– Europe’s shale strategy ‘puts cart before the horse’

Helen Robertson, LONDON: Europe must improve its infrastructure and develop a clear fiscal
and regulatory framework for shale gas or the nascent industry will not succeed, the head of
Breitling Oil and Gas, a US-based exploration company, said.

‘We have this cart before the horse syndrome. We need to get infrastructure before we can
validate that it works,” Chris Faulkner, Breitling chief executive told PEU. “Even if we drilled a
thousand wells (in Europe) and the production is tremendous in Poland the reality is that there’s
no infrastructure to move the gas and monetize it.’

Europe could have 639 trillion cubic feet (cf) of recoverable shale-gas reserves, according to
US Energy Information Administration (EIA) figures. The largest resources are in Poland and
France; two countries who have taken opposing political views to developing the unconventional

France, which is thought to have 180 trillion cf of recoverable shale gas, banned hydraulic
fracturing (fracking) in October 2011 after pressure from environmental opposition.
Poland, however, is keen to develop a shale-gas industry to ensure security of supply and to
reduce its dependence on Russian gas. The government has pledged PLN50 billion ($15.84
billion) of government and private funding for shale-gas development over the next eight years.
It also announced a new tax regime in October aimed at encouraging investment in the sector.
But only a handful of test wells have been drilled so far and with mixed results. After an initial
rush for exploration licences in 2008, investment in Poland’s shale gas sector has stalled due to
technical difficulties and uncertainty over the fiscal framework. ExxonMobil suspended its shale
gas exploration activity in Poland earlier this year after seeing disappointing flow rates at its first
two wells. Both ExxonMobil and Canada’s Talisman Energy are reportedly in talks to sell their
acreage back to Poland’s PKN Orlen, according to local media.

‘The reality is that the smartest people in the world can’t convince an E&P (exploration and
production) company to plough $10 billion into a play if they don’t understand the rudimentary
components of the fiscal and regulatory regime,’ Faulkner said. ‘As soon as we get a country with
resources in place and a tax holiday to encourage investment, that will unlock this puzzle. The
geology will come with it.”

Faulkner believes that the UK and Germany are the most promising countries in Europe for
shale-gas development, because of their resource potential and the existing infrastructure in
place. The UK and Germany are thought to have 20 trillion cf and 8 trillion cf of shale gas
respectively, according to EIA figures.

The UK government announced on 5 December that it plans to lower its corporation tax to
encourage development of its shale-gas sector. The UK imposed a moratorium on fracking last
year after test drilling by Cuadrilla Resources caused two tremors in Northern England.
European natural gas demand is expected to reach 23.6 trillion cf by 2035, according to the
International Energy Agency (IEA), up from 20.1 trillion cf last year. Although the IEA forecasts
that unconventional gas will comprise almost half the increase in global gas production by 2035,
the growth will primarily come from the US, China and Australia.
Moreover, shale gas is unlikely to bring gas prices down in Europe in the same way it has in the
US, Henry Hub prices have tumbled from around $12 per million British thermal units (Btu) in
2008 to under $4 per million Btu this year.

Faulkner reckons the cost of producing shale gas in Europe, in countries such as Poland and
Germany, would be between $12 to $14 per million Btu, which is not going to support the case
for unconventional gas when there is an abundance of conventional resources from Russia and

‘If you compare that to pipeline gas, those numbers could be $8 to $9 per million Btu, even lower
for Algerian gas. I think those are the momentum breakers for shale,” Faulkner said. “If you can’t
reduce the cost by generating a better, competitive local service sector it will be a tremendous
roadblock for shale.’

Poland is heavily reliant on Russia for its natural gas supply. The Baltic nation imported 187
billion cf of natural gas in 2011, all of which came from Russia.

Poland’s state-run energy company PGNiG has a take-or-pay supply deal to import 307 billion
cf of gas a year from Gazprom until 2022 and earlier this month it successfully renegotiated the
terms of that deal. Although the details of the deal were not made public, reports suggested that
PGNiG had secured a 10% discount on the previous terms.

Even if Gazprom is feeling pressured by the European shale hype to renegotiate supply contracts,
it is not likely to be displaced as the continent’s dominant natural gas supplier any time soon.
With high costs, marginal European production for the next decade and competition from
cheaper and abundant conventional gas, Faulkner sees shale gas as just one piece of Europe’s
future energy mix, not the dominant one.

“I don’t think we’re going to displace piped gas or LNG from indigenous supply in Europe,
especially in Poland, so we’re going to have to keep working with Gazprom,” Faulkner said.
“What we can do, though, is redraw supply lines.”

Breitling Oil and Gas has exploration projects in several US unconventional plays including the
Eagle Ford, Marcellus, Bakken and Three Forks. Investing in Poland’s shale sector is not a risk

the company is prepared to take just yet. The company is, however, watching political and fiscal
developments in Poland and may yet consider an exploration venture in the country in the future.

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