Where Will Polish Shale Gas Go

Shale gas development might change almost nothing

Even if Poland were able to successfully produce a significant amount of unconventional gas from its significant shale basins, just how would the country get that gas to other markets?

That was the question raised by Gregorz Pytel, European Commission Advisor and Senior Expert at Poland’s Sobieski Institute. His speech at the Global Unconventional Shale Gas Plays Forum in Vienna, Austria was entitled “Poland’s Shale Gas: Routes to Markets Challenge.”

“Shale gas is a calculated risk,” contended Pytel. “There are significant uncertainties. The potential must be significant. In Poland there may be 3 TCM of natural gas, but the Chief Geologist in Poland says there could be much more. Basically we don’t know.”

He provided an analogy of development of the shale gas drilling industry with that of the development of drilling for hydrocarbons in the North Sea.

“The technology has been developed and is proved to be working,” he said of unconventional drilling, “but not as commercial.”

Pytel said this was just like offshore technologies in the 1960s and 70s in the context of the harsh conditions of the North Sea. “There was no public or state capital for offshore developments,” he recalled, noting that there was more commercial scrutiny in development driven by private funding, and it was good news for shale gas that there was no state funding involved.

“Oil and gas major companies are running out of options,” explained Pytel of their reason to embrace unconventional gas. “There’s a crisis in oil supplies due to the situation in the Middle East; conventional resources are in the hands of governments. In the 1970s they looked at the North Sea for an alternative.”

He said there was also pressure on diversification and an increase of sources.

We may take an optimistic view that in 10-20 years’ time actual reserves will be much larger than that.”

In dealing with shale developments in Poland, Hungary and Romania, Pytel said it was wise to look at supply and transit routes.

He also spoke of the oil and gas potential of Ukraine: “The country has 1 TCM of conventional, so why the heck are they even talking about unconventional, when the conventional is proven and it’s not from Russia?”

Pytel attributed that interest to regional political and business relationships.

He spoke of the fragmented demand for natural gas in Central and Eastern Europe, with Poland at 15 BCM/year, Lithuania had only 4 BCM, Sweden 1 BCM, Finland 9 BCM, the Czech Republic 9 BCM, and Slovakia 6 BCM. Pytel stated that for the remaining countries, demand was less than 400 BCM.

“The problem is the market fragmentation,” he explained. “Europe has no route to transport significantly from north to south.”

Pytel explained that with the development of reserves in Poland, Hungary and Romania, it would be crucial to extend the pending Nabucco natural gas pipeline up to Finland, to have a north-south trunk line to balance the markets.

“Because countries in the south needed gas to cool down in the summer, it could run from Turkey up to Finland and back depending on the season,” he said.

He proposed an extended, “reversible” Nabucco. Pytel said it would be a trunk line allowing locally produced gas to flow, balancing supply and demand along the north-south axis. It would make for a new route of gas supply to Finland and the Baltic states; integration of a 50 BCM Latvian storage facility; Poland, Austria, Hungary would be the new significant producers with inter-connectors; and the pipeline would connect Italy, the Balkans and go down to Turkey.

According to Pytel, this would give seven supply hubs for Europe. Central and Eastern Europe would own production, and LNG could still come from North Africa.

He discussed what he termed the political realities in Poland. “Polish conventional gas reserves are about 110 BCM, which is as much as for Germany, Denmark, or Italy – it could happily live on its own, so why is Poland running different policies?”

Pytel explained that Poland had an extremely low taxation regime ensured by the existing infrastructure of the exploration and production industry. “This is enshrined by the existing monopolistic structure in Poland. If it were changed, our indigenous company, PGNiG would go bust, so they are best friends with outside investors.”

“Existing market suppliers don’t want strong competition,” he continued, “but want to preserve the status quo of a locked and divided market. The market is small and unattractive and well taken care of.”

For oil companies, Pytel said, Poland’s resources were attractive and he pointed out that it was close to attractive markets in Western Europe (and in line with the expected gap in the Russian supply of natural gas).

Regarding Western Europe, he said: “These markets are attractive and competitive, and need more natural gas on a competitive and secure basis, considering the possible supply gap of Russian gas.”

Pytel added, “Russia is not too happy with future competition, but is happy others will fill the future supply gap. As long as it doesn’t upset their natural market, it would be okay if Poland produced gas.”

Still, the model of a reversible Nabucco is not likely to happen, according to Pytel, who commented, “If it hasn’t happened for the last 15 yrs, it’s unlikely in the next 10.”

Still, he said Western Europe was a natural market for Polish natural gas.

“The Yamal pipeline in Poland is the key. Poland’s structure of the E&P sector will remain low, as would taxation,” he said, but pointed out that Russia would have control of Yamal.

Pytel offered what he saw as a “naturally developing scenario.”

“Nabucco won’t be built,” he conjectured, “and producers in Poland will be negotiating how to transport that gas to western markets. They will pay a negotiated price for delivery onto Western European markets. Producers and a pipeline transit provider will share bulk of financial proceeds form shale gas.”

If such a scenario comes to pass, Pytel said be believed this meant no change in the “sphere of privileged influence” in Central and Eastern Europe, which would still be dependent upon Russian gas imports.