Henry Foy in Warsaw
Poland’s much-hyped shale gas boom could take as long as six more years to become commercially viable, as foreign oil and gas companies abandon their exploratory plans, citing bureaucratic tangles and an unfriendly investment climate.
Poland dreamt of domestic shale gas providing both an alternative to relying on politically unpalatable Russian energy and a windfall to state tax coffers.
But instead exploratory wells have failed to meet expectations and many drillers have grown impatient with regulatory delays that executives say have smothered their ambition.
Of the 11 foreign companies that invested in the country’s shale gas market over the past four years, seven have abandoned the market, after spending a cumulative £500m.
That has left domestic, state-backed companies such as PKN Orlen, Lotos and PGNiG with the financial and regulatory backing of the government, and a handful of well-funded global players, to wait for a change in fortunes.
“We gave it our best shot. We got to a point where we could not justify carrying on. We demonstrated some potential, but our company could not justify committing further capital based on the results so far,” says Kamlesh Parmar, chief executive of British driller 3Legs Resources, which pulled out of Poland in September.
“It is going to take longer and cost more money than most people imagine. Those operators that continue will have to have the funding and patience to give their projects the best chances of success.”
The steady withdrawal of investors and explorers and rising disillusion with Poland’s shale gas prospects is not likely to be helped by the recent sharp fall in global oil prices, which have cast doubt on the financial credibility of the fuel even in well-established drilling markets such as the US.
The country’s environment ministry, which regulates the industry, says that it could take until 2020 before Poland begins to deliver commercial shale gas at a level of profit seen in the US.
Driving through fields and forests 80km outside of Gdansk on Poland’s northern Baltic coast, it is easy to miss the birthplace of Poland’s shale gas dream.
Two large metal wellheads, barely visible from the road in the middle of a large field, mark the graves of the country’s first vertical and horizontal shale gas wells.
Drilled by 3Legs in 2010 and 2011, the wells did produce some gas, but not enough to start commercial production.
Mr Parmar says that the weight of red tape, which can mean waiting 18 months for permission to start drilling for gas, slowly eroded the company’s finances and appetite to continue investing in new wells.
“These delays deter investment,” he says. 3Legs in September handed over its concessions to ConocoPhillips and stopped its operations in Poland, joining Total, Eni, ExxonMobil and three other foreign companies in packing their bags.
“We are working to shrink decision-making times, to make it as easy as possible for the companies,” says Pawel Mikusek, spokesman at Poland’s environment ministry. “But come on, it is geology. It takes years. We need to take a breath and let investors do their work.”
One investor that has not lost hope is Ireland’s San Leon Energy, which has concessions in Poland. “At times it has been very frustrating, very bureaucratic, but things have changed . . . The government is very supportive,” says the company’s executive chairman Oisin Fanning. “Shale gas will be proven, and will flow in Poland.”
In 2011, estimates of Polish shale gas reserves were 5.3tn cubic metres, enough for 300 years of domestic gas demand. Government officials talked of the industry creating a sovereign wealth fund to rival Norway’s.
Today, the ministry reckons the country may have around 55 years’ worth of gas, if it can be extracted. So far 66 wells have been drilled, according to the government. None are producing gas in commercially viable quantities.
“I think it’s fair to say that there was a little too much expectation, too much hope,” says Jacek Libucha, principal at the Boston Consulting Group in Warsaw.
"Now the effort is being led by the state-owned companies who have financial resources, but are having to learn the right knowledge to exploit the potential . . . intention is to develop it at their own pace, rather than this gold-rush mentality that was present a few years ago.”
A new hydrocarbon law, two years in the making, was passed in August in an attempt to smooth the regulatory process for shale gas miners in Poland, while the environment ministry says it has boosted its team dealing with industry applications to 10 people, from just three in 2012.
ConocoPhillips, which invested in Polish shale gas assets alongside 3Legs in 2009, says that it is still conducting tests to determine the prospects of its concessions in Poland.
It said that it “continues to advocate for regulatory change that promotes investment while protecting Polish interests”.
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