Europe’s best hope for a shale-gas boom is fading as explorers in Poland confront rising taxes, a lack of rigs and rocks that are harder to drill than expected.
While shale could help Poland lessen dependence on Russian supplies and cut its gas bill, a government proposal for a levy on production threatens to curtail investment. Failed wells by Exxon Mobil Corp. (XOM) curbed the optimism that led two dozen companies to grab licenses. The government said last week that shale-gas reserves may be lower than estimated, and drilling a well costs almost three times as much as in the U.S.
“The growth of shale in Poland will be slower than in the U.S. because it would need to build the infrastructure the U.S. already had available,” said Laura Loppacher, an oil and gas analyst at Jefferies International Ltd. in London. “We know the gas in place is there, but it’s unclear if it can be extracted at a rate that’s commercial.”
Exxon, Chevron Corp. (CVX) and ConocoPhillips acquired rights in Poland, anticipating Eastern Europe’s largest economy would lead the development of shale fields similar to those that upended North America’s energy industry and made the U.S. the world’s biggest natural gas producer. The U.S. Energy Information Administration said last year Poland may hold 5.2 trillion cubic meters of gas, or enough fuel trapped in shale to meet domestic needs for 300 years.
Europe’s greater population density and stronger environmental lobby make drilling more difficult than in the U.S. France and Bulgaria have banned hydraulic fracturing, the controversial process that uses water, chemicals and sand to break open shale rock.
“There are many differences between Poland and the U.S. in terms of geology and the amount of data from exploration wells,” said Arkadiusz Wicik, a director on the energy team at Fitch Ratings. “Technology will have to be adjusted and initial costs of output will be higher.”
The Polish Geological Institute cut estimates of domestic gas reserves 85 percent last week, based on analysis of data from wells drilled between the 1950s and 1980s.
More recent drilling into shale layers has disappointed. Exxon said in January that two exploratory wells failed to flow enough gas to make development profitable. Flow rates at sites drilled by 3Legs Resources Plc and BNK Petroleum Inc. weren’t as high as similar wells in the U.S.
3Legs Resources declined by 3.1 percent to 63.5 pence by the close of London trading.
As results from some exploration wells disappoint, Poland plans to announce taxes on natural-gas production next month. The government wants energy revenue to bolster state finances and has considered the creation of a sovereign wealth fund similar to Norway’s petroleum fund.
Drillers argue the government is getting ahead of itself, and more exploration is needed to establish shale’s potential. While Poland has granted 109 licenses, just 13 wells have been completed out of 127 promised by explorers by 2017.
“Proposing draft legislation at this stage may be detrimental to exploration, given that the scope of investment and costs of potential production are yet to be known,” said Marcin Zieba, general manager at the Polish Exploration and Production Industry Organization, an industry group whose members include Exxon, Chevron and the country’s dominant gas company Polskie Gornictwo Naftowe i Gazownictwo SA.
PGNiG, as the company is known, today began drilling a new shale gas exploration well in eastern Poland. The company plans to drill a 4,300-meter (14,100-foot) deep well in 100 days.
It closed 0.5 percent higher at 3.92 zloty in Warsaw.
The industry’s criticisms are being heard.
“As a government we have to facilitate shale gas development,” Treasury Minister Mikolaj Budzanowski told a conference in Warsaw last week. “The worst we could do would be proposing measures that would slow exploration.”
Using hydraulic fracturing, which critics say risks polluting groundwater, has boosted U.S. natural-gas production 21 percent in the last three years, driving prices to a 10-year low of $2.20 a million British thermal units. Prices in Europe are about four times as high.
New methods and tools need to be invented to tap some rocks in Europe and China and many fields may prove unresponsive to drilling techniques that worked in the U.S., Rex Tillerson, Exxon Mobil’s chief executive officer, said on March 8.
“We should first find out how much gas is available and what capital expenditures are required to mine it and only then try to propose an adequate fiscal regime,” Piotr Dzieciolowski, a Warsaw-based analyst at Credit Suisse Group AG, said by phone.
Shale-gas drilling in Poland costs more than the U.S. partly because of greater population density, according to Schlumberger Ltd., the largest oilfield-services provider.
The cost of drilling a 2,000-meter horizontal well in the U.S. averages $3.9 million, compared with $11 million in Poland, Peter Richter, global unconventional technology and marketing manager at the company, said in November. Some Polish wells have been as deep as 3,600 meters.
“Planned tax on gas output can’t be simplistic, it has to take into account the costs of exploration, development and production,” said Tomasz Minkiewicz, a partner and head of the natural-gas team at CMS Cameron McKenna in Warsaw.
Explorers have to use single-lane country roads to transport parts of the 1,500-ton rigs. Because many of the roads were built to support vehicles of as much as 15 tons, more time and money is needed for the job.
Law in Line
“There’s the issue of lack of adequate infrastructure, which results in stretching the time needed to move rigs from one well to another to weeks rather than days in the U.S.,” Dzieciolowski said.
Not all Polish wells have failed. Last week, ConocoPhillips exercised an option to buy 70 percent of three concessions owned by 3Legs Resources after the Isle of Man-based explorer drilled a successful horizontal well in the Baltic Basin.
“Shale gas in Poland could still be a game changer for the country’s energy sector despite the disappointing shale gas reserve estimate,” said Fitch’s Wicik.
As Poland brings laws into line with European Union guidelines, all licenses to explore and produce oil and gas in the nation must be awarded by competitive tender, according to the Environment Ministry. Exploration licenses were granted on a first-come, first-served basis.
“Another negative factor is uncertainty concerning EU pressure to tender exploration and production licenses separately, unlike now where exploration companies have certainty over control of output,” according to Marek Matraszek, Warsaw-based head of CEC Government Relations, which advises companies dealing with the government.
“It has been decided that rights acquired by investors will be honored,” Piotr Wozniak, the country’s deputy environment minister and chief geologist, said last week.
Whatever the size of Poland’s reserves, the industry isn’t yet giving up.
“We need dozens if not hundreds of wells before we can estimate Poland’s shale gas potential,” said Tom Maj, Poland manager for Talisman Energy Inc. (TLM), the Calgary-based oil and gas explorer. “Wells must be kilometers rather than dozens of kilometers apart, as they are now, to fully assess the reserves.”
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