However, the study, which also notes significant shale gas potential in Lithuania, Hungary and Bulgaria, warns 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 exploitation 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 desperate to diversify their energy supplies,” says Steve Butler, Director at KPMG in Hungary’ Energy & Utilities Advisory Practice, co-author of the report.
But he also warns 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 and Eastern 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 stake-holders, 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 says.
The study also notes that environmental concerns are more to the fore 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.”
This dependence was brought sharply into focus by the 2006 and 2009 Russia-Ukraine gas disputes, and the Russia-Belarus disruption in 2010, all of which spurred countries in the region to seek alternative sources. Furthermore, 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 3.2 percent – having significant implications on pricing.
Meanwhile, as the study notes starkly: “Of the 18 CEE countries, only a handful have substantial reserves of proved conventional gas, and even this is equivalent to [only] approximately 3 percent of Russian reserves.”
Could shale gas meet these concerns? The answer is a resounding yes, at least for a number of countries.
“Based on 2010 annual consumption rates, the estimated amount of shale gas in CEE, at 4.13 Tcm, has the potential to cover the region's gas demands for decades,” the report states.
Despite the potential, the study warns that a number of issues, not least financing, will be very challenging.
“The high initial exploration and subsequent development costs of shale reserves are daunting. State-owned E&P 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,” Steve Butler claims.
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 United States.
But it is Poland, which sits on some of the largest shale gas reserves in the region – an estimated 1.92 Tcm, of which a maximum 0.77 Tcm is considered technically recoverable – that leads developments in the region, with exploration having started in 2007. 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 know-how 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,” says Marcin Rudnicki, Partner at KPMG in Poland.
But, he stresses, the ever-present desire to raise living conditions to something closer to those in Western Europe means increased energy demand, which in turn leads to pressure on prices.
“Given all these trends, the opportunities to exploit shale gas, which is there, lying beneath the peoples' feet – not thousands of miles away in the Ural region or Siberia – are simply fantastic. As such, the decision to overcome the challenges and tap these deposits can only be a matter of when, not if,” Rudnicki concludes.