Poland was always the European country that most aggressively welcomed the shale gas revolution. But success has been fleeting and there have been plenty of setbacks, as Stuart Elliot discusses in this week’s Oilgram News column, Petrodollars.
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Poland may claim its newly-presented draft hydrocarbon tax regime makes it one of the most attractive places to explore for shale gas in the world, but the country is still reeling from a huge loss of confidence in the sector after a major reserves downgrade and the exit of ExxonMobil.
This month, the Polish government published its long-awaited set of taxes to cover the country’s hoped-for shale gas production boom, which capped all tax at 40% of an operator’s gross profit.
“I think that as a result of those regulations, Poland will be perhaps the most attractive place to produce hydrocarbons in the world—we are the leader regarding regulations and investor activity in Europe,” Polish environment minister Marcin Korolec proclaimed earlier this month.
But a favorable tax regime may not be enough to save Poland’s faltering shale gas industry.
Earlier this year, the Polish Geological Institute (PGI) estimated the country’s shale gas resources are considerably lower than thought.
In a much-anticipated report released in March, the PGI said the average of its estimates of Polish shale gas reserves in the country’s three shale gas basins was 557 billion cubic meters, almost than 10 times lower than the estimate of 5.3 Tcm released by the US’ Energy Information Administration in April last year.
The downgrade may well have dampened expectations. Together with poor drilling results to date, the majors have begun to have their doubts. This was cemented in June when ExxonMobil made a decision that would rock the Polish shale world. It was quitting.
“We did not observe a basic commercial level of hydrocarbons flow in our two wells in the Lublin and Podlasie basins,” Adam Kopysc, a spokesman for ExxonMobil Exploration and Production Poland, said of its decision to leave Poland.
The aftermath was far-reaching. France’s Total, which was part of a joint venture at several ExxonMobil sites, said it was having to look again at its participation. In September, the company said it had no plans to drill any more wells and would limit its activity to studying more existing data.
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Even 3Legs Resources, the much-hyped first mover in Polish shale, opted in early August to relinquish acreage after disappointing drill results. This is not a sign of a healthy shale gas sector.
And, as Warsaw begins making increased noise about state companies having stakes in every shale gas license in the country, the optimism seen in 2010 now seems to be fading.
Asked recently whether the mood in Poland had shifted from optimism to pessimism, Peter Csaszar, energy analyst at Budapest-based KBC Securities, said: “I would say the mood has shifted from optimism to realism.”
He said there were many obstacles to a commercial shale gas industry in Poland and, even if one is started, its size would be limited. “It looks like Poland will not be the next Norway,” he told Platts. “Poland will probably not replicate the success in the US—I’d bet on that.”
It will take time to get to even 1 Bcm/year of production, Csaszar said. “There are too many obstacles—shale gas production in Poland will only be a long-term option.”
Another obstacle to a large-scale gas producing business is the fact that the ownership structure of property in Poland is different from the US: explorers do not own the land and have to pay royalties.
There are also other environmental factors—the availability of water could be a concern given that hydraulic fracturing requires large volumes of water.
Other above-ground factors include a service industry that at present is too small to deliver what Poland and Europe need. “The oil service industry will have to expand rapidly to cope with demand for rigs. In the US the rig count is at a record high—that could be a lacking factor in eastern Europe,” Csaszar said.
There is very little data so far from drilling in Poland, so it is difficult to gauge how successful the sector stands to be. The lack of data is puzzling given how many wells have been drilled.
“One option is that the wells have not been as promising as they hoped so they need to drill more to evaluate what is under the ground,” Csaszar speculates.
It’s not the end of the story though, and one thing is clear: there will be a shale gas industry in Poland of some kind.
Both domestic and foreign exploration companies have flared shale gas at test wells in Poland, and Treasury Minister, Mikolaj Budzanowski, said in January that Poland could realistically start initial test production of shale gas in 2014.
“2014, or 2015 at the latest, we can think realistically of starting the first, on a small scale, shale gas production in Poland,” Budzanowski said.
Poland has awarded more than 70 shale gas exploration licenses in the last three years to local and international companies including ExxonMobil, Chevron, Marathon Oil, Total, Italy’s Eni and ConocoPhillips.
“For big companies like ExxonMobil, Poland is not a make-or-break country, but for local companies there are opportunities, and there will be gas to realize,” Csazsar said.
–Stuart Elliott in London