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Column by Colin Smith, Head of Energy Research at VTB Capital plc, for The Daily Telegraph (UK) # Russia Now supplement

24 April 2012
Russia can relax: Europe’s shale gas is not a threat 

24.04.2012.

The Daily Telegraph (UK), Russia Now supplement

Colin Smith is the Head of Energy Research at VTB Capital

This month, Russian President-elect Vladimir Putin told the Russian parliament that the country needs “to rise to the challenge” posed to global natural gas markets by the recent increase in production of shale gas by the US. Given how central the export of natural gas is to the Russian economy, one can understand why Mr Putin’s is concerned about what this new US gas boom might do to global gas prices. 
While US shale gas discoveries are obviously important for the overall North American supply of natural gas, the potential for Europe to have its own shale gas boom is perhaps of more immediate concern to Russia. 
Around 70 per cent of Russian gas exports go to the EU, and while only the UK only imports around 2 per cent of its total gas supply from Russia, other big European countries such as Poland and Germany are major customers of Russian gas. Any large increase in the European gas supply will therefore have serious implications for the Russian economy. According to research published in 2011 by the US Energy Information Administration, Europe has around 75 trillion cubic metres of shale gas, almost five times the previous estimate. That is equivalent to a reserve life of 39 years, compared to the current 11 year reserve for conventional gas reserves. 
In early April, British shale gas company IGas doubled its estimates of shale gas in north west England to 130m cubic metres, potentially making the UK’s reserves larger than those of the European shale gas leader, Poland.
On paper, these new reserves have the potential to lessen significantly European dependency on Russian natural gas. However, removing this shale gas safely from the ground and distributing it to customers is a very different proposition in Europe than it is in the US, where exploration and extraction has already put downwards pressure on prices. 
European shale reserves generally present far greater geological challenges than is the case in the US. European shale reservoirs are generally thinner than successfully commercialised shale gas sites in the US. A good shale gas prospect has a shale thickness between 90 and 180 metres – this is the case with the major the US shale sites, but the vast majority of European sites have far thinner reservoirs, with the UK’s standing at a mere 49 metres.
The majority of European shale reservoirs are also typically significantly deeper than those in the US, adding to drilling costs and complexity. In addition to these geological challenges, European shale faces a number of political, legal and regulatory hurdles that are far more pronounced than in the US and are likely to make commercialization of shale gas significantly more challenging, despite the higher prevailing gas price. 
In addition, as the US experience shows, public health concerns over “fracking” can develop rapidly and prove a real barrier to access, as demonstrated by the ban on drilling in the state of New York. As Europe (including the UK) is typically far more densely populated than the US, these concerns could seriously delay drilling, as it has done already in France, Sweden and now, Bulgaria.
Recent European shale gas drilling experience, notably in Poland which probably has the best prospects of developing shale gas in Europe and is at the forefront of Europe’s early efforts to test its shale potential, have been generally disappointing.
That is not to say that there will be no shale gas production in Europe, but that the pace of growth is likely to be low in relation to Europe’s growing need for new sources of gas, certainly to the end of the decade and probably well beyond. Europe will continue to need Russian gas for the foreseeable future, most likely in increasing quantities. 


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