Shale gas in Europe: Golden age will need golden standards first

On a recent day in June, three oil and gas companies announced their intention to list on the London market. After a dry period for flotations in the sector, the flurry underlined resurgent investor appetite.

The smallest of the three, the Aim listing of 3Legs Resources, was nevertheless significant, highlighting investor support for the exploration for unconventional gas in Europe, a trend that barely registered four years ago when the company was established.

Chaired by Tim Eggar, the former UK Conservative party energy minister, 3Legs Resources raised £62.5m ($101m) from the flotation. The money will be used to develop its shale gas licences in the onshore Baltic Basin in northern Poland where it is drilling with US partner ConocoPhillips.

The development of shale gas has transformed the North American energy landscape and its supporters believe unconventional gas has the ability to revolutionise the European market, which is also home to vast resources.

A report this year by the US Energy Information Administration analysed 48 shale gas basins in 32 countries, and estimated the technically recoverable resource in Europe at 624,000bn cu ft compared with 862,000bn cu ft in the US.

The resources hold the potential to cover European gas demand for at least 60 years, according to a study by the European Centre for Energy and Resource Security.

However, 3Legs Resources’ debut on the market comes at an uncertain time for the industry, as governments and regulators try to balance concerns about the impact on the environment of the technology used to extract the gas with the need for a viable source of energy that has lower carbon dioxide emissions than coal.

In June, France’s upper house, the Senate, adopted a bill banning exploration for hydrocarbons using hydraulic fracturing or “fracking”.

The process, which involves pumping water, sand and chemicals at high pressure into the shale rock to release gas trapped thousands of feet underground, has prompted concerns about the contamination of water supplies with the chemicals used. Opponents also warn that not enough is known about the effects of the process.

A study by scientists at Duke University in North Carolina published this year found that in one region of Pennsylvania, water from wells in areas with active shale gas production had, on average, 17 times more gas in it than in areas where there was no drilling.

That study has been challenged, but some industry figures admit that badly executed extraction can cause gas to leak into water supplies. The Duke study also provided some support for the industry, by finding no evidence that the chemicals used in fracking – which are pumped deep underground – were leaking into water wells, which are much shallower.

The adoption of the bill by the French Senate means that it should soon become law and the government has also temporarily halted all shale gas and oil drilling.

In the UK, Cuadrilla Resources, the first company to explore for shale gas, has suspended the use of fracking pending a review by the British Geological Survey after possible links between the activity and two small earthquakes near Blackpool. The government, however, continues to support the process.

Despite the controversy, Mark Miller, chief executive of Cuadrilla, believes shale gas has a future in Europe.

It could take several months before the company can return to fracking at its British site, but it hopes to drill its third well in July. It owns its own fracking equipment, which means it could move it to another project.

Other executives such as Peter Clutterbuck, chief executive of 3Legs Resources, argue the future for shale gas in Europe depends on where you are looking, as it is “country specific”.

Poland, site of the company’s biggest investment and where some of the world’s largest oil and gas companies, including ExxonMobil and Chevron, have bought up acreage to explore for shale gas, has a different attitude, he says.

“The government’s reaction and that from the local communities is very positive,” he says, adding that the country “wants to be rid of its dependence on imports of Russian gas”.

In Germany, where the government recently announced it would phase out all nuclear reactors by 2022 in the wake of the Japanese crisis, the country will need to make a decision about how it will meet the supply gap.

Many analysts believe natural gas, including shale, will be the winner.

Nevertheless, companies face other hurdles in Europe before shale gas becomes a commercial reality.

Unlike in the US, where the owner of the land also owns the subsoil, in most European countries the state owns the rights and receives the royalties, giving landowners less incentive to allow drilling on their land.

Fatih Birol, the chief economist of the International Energy Agency, warned in June that if companies wanted to see a golden age for natural gas they would need to come up with “golden standards of practice” for developing unconventional resources.

It is a point not lost on the companies. “The industry has a lot to do in terms of public relations,” admits Mr Clutterbuck. “It needs to respond.”

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