OREANDA-NEWS. Lifting a ban on fracking in Germany is unlikely to have any significant impact on the country's domestic gas production in the foreseeable future, Fitch Ratings says. Obstacles abound, including opposition to drilling and uncertainty about the levels of reserves. Furthermore, production costs may be high at a time when gas prices are low due to slack demand.

The German cabinet may soon decide on the future of fracking. The country's oil and gas industry has been lobbying for an effective ban to be lifted to allow Germany to increase self-sufficiency in natural gas as part of Europe's commitment to reduce reliance on Russian imports. Germany produces only 10% of the gas it consumes, down from 20% in 2000. Russia's Gazprom meets about 35% of Germany's total demand with most of the rest coming from the Netherlands and Norway.

The prospects for fracking, however, are not great. Wide-scale production remains limited to the USA and Canada, while China and Argentina have only small-scale operations. Lithuania, Poland, Romania and Ukraine have solicited investment in the last few years but oil majors have halted exploration due to environmental opposition or a failure to find economically viable quantities of gas.

The decline in gas prices in 2014 was a major factor in the halt to exploration, particularly as costs proved higher in eastern Europe than in other regions. Drilling costs in Poland, for example, ranged USD20m-USD25m per well, or several times that of the US.

Early expectations of Poland's recoverable shale gas volumes proved wildly optimistic. In 2011 the country was estimated to have as much as 5 trillion cubic meters of recoverable shale resources, but a 2014 assessment put the figure at just under 1 trillion cubic meters. None of the nearly 70 wells drilled in the country using fracking resulted in commercial production of shale gas and currently only a handful of small independent players continue exploration for shale gas in Poland.

Far less progress has been made on fracking in western Europe where it is widely viewed as environmentally damaging - France banned it. England is the region's leader in terms of granting land plots for fracking. But there isn't large-scale commercial shale gas production and drilling has often been hampered by local protests.

Natural gas demand is also currently relatively low across Europe, particularly in Germany, due to increasing use of renewables, low coal and CO2 prices, and weak economic growth. Spark spreads in Germany have remained in the red since early 2012, meaning utilities use little gas-fired power generation on a merchant basis. This has driven the share of natural gas in total electricity generation down to 9.6% in 2014 from 12.1% in 2012, while that of renewables increased to 25.8% in 2014 from 22.8% in 2012, according to the Federal Statistics Office. We expect this trend to continue and forecast flat gas demand in Europe in the medium term until older coal units are decommissioned and the last nuclear plants shut in Germany by 2022.