European Shale Gas Is Still Hot Air

(Dow Jones Newswires), May 31, 2011

Shale gas has been a game-changer for U.S. energy markets. Following an estimated $250 billion of investment, 23% of US gas production now comes from rocks several thousand meters underground, up from 1% 10 years ago. Could Europe see a similar shale gas revolution?

That seems unlikely for the moment. True, Europe could have 639 trillion cubic feet of shale gas, only 25% less than the U.S., according to the U.S. Energy Information Administration. That could reduce its reliance on gas imports and more polluting alternative fuels. Around 50 companies are exploring for gas now, from majors like ExxonMobil to small independents.

But European shale gas is likely to be much more costly to develop. European shale depths are on average 1.5 times lower than in the U.S., according to the Oxford Institute for Energy Studies. Europe's dense population doesn't help, as the number of wells needed for commercial shale gas production requires lots of space. Drilling costs are also likely to be higher in Europe, given the lack of a high-tech services sector to support the industry.

Meanwhile shale gas faces opposition from environmentalists who fear the extraction process could damage water supply. France is close to banning activity, despite having substantial potential reserves. Production costs could be as high as $16.2 per thousand cubic feet (mcf), according to OIES. That compares with the $8.7 per mcf Gazprom, Europe's main gas supplier, charged for contracted gas in 2010. Existing gas imports from Russia and Africa cost between $3 and $6 per mcf, while US shale gas production costs are around $3 per mcf.

Clearly, the outlook for shale gas would improve if gas prices rise. But few expect them to rise high enough to make European shale gas profitable; Bernstein Research expects prices to reach $13.8 mcf by 2015 while Wood Mackenzie expects oil-linked gas prices to rise to only around $11 per mcf by 2025. And in the U.S., the shale gas supply shock has seen prices fall rapidly, meaning producers' returns on investment are in single-digits now, according to TPH.

Europe's shale gas revolution may be a long time coming.

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