Talisman puts another dent in Poland's shale gas dreams

By bne IntelliNews May 9, 2013

bne -

Pouring more cold water on Warsaw's dreams of forging energy independence by tapping its shale gas deposits, a second international explorer announced on May 8 that it will up sticks and quit the country in the midst of regulatory and tax uncertainty, as well as poor test results.

Canada's Talisman Energy said that it has agreed to sell out its stake in its Polish joint venture to partner San Leon Energy, in order to focus on other regions. San Leon, which has drilled a single test well at each of the three licensed areas held by Talisman Energy Polska, issued its own statement to announce that it has acquired 100% of the shares in the JV. The company, whose operations have to date been funded by Talisman since it signed a farm-in agreement in February 2010, has reported gas flows, but they're clearly not sufficient to tempt it to stick around.

"Talisman's decision to exit Poland is driven by our strategic priority to focus on production within our two core areas: the Americas and Asia-Pacific," Paul Warwick of Talisman said in a statement. "Although encouraged by the preliminary results of our drilling program, we need to focus on what is important to our shareholders. I am proud of what our team has accomplished in Poland: a technically successful drilling program and strong relationships with key stakeholders."

In addition to the interests in the three concessions in the Baltic basin, Talisman Polska's assets are valued at $10m, and include cash and drilling equipment. Talisman reports it has already closed its office in Warsaw, and has exited the country with no obligations standing. London-listed San Leon said in its statement that it will now use the debt-free Talisman Polska's cash to fund further drilling, which will begin as soon as permitting and regulatory approval is granted.

"Talisman's Poland exit has been inevitable since the company altered its strategy to concentrate on two core areas, the Americas and Asia-Pacific. It became clear to us that we had to regain control of the drilling programme as soon as possible to ensure the Baltic Basin work programme continued," San Leon Executive Chairman Oisin Fanning comments. "There is still significant and continued industry interest in the Baltic Basin shale gas play, and we expect the results of our fracking programme to attract further interest from potential farm-in partners."

However, it's debatable whether that interest is coming from foreign investors with experience in exploiting unconventional gas. Talisman is the second major foreign company to leave Poland, following ExxonMobil's exit in 2012. Uncertainty over both the regulatory and tax regimes overseeing Warsaw's shale gas push has only added to the discomfort of those companies that arrived in 2011 on the back of estimates of massive reserves, only for those predictions to be slashed last year. Meanwhile, test results have yet to offer any promise of commercial flows.

To date, only 43 wells have been drilled, while hundreds are needed to accurately assess the country's reserves potential. Only 12 have produced some gas flow, according to Jolanta Talarczyk, spokeswoman for the State Mining Authority, reports AP. A key problem is that companies are currently focusing on shale gas deposits that are easiest to extract. Due both to the geological make-up of the land and the density of population compared with the US, European shale gas has proved far more difficult to extract. The debate over the environmental effects of fracking in the EU - which has seen several countries declare moratoriums on exploration - also offers little encouragement.

"The main concern is the geological risk," suggest analysts at Erste Bank, "as the oil & gas companies could lobby for a better legal framework and taxation, but they cannot change the geological structure. It seems that most of the reserves of the three shale gas formations in Poland are difficult to extract with current technology. We would guess that some of the exploration projects would result in recoverable reserves, but the cost of extracting the gas would be in parity with imports or at an even higher cost."

The rush into Poland from overseas in 2011 - when over 100 licences were issued - quickly dried up last year. That saw Warsaw push state-controlled companies into the fray. However, with the government also insisting they invest huge sums in building Poland's generation capacity, as well as hand over large dividends to help support the budget, the companies have been struggling to keep up.

That led to the sacking of Treasury Minister Mikolaj Budzanowski in April, closely followed by the CEO of national gas utility PGNiG, both of whom were understood to be leading proponents of the whole shale gas push. While it has not been confirmed, there is speculation in some quarters that the government may have now changed tack, and that the casualties are a sign that the ambitions for unconventional gas have now been scaled down.

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