Bloomberg News

European Fracking Bans Open Market for U.S. Gas Exports (1)

May 23, 2012

Opposition to a drilling technique known as hydraulic fracturing has slowed the development of natural gas in Europe, creating export opportunities for U.S. producers hurt by low prices and a glut of gas at home.

Fracking, as the practice is known, was temporarily suspended in the United Kingdom after it was linked to a series of earthquakes. Bulgaria and France -- home of the continent’s largest estimated reserve -- outlawed it over environmental concerns. Some other countries are poised to impose moratoriums on the process, in which water, sand and chemicals are pumped underground to free gas trapped in rock.

This opposition, along with a projected growth in demand driven in part by Germany’s plan to phase out nuclear power, has created opportunities for U.S. gas producers such as Exxon Mobil Corp. (XOM:US) Imports to the European Union are projected to grow 74 percent by 2035 as Italy, Poland and Lithuania build terminals to receive tankers carrying gas in liquefied form.

“Europe’s an obvious market for such U.S. LNG exports,” said Daniel Yergin, an energy analyst and Pulitzer Prize-winning author of books chronicling development of the global energy industry.

Europe has an estimated 639 trillion cubic feet of shale gas resources, according to the U.S. Energy Information Administration. That is more than four times the reserves of the Marcellus Shale formation from New York to Tennessee that has fueled much of the fracking boom in the U.S.

France, Poland Supplies

Much of Europe’s gas, however, lies under Poland, where Exxon Mobil said early results suggest extraction may be unprofitable, and France, which outlawed fracking in July after environmentalists and wine producers raised alarms about water pollution.

Also working against fracking in Europe: a population density that leaves many countries without the open areas in which drilling can be accomplished, and a lack of pipelines to move the gas to customers, said Octavio Simoes, president of Sempra LNG based in San Diego.

“In the United States, you had what you call a perfect storm,” Simoes said in an interview. “You had highly qualified people who have been doing it for a long time, a lot of developed support maintenance equipment suppliers, that could easily provide everything that shale developers needed, you also had plenty of land with few inhabitants.”

Fracking Slowed

Not so in Europe, where environmental concerns about fracking persist even after a study commissioned by the EU concluded that current legislation is adequate to protect the environment.

Bulgaria banned hydraulic fracturing in January, and withdrew a license granted to Chevron Corp. (CVX:US), after hundreds of protesters marched in Sofia to oppose the technique, fearing it will pollute the water and soil in the nation’s most fertile farm region of Dobrudja, where Chevron was planning to drill.

The Czech Environment Ministry is preparing a moratorium on new shale gas exploration licenses to adjust its legislation and eliminate legal risks, the ministry said on May 8.

Romanian officials said on May 21 the nation may lift its moratorium if environmental concerns can be resolved.

Cuadrilla Resources Ltd., a U.K. shale-gas explorer that suspended drilling in northwest England after minor earthquakes linked to pumping operations, expects to resume work this year. The company says it’s found more natural gas trapped in U.K. shale rock than Iraq has in its entire reserves.

Dependence on Russia

While the Polish government supports fracking, seeing it as a way to reduce dependence on supplies from Russia, the national Geological Institute slashed the U.S. estimate of gas reserves 85 percent to 768 billion cubic meters (27 trillion cubic feet).

“We do anticipate some shale gas to come out of Poland, but the initial results don’t suggest it’s going to be a game changer,” Noel Tomnay, head of global gas research at Wood Mackenzie Ltd., said in an interview from Edinburgh.

By 2020, Europe will be using more shale gas produced in the U.S. than from domestic fracking, Wood Mackenzie estimates.

According to the International Energy Agency, the 27-member EU’s dependence on gas imports will increase to 86 percent in 2035 from 61 percent in 2009, and the volume of imports will rise 74 percent.

Yergin, who wrote “The Prize,” a history of the oil industry, and its sequel, “The Quest,” said Europe may not yet realize how much natural gas it will need in the future.

‘Bigger Part’

“Gas is going to become a bigger part of energy mix,” he said. “One consequence of Germany turning off its nuclear plants is increased natural-gas use.”

That is one reason why U.S. liquefied natural gas terminal owners such as Cheniere Energy Inc. (LNG:US) and Dominion Resources Inc. (D:US) are lining up for permits to export the fuel.

The companies building LNG terminals see Europe as second only to Asia in terms of demand. China, the world’s biggest holder of shale reserves, seeks to produce 6.5 billion cubic meters of shale gas by 2015 and set a target of 60 billion to 100 billion cubic meters by 2020.

China, the world’s biggest energy user, may need to boost LNG imports by 80 percent by 2030 to meet domestic demand for the fuel, according to Wood Mackenzie.

European LNG imports declined 34 percent in the first quarter as the cargoes were diverted to Asia, where Japan, world’s largest LNG consumer, was paying more. Japanese paid $16 per thousand cubic feet, 32 percent more than a year ago, to woo supplies. Japan’s demand for natural gas rose following the shutdown of nuclear plants after a tsunami and crippled a plant at Fukushima, according to Sanford C. Bernstein & Co.

Price Advantage

European gas prices remained unchanged at about $10 per thousand cubic feet in the same period, according to Bernstein’s analyst Oswald Clint.

Those prices are attractive to producers in the U.S. where natural gas on the New York Mercantile Exchange (NYX:US) was $2.503 per million British thermal units in the first quarter, an equivalent of $2.57 per thousand cubic feet.

Cheniere, based in Houston, won federal government approval to export 2.2 billion cubic feet of gas a day from a $10 billion plant in Louisiana, and expects shipments to start as early as in 2015. Clients are Berkshire, U.K.-based BG Group Plc (BG/), Barcelona-based Gas Natural Fenosa, GAIL India Ltd. (GAIL) and Korea Gas Corp. (036460)

Hackberry, Louisiana

Sempra Energy (SRE:US), Mitsubishi Corp. (8058) and Mitsui & Co. Ltd. (8031) seek permits to export natural gas from Hackberry, Louisiana, upon completion of a $6 billion investment in 2016.

Freeport LNG in partnership with Macquarie Group Ltd. (MQG), Australia’s largest investment bank, is planning to start an export terminal in 2017 and Dominion Resources Inc., a Richmond, Virginia-based power producer, plans to have an export facility operating by 2017.

All these investors need federal approvals, which have been delayed as lawmakers including Senator Ron Wyden, a Oregon Democrat, and the Industrial Energy Consumers of America, raised concerns that sales overseas might increase prices at home.

Dominion, whose facility would ship gas produced from Marcellus, the largest U.S. shale formation, said the project would benefit the economy by promoting continued development of domestic natural gas and creating jobs.

LNG satisfied 21 percent of Europe’s natural gas demand in the 12 months ended in March, according to Bernstein. Russian exports, the main source of European gas supply, met 32 percent of demand, while the remainder was covered by the conventional production from Norway, Dutch and British North Sea fields, Germany, Italy, Poland, Hungary, Austria and imports from Africa.

Europeans are “going to find as many routes as possible to diversify, their shale resources are one of those options, as would be North American-based LNG,” said Andrew Ware, director of corporate affairs at Cheniere.

To contact the reporter on this story: Katarzyna Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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