Poland: The Promise and Perils of Shale Gas Exploration
Summary
Lane Energy Poland, an exploration company controlled by U.S. energy giant ConocoPhillips, announced Aug. 28 that it has been extracting some 8,000 cubic meters of shale gas per day at a test well in northern Poland since late July. While this is not significant enough to qualify for commercial production, it is the best result for shale gas extraction in Poland to date. The announcement comes after three international firms left Poland following disappointing drilling results and raises hopes that shale gas extraction in the country could regain momentum. However, significant regulatory, technological and infrastructural challenges remain.
Analysis
Exploration for shale gas is a sensitive issue in Poland, but Warsaw considers it essential in its efforts to achieve self-sufficiency and end its current dependence on Russian energy. Poland is one of the least energy import-dependent countries in the European Union, largely because of its heavy reliance on coal. It is one of the top 10 coal producers in the world, and more than half of the country's primary energy supply comes from this resource (the EU average is around 20 percent). According to the European Association for Coal and Lignite, Poland has around 17 billion metric tons (18 billion short tons) of hard coal reserves and 15 billion metric tons of mineable lignite. Currently, Poland produces more than 90 percent of its electricity in coal or lignite-fired power plants.
Although Poland is largely self-sufficient in coal, and thus electricity, it is not independent in other areas such as heating and transportation fuel, which largely require oil and natural gas. Poland is a net energy importer; roughly 95 percent of oil and 66 percent of natural gas demand in the country is met through imports. Russia is the most important supplier of both commodities. More than 90 percent of oil imports and around 80 percent of natural gas imports come from Russia. This dependence is an important factor in Poland's energy security and diversification plans, especially since Poland is under pressure from the European Union to reduce its dependence on coal and meet tighter carbon emission targets.
More important, Poland's dependence on Russian energy gives Moscow significant political and economic leverage in its relationship with Warsaw. In the past, Russia has used Central and Eastern Europe's energy dependence as a political tool and has implemented energy cutoffs and politically motivated pricing mechanisms to exert its influence in the region.
This situation has led Poland to pursue several diversification plans, including the construction of a liquefied natural gas import terminal. The terminal is scheduled to be ready in late 2014 and is expected to initially receive 2.5 billion cubic meters of liquefied natural gas annually -- its capacity could be later expanded. There are also plans to build two nuclear plants, which would not come online before 2024.
In recent years, the prospect of shale gas exploration brought hopes that Poland could significantly reduce its dependence on foreign natural gas. Poland's enthusiasm for shale gas exploration was triggered in 2011, when the U.S. Energy Information Administration published that Poland could have untapped reserves of some 5.3 trillion cubic meters -- sufficient to meet the country's demand for three centuries. (Poland's annual demand for natural gas is around 17 billion cubic meters.) This led Warsaw to declare shale gas exploration a strategic priority, fueling speculations that Poland could even become a net exporter.
Geological and Regulatory Problems
However, several problems have dampened Poland's hopes for a shale gas boom. Recent estimates by the Polish Geological Institute have cooled expectations, saying the country may have 346 billion to 768 billion cubic meters of shale gas, which is equivalent to 65 years of cumulative domestic natural gas consumption. In June 2013, the U.S. Energy Information Administration revised downward its own original estimates for shale gas in Poland.
Geology is an additional obstacle. Shale rock in Poland, which runs some 4 kilometers (about 13,000 feet) underground from the Baltic Sea coast through central and eastern Poland to the borders with Belarus and Ukraine, is more difficult to mine than shale rock in the United States. The geologic features of the land are a significant problem for exploration, and the region is also much more densely populated than most areas where shale gas is available in the United States. This makes exploration more time consuming and more expensive.
Even if shale gas could be extracted at commercially viable levels, there are significant infrastructure problems. First, most pipelines in Poland are located in the southwest, while the shale gas reserves are concentrated mostly in the north, east-central and southeast, so more transmission capacity will be needed. Second, because of Poland's traditional dependence on coal, only half of its households are currently connected to natural gas distribution networks. As a result, significant investment will be required in Poland's natural gas transmission infrastructure to upgrade the country's network.
In June 2012, doubts over the scale of Poland's shale gas prospects grew when ExxonMobil announced plans to cease exploration in the country, citing disappointing test drilling results. Then in May 2013, two more multinationals, Canada's Talisman Energy and U.S. firm Marathon, left Poland, fueling even more doubts about the commercial viability of shale gas exploration in the country. Not all companies engaging in shale gas exploration have left, however; significant players, including U.S. giant Chevron, are still operating in Poland. Moreover, the biggest holders of shale gas concessions are state-owned companies, most notably Polish Petroleum and Gas Mining.
In addition to unconvincing test drilling results, there are problems related to legislation and bureaucracy. Poland has granted more than 100 exploration permits to some 30 different investors. But companies operating in Poland often claim that complex environmental regulations and a lack of legislation on shale gas complicate their activities.
There are also fears that Warsaw could try to centralize control of shale gas production further, especially after the Polish government announced plans to create a state-owned company -- the National Mining Resources Operator, commonly known as NOKE -- that would take up to 5 percent of the projects' expenses and profits to ensure that the government oversees all projects. Companies also argue that the current regulations do not legally guarantee them the right to turn their existing exploration licenses into production licenses.
Finally, prices could become an additional problem. If Russia moves forward with its current strategy of lowering natural gas prices, expensive shale exploration could become less cost-effective and therefore a less attractive enterprise.
The Polish government is trying to reduce uncertainty about its shale gas sector, and in June it presented two bills to address existing gaps in legislation. First, Warsaw proposed that a controversial law on hydrocarbon taxes (which caps the government take at 40 percent of an operator's profits) would come into force in 2015, but taxes would not be collected until 2020. This is meant to encourage investors to explore for shale. Second, it proposed that National Mining Resources Operator would not have veto power over license-holders' decisions but only the option of issuing "reservations" to the Environment Ministry. The Polish parliament has yet to approve either proposal. Polish lawmakers are also analyzing ways to make shale exploration more attractive for U.S. companies, which could have valuable expertise in the matter because of the success of shale exploration in the United States.
A Political Message
Other EU member states will watch the evolution of the regulatory and technological environment for shale exploration in Poland closely. In the United Kingdom, the government of Prime Minister David Cameron has been pushing to expand shale gas exploration, which is currently limited due to strong resistance from environmental groups. In Romania, the government of Prime Minister Victor Ponta changed its opinion on the issue and in May allowed shale gas exploration on the Black Sea coast. However, other EU countries with potentially significant shale gas reserves, such as France, still oppose exploration on environmental concerns.
Lane Energy's announcement is very modest from a technical perspective, but it is politically meaningful to Poland. Warsaw needs to send positive messages regarding its shale gas sector to international investors and Moscow in order to create the perception that shale exploration is finally making some progress. However, regulatory, technological and infrastructure constraints will have to be addressed before Poland can make substantial progress in its aspirations for a shale gas revolution.
Natural Gas Europe is pleased to provide this article in cooperation with Stratfor, a Natural Gas Europe Knowledge Partner. For more visit http://www.stratfor.com/ Follow Stratfor: @stratfor on Twitter | Stratfor on Facebook