Three years ago, Poland seemed on the verge of an energy boom powered by the vast shale gas reserves it was reported to hold. Did that prove to be wishful thinking?
by Remi Adekoya
When the US Department of Energy announced in 2011 that Poland may hold as much as 5.3 trillion cubic meters of shale gas – enough for 300 years consumption for Poland – the local political class swooned. Politicians rushed out to announce that the country would soon be an energy giant. Foreign Minister Radosław Sikorski declared that Poland was on its way to becoming a “second Norway.”
The excitement was understandable.
The vision of Poland not only shaking off its dependence on Russian gas supplies, but also becoming a (rich) energy exporter within a decade was intoxicating. Energy remains a significant link between Poland and its former communist-era Russian masters, a tie Warsaw would happily sever.
Moscow currently supplies two-thirds of Poland’s gas, about 11 billion cubic meters per year. “After years of dependence on our large neighbor, today we can say that my generation will see the day when we will be independent in the area of natural gas, and we will be setting [the] terms,” Prime Minister Donald Tusk announced triumphantly at the time.
Even when a few months later, a report from the Polish Geological Institute estimated the country’s shale gas reserves at between 0.35 and 0.77 trillion cubic meters (tcm), about 10 times less than the original American estimate, the mood remained very gung-ho.
Fast-forward three years and the reality on the ground is that ExxonMobil, ConocoPhillips, Marathon Oil and Talisman Energy have all withdrawn from shale exploration in Poland, leaving only a handful of smaller companies and one major player, Chevron, in the search for the unconventional resource.
So how did we go from those early heady days to where we are now?
“The main problem is that our government has been unable to implement regulations governing the energy industry and especially the hydrocarbon sector for the past three years, instead there has been continuous inter-ministerial conflict on the issue,” said Wojciech Jakóbik, a sector analyst at the Jagiellonian Institute.
Jakóbik said that since there is no one particular ministry responsible for energy affairs, several ministries, such as the environment ministry, the treasury ministry and the economy ministry were all “fighting to promote their own agenda.”
“Too many ministries have a say in energy affairs in Poland, while none of them have full responsibility for the issue. All these ministries have lobbyists around them and thus are de facto fighting a proxy war among various interest groups,” said Jakóbik.
An example in case was the years-long battle between the environment and treasury ministries over the creation of a national hydrocarbon operator, which would be entitled to proceeds from shale gas royalties. The environment ministry strongly supported the idea, while the treasury was dead set against it.
In the end, Environment Minister Marcin Korolec, and his deputy Piotr Woźniak, who was Poland’s chief geologist, were dismissed late last year, obviously losing that battle.
Maciej Grabowski, an economist by profession and instinctively more pro-business, took over as environment minister. He said speeding up shale exploration in Poland would be his “priority.”
It’s the geology, stupid
Surely, Poland’s bureaucracy has not done a satisfactory job on shale gas. In a scathing report released by the Supreme Audit Office (NIK) in January this year, it stated that “despite declarations, the Environment Ministry did not treat the issue of shale gas exploration as a priority. For instance, in 2007-2012 there were only three people responsible for the issuing of licenses for shale gas search.”
As a result, the ministry issued administrative decisions related to the licenses for shale gas exploration with “significant delays (132 days on average where the law required 30 days).”
NIK also said that “no credible estimation of the size of shale gas deposits in Poland have been made so far.” In order to do so, about 200 exploratory wells would have to be dug. At the current boring speed, that would take about 12 years, NIK estimated.
However, Andrzej Szczęśniak, an independent industry analyst, does not believe delays on the hydrocarbon bill and bureaucracy are the reasons so many firms have given up on shale gas exploration in Poland. He says the conditions for foreign companies in Poland are “excellent.”
“Taxes and royalties are currently set at a very low level, the government has postponed the introduction of a new hydrocarbon tax for seven years [until 2020]. I know of no other country where shale gas explorers have such favorable financial conditions,” Szczęśniak said.
He also stated that Polish expectations regarding shale gas had been “very unrealistic” and “the result of a media hoopla.”
“Now the reality is setting in. The main problem for shale gas explorers here is geology,” Szczęśniak said. “The geological conditions are simply too challenging, much more challenging than, for example, in the United States, which is leading the shale gas boom,” he added.
Szczęśniak’s view was echoed in a December 2013 paper written for the Pulitzer Center by a journalist Dimiter Kenarov, who visited Poland in 2012 and interviewed dozens of people involved in the shale gas industry.
Kenarov said that on the one hand the shale gas explorers who left Poland had faced purely technical problems: “not enough modern rigs for horizontal drilling, not enough equipment, no competitive services for hydraulic fracturing, no gas infrastructure and poor roads.” On the other hand, Poland’s “shale rock layers were very deep underground, which increased the price-tag of drilling and fracking,” he added.
Overall, digging one exploratory well in Poland costs roughly $15 million, compared to about $4 million in the Barnett Shale basin in Texas. “The price of natural gas in Europe was significantly higher than in the US, but even that could hardly make up for the expensive production costs,” Kenarov wrote.
Due to the lack of necessary infrastructure and equipment as well as the cost of drilling in Poland, huge investments will be needed to make the industry viable. But the big players will not make those investments unless they see some impressive-looking exploration results. Yet the results will likely remain unimpressive as long as the huge investments necessary are not made. And so the circle closes.
So far, companies in Poland have drilled roughly 50 exploratory wells while, according to Environment Minister Maciej Grabowski, it would take between 200 and 250 to assess whether Poland’s deposits are commercially viable.
All hope is not lost, though. Szczęśniak said that there is still a chance that Poland’s much longed-for shale gas revolution will take off. He said the geological conditions in the Pomeranian region seem the most promising and could well prove profitable for shale gas explorers.
In January this year, San Leon Energy, a gas explorer backed by George Soros and investment management firm BlackRock, said one of its Polish wells had “moved a long way” towards producing Poland’s, and Europe’s first commercial shale gas. “This is the most encouraging vertical shale well test in Poland to date. We have moved a long way towards cracking the code towards commercial production from our unconventional plays,” the firm’s CEO said in a statement.
Optimism ungrounded in reality is a silly man’s game. But it is still decidedly too early to write off Poland’s shale gas revolution for good. While the country is not going to become a “second Norway,” it could still find enough commercial quantity shale gas reserves to make itself energy self-sufficient. That in itself would be worth no small celebration.