Shale-acked in Poland

By bne IntelliNews November 28, 2011

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Polish Prime Minister Donald Tusk's mix of spending cuts and new taxes on exploiting minerals and hydrocarbons, announced on 18 November, was welcomed by the markets. But the measures come at a difficult time for the shale-gas industry, which has suffered a series of disappointments lately.

The raft of measures aimed at safeguarding Poland's economic growth in these dangerous times included new sources of budget income by imposing extra taxes on mining Poland's sizable copper and silver deposits, as well as on shale gas, of which exploratory searches are under way. Poland has never had a mineral royalties tax, since most mining of copper, coal, oil and gas has traditionally been done by state-owned companies. So the extra taxes on silver and copper are clearly aimed at squeezing more money out of state mining firm KGHM, which is now only 32% owned by the state. In the longer term, analysts say the government's aim is to establish a proper functioning royalty tax ahead of the commercial production of shale gas, which is expected in three to four years time.

Ministry of Finance spokesperson Malgorzata Brzoza on November 22 stressed that Poland would levy taxes on a broader array of hydrocarbons than just shale gas, and those taxes would be implemented only once commercial shale gas extraction is underway. "The hydrocarbon extraction tax - crude, conventional gas and shale gas - will be introduced at a later date when Poland begins commercial extraction of shale gas," Brzoza was quoted as saying by PAP news agency.

Poland is being pegged as one of the most promising shale gas plays outside of the US. However, that reputation has taken a knock recently after initial flows at various test wells have not been as encouraging as hoped.

According to an April 2011 study by the US Energy Information Administration (EIA), Poland has technically recoverable shale gas resources of 5.3 trillion cubic metres (cm) of gas, making them the largest in Europe, compared with the country's current proven conventional gas reserves of 164.2bn cm. The government has been especially excited by the prospect, since it could help make Poland energy independent - an enormously attractive prospect 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.

This has led to something of land grab, as the Polish government encouraged shale gas players to acquire exploration rights across the country's shale basins. It was minnows such as 3Legs Resources, Realm Energy and San Leon Energy that moved first, but industry majors soon saw the potential, leading to players like ConocoPhillips and Total striking a series of farm-in deals.

It was an announcement by 3Legs on November 16 that has done most to undermine the euphoria that has surrounded the Polish shale outlook so far. The admission that "flow rates have been low" at the first horizontal shale gas wells in Poland at Lebien and Lebork in the Baltic Basin caused shares of the Aim-listed explorer to fall 40%. The company and its partner ConocoPhillips have suspended tests at the prospect "for an extended period of several months" due to high costs and subzero temperatures.

This followed similarly-disappointing test flow results from Aurelian Oil & Gas at its exploratory well at the Sierkierki shale gasfield, which led the company to reduce its estimate of recoverable reserves at the well from 45bn-56bn cm to just 11bn-22bn cm.

However, there have been some brighter spots, with San Leon Energy, an Irish company associated with financier George Soros and BlackRock Investment, and its partner Talisman Energy announcing on November 17 that they had successfully completed the first shale gas exploration well in the Pomorskie province in northern Poland.

"In spite of these disappointments, it remains very early days for Polish shale," says Business Monitor International. "Companies operating in Poland, however, are doing so under intense scrutiny, in which every misstep or perceived disappointment is magnified."

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