Polish Shale Gas Prospects

Warsaw-based energy expert Tomasz Chmal takes stock of recent progress in the energy sphere and charts the changes that are likely to occur in the Polish policy and public opinion landscapes if current estimates of shale gas reserves translate into larger-scale development efforts.

The shale gas rush that commenced in Poland in 2009 is going strong. By now, as many as 107 concessions for the prospecting and exploration of unconventional natural gas resources have been granted. Their holders include major U.S. companies such as ExxonMobil, Chevron and Marathon Oil, as well as smaller players like BNK, Cuadrilla and San Leon Energy. A large portion of the shale gas play has also been claimed by Polish companies, such as PGNiG and PKN Orlen. Overall, the total area of interest accounts for 28 percent of Poland’s territory.

Driving the interest in Poland’s undeveloped gas resources is the size of this potential reserve. In April 2011, the U.S. Energy Information Agency (EIA) announced its preliminary estimates of technically recoverable shale gas in Poland, which total 5.3 trillion cubic meters (tcm). This represents a significant increase from previous assessments by Advanced Resources International (3 tcm) and Wood McKenzie (1.4 tcm). Given that the current average annual exploitation of gas in Poland amounts to 4 billion cubic meters (bcm), with a consumption volume of approximately 14 bcm, such figures understandably make the hearts of energy corporations, politicians and even ordinary consumers of blue fuel beat faster. As energy companies go about the process of confirming the recoverable volumes of Polish shale gas, many hold high hopes for the results. However, we can expect a stormy debate to flare up in Poland as soon as they turn out to be successful.

EU Energy Policy

When it comes to European Union (EU) policy, divisions over the perceived opportunities and risks related to shale gas are already apparent. While Poland is very supportive of the exploration process, France has banned hydraulic fracturing (the technology used in the prospecting and exploitation of shale gas) on its territory and Germany remains internally divided. With such differing attitudes, it is hard to imagine a compromise at the EU level. Moreover, the Lisbon Treaty gives member states significant freedom with regard to prospecting and exploiting hydrocarbons, so the discussion is likely to be rather limited.

Regarding the EU regulatory environment, it is important to note that Poland has adopted all legislation required for membership in the European Community. These laws govern precisely the protection of water, air and soil; specify the chemical substances that may be used in the industry; and dictate the manner of managing exploitation waste. Moreover, they specify protected areas and set out rules for obtaining the relevant permits. Nevertheless, the European Commission and the European Parliament (EP) could try to hinder the prospecting and exploitation of shale gas. Statements made by Energy Commissioner Günther Oettinger on the standardization of shale gas exploitation or proposals by EP member Jo Leinento to introduce a new “energy quality directive” are the first signs of such attempts. It is telling that the EP’s Committee on Environment, Public Health and Food Safety (ENVI) requested the preparation of a study entitled “Impacts of Shale Gas and Shale Oil Extraction on the Environment and on Human Health” from a German ecological foundation, the Ludwik Bölkow Stiftung (LBS). While there have been questions over the objectivity of the LBS analysis, the European Parliament has commissioned yet another study.

Polish Energy Policy

In the case of Poland, the shale gas sector may face additional challenges connected to Polish energy policy and the potential taxation of hydrocarbon exploitation. A lively public debate on these issues is expected to take place soon and could focus on the amount of taxes, royalties and other payments to be made to the State Treasury and local governments. It is likely that the different views — from keeping royalties at the current relatively low level, to raising them as high as those applied in Norway — will collide. Already Poland’s Law and Justice (PiS) party, currently the largest member of the opposition, has introduced a bill which provides for, among other things, the creation of a state-owned company that would be a shareholder in all firms exploiting hydrocarbons. It would likewise establish a mining fee at a level no lower than 40 percent of the exploitation revenue. Going forward, it will be necessary for Poland to arrive at a reasonable compromise on national shale gas policy. Ideally, this would allow mining companies to continue their work and plan for long-term investments, while simultaneously ensuring that the country’s strategic interests are properly secured.

Public Concerns

One factor in assessing the public’s view of shale gas development is the fact that Poland has a longstanding mining tradition. Experience in the exploitation of coal, gas, copper and other minerals has given state authorities good insight into the challenges associated with the production of hydrocarbons. However, citizens also remain concerned about the security of supplies and gas prices. In this context, the statements of a Russian supplier that prices in 2011-2012 may reach $500 per 1,000 cubic meters are quite alarming. The EU’s climate policy could also have a severe impact on energy prices, since 90 percent of Polish electricity is generated from coal. The system of auctions for CO2 emission permits, which will be introduced in January 2013, may worsen the competitiveness of the Polish economy, especially in terms of the availability of low-cost energy. In light of the above, the potential success of shale gas exploitation gives hope and creates new opportunities for a gas-based energy sector. And yet, even though subjects like price and competitiveness help to frame this discussion at the rational level, it seems that the battle for Polish shale gas could instead take place on an emotional level. In fact, Polish television has already showcased multiple reports about farmers complaining about the activities of international energy corporations operating in their communities. If Polish shale gas development is conducted on a large national scale, the trend toward heightened public scrutiny is likely to intensify, especially as it may threaten the interests of other players in the energy market. Thus, regardless of the current government’s strong support for shale prospecting, one cannot rule out the possibility for political attempts to contest unconventional gas investments in Poland.

Polish-American Cooperation

Finally, cooperation between Poland and the American oil and gas industry is likely to succeed if it is based on an equal partnership. Given Poland’s rather negative experience with the implementation of trade offsets for U.S. arms purchases, it is necessary to redefine the concept of U.S.-Polish cooperation in terms of mutual benefit. Energy policy offers the perfect opening to do that. The key to success for shale gas development is to ground the partnership in common interests, not emotions, prejudices or fears. With all the looming challenges at the EU and local level, this opportunity must be given careful consideration and should not be wasted.

Tomasz Chmal is an energy expert at the Polish republican think-tank, the Sobieski Institute, as well as a partner at White & Case in Warsaw.

This article first appeared in the Center for European Policy Analysis.