Why shale gas will, and must, work in Europe

Written by Nick Grealy

In the spirit of environmental sustainability,  forgive me for recycling this comment I made in response to an FT story that started out:

The jury is still out on whether the US shale gas revolution can be replicated in Europe.

Having had the best part of five years experience observing the shale energy revolution, and being cursed with a long memory, I can provide some context in dismissing the “conventional” thinking of why unconventional energy isn’t for the likes of us inexpert Europeans.

Over the years, various analysts at WoodMac have been wrong about shale gas first in the US, latterly in China and consistently in Europe.  I’ve seen others such as Ben Dell of Bernstein move on from being the bad news bears of shale energy to take up new positions promoting shale oil exploration in Europe.  One person’s opinion I’d love to hear more of would be that of the FT’s John Dizard, who has been consistently, and spectacularly, wrong since 2009.  In his Olympian “expert” voice, he first told us how shale gas, thanks to outdated depletion analysis was either doomed to failure in the US or would need gas prices over $6 as he confidently predicted in 09,10,11 and even 12. In 2013, he doesn’t answer e-mails.

The essential failure of those like WoodMac, unlike Citi, BoAM,or true experts in energy like IHS CERA, Navigant and Bentek is to completely miss the inflection point of shale gas. That means a moment of dramatic, and disruptive change, that makes the past, in many, but not all, ways irrelevant.  A handy rule of thumb I have is to ignore anyone who uses charts more than five years old.  Shale is more than anything a technological revolution built on the back of the revolution of computing power of this century. The largest users of computing power outside of intelligence and weather forecasting are now oil companies. Hydraulic fracturing and horizontal drilling were enabled by tech, and technology in exploration and production unlocked their potential.

The essential failure of shale deniers rests on a view that the future will simply be a continuation of the past, including I assume, continuing revenue as conventional analysts fail upwards. London analysts often prefer to be wrong in a group than right by themselves. By the time they get proved wrong, we see what I call the ‘burning papers in the Reichstag courtyard’ moment.  Faced with the shale revolutionaries tanks on the lawn, they suddenly transmute into shale experts, hoping their clients are unable to use the internet where their mistakes live on in digital immortality.

The reality is that shale gas in Europe is inevitable. Whatever other problems there are, the fact remains that Europe is the largest natural gas market on earth and is underpinned by the rule of laws far more stringent than those in Argentina for only one example. Are Europeans so self-hating that Argentina has returned to its role of a century ago as land of the future?

Similarly, the US of even last year doesn’t provide a road map for European shale today, let alone next year. Shale, building on technology, is a story of continuous improvement.  We’ve seen shale provinces such as Ohio’s Utica move from zero last year to a projected 4.8 BCM by end of 2013.  We’ve seen the Eagle Ford move from 5,000 barrels a day in 2010 to over 600,000bd this year. Pennsylvania, the place John Dizard told us in 2009 was doomed to failure and bankruptcy has moved from a trickle in that year to 7 BCFD or 72 BCM a year today.

In 2009, wells took three weeks to drill, and recent wells in the Eagle Ford have broken the  five day barrier. Horizontal stages of a few hundred feet have been replaced by those of several miles. Frack stages are no longer measured in days but in hours.  Shale gas is a factory style industrial process, with similar improvements in productivity and profitability. To predict European costs on the US past is as pointless as believing, or is that fervently hoping, that Europe even has different geology than the rest of the planet and we have been cursed with being a hydro carbon desert as the rest of the world blooms with shale energy.

For now, we remain stuck in an un-virtuous circle in Europe. Governments, although most definitely not at the EU level it must be stressed, mostly wish shale gas would go away. The story of the US has been natural gas bankrupting investors involved in turn in LNG imports, coal CCS, nuclear, storage, and coal in generation. Now natural gas, as Ed Morse of Citi recently noted, is substituting for oil in transport, generation and naptha in chemicals. What hasn’t happened in the US is the number one fear of those who see gas as enemy of renewables in Europe. Wind and solar are thriving in the US. In classic carbon economies such as Texas and Oklahoma, wind provides over double UK’s wind percentage in generation.

The circle we must break out of, means the bad news bears, unable or unwilling to abandon out dated concepts must be faced down. Too many people blame European greens as creators of shale’s problems in Europe, and it is true their carbon-counter productive gas demonisation remains strong among many. Greens often have significant emotional investments in narratives suddenly disrupted by the ubiquity and permanence of the shale transformation, and some have chosen a path which leads not to constructive dialogue but a dead end of petulance.

We should ask however, how much of the “opposition” to shale gas in Europe comes from those financially invested in a construct of natural gas as carbon heavy, expensive and inherently insecure?  They stand to lose not just reputation or dogma, but cold hard cash - as do their clients who bought into their expert opinion. That in turn leads to an industry starved of investment: shale gas won’t happen in Europe because we say so. The tragedy is that investors are perfectly happy to invest in shale anywhere but here in Europe. That leads to not only a permanent road block to European growth, but an actual acceleration of our decline.