BMI View: Although current domestic production of oil and gas is negligible, with imports meeting around 99% of current demand, we are witnessing a gradual but notable uptick in investment targeting Spain's upstream. The acceleration of onshore and offshore activity could cut Spain's hefty import bill, but there are political and regulatory risks that hold sizeable downside risks to both conventional and unconventional efforts. However, the environment ministry has recently allowed deepwater drilling off the Canary Islands and the Supreme Court has granted Repsol the authorisation to start exploration after the permit had been legally challenged by local authorities. Despite this success, the company announced it had abandoned the project in January 2015 after initial exploration proved unsuccessful. In November 2013 the central government legalised the process of hydraulic fracturing. However, while we see brightening prospects for onshore unconventionals, this upside is unlikely to significantly alter production for within our forecast period: significant technical, environmental and political obstacles preclude us from including significant shale gas production within our forecast period.
|e/f = BMI estimate/forecast. Source: EIA, BMI|
|Crude, NGPL & other liquids prod, 000b/d||4.6||5.1||5.4||5.5||5.3||5.2||5.1|
|Dry natural gas production, bcm||0.1||0.1||0.1||0.1||0.1||0.1||0.0|
|Dry natural gas consumption, bcm||32.7||32.0||32.3||32.7||33.4||34.0||34.7|
|Refined products production & ethanol, 000b/d||1,147.5||1,200.3||1,209.9||1,185.7||1,162.0||1,150.4||1,138.9|
Madrid filed a legal challenge to the fracking ban that the northern region of Cantabria had unanimously voted for in April 2013. In June 2014 the Constitutional Court rejected Cantabria's law, posing an upside risk to our long-term forecast. In August 2014 Spain's Minister of Industry, Tourism and Trade, Jose Manuel Soria, reiterated the Government's intentions by declaring that a local exploitation of shale gas would make the country more independent from foreign energy sources and would save millions of euros in the long term. However, while we are seeing increasing opportunities in Spain, we cannot yet quantify the total upside risk to our forecast given the challenges and nascent stage of activity. Our core view remains for Spain to see negligible domestic production, although efficiency gains and lower prices globally will translate into some relief for its energy costs.
The main trends and developments we highlight in Spain's oil and gas sector are:
The Spanish government legalised the process of hydraulic fracturing, also known as fracking, on October 31 2013. The government took the decision to promote shale gas exploration and drilling projects as part of its efforts to boost the economy. It has published rules for oil and gas drillers using fracking in the country, allowing water-intensive drilling. Under the new rules, shale exploration projects across Spain will not have to go through the Environmental Impact Assessment. The new rules limiting the power of regional governments to prohibit hydraulic fracking in the country have been used to challenge the country's Constitutional Court with regard to the fracking ban in the region of Cantabria. In June 2014 the Court pronounced itself in favour of the government, effectively ending the fracking ban in Cantabria.
A delay to a planned shale gas exploration programme by Repsol underscores the threat local bans on fracking pose to shale gas in Spain. Previous downside risk generated by regional bans has been cleared out by the Constitutional Court's June 2014 ruling.
In November 2013, Australian junior Petrel Resources revealed that its Tesorillo licence in the Guadalaquivir Basin had been independently certified to contain prospective gas resources of up to 84bn cubic metres (bcm). P50 reserves were placed at 34bcm, but given Spain's current natural gas reserves are estimated by the US Energy Information Administration to be just 2.5bcm presently, Tesorillo offers sizable upside to our forecast if the appraisal proves successful. Drilling is due to test the prospect over 2014, but Petrel noted that given the Maghreb pipeline is located some 3km away, 'any reasonable flow rate would be readily commercial.'
Spain is also seeing activity target its offshore plays. Namely the Gulf of Valencia basin and the waters near to Morocco where the Spanish Canary Islands are benefiting from newfound interest in the offshore potential of North Africa. Activity in the Gulf of Valencia, an area to the east of central Spain also reflects growing interest in the broader Mediterranean.
Exploration in these areas could nonetheless be slowed down or even cancelled together amid growing popular protest against offshore upstream. In May 2015 Cairn Energy announced that it abandoned prospects in the Gulf of Valencia following opposition from local governments and environmental associations.
Spanish oil and gas giant Repsol has also sought permission for drilling near the Canaries. The company has previously indicated it was willing to spend in the area of USD10bn to develop offshore fields it hoped find and believes may hold some 900mn to 2.2bn barrels (bbl) of hydrocarbons. Repsol has previously estimated that the region could produce some 140,000b/d, a rate that would result in a sizable cut to Spain's current import bill. In June 2014 it has received the Court's green flag for exploration, after local authorities had legally challenged the approvals granted by the government in Madrid. In August 2014 Repsol was granted a three-year licence to drill in three sites some 50km off the islands' coast. A referendum on the archipelago to vote against the project was called off by the Constitutional Court, after being challenged by the country's central government.
Repsol nonetheless abandoned the prospect in January 2015 following a first well at the end of which the company deemed that the presence of hydrocarbon was too sparse to give scope to any commercial production.
At the November 2013 East Atlantic Oil and Gas Summit in Madrid, Cairn Energy general manager for Spain Antonio Martin characterised Spain as 'a country with growing exploration potential, offering a friendly investment environment with new investment business opportunities.' Attendees at the conference cited that sustained by high oil prices and improved offshore E&P capabilities, Spain was once again an attractive destination for upstream investment.
Spanish industry Trade group ACIEP (Association of research and exploration companies oil and underground storage) reported the country may hold 2bn bbl worth of oil reserves and a further 2.5trn cubic metres (tcm) worth of gas. According to the group, there is a resurgence in activity in Spain. Currently, the authorities have issued 70 licences to explore different zones, a total of 57 licences are being examined for approval and 23 licences were issued for hydrocarbons exploitation, according to the 2014 List of Concessions for Exploration and Operation, edited by Spain's Ministry of Industry, Energy and Tourism.
Lengthy and cumbersome approval processes have seen operator timelines impacted and discouraged new exploration, with the majority of the 688 wells drilled in Spain completed over 30 years ago. Long waiting times for drilling permits, with local and regional government lacking an incentive to approve drilling given environmental risks, are a key source of complaint for the industry. Given Spain's energy and tourism authorities are part of the same ministry, a lack of clear regulatory jurisdiction and competing interests are also a cause for concern.
We expect imports of crude and other liquids to average 1.209mn b/d in 2015, a 0.8% yearly growth, representing USD38.6bn of expenditure. At the time of writing, we assumed an OPEC basket oil price for 2014 of USD102.0/bbl falling to USD87.8/bbl in 2015. This drop in the oil price translates to a 13% reduction in expenditure compared to 2014. Due to oil price drop and an improved economic outlook, we have also revised our refined fuel consumption estimates now projected to have a slightly positive growth reaching 1.2mn b/d in 2016. Imports of gas will see Spain spend a further USD14.1bn in 2015. In the medium term we expect combined imports of liquids and gas to be lower, on the back of moderating prices, at USD56.5bn in 2017.