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Is Europe going to miss out on the Shale Boom?

The Shale Boom in North America
The development of unconventional oil and gas in the United States (US), particularly shale gas, has attracted much interest in Europe and elsewhere. Commercial production of unconventional gas accelerated in the 1980s, but only since 2006, has the US experienced a real boom in production. For example, exploitation of the Barnett Shale alone saw over one trillion cubic feet (Tcf) of gas produced in 2007. Unconventional gas also accounted for over 50% of total US dry natural gas production in 2010. This has allowed the US to become a self-sustaining gas producer in less than four years. Indeed, projected production is forecast to outpace consumer consumption up to at least 20401. Within the US there has been considerable discussion as to whether or not the increased production of unconventional oil and gas should be reserved for domestic consumption or exported. A political decision to allow exports was made in 2013 and the US is now set to become a leading exporter of LNG. US dry natural gas is projected to increase by 1.3% per year, overtaking domestic consumption by 2019 with shale gas key to the transition to exports as shown in Figure 1. Tight oil is a major part of the US energy security and supply mix accounting for over six million barrels per day at 2040 as shown in Figure 2.
Figure 1: US Dry Natural Gas Production (Tcf) Figure 2: USA Domestic Crude Oil Production by Source, 1990-2040 (million barrels per day)

Source: EIA, Annual Energy Outlook, 2013

The key catalysts for the US unconventional oil and gas boom are summarised in Box 1:
Box 1: Catalysts to the US Unconventional Oil & Gas Boom 1. 2. 3. 4. 5. Supportive fiscal policies and an entrepreneurial approach amongst independent oil and gas companies combined with ready access to risk capital generated exploration activity Technological innovation and breakthroughs boosted production, cut costs and enabled & efficient operating procedures Land availability in the form of limited restrictions on land-access and large scale area of leases provided saleability. A strong US build-up of sub-surface knowledge has resulted in a good definition of resource potential. An established gas processing and pipe-line infrastructure supports the economic feasibility of oil and gas plays in North America.

US Energy Information Administration (EIA), International Energy Outlooks & the Annual Energy Outlook 2013 with projections to 2040. US Office of Integrated and International Energy Analysis, available at; www.eia.gov/forecasts/aeo

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European and Global Resource Estimates

For the European continent, 17 basins and 24 shale formations included in the World Shale Gas and Shale Oil Resource Assessment2 are expected to offer a significant quantity of recoverable unconventional oil and gas reserves. A combined estimate for these basins alone shows risked shale gas in-place levels at 4,895 Tcf, of which 883 Tcf would be technically recoverable. In addition, risked shale oil in-place estimates are 1,551 Tcf with technically recoverable estimates at 88.6 Tcf. Risked shale gas and oil in-place and technically recoverable estimates for seven continents are shown in Table 1 with major shale basins illustrated in Figure 3.
Table 1: Technically Recoverable Estimates for Unconventional Shale and Oil Resources Continent Risked Shale Gas Estimates Risked Shale Oil Estimates Risked In-Place Risked Technically Risked In-Place (B bbl) Risked Technically (Tcf) Recoverable (Tcf) Recoverable (B bbl) North America (Ex. US) 4,647 1,118 437 21.9 Australia 2,046 437 403 17.5 South America 6,390 1,431 1,152 59.7 Europe 4,895 883 1,551 88.6 Africa 6,664 1,361 882 38.1 U.S 4,644 1,161 1,375 61.1 Total 35,782 7,795 4,799 286.9 Source: US. Department of Energy & Advanced Resources International, 2013

Unconventional gas reserves in the UK are estimated by the BGS3 to range between 822 Tcf and 2281 Tcf with a central estimate of 1329 Tcf. With current technology it is estimated that approximately 10% of this resource could be extracted4. This equates to 132 Tcf of potentially recoverable gas. In comparison, the latest recoverable gas estimates for Poland range between 12.2 Tcf and 27.1Tcf (346 to 768 billion cubic metres 9Bcm)5. The actual number of years of supply will be dependent on key factors such as demand, usage and extraction techniques. In addition, investment in R&D, as well as social and political drivers/blockers will be influential. Resource estimates for unconventional oil and gas have been proposed for a number of key basins as shown in Figure 36, although the actual size of recoverable resources will depend upon the aforementioned factors.
Figure 3: Assessed Shale Gas and Shale Oil Basins of the World

Source: Advanced Resources International, Inc, 2013

2 US EIA & Advanced Resources International (ARI), 2013, World Shale Gas and Shale Oil Resource Assessment. Technically Re coverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States 3 Note, 2013 British Geological Society (BGS) 2013, Bowland Shale study refers to gas-in-place figures as an estimate for the entire volume of gas contained in the rock formation , not how much can be recovered. Available at; https://www.gov.uk/government/publications/bowland-shale-gas-study 4 Royal Society & Royal Academy of Engineering report shale gas extraction in the UK; a review of hydraulic fractur ing, 2012, proposes 10% as a ball park figure for technically recoverable gas, based on US experience. Full text available at; royalsociety.org/policy/projects/shale-gas-extraction 5 Polish Geological Institute Assessment of Shale Gas in the Lower Paleozoic & Baltic-Podlasie-Lublin Basin in Poland 6 Advanced Resources International (ARI), 2013, study based on 95 shale basins and 137 shale formations outside of the US

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Hydraulic Fracturing: Discerning Fact from Fiction

Unconventional development of natural gas or Methane (CH4) uses high volume hydraulic fracturing from clustered multi well pads and laterals as a way of extracting gas trapped inside shale formations or rock fractures. Large volumes of water are injected into deep wells under high pressure in order to open rock fractures and release hydro-carbon molecules such as oil and natural gas. These rock fractures are held open by proppants (usually sand) which is added to the frack fluid. Chemicals are also added (<1%) to increase flow rates. This process is illustrated in Figure 37.
Figure 3: Illustration of Hydraulic Fracturing

Risks associated with hydraulic fracturing have received wide publicity. Concerns about induced seismicity, possible impacts on climate change and local communities have dominated recent debates on the subject. Most of the water challenges linked to the process relate to key areas of water quantity, potential impacts on drinking water Source: Al Granberg/ProPublica, 2013 quality as well as infrastructure and treatment challenges. However, processes and risks associated with hydraulic fracturing are widely misunderstood. Five common myths and facts surrounding the debate around fracking are summarised in Box 2.

Box 2: Shale Gas Extraction: The Facts

Myth 1) Fracking is a 60-year old well-proven technology Although the basic technology had been established 60 years ago, it is as a result of recent innovation that production became technically and economically feasible. In particular, lateral drilling techniques and the ability to inject very high volumes of frack fluid were introduced in the 1990s, while the development of slick water, multi-well pads and cluster drilling were important developments that followed. Fracking is still an evolving technology. Myth 2) The use of multi-well pads and cluster drilling reduces surface impacts Multi-well pads and cluster drilling will minimise the land footprint. In combination with a thorough understanding of both surface and sub-surface characteristics, together with increasingly advanced horizontal drilling technologies, the exploration and production phases can be optimised. At the surface, potential risk from spills, ruptures, fluid transportation and treatment flow-back or produced water remain key issues to be managed. In addition, as with most industry uses there will be airborne emissions to take into consideration. Myth 3) Fluid migration from faulty wells is rare Gas or frack fluid migration up through the overlying geology resulting in water contamination is a low probability event. It is highly improbable in any one well for that to happen. There are risks associated with gas migration around the well casing which need to be addressed by testing the cement integrity and robust casing design and installation. Incidents of ground water contamination in the US have occurred due to migration of gas out of well casings but this is largely due to operational issues which could occur with any drilling activity rather than the actual fracking process.
7 Al Granberg/ProPublica, 2013, What is Hydraulic Fracturing? Available at; http://www.propublica.org/special/hydraulic-fracturing-national

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Myth 4) Natural Gas is a Clean Fossil Fuel Natural gas is a hydro-carbon, however, it is a lower carbon alternative to coal which typically produces twice as much carbon dioxide as natural gas per unit of electricity. There is an argument that unconventional gas offers a transition fuel for countries to use in their move towards a less carbon intensive economy by allowing the more immediate phasing out of coal for electricity. The role of natural gas in the UK governments agenda for transitioning to a low carbon economy is set out by a recent report published by DECC in 2013 8. Myth 5) Water Use in Fracking is Well-defined The quantity and quality of water and added chemicals depend on the geometry, geology and the type of fracking process being used. Shale gas production typically demands less water when compared to other energy uses such as coal, nuclear, biofuels and concentrating solar power plants9.. Most of this water will return as flow-back or produced water and will have to be treated, some of which can be recycled. Between 10,000 - 20,000m of water may be used during the first 3 months of setting up and completing a well. For multi-stage hydraulic fracturing (5-15 stages) around 2,500 - 5,000 m has been estimated to drill the well and 7,500 -15,000 m to fracture it10.

Unlocking the Potential in Europe

Understanding the key factors that made shale gas exploitation successful in the US is important, but it is likely that Europe will have to develop its own model. Constraints around land access, mineral rights, regulations and cost issues are specific hurdles for Europe. In addition, the knowledge of sub-surface conditions and the detailed location, quantity and quality of resources has considerable scope for improvement. A key challenge is that exploration and development is likely to be more costly than in the US which may hinder the development process. Indeed, three key obstacles to unconventional oil and gas development in Europe include: 1. 2. 3. Geological knowledge of unconventional gas reservoirs being in their early stages A protracted phase of exploratory drilling and pilot production is required to prove economic viability Lead times of around five years based on US shale gas projects, which may prove longer unless more streamlined regulatory and permitting procedures are introduced in countries such as the UK.

Economic Considerations It is estimated that the production of around one Tcf/year of produced gas may be required to see a game changing scenario at a pan-European level (to stabilise imports). However, lower levels would considerably transform the energy supply in particular countries11. Market conditions for unconventional oil & gas development in Europe are favourable. A decline in conventional gas resources, coupled by an increase in demand has led to energy security concerns in some countries. Europe also has the second largest regional gas market in the world and benefits from a dense pipeline network and an established gas processing infrastructure. Fiscal policies were critical to the scaling up of production to an appropriate level in the US. In the UK the political will for supporting further exploration is growing, as demonstrated by the Chancellors planned taxbreak incentives for companies prospecting in this area. However, EU and National governments will probably need to pay greater attention to creating an appropriate investment framework. Current limited investment in
8 UK DECC, 2013, report titled Potential Greenhouse Gas Emissions Associated with Shale Gas Extraction and Use concluded that the net effect on GHG emissions from UK shale gas production will be relatively small 9 From the European Resource Centre for shale gas, tight gas & coalbed methane, available atl; http://www.shalegas-europe.eu/en/index.php/resources/environment-safety/water-useand-protection 10 Water usage data retrieved from the European Commission Eurostat publications, 2013, available at; http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Water_statistics 11 Geny, F, (2010), Can Unconventional Gas be a Game Changer in European Gas Markets?, Oxford Institute for Energy Studies, Oxford University Publishing

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R&D poses an obstacle to investors who need to be more confident in the level of cost-benefits. In addition, concession restraints and regulation all have specific cost implications. The number of seismic and pilot wells required to prove a play, are also key factors. A rapid scaling up of R&D and continued investment in surface and sub-surface conditions will be needed if Europe is to see growth that is safe, efficient and costeffective. Greater efforts are needed in evaluating commercial risk and incentives at national, regional and local levels.
Figure 4: Natural Gas Prices in US, Europe, Japan

The shale boom has led to lower gas prices in the US as shown in Figure 4. This is likely to be an inherent part of exploiting resource plays (as supply increases, cost typically decreases). However, to be commercially viable, it is important to strike a balance between ensuring that gas prices become low enough to be competitive (particularly for export led growth), but not too low so they fall below the cost of production.
Source: World Bank Commodity Price Data, 2012

The Importance of Regulation An aggressive drilling approach typified as a drill, drill, drill philosophy has caused some controversy in the US and resulted in a large number of failed or un-productive wells. Disjointed regulation between states did not help to improve the situation. The oil and gas industry is heavily regulated in Europe but over-regulation can lead to an excessive increase in compliance costs. Independent studies have suggested that US federal legislation is expected to see an overall cost increase of between $125,000 to $250,000 per well12. For countries such as the UK, repetition of lengthy permitting processes for every drill pad may significantly hinder successful development. It is important for Europe to develop a level playing field when it comes to regulation. Regulation should not aim to hinder development but also enable and ensure environmentally safe and efficient practices. In the UK, the Office of Unconventional Oil and Gas (OUGO) was formed in 2013 to oversee the development of a robust permitting and planning process that is a) more streamlined in order to facilitate exploration, appraisal and production phases while b) ensuring public safety and the environment are not compromised. OUGO has also been set up to facilitate licensing regimes and the taxation system to support the growth in this sector. Technology & Innovation Technological advancement was a catalyst to growth for the shale boom in the US. More stringent regulatory requirements in Europe and different surface constraints means that Clean Tech technology and R&D are likely to form an even greater part of the European model for unconventional gas. Investment in greener operating practices will be required to not only off-set the regulatory challenge but to facilitate wider costbenefits to the industry. For example, improved treatment technologies may have favourable cost-saving and environmental outcomes associated with the recycling of frack fluids for subsequent abstraction jobs. Horizontal drilling techniques, waterslick-based fracks and customised operating procedures played a key role in offsetting regulatory costs and producing economically attractive flow-rates in the US. In comparison to the US, Europe will need to conduct more efficient operations and choose optimal positions for its drill sites. Identifying sweet-spots can be achieved by an improved understanding of sub-surface characteristics which optimises the exploratory drilling process.

12 Reservoir Research Partners, 2010, figure quoted in Natural Gas Week. Available at; http://www.energyintel.com/Pages/ArticleSummary/678217/Fracturing-Ban-Not-Likely--ButCompliance-Costs-Likely-to-Rise

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Understanding the quality and scope of unconventional gas resources in Europe is an increasingly important issue. A streamlined framework for accelerating robust technological innovation and R&D related to unconventional gas is needed. Critical success factors for unconventional oil and gas development are summarised in Box 3.
Box 3: Critical Success Factors 1. Commercial & Economic: Appropriate fiscal policies for R&D will be key to supporting economic and commercial viability and minimising impacts on the environment. Regulation & Protocols: A level playing field is needed the challenge is to create a more stream-lined permitting process while ensuring environmental risks are minimised. Effective protocols will need to be developed with statutory consultees such as the water industry. Technology & Innovation: Fundamental for optimising resource potential, offsetting regulatory compliance costs, and minimising land & environmental foot-print (i.e through Clean Tech).

2.

3.

New Business Opportunities and employment Substantial new business opportunities around shale oil and gas are likely to arise in key areas of technology and innovation. A whole new supply chain, particularly equipment manufacturing, but also water supply, treatment and disposal will be required. Economic benefits in the US have been brought about by reductions in gas and electricity prices for consumers, employment opportunities and bolstered tax revenues. According to a study by the IHS Global Insight, around 600,000 jobs were created in the USA by shale gas production in 2010 as shown in Figure 5. This is forecast to rise to 870,000 by 2015, contributing to over $118bn in GDP13.
Figure 5: US Shale Gas Employment Contribution (2010) (601,348 Workers) 12%
Agriculture

7% 45% 14%

Services Government Mining Construction Manufacturing Transportation & Utilities Retail & Wholesale Trade

11% 10% 1% 1% Source; IHS, Global Insight Report, 2013

Similarly, for countries within Europe such as the UK, shale gas offers a major opportunity to develop a cost effective and reliable domestic energy source, generate employment and reduce the need for gas imports14.

13 IHS, Global Insight Report, 2013, statistics available at; www.ihs.com/info/ecc/a/shale-gas-jobs-report.aspx 14 IOD report on Britains shale gas potential, 2012, available at; http://www.iod.com/influencing/policy-papers/infrastructure/britains-shale-gas-potential

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Conclusion - A matter of governance

The three key factors for realising European shale gas potential are economic, regulatory and technological. With exploration phases being in their infancy, precise quantities of recoverable unconventional gas are difficult to determine, but in any case the size of the resource base is vast. Good governance is essential if Europe is to move towards further exploration and pilot production in a safe and efficient manner. Work-able and realistic commercial and regulatory frameworks will need to be developed if this valuable resource is to be developed properly and safely. A more detailed understanding of surface and sub-surface characteristics will also be increasingly required. Targeting optimal well locations or sweet-spots is a particularly important consideration for Europe with greater land access, surface and population constraints. As an optimization process this would offer the potential for higher production rates per well and lower overall environmental impacts during the production life-cycle. Concerns around investment exposure and economic returns will need to be addressed through appropriate R&D and government fiscal policies. In addition, more thorough planning and technical innovation will be needed to ensure longer term economic and social benefits, while reducing unnecessary costs and minimising impacts on the environment.
Box 3: Recommendations A clear road map towards achieving economically viable and work-able unconventional gas development at pan-European and national levels. Detailed assessment and further definition of game-changing scenarios and national, regional and basin levels. Clearer understanding and identification of the social, economic, political, environmental drivers / blockers for particular countries. Adopt an approach of identifying the drilling sweet-spots in order to optimise the resource potential cost-effectively and minimise the impact of exploration and production. Far more investment in exploring, appraising and mapping unconventional oil and gas resources and influential sub-surface characteristics and surface constraints. Robust and integrated planning consultation, including the implementation of local water utility companies as statutory consultees.

Authors Stephen Hodson Consultant RSKW Ltd Stephen.Hodson@rskw.co.uk www.rskw.co.uk Andrew Gunning Partner RSKW Ltd Andrew.Gunning@rskw.co.uk