Sitting on it
By : Anna Kocinska
On a prayer: Exploration methods in Polands gas industry are becoming increasingly reliable and profitable.
For years Poland depended on Russia as the country's primary source of natural gas, but following a pipeline deal with Norway this month and stepped-up exploration projects at home, Poland is beginning to loosen the grip of its eastern partner.
"For years, geologists and experts in national security have been talking about Poland's natural gas and oil reserves, which could contribute to guaranteeing our energy security, but this message never broke through to our political establishment," said Grzegorz Kostrzewa-Zorbas of the Warsaw-based Political Studies Center (ISP). "During the Warsaw Pact era, Polish oil deposits were kept as a reserve for the Soviet Army in the event of a war with NATO. But today, exploitation of domestic natural gas resources that are owned by the state could be cheaper than imports from Russia or Norway, but you need strategic thinking to understand that."
There are limits, however, on how much domestic production can be increased. According to estimates from Polish Oil and Gas (PGNiG) (http://www.pgnig.com.pl), Poland's natural gas monopoly, internal gas resources already provide 35% of the country's needs. While Poland used 11 billion cubic meters of gas last year, consumption is expected to swell to 18-22 billion cubic meters by 2010. Stanislaw Radecki, resource director at PGNiG, said domestic output could grow to 6 billion cubic meters a year by 2005, up from 4 billion this year. "All deposits that were discovered have their exploitation age," Radecki said. "For natural gas reserves it's usually 15-20 years. We guarantee 35% of Poland's gas needs and we can keep it this way for the next 20 years."
But David Gilbronson, managing director of Apache Corp. Poland (http://www.apachecorp.com), a U.S.-based gas and oil company that has been conducting gas explorations in Poland since 1997, is optimistic about the country's ability to intensify exploitation of its gas reserves. "We believe the geology in Poland still has more gas to offer, but it's a matter of encouraging investors to come in and drill more wells," Gilbronson said. "The main reason we came to Poland is that there is a geologic basin called the Permian Basin that extends into Poland; the same geologic basin that extends into the North Sea where there is very good production of gas. The geology is the same."
Scratching the surface: Apaches Gilbronson is optimistic about Polands gas reserves.nds gas industry are becoming increasingly reliable and profitable.
Gilbronson said that Apache would be interested in working with PGNiG on exploration investment projects. "Apache can supply capital, some high technology and some of our best people to work with PGNiG to develop and accelerate some of the best discoveries that (PGNiG) has already made in Poland," he said. "They in turn would invest their people and the areas that need exploration. We hope that with joint cooperative investment with companies like Apache and PGNiG, we can accelerate some of the existing discoveries."
It remains to be seen, though, whether Poland will even need the added domestic supply if it starts importing gas from Norway and via the Russian Yamal pipeline. Assuming the Norwegian deal goes through, Poland will import 5 billion cubic meters of gas annually for 20 years. That figure would be in addition to the 22 billion cubic meters Poland is contracted to purchase from Gazprom. Poland already buys 8 billion cubic meters annually from the Russian gas giant, but under the terms of the Yamal pipeline deal signed in 1993, Poland will have to accept another 14 billion cubic meters each year. As a result, internal production may become unnecessary.
But Zbigniew Tatys, deputy president of PGNiG's management board, said domestic production is not under threat. "Production of domestic gas will grow," he said. "It's cheaper than gas coming from Norway or Russia. So it's hard to imagine that its role within Poland's gas system will diminish."
Diversification
Discussions about Poland's dependence on Russia for natural gas heated up last year when news surfaced that Gazprom had struck a secret deal with Western partners to construct a second arm of the Yamal pipeline that would traverse Poland without consulting Polish authorities.
But controversies surrounding the import of gas from Russia began when PGNiG and Gazprom signed what is now referred to as "the deal of a century" the eight-year-old Yamal contract under which Poland nearly doubles its consumption of Russian gas. In addition, under the contract's "take-or-pay" rule, Poland would have to pay for the contracted gas even if demand decreases. For Poland to begin importing gas from Norway and increase consumption of its own supplies, the terms of the Russian deal would have to be renegotiated.
According to PGNiG's Tatys, imports from Russia or Norway do not affect internal production. "It's important to have the largest possible production of domestic gas because it's within Poland's interests and within the interests of our company."
Yet another aspect of the controversy over the Gazprom deal is Europolgaz, a company founded by PGNiG and Gazprom. Under the contract, Europolgaz would own the Yamal pipeline section that runs through Poland. Gazprom and PGNiG each have 48% in Europolgaz. The remaining 4% belongs to Gas Trading, in which PGNiG has 30%, Gazprom 35% and Bartimpex 25%. Critics of the deal contend that Gazprom has the most influence in Europolgaz because Bartimpex, a trader of Russian gas, may not be impartial. Supporters of boosting Russian gas supplies in Poland argue that Russian gas is readily available and Poland could benefit from transfer fees for selling gas to Western Europe. But the notion that near-total dependence on Russian gas could pose a threat to the country's sovereignty led the government to conduct two-year-long negotiations with Norway to find an alternative supplier.
"Diversification of the gas supply is a must and even the current government's plans are not sufficient when compared to international standards," Kostrzewa-Zorbas said. According to Western energy-safeguard regulations, no more than 30% of supplies may come from a single external source. "Under current plans, external gas supplies other than Russian will account for up to 30% of total supply," he said. "So, our plan is less ambitious than the standards used in OECD (Organization for Economic Cooperation and Development) countries."
Meanwhile, Poland's plan for diversifying its external sources of gas is waiting to be implemented. While the Financial Times reported earlier this month that the negotiations with Norway should be concluded before September's parliamentary elections, the government has been trying to finalize the deal for the past two years. In addition, Leszek Miller, the Democratic Left Alliance (SLD) leader tipped to be the next prime minister in an SLD government, said in July that if his party comes to power it may cancel the deal with Norway.
"I hope it was only a way of discouraging the Norwegians from signing the contract," Kostrzewa-Zorbas said. "Apparently these tactics failed and the Norwegians weren't discouraged. I think the new government would not dare to break this contract if it's signed because it would find itself under fire from international organizations."
Two heads better than one
While politics are involved when deciding on the level of external supply, it's economic arguments that will prevail when it comes to making decisions about the future of domestic gas exploitation, Apache's Gilbronson said.
"I don't doubt that sometimes where oil and gas are concerned, political points of view become more important than economic choices," he said. "We are here to conduct good business. We have no opinions one way or the other about external supplies. Honestly, I think you need a good program of both external and internal supplies to be effective."
And according to PGNiG's Radecki, domestically produced gas is always cheaper. "If you take Russian gas, our exploitation costs don't exceed 60% of their current prices," he said. Nevertheless, exploitation of domestic gas is becoming more costly because Polish natural gas reserves are tough to explore.
"The exploitation of gas discovered in the 1960s is in its final stage and gas deposits discovered now are often small," Radecki said. "Smaller deposits require more technological prowess to exploit them." It also costs millions of dollars. "But we choose only those sites that, according to our estimates, are commercial and rich sites that will start generating a return on investments within a few years," he said. "Now, exploration is more costly (than exploitation) because it's far more risky. If you get 20-30% of well-aimed holes while drilling, that's really a good result."
Soaring exploitation costs are the main reason why PGNiG, which is still state-owned, needs partners, Gilbronson said.
PGNiG and Apache are already doing business together: The Americans use PGNiG's drilling rigs and service companies when exploring for gas on its concession areas in Pomerania and near Warsaw. "But some of the richest areas in Poland are worked exclusively by PGNiG and we'd like to work together with PGNiG on them," Gilbronson said. Apache is in talks with PGNiG to set up a so-called cooperation model. "Such a model would ideally be 50:50, truly a joint cooperation. I can't say how much we would invest but Apache has invested more than $1 billion in Egypt and $1 billion in Australia, so we feel like we've got the financial resources."
Apache has invested more than $60 million in Poland in the last four years. It has drilled 10 exploration wells and recorded two discoveries: in Tuchola, northern Poland, and in Wilga, south of Warsaw. In September, it plans to drill a well in Jachowka in the Carpathian Mountains. Apache arrived in Poland after the country opened its exploration market to foreigners. Until 1993, PGNiG was the only company in Poland with the rights to search for gas and oil. Today, PGNiG has 60,000 square meters of concession areas while foreign companies have 50,000 square meters. The oil and gas itself is owned by the state, and mining areas are put out for tender. Apart from Apache, exploration concessions have been granted to CAL Energy, FX Energy, Texaco, Medusa Oil & Gas and Germany's RWE DEA.
"We do cooperate with foreign companies but their actions are not necessarily up to our geological specifications," Radecki said. "That's why only Apache has seen positive results.
Numerous discoveries made by PGNiG in the latter half of the 1990s resulted from a $250-million loan granted by the World Bank. "It was a breakthrough," Radecki said. "The credit was used for modernization of exploration equipment and improvement of technology used for exploitation. I can say that now we represent a 'medium' European level as far as technology is concerned."
According to PGNiG's estimates, reserves discovered in 1997 alone may contain 35 billion cubic meters, accounting for one-third of all reserves documented so far in Poland. "This year we discovered a new region rich in oil and gas, near Miedzychod in Wielkopolska," Radecki said. "According to our estimates, it may provide some 40-50 million tonnes of gas."
PGNiG, set up in 1996 through the merger of several state exploration and exploitation companies, is now being prepared for privatization.
"This whole issue of privatization, particularly in a coalition government, has slowed down PGNiG's ability to do more of these joint investment opportunities," Gilbronson said. "We're hopeful that a new government will set a clear direction but even if privatization is delayed we think there are still benefits from doing these joint investment activities. Please keep in mind that PGNiG lost money last year, so one must ask what an investor would pay for a company."
PGNiG's losses topped zl. 500 million ($119 million) last year. "Sure it (PGNiG) would have some value but the value is tied up in the assets that need to be explored," Gilbronson said. "To release that value you need to make discoveries. We've met with people at all levels of the government and 100% of them spoke in support of improving the internal gas supply."
According to PGNiG's Tatys, the company is in talks with two foreign firms, FX Energy and Apache. "We might explore for gas near Jarocin and Kalisz (Wielkopolska) together with FX Energy, and we are in talks with Apache, with which we might cooperate in exploration near Lublin," Tatys said.
