A map of Poland, unevenly colored in shades of yellow, brown, green and purple, like a half-finished jigsaw puzzle, hangs prominently on the walls of the country’s ministries, state agencies and corporations. Official visitors are cordially invited to take a closer look.
The label in the upper right-hand corner of this new map reads, “Map of Concessions for Hydrocarbon Exploration and Production.”
Poland, which last century was the target of foreign armies shaping the region’s political history, today is being divided up by a hydrocarbon fever that the Polish government has energetically encouraged. Hoping to reproduce the recent “energy revolution” brought about in the United States by the advent of fracking and other drilling technologies, the Polish government has spearheaded shale gas exploration in Europe in the hopes that one day it will have its own dynamic natural gas industry.
“Shale gas exploration and extraction is a priority for our government, and that’s the reason we’ve decided to focus the investment energy of many companies,” says Mikolaj Budzanowski, Poland’s treasury minister, supervising the country’s state-owned oil and gas enterprises.
So far, 111 exploration concessions have been awarded to about 30 companies, both state-owned and international, on a territory of more than 35,000 square miles – nearly a third of the country.
Despite the enormous infusion of capital and promises that production could start as early as 2015, however, Poland’s gas industry has yet to take off. Hampered by difficult geology, a paltry service sector, a lack of adequate infrastructure, as well as an uncertain regulatory and tax environment, there have been few exploratory wells drilled.
That, in turn, has delayed assessment of the actual size of reserves and left in doubt whether the industry could ever be commercially viable.
In 2011, the U.S. Energy Information Administration published an enormous figure – 5.3 trillion cubic meters of gas – in estimating the natural gas reserves in Poland, which generated the initial burst of political and investment enthusiasm. Then in 2012, the Polish Geological Institute together with the U.S. Geological Survey, using stricter methodology, decreased those figures by a factor of 10.
“You can say that the basin in Poland has historical data that is on the edge of being good or bad. Depending on how strict you are, you can make it easily negative or expand it easily to a bigger number,” says Pawel Poprawa, one of the first Polish geologists to start working on the shale gas issue, as far back as 2005, and a co-author of the Polish Geological Institute report.
According to Poprawa and many other experts in the field, the only way to arrive at a more realistic estimate of Poland’s gas potential is to do exploratory drillings, lots of them. All other reports are simply “first guess.”
“We’re very optimistic and we think there’s real potential here in Poland, although we have to drill a lot more wells before we feel confident for development,” says John Buggenhagen, exploration manager of London-based San Leon Energy, which bills itself as Europe’s largest shale gas company by acreage and holds the second largest number of concessions in Poland after the government.
“One of the things we do in North America that isn’t done anywhere else in the world is that we drill, drill, drill, drill, drill,” he said. “And the way to find hydrocarbons is to drill.”
But it is exactly the sheer scale of drilling required that may prove impossible for Poland. Unlike conventional gas, shale gas development needs a much larger number of wells, a substantial portion of which will contribute almost no production. Only a few of them, rich in natural gas liquids or tapping the so-called “sweet spots,” could prove commercially viable, and the decline of production could be rapid, up to 75 percent in the first year, according to the International Energy Agency.
Studies have offered various growth scenarios, but all of them agree that if Poland’s shale gas industry is to have a real economic impact, a substantial number of wells would be necessary.
The Kosciuszko Institute, a leading Polish think tank, assumes that Poland would drill an average of 500 wells per year to create 155,000 jobs over a period of 10 years. The Oxford Institute for Energy Studies has calculated 700 to 1000 drillings per year.
That’s wildly more than Poland has drilled. Over a period of three years, only 33 test wells were drilled, with 10 of those hydraulically fractured, out of which just two were horizontally drilled and fracked – the definitive procedure for assessing potential.
Government officials recognize the challenge.
“Whoever was thinking of a direct parallel to the American gas boom is, of course, wrong,” said Piotr Wozniak, Poland’s chief national geologist and the undersecretary of state at the Ministry of Environment, which is responsible for giving out concessions. “It would be absolutely different. It would develop differently, at a different pace, and the results would be different.”
Results have not been encouraging. Exxon Mobil withdrew from Poland in 2012, saying its wells had failed to demonstrate “sustained commercial hydrocarbon flow rates,” while ConocoPhillips relinquished its 70 percent option in three concessions in northern Poland, although it retains three more. It has been reported that Canada-based Talisman Energy also has started talks to sell off its Polish exploration licenses.
Meanwhile, with market uncertainty growing, the share price of small independent companies engaged in unconventional gas exploration in Poland has plummeted precipitously, which has forced them to nearly halt operations.
A major challenge has been the price of wells, and drilling services in particular. Although Poland is one of the oldest oil and gas producers in the world – its first oilfield dates back to 1853 – it never managed to develop a competitive market for services. Unlike in the United States, its industry has been dominated by the state monopolist PGNiG and its daughter companies, distorting the economics of the market.
According to European Union statistics, Poland has just 11 drilling rigs available (there are 70 in the whole of Europe), compared to about 2,000 in the United States – a huge impediment to any future large-scale operations.
In addition, Polish shale gas has proved to be on average 1.5 times deeper – some deposits are more than two miles underground – than most formations in America, ramping up costs. All in all, the average price of an exploratory well in Poland, horizontally drilled and hydraulically fractured, comes to about $15 million, compared with just $4 million in the Barnett Shale in Texas.
Even with higher gas prices in Europe, those numbers make the commercial viability questionable.
Industry representatives contend that only economies of scale – much more drilling – will bring costs down. Yet that won’t happen without definite proof of available reserves, while available reserves can’t be proved without more drilling – a vicious circle.
“Definitely hopes and expectations a year ago were much higher than today,” says Cezary Filipowicz, a former vice president at PKN Orlen, the biggest oil refiner in Poland, and currently the business development manager of United Oilfield Services, a new service company that has raised $150 million for state-of-the-art equipment, including seismic trucks, a fracturing fleet, and one drilling rig.
“I’m not sure what will happen next year and how many wells will be drilled,” Filipowicz said. “If there are again a dozen or so and we use 10 percent of our capacity, it doesn’t make sense in the long term. Nobody would risk investment in equipment without a market for services.”
Tomasz Chmal, an energy analyst with the Sobieski Institute, a Polish think tank, urges patience. “It’s too early to judge. Let the business people decide, not politicians,” he said. “The price of the technology is going down. It may not be economic this year or next year, but it might be economic in the years to come.”
That possibility faces another hurdle: The government has made plans to introduce a new hydrocarbon law that would give the state a minority stake in each concession and would, reportedly, raise taxes to around 40 percent of gross profits.
The idea, according to Wozniak, the country’s chief geologist, is to have legislation comparable to that in Norway, Denmark and the Netherlands.
Private operators contend that any comparisons to Norway and Denmark, major producers of conventional gas, are unwarranted, as shale gas resources in Poland are still a matter of speculation, and investment is much riskier.
“We haven’t even proved if there’s a commercial hydrocarbon industry beyond what has already been found and the government is already talking about that they’re the North Sea and they’re going to have all this production and they’re going to raise taxes,” says Buggenhagen of San Leon Energy. “People are just going to leave.”