PKN Orlen's shale makeover

By bne IntelliNews September 15, 2011

Jan Cienski in Warsaw -

PKN Orlen is Poland's largest oil refiner, with a network of petrol stations that spans the country. But the company sees its future as very far removed from the world of petroleum.

"Orlen wants to be a leader in gas extraction," Jacek Krawiec, the company's CEO, said at a recent conference dedicated to shale gas, the unconventional fuel that may be present in enormous quantities locked into rock formations deep underground and which has set off a gas rush in Poland.

PKN Orlen eventually hopes to become a large gas producer, which it will use in gas-fired electricity plants, a big change from its current reliance on refining. The company is already undertaking seismic testing at two sites in eastern Poland, and plans to begin drilling later this year. Its interest in shale gas was confirmed earlier in September in a report that it was trading some of its Polish gas concessions for access to US shale deposits with Canada's Encana Corporation.

Any transformation from an oil company to a gas-fired power generator will be enormously difficult - and PKN Orlen hasn't shown a knack for successful shifts in the past. As managements have come and gone in previous years, usually at the behest of the politicians who have ultimate control of the company, their strategy has shifted dramatically.

In 2003, under the government of the ex-communist Democratic Left Alliance, PKN Orlen acquired 500 filling stations in Germany as part of an enthusiastic Central European expansion programme that found less support with later managements.

Then in 2006, under the right-wing government of the Law and Justice party, PKN Orlen undertook Poland's largest foreign investment, the purchase of Lithuania's Mazeikiu Nafta refinery for a total price of $3.7bn. The venture never made all that much commercial sense for the Poles, more so when the Russians, peeved at having missed out on the acquisition themselves, cut off pipeline oil supplies to the refinery. However, President Lech Kaczynski, killed in the April crash of the Polish government airliner, was very keen on the deal. Kaczynski was intent on forming close ties with as many ex-Soviet republics as possible as a way of weakening Russia, and buying the refinery would cement warm relations with the small Baltic state.

The current government's enthusiasm for shale may presage another shift in PKN Orlen's strategy.

You can be sure of shale

PKN Orlen's gas play is just a small part of a much wider shale frenzy that has gripped the country since the US in a matter of years turned from a gas importer to a gas exporter. Earlier this year, the US Energy Information Administration said that Poland may have the largest shale gas deposits in Europe - as much as 5.3 trillion cubic metres (cm). "Thanks to shale gas, Poland has the chance of making itself energy independent," Janusz Steinhoff, a former economy minister, tells the Rzeczpospolita newspaper.

The prospect of energy security is enormously attractive for a country that imports two-thirds of the 14bn cm of gas it uses every year, most of it from Russia, which also supplies Poland with the overwhelming majority of its crude.

Further, almost all of Poland's electricity is generated with coal, which may be plentiful, local and cheap, but which will become more and more costly thanks to the EU's clampdown on greenhouse gas emissions. "Extracting shale gas could have a significant impact on the energy potential of our country and for whole of central and eastern Europe," says Waldemar Pawlak, Poland's economy minister.

Poland is seeing enormous interest from the US and Canadian companies that first developed the technology to extract the gas by drilling deep underground and fracturing rock formations with water under very high pressure - a process known as "fracking". Chevron, ExxonMobil and Marathon are active, as are a host of smaller companies which are aggressively competing for more than 100 shale exploration concessions around Poland. Britain's 3Legs Resources, working with Canadian Lane Energy and US ConocoPhilips, has made the most progress, drilling a test well near Lebien, in north-central Poland, and flaring off the resulting gas. "The first impressions indicate that the reserves could be effective," says Pawlak.

The true extent of Poland's reserves, and whether extraction is commercially viable, will be known in about five years, but there are still a lot of hurdles before Poland's dreams of becoming another Norway - as Radoslaw Sikorski, the foreign minister, once said - can be achieved.

Poo-pooing shale

The first are possible regulatory hurdles. France, which also has large potential shale reserves, has imposed a moratorium on exploration, ostensibly for environmental reasons, but Poles darkly mutter that the French are simply protecting their powerful nuclear industry from a potential competitor. Poland is also lobbying hard to prevent the EU from imposing tough environmental rules that could kill off shale production before it starts. Guenther Oettinger, the EU's energy commissioner, is mulling over the introduction of higher environmental standards for shale extraction.

Then there are cost issues. Shale gas has dramatically cut the price of gas in North America and turned it into a gas exporter. But if world gas prices continue to fall, it may end up be uneconomic to develop new deposits in Poland, which lacks the infrastructure and specialised (and expensive) equipment to quickly ramp up production.

Finally, Poland would have to adapt the liquefied natural gas (LNG) terminal currently under construction near the Baltic port of Swinoujscie to handle exports instead of imports, as well as expanding its pipeline network, which mainly ferries Russian gas west, in order to handle a surplus of domestic supply.

Those potential complications are not dampening hopes of an energy bonanza, however. And the country's ruling Civic Platform party has even added gas to its pre-election pledges. "By 2013, we will introduce solutions guaranteeing Poland high revenues from shale gas extraction, which will be used for securing future pensions," says an ambitious declaration in the party's electoral programme.

There is a saying for that in Polish - "Dividing a bear's skin before it's dead."

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