Shale gas in Poland: Reports of the death of Polish shale gas are quite exaggerated

Through 2012 a spate of bad news concerning the unconventional hydrocarbon sector in Poland has cast something of a pall over the industry. This has spurred a series of editorials in the mainstream media declaring that Poland - and by implication Europe - will never replicate the shale gas boom witnessed in North America and is destined to remain dependent on Russian imports indefinitely. What is the catalyst for these pessimistic forecasts, and are they justified?

Disappointing flow rates Euphoria surrounding shale gas in Poland began to wane after a string of poor results from early exploration wells. 3Leg Resources' testing of the Lebien and Lebork wells in the Baltic Basin in September saw natural gas flowing with the aid of nitrogen lift at an initial unstabilized rate of 2.2 mmcf/d, declining to 0.5 mmcf/d a week later. These rates were well below the flows from similar wells in the US's Barnett, Fayetteville, and Marcellus shales, where average 30-day flows range up to 4 mmcf/d. Since then 3Legs announced it will relinquish the Dabie-Laski project in Poland and is currently "considering options" for the Bytom-Gliwice and Glinica-Psary concessions.

Other firms have also been discouraged by their flow rates too: Aurelian Oil and Gas announced at the end of 2012 that had halved its expected gas recovery from the Trzek-3 well whilst FX Energy, the Utah-headquartered independent gas producer decided to plug and abandon the Kutno-2 well in November this year. Perhaps most damaging to confidence was the announcement from ExxonMobil in June that it would pull out of Poland, following weak flow rates at its Krupe 1 and Siennica 1 wells in the Lublin Basin. Rumours also abound that Petrolinvest is considering the sale of its subsidiaries EcoEnergy Silurian and Wisent which collectively account for 13 different shale gas exploration licences across the country.

It hasn't just been the oil and gas firms offering bad news either. In March, Poland's Geological Institute released a report which sharply revised down estimated gas in place reserves. The report concluded that whilst recoverable reserves may be as high as 1.9 trillion cubic meters, they are more likely in the range of 346 billion-768 billion cubic meters - much less than the 5.3 trillion cubic meters estimated earlier by the U.S. Energy Information Administration.

Too soon to say Yet declarations that Poland's shale gas sector is expiring are more than a little premature. To begin with, even the more conservative estimates of recoverable reserves are still enormous: Poland imports 9BCM, mostly from Russia, so even a modest increase in domestic production from 6BCM to 10BCM per annum (well within the realms of possibility in the PGI scenario) would have a major impact on the country's energy balance.

Moreover, only 34 wells have been drilled to date - even less than the 45 planned by the Environment Ministry. This is a tiny sample size - far too small to make pronouncements on the country's overall prospects. To date, the United States has drilled in excess of 105,000 wells, hence it is hardly surprising that no firms have yet found the "sweet spot" in Poland after a mere 35 attempts.

Furthermore, the rate of drilling is set to increase dramatically over the next two years, driven by regulatory change. On 16 October 2012, Poland's Minister of Environment, Marcin Korolec, released a much-anticipated draft of the country's new laws on hydrocarbon production. Crude oil and natural gas will be taxed respectively at 10% and 5% of the value of the volumes produced, minus value of the corporate income tax (currently 19%). A special tax vehicle linked to the difference between the companies' revenues and expenditures is planned (cash flow tax) which should reach 25%. In addition to other fees, total government take should reach 40% of pre-tax profit (Deputy Environment Minister Piotr Wozniak explicitly ruled out anything higher). The new rules are still under debate and will not come into effect before 2015 but the release of the draft text at least sets a pitch for discussion and provides some visibility for prospective firms, implicitly spurring more evaluation wells.

This doesn't mean investment into Poland's shale gas sector is assured. There remains a good deal of apprehension over other elements of the bill (notably the creation of the National Operator of Energy Minerals or NOKE - a government institution which seems to be part regulator, part state energy company, and which has first refusal to partner on all new projects). But so long as European gas prices remain high, exploration seems likely to be forthcoming: Poland's gas is thought to be profitable when gas import prices are above a threshold of around $8/MMBtu, in turn reflecting crude oil prices of around between $70 and $80 per barrel. Progress to date may be slow and the tone amongst policy-makers may have shifted from euphoria to a more sober analysis but this does not mean shale gas will not have a game-changing effect in Poland later on this decade - it is certainly far too early to write the industry off as dead.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.