According to the International Energy Agency (IEA), Europe currently imports approximately 60% of its natural gas.
That figure is estimated to grow to 83% by 2030, due to increasing demand, stronger environmental laws, and declining production from established fields.
Yet that’s all about to change.
In an attempt to improve its energy independence and stimulate economic growth, Europe is now following in the United States’ footsteps and ramping up hydraulic fracturing (fracking) operations.
The impact on Europe’s energy market promises to be significant. Here’s why…
European Shale Beds Coming in All Sizes
Estimates from the Energy Information Administration (EIA) indicate that Europe is sitting on 470 trillion cubic feet (tcf) of unproved technically recoverable natural gas.
And while there are currently no commercial drilling operations in Europe, the European Commission has stated that operations could commence in 2015.
In the meantime, speculative drilling is ongoing. The EU has deferred the decision to explore shale gas to each -member nation, leaving governments the right to decide if (and where) they want to explore for shale gas.
Let’s look at a breakdown of the top contenders in the space…
Natural Gas Contender #1: Poland. Currently the top player in terms of reserves, Poland boasts an estimated 148 tcf. And the country is determined to make the most of its considerable shale gas potential.
The nation is under pressure from the EU to cut its carbon emissions by reducing its coal-driven electricity, which currently accounts for over 90% of its power generation.
Pace is picking up again, though. In January, UK-based San Leon Energy (SLE.L) announced successful testing at the Lewino well in northern Poland. Chevron (CVX) has multiple exploration concessions in southeast Poland, and drilled its first exploration wells last year.
Natural Gas Contender #2: Romania. With 51 tcf, Romania is next on the list. Chevron has concessions throughout eastern Romania, and plans to drill its first exploration well in the northeast this year.
Romania has shifted from opposing shale gas to allowing Chevron to carry out test drilling near the Black Sea.
Natural Gas Contender #3: United Kingdom. With 26 tcf, the UK lifted its fracking moratorium in December 2012. In January, Total Energy (TOTZF) bought stakes in shale licenses in northern England held by IGas Energy (IGAS.L), Dart Energy (DEGEF), and others.
This year, privately held Cuadrilla is drilling a vertical test well in the southern basin in Sussex. And UK’s IGas is drilling in the Bowland shale.
Bursting With Potential
Onshore Operators Group reports that 10 companies are considering drilling some 20 to 40 wells by 2015. (Interestingly, all these companies are small, despite the UK having major oil and gas companies.)
Additional European shale opportunities have been discovered, as well. Some countries are facing some opposition (more on that below), but there’s no question that fracking interest in the EU is picking up steam.
If you’re interested in playing the trend, there are a few options to consider…
On the oil and gas services side, Halliburton (HAL) stands out in particular. It serves the upstream oil and gas industry throughout the life cycle of the reservoir.
If you’re checking out the exploration and production side, Chevron is exploring more than four million acres under recent and pending agreements with the governments of Poland, Romania, and Bulgaria.
Besides the companies I mentioned above, there are some additional names active in European exploration and drilling – such as Royal Dutch Shell (RDS.B), Italy’s ENI SpA (ENI), and Norway’s Statoil (STO).
Some smaller-cap names, such as San Leon Energy plc., are diversifiers, with Poland being the company’s core focus.
Finally, you can always consider private equity plays, too, as there are a number of new entrants in European shale gas.
Dealing With the European Opposition
Drilling in shale gas is a divisive issue in Europe, as it emphasizes the growing tension between the EU’s energy and climate policies.
Shale gas could provide the much-needed gas to complement renewables in Europe’s low-carbon strategy, and regulation can serve to minimize the risks of pollution. But extracting is likely to be an intensive industrial operation, as shale beds are predominantly located in densely populated regions.
That’s causing some major issues.
France, for instance, sports the second-largest shale gas potential in the EU, with 137 tcf. However, the government banned fracking in 2011, and revoked shale exploration licenses held by Total, GDF Suez, and privately held Schuepbach Energy. Both France and Bulgaria (17 tcf), have passed laws that ban fracking, and have revoked any exploration licensees that had earlier been granted.
Then there’s Germany with 17 tcf. The country has effectively banned it, as well. Currently, local authorities won’t approve new wells, due to pressure from environmentalists and local residents. Lawmakers have recently urged the government to reconsider this position. The guidelines under consideration would require independent environmental audits, and would ban drilling on areas requiring water protection. The guidelines are expected to be developed before the summer recess and should be sent to Parliament for a vote by the end of 2014.