Schlumberger Says Fracking in Europe Will Cost A Lot More

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Replicating the U.S. shale gas boom in Europe may be a lot costlier than previously estimated. In the Shale Gas World Europe 2011 conference in Warsaw, leading oilfield services provider Schlumberger (NYSE:SLB) indicated that the process of drilling a shale well in Poland would cost almost three times as much as in the U.S. [1] Many large players such as Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have won licenses in Poland to explore shale prospects. Gas production in the country may also be hampered by the lack of infrastructure and the lack of necessary expertise, according to Schlumberger’s global unconventional technology and marketing manager Peter Richter. We have a $101 price estimate for Schlumberger, which is 35% ahead of the current market price.

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Skepticism abounds

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Schlumberger revealed that a 2,000 meter horizontal well would cost $11 million in Poland while a similar well in the U.S. would cost around $3.9 million. [1] Even in the U.S., shale exploration is considered costlier than the extraction of conventional deposits because of the dispersed nature of the resource. Skepticism over the possibility of a widespread shale gas boom in Europe has strengthened over the past few months with explorers having to contend with a host of problems. Some of these issues include the higher population density in European nations impeding the use of land and less available water, which is necessary for the hydraulic fracturing (or fracking) process. Fracking has also raised environmental concerns which resulted in a ban of the process in France. Poland, however,  has however powered ahead with its shale exploration plans in order to reduce its dependence on Russia.

To date around 11 wells have been drilled in Poland out of a mandated 124. [1] The country granted over 100 licenses to operators such as Exxon Mobil and Chevron to develop a part of the estimated 1.4 to 3 trillion cubic meters (Tcm) of shale reserves it sits on. [2] The country uses around 14 Bcm of gas a year, of which about 10 Bcm is supplied by Russian major Gazprom. High costs may significantly impact Poland’s plans to develop its shale reserves. Foreign players have been attracted to Poland in the past because of attractive contract terms – the country charges a 1% tax on the volume of gas produced and has a 19% corporate tax rate on profits. The duration of the contracts and the area awarded are also higher than those offered in other countries.

Future plans

One of the major stumbling blocks for explorers looking for gas in Poland is the lack of pipeline infrastructure. Additionally,  Mr. Richter noted that public concerns over the process of fracking would have to be addressed to make the efforts more popular.

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Notes:
  1. Shale-Gas Drilling Cost in Poland Triple U.S., Schlumberger Says, Bloomberg [] [] []
  2. ‘Fracking’ comes to Europe, sparking rising controversy, Post Carbon Institute []