Will Europe Ever Catch the US in Shale Gas Success?

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If recent experience is anything to go by, no. Not ever.

Europe’s most promising region, in Poland, was widely expected to lead the way. Regulation was lighter than in markets like Germany which has a moratorium in place and France where significant probable reserves have been ruled out by all major political parties in the country with an outright ban.

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Less dense population areas in Poland were also expected to reduce the not-in-my-backyard response seen in the UK, in particular, but according to a BBC report out of 30 to 40 wells planned for 2013, to date there is just one well producing enough gas to be economically viable.

ExxonMobil, Talisman, Total and Marathon have all pulled out, while Chevron, Conoco Phillips and San Leon are persevering with the latter recently announcing it has a vertical that has proven to be encouraging enough that San Leon will proceed to horizontal drilling to further test the resource.

What has caused this disappointment? Initially, government policy was unnecessarily punitive, not environmentally but in terms of taxation and local collaboration. The main reason, however, according to ExxonMobil is the geology is different in Europe and the technology has not proven as effective as it has in the US.

Sure, the biggest hurdles to adoption in Europe  remain environmental and public opposition. Environmental concerns around contamination of groundwater and disposal of wastewater require research to quantify the real risks, research the EU has not undertaken and in the current climate the oil majors seem unlikely to take it on.

Public opposition is, in part, based on uncertain science and the difference in mineral rights in Europe from the US. In Europe mineral rights are owned by the state, whereas in the US they are owned by the landowner, creating a much greater incentive for landowners to allow hydraulic fracturing or “fracking” on their land.

In all probability, no place will likely  mirror the US’s success. In terms of reserves, China holds the largest according to the US Energy Administration at 1,115 trillion cubic feet of technically recoverable resources. Argentina is next with 802 and Algeria third with 707. Argentina’s treatment of foreign oil firms like Repsol will dissuade investment in the short term but over time may prove attractive depending on the geology. Likewise, Algeria and Mexico at 545 may also qualify for the low density/loose regulation argument, although as with China scant water resources in some areas are proving a major headache for other forms of mining.

China’s centrally controlled economy probably has the best chance if it can entice  sufficient foreign expertise and gear up its rig construction industry, already significant, to take on the task of domestic development. Even more than in the US, collection infrastructure will be required promising rich rewards for tubular product steel mills in the years to come if the technology works effectively. The largest hurdle may be water availability, the country has the right geology, far fewer regulatory obstacles and, so far, relatively little public opposition but the main issue is water, the BBC says. Much of China’s shale reserves are located in the northwest of the country, which is extremely arid.

After all the hype, the US may yet prove the sole major beneficiary of shale gas, at least in this decade, as others fail to match the mix of entrepreneurial talent and technological sophistication to overcome opposition and produce sufficient quantities to meaningfully impact prices.

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