Last week the Danish government gave French energy major Total (NYSE: TOT ) permission to drill test wells for shale gas around Frederikshavn, a municipality in northern Denmark. Apparently Denmark is allowing Total to explore on its soil due to concerns about the country's dropping gas output. The Danish government, no doubt, wants to stem that decline in gas production, a decline which threatenes to undermine plans for Danish energy self-sufficiency by 2050.
If only it were that simple. Just a couple years ago ExxonMobil (NYSE: XOM ) dropped plans to drill for shale gas in Poland for the same reason Total will probably be unsuccessful in Denmark: Commercial viability.
While many geologists believe that Europe does indeed have considerable shale resources, having the stuff in the ground and getting it out properly are two very separate things. In Denmark's case, test wells could yield substantial amounts of natural gas. After that dry gas is removed, however, it must first be transported to a processing facility and then transported again to end users.
Unfortunately, Denmark does not currently have the pipelines or processing facilities to meet this need. Although Denmark does have considerable oil and gas infrastructure, it is all geared to offshore, North Sea production.
This is where commercial viability comes into question. In order to make shale drilling operations work, Total will have to build most infrastructure itself. Regarding drilling regulations and permitting, Poland is perhaps the most business-friendly country in Europe. Denmark is among the least. If ExxonMobil couldn't make it work in Poland, the cautious investor should be even more doubtful about Total's test wells in Denmark.
Mandate from Brussels
Meanwhile, Denmark has been one of the most enthusiastic participants in Europe's drive to renewable energy. The EU renewable energy mandate gave Denmark an overall target of 30% of all energy coming from renewable sources by 2020; a target Denmark is set to exceed thanks to the buildout of an expensive 'smart grid.' Not inconsequentially, Denmark's per megawatt cost of energy is now the highest in Europe at 30.54 Eurocents per kilowatt hour.
In any case, betting that Denmark will, on the back of its renewable energy infrastructure, build a pipeline and processing network for shale gas, is another questionable prospect.
Hands of the few
Assuming that Total can make Danish shale gas profitable, an unlikely prospect in my opinion, retail investors will still find it difficult to profit meaningfully from Total's success. After all, Total is a huge company with a market cap of nearly $160 billion. Danish shale gas would account for just a small portion of overall revenue even in a best-case scenario.
Don't count on smaller, independent companies to get involved, either. The EU's strict environmental regulatory stance ensures a high cost of doing business, and an even higher barrier to entry. Non-European independent companies would therefore have a very difficult time breaking into a hypothetical European shale drilling industry. The benefits of a European shale gas boom would likely rest in the hands of the few.
If you do believe in the shale, it's best to stay away from Europe. Drilling results in other European countries have thus far been disappointing. Furthermore, Brussels-based environmental mandates, a strong tradition of "not in my backyard," often dating back to colonial times, and a high tax regimen are all reasons to keep your investment money in North American energy instead.
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