Articles from 2013
The coming wave of shale gas in Europe
- Written by Nick Grealy
- Published: 16 October 2013
Not only does UK/EU shale gas have to deal with environmental myths about shale gas, we also have to contend with an unremitting litany of despair from parts of the financial community. Before pointing out that their track record on predicting shale is often poor in the US, lets point out that they often have a financial interest in competing energy technology no less strong than the emotional investment green opponents hold.
They insist that they don’t, but judging from the giveaway of their name, I make the not entirely unreasonable assumption that Bloomberg New Energy Finance, (a unit separate from Bloomberg News but deriving some residual reputation therefrom), has more than a passing interest in, well, financing new energy.
Recently, BNEF told the House of Lords Standing Committee on the economic impact of shale gas and oil that
UK unit costs for shale gas extraction are likely to be considerably higher than those seen in the US (Figure 3). While dry US plays such as the Marcellus, Haynesville and Barnett have breakeven costs of some $5-6/MMBtu (always assuming a 15% after tax equity IRR), we believe the comparable range for the UK is likely to lie between $7.10 and $12.20/MMBtu. This is close to the $8-11/MMBtu range in which spot UK gas prices have traded over the past two years.
But the US drilling figures, which appear to be from their own research alone are entirely inaccurate - or perhaps simply out of date. Anything over 45 days is ancient history in shale, so this slide from a Cabot investor presentation of October 2 says that the most prolific producer in the Marcellus has production costs not of $5.23 but $1.20 to $1.60
Cabot’s presentation also underlines how drilling times get shorter even as longer laterals produce more gas. Even better this means that production costs come down as the supply of services exceeds demand.
The BNEF US figures throw into question any reliability of their UK numbers. BNEF’s report was highlighted in a press release and thanks to the name, you can find it quoted as gospel by those with either the green agenda or one seeking to prop up existing or future investments in other sectors
BNEF hasn’t responded to several requests for explanation as to why their estimates of US costs diverge from several similar company reports or several other sources.BNEF also gave four reasons why UK shale gas will be difficult or slow to develop, including an old favourite of analysts:
Lack of drilling services market
There are currently around 1,700 land rigs operating in the US, compared with around 80 in all of Europe, according to oilfield services company Baker Hughes. Over 10,000 onshore oil and gas wells are drilled in the US each year, meaning that the market for onshore drilling services is, by a large margin, the largest and most competitive in the world. Drilling service companies undertake various tasks, from early-stage exploration and formation evaluation to development-stage drilling and fracking, as well as later-stage well work-overs and various support functions. While the companies do not produce petroleum, they are essential to the market.
The UK does have a very well-developed offshore services market, but it has almost no experience in onshore work. In addition to the lack of experience, there is a lack of equipment – the vast majority of high-horsepower rigs and pressure pumping systems needed to frack are located in North America.
But that’s changing too as this from the FT this week shows
Halliburton and Bakers Hughes are expanding in Europe in the hope of riding the continent’s coming shale boom. They hope to apply the same technology that opened the shale fields of North America to Europe’s untapped shale reserves, sparking a similar-sized gas bonanza.
Noting the cost declines in Cabot’s completions costs, it makes a lot of sense for US service companies, and European ones like Aker to seek pastures new.
“If the political will and public acceptance is there, the oilfield services companies could build up capacity very quickly,” says Mike Smith, operations director at Aker Solutions.
Let’s underline some things here:
The UK Government has given unambiguous support to shale exploration
The UK gas price can be reasonably expected to fall at least 20% simply by the introduction of US (shale) LNG to world markets, but that gas price will still be over double US gas
The UK has country risk second to none, and after this week, maybe even more secure than the US.
We are on the doorstep of the world’s largest gas marketplaces.
Add them up, and the financial attractiveness of Europe as a gas producing region is second to none. Shale has always been inevitable in Europe, but it will soon, sooner than most think, enter the realm of the achievable.