Can Unconventional Gas be a Game Changer in European Gas Markets? Florence Gény NG 46 December 2010 i The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2010 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-907555-17-6 ii Preface Since the late 2000s, unconventional gas has become the most important new energy issue to reach public consciousness. In the United States, where gas production was in decline and imports were increasing, the revolution in (especially) shale gas production has completely transformed the outlook; production is rising and imports have fallen sharply. The prospect of a similar revolution in Europe has given rise to a huge number of conferences, op-ed articles and blogs which have created a wave of hype, but little clarity, about the subject. When Florence Gény agreed to join OIES to conduct a detailed research study of shale gas development in Europe, this provided our Programme with a major and important new avenue of study. Europeans are generally unaware of the long history of unconventional gas development in the US, and the legal, fiscal, environmental and land use particularities which enabled the technical breakthrough in production techniques to be implemented so rapidly. This study places US unconventional gas development in its proper context in order to set the scene for an analysis of European developments. Because of the very small number of exploration wells which have been drilled it is impossible to make any definitive comment on the extent and quality of the European resource base. The major contribution of this study is that it provides detailed analysis of the specific requirements of European unconventional gas in relation to crucial issues such as drilling, land use and water use. It assembles data which are very difficult to find and applies them to the European countries which appear to have the best prospects, using a model to analyse the economics of unconventional gas development. This is the first public domain study of European unconventional gas to provide this level of detail and quality of research and analysis. I am very grateful to Florence Gény for the huge amount of work and enthusiasm she has brought to this project. The quality of Florence’s analysis makes this a highly credible and valuable study of a new and emerging area of gas research. Jonathan Stern Oxford, December 2010 iii Acknowledgements I would like to thank Jonathan Stern and John Elkins for their helpful comments and editorial corrections. My gratitude also goes to companies and individuals within the oil and gas industry that have provided me with useful information and insights: my colleagues from Statoil, Sarah Ladislaw from the CSIS, Vello Kuuskraa from Advance Resource International, Kamel Bennaceur from Schlumberger, Bob Moran, Mike Watts and Jerzy Wozniak from Halliburton, John Beswick, Composite Energy and Barclays Capital Commodities Research. I also thank Wood Mackenzie and IHS CERA for allowing me to use some of their data. Finally, I would like to give special thanks to my colleagues at the Oxford Institute for Energy Studies that have assisted me in my research in various ways, in particular Howard Rogers, Anouk Honore and Andy Flower. SBC Energy Institute and Oxford Institute Collaboration Acknowledgement The SBC Energy Institute and the Oxford Energy Institute for Energy Studies have formed a knowledge partnership to collaborate on joint research studies to better understand key energy themes of the 21st century. As part of this collaboration the SBC Energy Institute has provided input for this paper, in particular on European unconventional gas technologies, operational models, service sector capabilities, and E&P costs, as well as public data on unconventional gas basins. In the context of this collaboration, I would like to specially thank Jean Cristofari for his continuous and insightful feedback and Hermes Alvarez. Disclaimer The SBC Energy Institute is a non-profit research institute incorporated in the Netherlands that is funded by Schlumberger Business Consulting (SBC). SBC is the management consulting arm of Schlumberger. The two entities do not share confidential client information, and implement strict information security measures in order to protect client data. The SBC Energy Institute and the Oxford Institute for Energy Studies collaboration bears no impact on day-to-day Schlumberger business, underpins the current judgment of the author at the date of the report, and does not necessarily reflect the opinions of SBC or Schlumberger. As part of the collaboration for this paper the SBC Energy Institute did not provide the Oxford Institute for Energy Studies with belowground resource estimates, aboveground economic analysis, breakeven prices, production modeling, or any other services provided to clients of Schlumberger Corporation. iv Contents Executive Summary ............................................................................................................. 1 Introduction .......................................................................................................................... 3 Definition of unconventional gas resources ....................................................................... 4 Overview of global unconventional resources ................................................................... 5 Part 1: Unconventional gas in North America: the tale of a quiet success ..... 10 Chapter 1 - Context: resources and production .............................................................. 10 Chapter 2 - History of a revolution ................................................................................... 11 2.1 Main plays by type of resource .................................................................................. 14 2.2 Main players: the role of independents ...................................................................... 21 Chapter 3 - Analysis of success factors ............................................................................. 24 3.1 Technology and R&D ................................................................................................ 25 3.2 Profitability ................................................................................................................. 30 3.3 Federal and State policies ........................................................................................... 31 3.4 Access to land and infrastructure ............................................................................... 38 3.5 Intense competition within the service sector ............................................................ 39 Chapter 4 - Limits and challenges to the shale gas business model ............................... 41 Part 2: Unconventional gas in Europe ............................................................... 46 Chapter 5 - Setting the scene: overview of resources, exploration and production activity and competitive landscape in Europe ................................................................. 47 5.1 An industry in its infancy ........................................................................................... 47 5.2 Overview of unconventional gas resources in Europe ............................................... 48 5.3 Players and activities .................................................................................................. 54 5.4 Implications for the development path of unconventional gas in Europe .................. 59 Chapter 6 -To what extent can Europe replicate the US unconventional gas model? . 61 6.1 Unconventional gas as a game-changer: production scenarios and operational requirements ..................................................................................................................... 62 6.2 European challenges and the transferability of the US experience - the question of the European response ............................................................................................................ 68 6.2.1 Technology and operating practices ....................................................................... 69 6.2.2 Land access ............................................................................................................. 72 6.2.3 Economic profitability (costs and breakeven prices) .............................................. 79 6.2.4 Energy policies and regulations .............................................................................. 89 6.2.5 Service industry - a significant bottleneck? ............................................................ 95 6.2.6 Conclusions ............................................................................................................. 96 Chapter 7 - General conclusions and macro-implications for European gas markets 99 v Appendix A – Conventional and unconventional gas: what are the differences? ...... 103 A.1 The origin of natural gas ......................................................................................... 103