirming that the role unconventional gas will play must now be assessed as objectively as possible.
Furthermore, a spokesman for the EU energy commissioner stated that unconventional gas will help Europe to reduce its reliance on gas imports in the future.
The science of unconventional gas is not alien to the EU; during the late 1990s, the EU-sponsored underground coal gasification trials in Belgium and Spain, while the mining industry across Europe has long been using methane for localised power generation.
Although exploration and utilisation of shale gas is very much at an early stage in Europe, the energy policy implications are clear.
Foreign relations between the EU and Russia and North Africa are influenced by energy, and the dependency member states have imports of oil & gas from them. Relationships also take account of strategic transit states, such as the Ukraine and Belarus.
Consideration of energy supply and transit security form part of the EU’s holistic approach to its neighbourhood, but development of the indigenous unconventional gas reserves would, of course, lessen the reliance upon external energy exporters, thus altering external relations.
Northern Poland is regarded as the future centre of shale gas development in Europe, with reserves conservatively estimated at 48trillion cu ft of shale gas alone.
More than 60 test drilling licences have been issued by the Polish government to a number of companies, including Chevron, Exxon Mobil and Shell.
However, the first producing shale well in Europe will be located in the north-west of England in the Bowland shale, near Blackpool.
Cuadrilla Energy hopes to flare gas from the Bowland shale by February 2011 – nearly five years before most analysts expect production to occur in the rest of Europe.
The UK Government has backed the development in the Bowland shale, with the Department for Energy and Climate Change (DECC) dismissing the environmental concerns raised, stating that Cuadrilla has made it clear that there is no likelihood of environmental damage.
By contrast, authorities in New York State have suspended all drilling activities in the Marcellus shale until the US Environment Protection Agency (EPA) completes its own investigation into environmental impacts.
In parts of North America, E&P (exploration & production) companies state that drilling a typical well requires between 65,000 and 600,000 gallons of water, while hydraulically fracturing a typical horizontal deep shale gas well requires an average of 4.5million gallons of water per well.
This not only raises issues of the sourcing of such vast volumes of water, but the subsequent treatment of the produced water. Hydraulic fracturing uses a cocktail of chemicals and proppants to open and maintain fissures in the shale rock to allow gas flow – thus the EPA is also investigating the specific environmental effects of the fraccing fluid of water table and aquifer quality.
The UK is also leading the development in coalbed methane and underground coal gasification projects. This localised energy production from coalbed methane at collieries in Derbyshire and Yorkshire, while reserves have been identified in north Wales and Scotland.
The UK is also estimated to have underground coal reserves with a gasification potential of 1.676trillion cu ft of gas. Although such reserves are not enough to achieve natural gas self-sufficiency, they will enable supply diversification and reduce overseas imports.
Notwithstanding technical and geological aspects of shale production, there are specific conditions in Europe that may inhibit the development that has been witnessed in the US.
For a start, the geo-political and economic conditions that fostered shale growth in the US are not present in Europe. Due to the geology of shale basins, production requires hundreds of wells to be drilled over a large area – Europe has only 10% of the number of land drilling rigs found in the US. These wells are spread over a large area across the shale formation, but Europe does not have comparable open spaces, as seen in American producing regions, and has a population density over three times greater than the US. It also has a population that is not used to viewing drilling rigs from their lounge windows.
Unconventional gas wells in the majority of US producing states are subject to tax breaks and exemptions, which keep the producing wells profitable.
There are no proposals for such financial conditioning in Europe, with the EU favouring a “Washington-consensus” style of economic governance. Shale gas development in the US has benefited from this financial assistance, during a period of high global energy prices. The costs of drilling may prove the principal debilitating economic factor for European development.
A typical shale well in the Haynesville play may cost $7.5-10million, with operating costs of around $2.25 per million cu ft, leading to a production cost of circa $7.5-8 per million cu ft.
US benchmark Henry Hub prices have been more like $4 per million cu ft over the last 18 months. The average cost of $3-5 per million by some industry analysts is therefore too optimistic, even unrealistic.
The generous tax breaks and subsidies found in many US producing states have helped to create an artificially low price for shale gas.
The natural gas supply glut in Europe may also prove a stumbling block for unconventional gas development. The Nord Stream, Nabucco, and South Stream gas pipeline projects, which have a combined patronage of 13 member states (including some involved in both Nabucco and South Stream), and a combined investment of more than 30billion, will collectively import 5.1trillion cu ft of gas to Europe by 2015.
Furthermore, Poland (the potential hub of shale gas production) has recently signed an agreement with Moscow to increase gas supplies by 38% by 2019, with a supply agreement that may run until 2045.
With the initial agreement running only until 2019, however, Poland has left the possibility of shale gas production (predicted by some to be as close as 2015) on the table before committing to a long-term contract.
There are also 23 new LNG import terminals due to be constructed in western Europe by 2015. This would appear to leave little room for shale gas on the European gas market.
Summing up, the impact that shale gas has had upon US energy supply and the global energy market cannot be understated. However, the role unconventional gas will play in the future of European energy remains uncertain.
Analysis courtesy of Andrew Reid at analysts Douglas-Westwood
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