The revolutionary changes brought to the US energy market by the developments of shale oil and gas production has made shale a topic of interest everywhere in the world. In this report, we examine the prospects of shale gas in Europe. We estimate that EU shale supply is to reach 17 bcm/y by 2020 and 52 bcm/y by 2025, 4% and 12.5% of current EU consumption levels. The two countries leading the charge will be Poland and the UK. Despite recent write-downs, Poland retains the largest estimate of total recoverable reserves (TRR) and an appetite by the government to see these resources developed. The UK is in the next tier of countries in terms of TRR, but importantly the government is interested and has recently announced some specific support for shale. By 2025, 50% of the production will be in Poland while 14 bcm/y (28%) of shale gas production will be coming into markets directly associated with Northwest European gas hubs.
In our view, the role of shale in the EU will be different than in the US, and is unlikely to bring the same type of benefits in terms of low gas prices. Oddly, Europe has little need of exploiting unconventional reserves as conventional reserves are something it has in abundance. It also has plenty of supply infrastructure, having easily coped with the continued loss of LNG imports from the market over the last few years. The issue in Europe is fundamentally about market structure and the control of so much production in the hands of one company – Gazprom. In the EU, the role of shale gas will simply be to help erode the market power of Gazprom. In turn, how Gazprom reacts to that threat will determine the ultimate impact of shale gas on European hub prices. We expect Gazprom to play the role of the swing producer, being content to lose market share to support prices, at least until shale production increases to a level that cannot be accommodated.
There will be pronounced differences from the US experience of the speed of development, with shale likely to see slower uptake once commercial production has begun. The US experienced a rapid growth in production as it saw its share of US production go from 10% to 40% in 5 years. We assume that Europe will proceed up the shale curve at a rate half as fast as that witnessed in the US due to three factors: a lack of an on-shore drilling industry, with current EU rig count being around 10% of what the US rig count was when commercial scale production began; popular opinion in many countries being opposed to shale gas, due largely to fears of groundwater contamination or an outright opposition to the use of fossil fuels; and regulatory regimes still have to be finalised, particularly to allay fears over the potential environmental impacts of fracking. Even then there are plenty of caveats that could mean that these assumptions actually are too optimistic.