However, the Central and Eastern Europe Shale Gas Outlook which also notes significant shale gas potential in Lithuania, Hungary and Bulgaria, suggests that local conditions – including geology, as well as regulatory and legal frameworks – are typically very different from those prevailing in North America, where local companies first engaged in shale gas development activities.
“There is no doubt that development of the shale gas industry is inevitable in this region; there are proven reserves in several countries, and all, without exception, are eager to diversify their energy supplies,” said Steve Butler, Director at KPMG in Hungary`s Energy & Utilities Advisory Practice, co-author of the report.
But he also cautioned that investors and managers of future production projects will need to pay careful attention to what are likely to be very country-specific conditions to achieve success.
“Central Europe is not the United States--mineral rights, for example, typically belong to the state, not to landowners, so you have a different environment, with different stakeholders, right from the start of any project. Managers, both on the ground and at headquarters, must understand this may have consequences in terms of lead times and costs,” Butler said.
The study also notes that environmental concerns are greater in Europe which has lead to moratoriums imposed on shale gas exploration in Bulgaria and France. Nonetheless, the underlying drivers are powerful, as the study underlines.
“CEE countries are heavily dependent on natural gas imports, making them vulnerable to supply and geopolitical risk. On average, 69 percent of regional gas consumption was covered by imports in 2010, of which more than 90 percent was supplied by Russia,” said Butler. “Consumption among EU countries in CEE is expected to rise by an annual 1.6 percent between 2011 and 2030 – with the fastest growth in 2011-2015 at a yearly rate of 3.2 percent – having significant implications on pricing. Of the 18 CEE countries, only a handful has substantial reserves of conventional gas, and even this is equivalent to approximately 3 percent of Russian reserves.”
Butler added, “Based on 2010 annual consumption rates, the estimated amount of shale gas in CEE, at 4.13 Trillion cubic meters (Tcm), has the potential to cover the region's gas demands for decades.” Despite the potential, the study points out that a number of issues, primarily financing, will be very challenging.
“The high initial exploration and subsequent development costs of shale reserves are daunting,” commented Butler. “State-owned gas exploration and production companies in CEE – especially those with high levels of debt – are unable to fulfill their drilling commitments. The need for capital is often the most important driver of joint ventures in the CEE shale gas segment, though knowledge transfer is also a keen motivator of such partnerships.”
Shale deposits in CEE are also deeper by a factor of 1.5 on average than in North America. This, along with increased temperature gradients in Europe, meeting tighter environmental standards and accommodating different geological conditions, have led some local officials to indicate that the estimated development costs of a well in Poland could be almost three times that in the US.
But Poland, which sits on some of the largest shale gas reserves in the region, leads developments in the region. By February of this year, the authorities awarded 111 concessions to 30 companies/consortia for unconventional gas exploration.
Progress in other countries with known potential, notably Ukraine and Romania, lags significantly.
“Shale gas development is only in its early stages in Central and Eastern Europe: there is a big knowledge gap and other challenges, such as uncertain legal and tax regulations, various and varying country risks and typically tougher geological conditions. All this means the North American experience cannot simply be replicated here,” said Marcin Rudnicki, Partner at KPMG in Poland.
But, he stressed that the ever-present desire to raise the standard of living to something closer to that of Western Europe means increased energy demand, which in turn leads to pressure on prices.
“Given all these trends, the opportunities to develop shale gas are simply fantastic. As such, the decision to overcome the challenges and develop these resources can only be a matter of when, not if,” Rudnicki concluded.
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