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First Well Drilled in European Shale Gas Could Impact Land Values and Stock Prices

|Includes: COP, HAL, Vermilion Energy Inc (VET), XOM

Investors and energy producers are waiting to hear results from the first shale gas well in Europe, recently drilled by ConocoPhillips (COP-NYSE) in Poland.

A successful well could mean a big jump in the rock bottom land prices that early entrants into Europe's young shale gas industry - and the stock prices of those who own big swaths of prospective acreage.

Europe is the first stop on the train of shale gas technology being exported around the globe – which should result in many new discoveries that will enrich oil and gas investors for years.

But unlike the North American shale gas revolution, which was dominated by mid-tier producers and juniors, European shale gas plays have seen huge interest from many of the major oil companies.  They missed out on the US shale plays, but they have acquired large land positions here.  All this means is that results aren't made public as readily as junior producers keen to boost their stock prices.

Several producers are starting to drill. The Polish state-owned oil firm, PGNiG, also spud a shale well on July 6th.  Talisman (TLM-TSX; TLM-NYSE) is expected to begin drilling early next year.  Chevron (CVX-NYSE) has also won large land blocks there.

There is no shale gas production in Europe right now – ConocoPhillips’ well is the first.  Up until now, the play has been a huge land grab – at a fraction of the cost in North America – and right now Poland is receiving the most attention.  By some estimates Poland has approximately 50 trillion cubic feet of natural gas reserves.So with big reserve potential, and cheap land costs – under $1 per acre sometimes vs. $5000 per acre in North America – for both oil and gas – and gas prices are at least 50% higher in Europe than North America and the economics for a big discovery could be very compelling.

As drilling results begin to come out of Poland in the coming months, the market will get a much better idea of how fast this play will shape up.  So far details have been hard to come by, but should someone announce a highly productive well, land prices will shoot up, and stock prices along with it.

And Europe is very keen to wean itself off politically charged Gazprom, the Russian gas company that supplies most of Europe’s gas.  Gazprom has already cut off gas supplies to one customer – Ukraine, twice – in the middle of winter.  Europe’s main source of domestic gas, Norway, saw its gas reserves peak in 2001 and production peak in 2004.

So a new discovery should get lots of political/bureaucratic support to get developed.

Junior companies listed in Canada – such as Realm Energy International (RLM-TSXv), BNK Petroleum (BKX-TSX), and others on the junior London (NASDAQ:UK) Stock Exchange board, AIM – such as Igas and Lane Energy, have also acquired large acreage positions in European shale gas plays.

Despite the low land costs, Realm CFO Kevin Rathbun says they will find a deep pocketed joint venture partner to develop their acreage:  “We were one of the first companies into this play.  We intend to joint venture our Polish properties, which is more than 450,000 acres net to us, and that will result in an aggressive 2011 exploration program.”

There was HUGE wealth creation for North American investors in shale gas in the last five years, as the majors missed almost the entire play – it was left to juniors and intermediates that were small enough that their stocks could benefit from a productive land position of a few thousand acres.   

As late as 2007 – 3 short years ago – the Marcellus and the Haynesville shales did not even appear on many maps outlining oil and gas basins in North America.  They are now the two fastest growing gas producers in the US.  So land prices, production – and stock prices – can ramp up quickly.

Europe does have a few disadvantages.  There is a different land tenure system in each country of Europe for oil & gas leases, the bureacracy isn't staffed up or trained in oil and gas permitting, and there is lack of trained service people to do the work – frac’ers in particular are in very short supply. 

And as mentioned earlier, the majors have big land positions here, and they are not as free flowing with news as the juniors.  News flow drives stock prices.

But enough money is being spent that the industry will not walk away until the secret to getting oil and gas out of European shale is discovered.  But that could take a lot of drilling and fracking – and time.

I’ve heard Halliburton has just commissioned two new frac spreads (the machines that do the fracking, and open up a yard in Warsaw, Poland.  This only makes sense with the major producers spending tens of millions of dollars in drilling.

For a list of some of the promising, but very early stage shale plays in Europe, click here

Disclosure: No Positions