This is a guest post from James Elston of Palladian Energy discussing last week's Bloomberg story on the Sanford Bernstein research on European Shale Gas:

Bernstein, I preferred the musicals

By James Elston, Palladian Energy, Former CEO Realm Energy

Being an integrated oil research analyst is a deathly dull but well paid job. I did it for 6 months a decade ago before more exciting small caps and ultimately shale beckoned. Lacking access to expensive full bottom up modelling, top down modelling provides few integrated oil insights worth writing about. In that context a good analyst has to develop themes that differentiate them from the crowd but require little actual analysis. At DLJ we focussed on counting tankers and “Growth vs Returns” i.e. trying to grow generally depresses returns.

More recently a good theme is “Is unconventional gas a threat to the oil linked gas prices in Europe?”.  Bernstein Research in London has explored that now on three occasions the latest of which is “Bernstein Energy: First Fracs of European Shale Gas Wells Show Why Conventional Producers Will Continue to Prosper” 10/10/11. Their answer - correct in my opinion - being no. Bloomberg subsequently wrote on the report.

Whilst Bernstein have raised many useful issues, their lack of in-depth knowledge of shale geology and technology is beginning to grate. This is especially true as I think they are preaching to the converted on gas prices amongst fund managers. I believe demand destruction through lengthy recessions and the Atlantic LNG market to be more credible threats to pricing.

"Recent data from Poland's shale gas wells validate our concerns about European shale gas: poor flow rates in over-pressured, hard-to-develop shales”Bernstein Research 10/10/11

Initial shale completion results in Poland have been disappointing but in this tough, very large play you need to drill a lot of wells before writing the whole diverse thing off. Equally the Old Palezoic plays in eastern Poland are not being explored by Chesapeake, EOG etc so more mistakes are being made in these early wells. Perhaps shale blackbelt Talisman can change that?

This brings me on to a more serious point. Conflating poor results in one high risk play with no North American analogues with the failure of shale in Europe as Bloomberg and, to an extent, Bernstein do is frankly ridiculous.

If we look at the great bulk of shale plays in Europe they are Permo-Carboniferous or Jurassic (see IHS Energy chart below) . The Barnett and Fayetteville shales are Carboniferous, the Haynesville is Jurassic. Whilst I’ve not seen a Haynesville analogue in Europe, the Carboniferous plays bear reasonable resemblance to their North American cousins the Barnett and Fayetteville and are very widespread across Western Europe and SW Poland. The Jurassic plays are mainly tight oil Carbonate/Shale sandwiches like the admittedly much older Bakken shale in the US/Canada. Vermillion are already producing oil in small quantities from such a play in the Paris Basin where they were able to frac existing vertical wells before French politics went to hell. I would also like to kill once again the rumour that European shales are especially deep. They are not.

{japopup type="image" title="Potential European Resources" content="images/stories/james.png" width="941" height="563"}Potential Resources in Europe

The Permo-Carboniferous plays will see a lot of attention in the coming year in Poland, with San Leon currently drilling Siciny-2 and the UK where Cuadrilla’s recent announcements are concentrating minds.

On the technical side I am guessing their US colleagues could proof read things and knock out the technical snafus but here goes.

EIA study useful but is a single source of light in poor studied area. In the land of the blind the one eyed man is king. I believe the EIA missed massive Permo-Carboniferous potential in at least three large western European countries, conversely I believe they wildly overestimated the potential of the Cambrian, particularly in Norway. This study naturally skews Bernstein’s country and play focus as it is all they have to go on.

Overpressure is not a problem, it is almost vital to success. Successful thermogenic shale plays in North American are almost all significantly overpressured. Overpressure is pressure at a given depth above hydrostatic head. It allows you to produce back your frac water and unload the well and produce. The Haynesville is almost 90% overpressured (SG 1.9, 0.8psi/ft) hence its mind boggling deliverability. Overpressure is also an indication of a closed system, underlining its physical separation from shallow water bearing aquifers from which there is already great depth separation.

Water use – Texas is drowning in shale and tight gas and oil. It has the Barnett and Eagleford shales, The western extension of the Haynesville/Bossier shales, the Midland Basin tight oil, tight gas and shale plays and the Western Granite Wash to name just the more well known plays, never mind the Eaglebine and others emerging. These all need fracking. According to Wikipedia Texas has only 26km³ of renewable water per annum. With a population of 25.8m from Google this leaves a renewable water per capita of 1.05 thousand m³ /per person/year. This is much less than Poland (1.6), France, Ukraine etc according to Bernstein’s much used Exhibit 9. (Took me 5 minutes to find this out).

{japopup type="image" title="Renewable Water" content="images/stories/james2.png" width="573" height="535"}Renewable Water

On a lighter note I always seemed to get muddy when doing field visits across Europe whilst CEO at Realm Energy!

Indeed, taking this further, frack water demand is almost a rounding error in the Fort Worth area, the heart of the Barnett Shale (TWDB 2007 study <1%). The UK’s Environment Agency considers that shale frac water demand would be manageable and just another industrial use of water (SMI Shale Gas Environment Conference, October 2011) and even the partisan Tyndall Centre’s Jan 2011 report quotes just 0.6% potential increase in national water demand under a massively successful shale scenario in the UK

Frack stages, productivity and costs- In analysing the increasing number of frack stages used in the Barnett vs. Initial production rates (IPs) since 2003 (Exhibit 6) Bernstein imply that the drilling is getting less efficient. News to most Barnett players! In fact what is happening (in the main) is that more wells are being drilled in less favourable parts of the play.

{japopup type="image" title="Performance" content="images/stories/james3.png" width="449" height="750"}Performance

In the Fayetteville a very different picture of increased efficiency from SouthWestern Energy emerges through time. Perhaps because they are only drilling the best shales in the Fayetteville a play, which they totally dominate.

{japopup type="image" title="Fayetteville Shale" content="images/stories/james4.png" width="941" height="563"} Fayetteville Shale

Don’t mix up tight gas and shale in this analysis; In Europe tight gas fields tend to be discrete and relatively small and therefore are unlikely to effect gas pricing regionally, the notionally Basin Centred Mako Trough in Hungary was thought as being a possible exception. Large and successful shale plays could, conceivably, affect gas pricing regionally.

Tight gas has been explored for and produced for many years successfully in Germany where there has been a great deal of fracking with no environmental issues (130 wells, 230 frac jobs, stages?? –source LBEG, Hanover). Having reviewed a recent presentation from MOL it is clear that Hungary is moving on from unsuccessful early attempts at unconventional Basin Centred gas exploration in the Mako Trough towards a focus on various tight gas sand plays elsewhere in the Pannonian Basin including in Romania. These seem sure to work with fracking of brittle if still silty tight sandstones in any area of such intense overpressure.

I believe there is a great deal of tight gas to be found in the thrust belts and foreland basins of Western Europe but that’s another story.

Poor Service availability and high costs – People who see me (perhaps too often) on the conference circuit will know I believe that drilling is very open to entrepreneurship across Europe and that rigs will be rapidly added to allow exploration and ultimately development. As regards frack services Halliburton and Schlumberger are falling over themselves to provide these services at low cost during exploration campaigns in Europe in the certain knowledge of massive demand if success comes.

Population density, Land availability – Given the increased use of pad drilling with larger numbers of wells per pad, longer laterals and increased numbers of frack stages the actual surface footprint of shale continues to spiral downwards. So land demand should not be an issue in most all plays especially in the growing recession where competitive uses may decline.

Strangely absent for Bernstein’s most recent analysis is building public acceptance and trust. Perhaps the largest battle apart from finding the right rocks is building public acceptance and trust, often in areas with little or no experience with oil and gas operations.

Following SMI’s recent Shale Gas Environmental conference in London its clear to me that there is little science for shale anti’s to utilise in their campaigns against the business. There is no smoking gun. Fukishima has unfortunately killed nuclear and gas is the lowest carbon of the unsubsidised energy choices and there is no longer any money for subsidies.

These factors together with strong existing safeguards across Europe should allow shale explorers to build trust through time with strong HSE compliance and an eye on minimising non-HSE impacts. I predict even France will wake up from its childish shale politics late next year, post the election cycle, helped by increasingly supportive scientific literature.

So in summary whilst it’s great that Bernstein were the first to write on unconventionals in detail in Europe and are right in their conclusion the bar has been raised and getting the technological commentary right is now vital. In that respect Jefferies and Company, whilst bullish broker to 3Legs Resources, do a much better job. You may also wish to access the good works of TD Waterhouse, Macquarie, GMP Securities, UBS Securities and Paradigm Capital all of whom write on BNK Petroleum and are almost daily shale play commentators.

I believe water resources can be managed responsibly, land will be available and services will come. The greater issues are finding the best rocks and building public acceptance and trust.

I believe in this business enough to be re-entering it again shortly.

Authors Note

James Elston, Palladian Energy, Former CEO Realm Energy

James Elston, has 20 years of broad ranging oil and gas experience in industry, banking and consulting. Mr Elston was until recently CEO of Realm Energy International Corp a TSX-V listed Shale explorer active in Europe currently subject to a headline C$140m bid from San Leon.

He is a director Palladian Energy Limited, where he advises investment banks, private equity firms and energy companies on a variety of issues largely relating to equity capital markets, M&A and equity research. Mr. Elston has assisted with floating 8 energy companies over the last few years on London’s AIM market, making him one of the most active pre-IPO analysts. He has worked with numerous unconventional gas players, and their advisors, and assisted in bringing Great Eastern Energy and Green Dragon to AIM. He also initiated the main unconventional gas conference outside North America and Australia in 2008.

He has a significant long position in RLM-TSX; shortly post merger to be converted to a significant long position in SLE-AIM.

He can be contacted at


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