Taking Flight: Poland tries to revive its shale gas hopes as Russia tightens its grip
After blowing it once, Poland gets a little help from Canada
Let’s face it. The Poles blew it. In the past couple of years, their maddening bureaucracy, a pinch of government greed – perhaps even their Paleozoic history – mucked up an opportunity for Poland to expeditiously develop its shale gas resources.
Developing those resources would have helped lessen its energy dependence on Russia and that country’s unpredictable, autocratic leader with his dangerously expansionist designs.
Now Poland is trying again. It’s reforming royalties and regulations regarding shale gas in a second-wind effort to entice North American energy companies to bring – in some cases bring back – their capital and technology to help Poland frack its untapped shale resources.
Last June, a delegation of Polish officials attended the Global Petroleum Show in Calgary to show off their new industry-friendly reforms and establish new North American contacts, especially in shale development. “Polish companies are increasingly interested in business, investment and co-operation opportunities with Canadian partners from the oil and gas sector,” says Rafal Pawlak, Poland’s head of trade and investment promotion in Canada. On January 1 of next year, Poland will introduce new regulations and taxation to boost investments and improve the operations of foreign companies. But the country will have to overcome the mistrust it seeded when it first tried to spur international interest in its potentially significant shale gas reserves.
It was in 2011 that poland, aided by a generous dollop of inaccurate help from the U.S. Energy Information Administration (EIA), first convinced Big Oil that its nation sits atop vast hydrocarbon-soaked shale formations. Back then the EIA estimated Polish shale might hold some 5.3 trillion cubic meters of gas – enough to last it three centuries. That was great news for Poland, which gets 60 per cent of its natural gas from Russia and will need more as its economy expands. As well, Poland, as a member of the European Union, is being pressured by EU environmental regulations to reduce its use of coal for power generation.
Thanks to those EIA estimates, Poland was hyped as the poster child for a European shale-gas surge that seemed destined to repeat the natural gas production revolution brought on in North America by hydraulic fracturing innovation. Big Oil bit into the dream of Poland’s potential gas self-sufficiency.
The Polish government “wanted to create this atmosphere of an energy revolution and a new Qatar,” says lawyer and energy expert Tomasz Chmal, a member of the Sobieski Institute, an independent Polish think-tank. Soon after the first exploratory wells were drilled in June 2010, the government began spending oil and gas revenues it didn’t have and making promises of further munificence to the Polish public. “This was ridiculous,” says Chmal, “because there were just a couple of wells drilled and nobody knew what is underground.”
Poland’s shale gas euphoria was short-lived. Starting in 2012 producers such as ExxonMobil, Marathon Oil Corp. and Calgary’s Talisman Energy Inc. began exiting Poland. And since North American service companies tend to follow their customers into new international markets, opportunities for Canadian shale drilling companies and completions providers to develop the plays disappeared as well.
When Talisman left in the spring of 2013, it said it was because it had altered its global strategy and was focusing more on core assets. Polish geology wasn’t helping. Its shale tends to lie deeper than North American deposits, has higher clay content and is often deposited in widely varying layers. That made horizontal fracking particularly difficult to North American drillers. Exxon left Poland around the same time as Talisman, citing poor results after drilling just two vertical wells.
Such a small sampling by Exxon suggests other factors were at play. Strategic decisions aside, it appears Polish geology was partly responsible for leaving oil companies with a bad taste. Early boasts about Poland’s shale gas reserves have come under revision after the Polish government itself concluded the EIA “overestimated the numbers by a factor of 10,” says professor Paul Stevens, an economist in London, U.K., and a fellow at the Royal Institute of International Affairs, Chatham House.
But geology isn’t the only reason oil companies have abandoned Poland “and why a lot of disillusionment has set in.” On top of all this, says Stevens, “the Polish government was also rather silly.” Stevens has used even blunter terminology in the past, calling the Polish government “stupid and greedy.”
The World Bank ranks Poland 70th out of 183 companies in terms of “Ease of Doing Business.” Oil companies soon discovered why. Not long after issuing its early shale concessions, Stevens explains, Poland abruptly changed its regulatory and fiscal regime to greatly increase its take from shale gas produced by foreign companies. That take could swallow as much as 80 per cent of the profits made by foreign energy companies producing gas in Poland. Nations often try to renegotiate royalties once foreign companies prove reserves on their territory and begin producing gas or oil. But the Poles acted very prematurely, says Stevens, changing the rules before any hydrocarbons were commercially produced.
That was a terrible stumble. Yet in the beginning, back in 2007 when the North American energy industry started eyeballing opportunities in Europe, Poland had put on a very investor-friendly face. Oil and gas royalties were low compared to other jurisdictions, Chmal says. With Poland’s energy industry largely state-owned, there was no need during the Soviet era for the puppet government to use royalties to extract revenue from its own energy enterprises. When foreign firms began making shale gas exploration deals in Poland, Chmal says, Prime Minister Donald Tusk’s Civic Platform party, which embraces a free market approach, continued offering the old Soviet-inspired and miniscule royalty structure to them. “Poland’s regulatory regime was simply not that prepared for such an inflow of new investment then.”
But then, following charges from opposition parties and the public of corruption, and that the government was giving away the country’s shale gas future for next to nothing, Tusk’s government tried to appease critics. It rapidly implemented a 40 per cent royalty regime on natural gas that could rise as high as 60 per cent. By comparison, Alberta collected 28.19 per cent in combined taxes and royalties from gas production in 2013.
In addition, Poland forced foreign companies to form joint ventures with state-controlled companies such as PGNiG, the country’s largest oil company. As well, foreign firms could only buy restrictive concessions limiting them strictly to drilling exploration wells. Those concessions were good for only two years – often too short a time for companies to properly determine prospects for a shale play. Companies had to endure a time-consuming process to renew concessions if they wanted to explore further. To make matters worse, if a viable reserve was discovered, there was no guarantee the company that found it would get production rights.
If you asked a minister,” says Chmal, “he would say, well, you almost have a guarantee. But it was not that clear to oil companies the block would be put into tender before the production phase started. Had it been clear, probably no one would have come over.”
The end result of the combined effects of Polish government and Polish geology was the 2013 pullout of half of the foreign companies exploring Polish shale. “Last year I think was a low point for Poland shale gas,” says Leslie Palti-Guzman, a New York City-based senior analyst, global energy and natural resources, with the political risk consultancy Eurasia Group. Yet Palti-Guzman doesn’t think it’s game over for Polish shale. Several companies remain there, including Chevron Corp., ConocoPhillips Co., San Leon Energy PLC (backed by American billionaire George Soros) and Britain’s 3Legs Resources PLC. Opportunities for Canadian energy service companies to service these firms are beginning to pick up.
In July, San Leon reported that new fracking techniques better suited to European deposits produced Poland’s most successful vertical test well to date, in its Gdansk W Concession. San Leon, which now plans to horizontally frack the well, predicts it could produce between 200,000 and 400,000 standard cubic feet of gas per day.
That’s a good sign. But Polish geology remains a largely unanswered question, says Palti-Guzman. “I don’t think they [foreign companies] did enough drilling to draw conclusions that the geology is not good enough. I think it really varies by location. So they really need to do more drilling to know what they have. So even at this stage, there has been too little done to alleviate confusion about how good the geography is, or how bad it is.”
The Polish government’s Rafal Pawlak says estimates now range from one to four trillion cubic feet. Its Environment Ministry says between 200 and 250 wells are needed to determine whether its shale deposits are commercially viable. So far, since the initial rush in 2010, only 65 wells have been drilled. Of that, only a few were horizontally fracked.
“If you compare that to what is annually drilled in Alberta or Texas or South Dakota, it’s nothing,” Chmal says. In Alberta last year 1,109 conventional gas wells were drilled. In Palti-Guzman’s view “it’s the aboveground risk that might be the main concern” in Poland. “You set rules and then you decide to change them, it doesn’t give a good precedent.”
But now, as Russian president Vladimir Putin continues on a beady-eyed warpath with Ukraine, the Polish government is pushing reforms to try and undo its past mistakes. “We think the Russia–Ukraine crisis is really giving a new impulse everywhere in Europe to diversify energy resources,” says Palti-Guzman.
Pawlak, among the Polish officials at theGlobal Petroleum Show in June, says the exodus of oil companies last year hasn’t reduced Poland’s determination to develop shale gas. “First, let me explain that the exit of certain foreign companies from Poland was mainly caused by the change in their global strategy and cannot be considered as an indication of lack of resources in our country.”
He’s confident the new laws, to be enforced on January 1, 2015, will speed up exploration and open the way for more Canadian and U.S. companies to come to his country. The changes include: dropping the requirement that foreign firms must form joint-ventures with a certain government-planned state-owned enterprise; a new regime giving foreign oil companies a break on taxes and royalties until 2020; a lower take on production of unconventional hydrocarbons to three per cent for oil and 1.5 per cent for natural gas. The new regulations will also offer joint concessions, giving companies the right to both explore for gas and then commercially produce that gas if drilling proves successful. If fulfilled, these changes would be a marked improvement.
The Canadian government says it has been working “intensively” to support Canadian industry interested in Poland’s oil and gas sector. During a visit to Canada in 2012, Polish Prime Minister Donald Tusk signed a joint Declaration on Energy Co-operation, calling on Canada and Poland to explore further collaboration in shale gas development and other areas of energy.
“In the past few years,” says Shannon Gutoskie, press secretary for Ed Fast, minister of international trade, “Natural Resources Canada senior administrators and departmental technical experts have also visited Poland’s officials several times to share their knowledge, expertise and lessons learned regarding Canada’s energy resource development.”
Canadian companies, Gutoskie said in an email, “have the required expertise and experience” to help Poland. “And they enjoy a strong reputation of quality.” She added: “Recent events in Ukraine have highlighted Poland’s strong desire for greater energy security and independence, and Canada is considered as a strong and valued partner to help Poland to achieve this goal.”
For its part, the Polish government says the crisis in Ukraine has actually had little impact on its efforts to develop a domestic shale industry. Ever since Poland was the first Eastern Bloc country to break free of the Soviet Union in 1989, says Pawlak, Poland has been trying to diversify its energy supply away from Russia. In the middle of 2015, Poland will open an LNG import facility in the northwest of Poland on the coast of the Baltic Sea. The $1.3-billion facility, with gas from Qatar, will eventually supply 50 per cent of Poland’s annual gas demands. That project “commenced a couple of years ago. So we can’t link it to what is happening on the east side of our border,” Pawlak says.
The big question now is what will happen inside Poland’s borders when it comes to shale gas. Will the companies who left return? Will service providers from the Western Canadian Sedimentary Basin follow producers into the country?
Chmal, who has helped oil companies navigate Poland’s previous bureaucracy, is trying to be optimistic. He says he’s seeing improvements in Poland’s handling of foreign investment inquiries in oil and gas. “Now it is more a time for realists. We need to bring this down to earth. We got too greedy and too pro-public opinion, but not pro-investment. Now we are changing this approach and trying to encourage some more investment.”
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