Europe’s answer to the U.S. shale boom may lie beneath the Sahara desert.

While environmental regulation and disappointing drilling tests have held back the development of shale gas reserves in Europe, Algeria is using tax breaks to encourage exploration. Pipelines under the Mediterranean to Spain and Italy already link Africa’s largest gas exporter into Europe’s grid.

The North African nation is holding talks with Exxon Mobil Corp. over shale, Ali Hached, an adviser to Energy and Mines Minister Youcef Yousfi, said in an interview. Eni SpA, Royal Dutch Shell Plc and Talisman Energy Inc. have already signed shale exploration accords with Algeria, which expects tax breaks for gas exploitation and drilling shale to get parliamentary approval within weeks.

Algeria holds 231 trillion cubic feet of recoverable shale gas, the International Energy Agency estimated, enough to supply the entire European Union for a decade and valued at about $2.6 trillion at current month-ahead U.K. prices. Higher North African production, if possible, offers Europe an alternative to Russian gas from OAO Gazprom, which links gas prices to oil and charges its customers about three times the U.S. price.

Algeria’s oil and gas potential “remains largely underexploited,” said Sohbet Karbuz, hydrocarbons director at Observatoire Mediterranee de l’Energie, or OME, a Paris-based association of Mediterranean region energy companies. “Improving investor confidence and the investment environment is the key.”

Export Earnings

Algerian President Abdelaziz Bouteflika wants to import technology for hydraulic fracturing, or fracking, to tap the potential of shale, allowing his country to maximize export earnings while satisfying growing energy demand at home. African nations with greater reserves are Libya, whose war has slowed development, and South Africa, where fracking has only conditional approval.

Europe’s attempts to develop its own shale reserves have faltered. France’s parliament banned fracking because of concerns the process pollutes drinking water. The U.K. halted exploration, while scientists investigated links between drilling and earth tremors. In Poland, where the government wants shale developed to gain energy independence from Russia, initial well results have disappointed.

In the empty wilderness of Algeria’s desert drilling has fewer risks. Rome-based Eni has already started exploratory fracking, in which sedimentary rock is blasted with a blend of water, sand and chemicals. Talisman and Shell plan to drill exploratory wells soon, Hached said.

Double Production

Shale gas could almost double Algeria’s marketed gas production during the next two decades to 160 billion cubic meters a year, and the country could export 110 billion cubic meters by 2030, Karbuz estimated. As well as pipelines, Algeria uses export terminals to liquefy gas for shipment by tanker.

Using fracking to tease gas out of shale rock has made the U.S. the world’s largest natural gas producer and cut prices more than 70 percent from their 2009 peak.

Algeria is back on big oil companies’ radar because it has offered “very attractive fiscal terms” to partners interested in shale exploration, according to Mark Liebster, general manager of Shell Upstream North Africa. He declined to specify the terms of the tax arrangement.

Eni and Exxon officials declined to comment on their plans for Algerian shale.

Those two companies have performed best in the last 12 months in stock markets among four that have shown interest in Algeria. Exxon and Eni have both risen 17 percent in the period, compared with a 3.1 percent increase by Shell in Amsterdam and a 10 percent decline by Talisman in Canada.

‘Right Direction’

The amended law modifies certain taxes and fees to attract foreign investors, Energy and Mines Minister Youcef Yousfi said on Sept. 24. Royalty fees will be adjusted for levels of production, and the tax on oil revenue will depend on the level of difficulty and risks of exploration, Algerie Presse Service reported, citing Yousfi.

The law “is moving in the right direction,” said Jean- Marie Dauger, executive vice president at GDF Suez SA. “It could encourage us to look outside our current perimeter at things that are a little more complicated to develop.”

Tax incentives to speed exploration and production of unconventional gas, which date to the late 20th century in the U.S., were announced by China this year. The country will subsidize production by offering 0.4 yuan (64 cents) a cubic meter for the fuel that’s developed and consumed from 2012 to 2015, China’s Ministry of Finance said in a Nov. 5 statement.

North African nations need to boost domestic production of natural gas as demand for the fuel in the region may more than double by 2030 to 210 billion cubic meters a year, OME has said. That will constrain the growth of exports, Karbuz said.

Geological Potential

“There is geological potential in Algeria for a lot of shale gas,” said Olivier Cleret de Langavant, senior vice president strategy and business development at Total SA. “It has a lot of source rock but it still has to be proven that it can flow and be produced profitably.”

Algeria needs to drill more than 400 test wells over the next several years to determine whether shale gas will be economically viable, said Djaouid Djelloul Bencherif, the director of deposits at Sonatrach Group. The state-owned energy company, which is party to the accords, has said it plans to invest $80 billion over five years.

The country is “very eager to learn new technology solutions” from its international partners, he said in an interview in Vienna.

First Flows

Still, given the early stages of the process and many remaining financial and legal obstacles, Algeria couldn’t hope to produce unconventional gas commercially before 2020, according to the country’s Energy Ministry.

The country has been more stable than many of its neighbors as regimes were rocked by violent uprisings in what has been called the Arab Spring.

“The advantage of Algeria is that it’s very stable, which is what investors like,” said Brian O’Cathain, chief executive officer of Petroceltic International Plc, which recently merged with Melrose Resources Plc to expand in North Africa and the Mediterranean. “Everybody wants to know what happens when Bouteflika steps down in 2014, but I don’t think much will happen.”

(Source: Bloomberg)