Sun setting on shale days in Poland

By bne IntelliNews November 21, 2014

Jan Cienski in Warsaw -

 

An aggressive Russia and growing worries about its reliability as an energy exporter should have provided a big boost to Poland’s nascent shale gas industry. Instead, gloom pervades the sector as unpromising geology, together with high costs and regulatory concerns create growing questions over shale’s future in Poland.

The biggest problem is that, despite the early promise, the results from the few wells that have been properly tested have proven to be lacklustre. It turns out that Poland’s geology is not all that similar to the US, where shale gas and oil has transformed the US into the world’s largest oil and gas producer. “The slow development is due to two factors – a slow and incompetent bureaucracy, and a not as good as expected geology,” says Pawel Poprawa, an expert with the Krakow-based Energy Studies Institute.

He says most of the test wells show only about 10% of the gas flow needed for commercial exploitation, with the best wells showing only 30% of the needed flow. “If the current rests are representative, then the commercial deposits are zero, but we are learning,” he says. “One good result could help – especially the smaller companies. We are at a crossroads. This could just stall, but there is still some hope.”

Hot air

Poprawa’s caution is a far cry from the optimism that swept Poland in 2011, when the US Energy Information Administration estimated that Poland could have gas reserves of as much as 5.3tn cubic metres, the largest in Europe. Subsequent estimates have backtracked from that high point. An updated US report in 2013 downgraded Poland’s potential shale deposits, saying: “Poland's Lubin Basin shale gas resource estimate was reduced from 44 trillion cubic feet in the 2011 report to 9 trillion cubic feet in this report… For Poland as a whole, the shale gas resource estimate was reduced from 187 trillion cubic feet in the 2011 report to 148 trillion cubic feet in this report.”

The Polish Geological Institute says the country could have shale gas reserves in the range of 346bn to 768bn cubic metres.

Figuring out just what lies underground has been hampered by the very slow pace of exploration. While the world-leading US industry drills thousands of wells a year, Poland has drilled only 64 vertical test wells. Only 11 of them have been hydraulically fractured – the process under which water and chemicals are forced at high pressure deep underground to shatter rocks and release trapped gas. Poprawa says about 200 test wells will be needed to get a better sense of the potential scale of Poland’s shale gas deposits.

One problem is the cost – as much as $25m per test well. Big international energy companies have been reluctant to pump that kind of cash into Poland while the country formulates a legal and regulatory structure for the new industry. That leaves much of the exploration in the hands of state-controlled companies like PKN Orlen, a refiner, and PGNiG, the former gas monopoly, as well as smaller independents.

As Poland’s shale problems mount, these companies are having greater difficulty raising money from sceptical investors and banks to finance further prospecting. “Western companies were unable to create an atmosphere of success around the sector,” says Grzegorz Pytel, an energy expert with the Sobieski Institute, a think-tank.

The difficult geology has been compounded by problems in coming up with a regulatory regime that is both attractive to the industry and which could generate sizeable revenues for the government in the event of a shale gas boom. A new law comes into force next year, aimed at lessening the red tape and administrative hurdles that have frustrated gas companies, but it is unclear if it will do enough to lift the pall now enveloping Polish shale.

Finally, Poland, like other European countries, has a different mineral rights tradition than in the US, where landowners and not the government normally own such rights, making them keen to cooperate with energy prospectors. “The more complicated and more accurate story is that Europe has a different operating environment: things take longer, landowners are perversely incentivized to block, evict or collude [if they are not the direct beneficiary],” says Parker Snyder with Cleantech Poland, an energy consultancy.

As a result, several oil majors have decamped from Poland in recent years. Marathon Oil, Talisman Energy, Eni and ExxonMobil have all gone, France’s Total did not renew its single exploration concession, while other companies have cut back on their hunt for gas.

The problems around shale raise doubts over whether it will ever meet the promise suggested a few years ago. Poland uses about 15bn cubic metres of gas a year – 4bn cm comes from domestic production and the rest is imported, mostly from Russia. Although there are worries about being over-reliant on Russia’s Gazprom, Poland is moving to make itself more independent. The country has put large efforts into building up its storage capacity, as well as constructing connectors to the gas systems of neighbouring countries. Finally, a liquefied natural gas (LNG) terminal on the Baltic Sea, with the capacity to import 5bn cubic metres of gas a year, is due to come online by the end of this year.

A more secure Poland may mean that shale gas’s window is closing. “There are now questions if we’ll ever finish the exploratory phase,” says Poprawa.

 

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