by Aaron Levitt | July 6, 2012 12:48 pm
Unconventional assets continue to be the name of the game for the oil and gas industry. Tapping the planet’s various shale formations has created vast opportunities both here and abroad for a variety exploration and production (E&P) firms. The hydraulic fracturing (fracking) and shale gas revolution has changed the world’s energy landscape.
Except if you live in Europe.
Despite the continent’s vast reserves, Europe’s development of unconventional assets and shale gas has been mild at best. Thanks to fracking bans, tough to “crack” geology and various political issues, Europe’s shale gas industry has been almost nonexistent aside from a few nations.
While these resource plays have been a game-changer in the U.S. — one that’s driving a new era of energy independence — Europe’s shale situation the opposite. That’s why investors looking to play the boom in shale gas and hydraulic fracturing are likely better off by avoiding Europe.
According to the U.S. Energy Information Administration (EIA), Europe has around 75 trillion cubic meters of shale gas. Based on current usage rates, that’s about 39 years of demand — a substantial amount compared to its 11 years worth of conventional gas reserves. Poland alone has recoverable shale gas reserves totaling as much as 768 billion cubic meters, according the Warsaw-based Geological Institute.
Yet, Europe is proving a difficult nut to crack for E&P firms as myriad factors continue to conspire against the region’s shale industry.
The latest blow came when industry titan Exxon Mobil (NYSE:XOM) ended its exploration efforts in Poland. After drilling two test wells in the country’s Lublin and Podlasie basins, Exxon announced that it had finished its search for shale gas there. It reported that it found “no demonstrated sustained commercial hydrocarbon flow rates” at the two sites. The well’s low productivity could be an overall bad omen for the nation.
Exxon cautioned that commercial production of Polish shale was at least five years away, and it had not decided yet what it would do with its exploration licenses. It controls four leases outright and jointly holds two with France’s Total (NYSE:TOT). Rival Chevron (NYSE:CVX) has pledged to continue its drilling campaign. However, analysts expect similar results.
This announcement represents another blow in an already difficult operating environment. The political, legal and regulatory hurdles continue to mount in Europe. Like in the U.S., public outrage over fracking has spurred several nations to ban the advanced drilling technique. The U.K., Sweden and Bulgaria have all now placed temporary or permanent bans on fracking, pending further environmental studies.
France, which has the continent’s second-largest reserves, banned fracking in 2011. That derailed a planned exploration program by Hess (NYSE:HES) in the nation’s rich Paris Basin. Similarly, Bulgaria threw a wrench into Chevron’s plans when it canceled the company’s exploration permit based its use of fracking.
Even if E&P firms were able to frack, Mother Nature is providing another hurdle. One of the reasons why the shale revolution has been so successful in the U.S. has to do with the nation’s “perfect” geology. First, reservoirs of gas in the U.S. sit relatively close to the surface. Second, these reservoirs have thicknesses of between 90 and 180 meters.
However, Europe’s geology isn’t so cooperative. Most European fields have far thinner reservoirs. For example, the U.K.’s average just 49 meters. These gas pockets are also located deeper than those in the U.S. These geological factors ultimately add to drilling costs and complexity of extraction.
Even though some nations are set to start exploring for shale gas, such as Lithuania, which has recently announced licenses in two fields, I wouldn’t bet on a “ shale revolution” like the one here. Sure, there’ll be some production in the region, but overall, the problems are daunting.
Analysts predict that unless the continent’s regulatory and legal environment vastly improves, the commercialization of shale gas in Europe will remain a dream. It will likely take to the end of the decade and most likely well beyond before shale gas is extracted successfully. Even then, production won’t be anything like in the U.S. Australia.
That’s unfortunate for E&P firms that have bet on the continent. While companies like Marathon (NYSE:MRO) and Talisman (NYSE:TLM) have included Europe in their recent capital spending and exploration programs, they represent a small piece of their overall energy efforts.
As an investor, I would worry if my energy company takes too much of a shine to Europe’s unconventional assets. The shale gas boom there just isn’t going to happen.
As of this writing, Aaron Levitt doesn’t own any securities mentioned here.
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