ExxonMobil Leaves Poland Guessing
The decision by ExxonMobil to leave Poland’s nascent shale gas industry has put the local rumour mill in overdrive.
Earlier this week, ExxonMobil announced that it was ending its exploration operations for shale gas in Poland, after drilling and fracturing operations at two wells in the Lublin and Podlasie basins resulted in unsatisfactory flow rates.
The development left Polish politicians, experts and media in a state of disbelief.
Just Two Wells?
Most observers agree that more than a few test wells are needed to determine the geological conditions and potential commercial value of reserves.
“Two is just not enough,” commented a high-ranking government official to Natural Gas Europe.
A geologist working for PGNiG, agreed. Requesting anonymity, he pointed to the Polish gas company's short history of shale gas exploration. PGNiG’s first shale gas well in Markowola, on the Pionki-Kazimierz concession in Lubelskie (Lublin), was abandoned after results proved to be unsatisfactory. However, the Lubocino-1 on Wejherowo concession in Pomerania, is according to reports, very promising.
According to Poland’s Ministry of Environment, the drilling of almost 200 wells would be required in order to collect the appropriate data required to properly to assess the country’s shale gas resources.
Shale Are Too “Tight”
Reports have surfaced that Exxon’s investigation has found that Poland’s shales could not be properly exploited with currently available technology.
But industry players universally recognize that procedures and technologies need to be adapted to geological conditions that may or may not be unique to Polish shale basins.
“Every unconventional play around the world has been proven through trial and error; and new innovation focused on the local technical issues,” said John Buggenhagen, Exploration Director for San Leon Energy.
Buggenhagen stressed that patience and investment is required to unlock the potential of Poland’s shale resources.
“The only way we are going to prove this play is to drill more wells and test them (both vertical and horizontal).”
It’s Just Business
For Exxon, the decision may have been just as simple as a weighing of risk versus reward and the allocation of capital and resources.
Senior Polish official suggested links between ExxonMobil’s withdrawal and its agreement with Russian state owned Rosneft on developing tight oil reserves in Siberia.
Poland has declared its pursuit of shale gas development as a key to reducing its dependence on imports of natural gas from Russia.
The Exxon-Rosnet deal had apparent caused alarm in Warsaw, with Polish Internal Security Agency (ABW), reportedly advising the leadership of the country to pay close attention to the strategic partnership.
Grzegorz Pytel, an energy expert at the Sobieski Institute, speculates that the ExxonMobil may have realized that close co-operation with Rosneft could have significantly damaged its position in Poland and decided to pick, what it viewed was the better business opportunity.
Polish officials suggest that Russian authorities may have encouraged ExxonMobil to abandon operations in Poland in hopes that that the withdrawal would potentially dampening the strong pro-shale gas lobbying efforts that have been underway by American political and industry interests at the European community level.
The U.S. Ambassador to Poland commented that Exxon’s move was a purely a business decision.
Ambassador Lee A. Feinstein was quoted by Polish media as saying that: “American energy sector has a strong representation in Poland (…) American companies are serious, long-term players on the energy market in Poland.”
Location, Location, Location
ExxonMobil was a late entrant in the rush to secure shale gas concessions in Poland. Smaller independents such as San Leon Energy, 3Legs Resources and BNK Petroleum, are generally acknowledged to have taken the most prospective targets, located in the Baltic Basin in the north of Poland.
It was trailblazing juniors that lead the development of the shale gas industry in the United States.
“What Exxon does in the Lublin Basin has nothing to do with our positions in the Baltic Basin and SW Carboniferous Basin, or the Lubin Basin for that matter,” said San Leon's Buggenhagen.
We Aren’t Leaving
Many of the companies presently involved in Polish shale gas exploration were quick to re-iterate their plans.
Chevron Corp says that it “remains committed” to its current exploration program in southeast Poland.
“Chevron has drilled two exploratory, vertical wells: one in Horodysko (G-6), and another one in Andrzejow (F-1),” the company said in a statement Tuesday. “We have taken the samples of shale rock and we are evaluating the results.”
3Legs Resources announced that it expects to spud its fifth well in the Baltic Basin in October this year. The company also said that it would conduct further testing on two of its horizontal wells in the Baltic Basin, including the Lebien LE-2H well, which was the first to deliver sustained shale gas production in Poland.
San Leon Energy recently increased it acreage at a previously granted concession and took a majority interest in three of Hutton Energy's concessions in the Baltic and Carboniferous Basins.
“We are extremely positive on unconventional gas in Poland and see the real upside potential of the play,” said San Leon’s Buggenhagen
Counting Our Royalties Before…..
Exxon departure could prove a strong wake up call for a government that has been counting on shale gas revenues to transform Poland into the “European Kuwait.”
It will also heighten scrutiny of draft legislation aimed at regulating Poland's shale gas industry.
Last week the Environment Ministry cancelled, without explanation, a news conference at which it planned to present the highly anticipated draft bill on the extraction and taxation of hydrocarbons from conventional and unconventional sources.
Poland lacks regulations that would apply to the development of unconventional resources such as shale gas and shale oil. The present legal system was created in the era of conventional sources and applied to a highly monopolized market.
Industry leaders were already skeptical of the government's handling of shale gas legislation, warning that Poland was putting the cart before the horse.
John Claussen, the Poland country manager for Chevron Corp., believes it’s too early to decide whether the regulations should be changed. In his opinion the legal system should be changed taking into account the development of the industry.
“Probably a critical aspect is to collect more information, on rocks, gas etc.” suggested Mr. Claussen, speaking at the 12th AGH Oil and Gas Summit in Krakow, last month.
John Buggenhagen agrees. “The government needs to look into way to encourage future investments and build a process (with more people) to help facilitate drilling and testing as opposed to talking about taxes and royalties on plays that are not yet proven.”
The new hydrocarbon law will see the introduction of new tax regime; the establishment of a national fund to reinvest a portion of tax proceeds and would establish a mining and hydrocarbon regulator, NOKE (Narodowy Operator Kopalin Energetycznych), which is to oversee the companies involved in the production of fossil fuels in Poland.
Industry has already voiced complaints that Poland’s regulatory environment clashes with market driven that shale gas leaders are used to dealing with.
“It feels like processes are rooted in remnants of old communist system,” commented one observer.
Wieslaw Prugar CEO of the Orlen Upstream and the head of the Polish industry organization in Poland OPPPW, has urged the authorities not to act in a manner that would make difficult or preclude required investment.
Exxon’s departure should provide a sober second thought to politicians and bureaucrats.
As Prugar warned last week: “In the world restricted by the crisis, business may decide to go somewhere else.”