Feb. 1 (Bloomberg) -- Exxon Mobil Corp.’s failed shale-gas wells in Poland may hobble the nation’s effort to become one of the world’s major energy sources and dismantle Russian dominance of Eastern European gas markets.
Exxon, the world’s largest energy company, yesterday said two exploratory wells drilled in a Polish shale formation at the end of 2011 weren’t commercially viable. The gas discovered in the wells, Exxon’s first in Poland, failed to flow in sufficient quantities to justify bringing them into production, David Rosenthal, vice president for investor relations, said during a conference call with analysts and investors.
International energy prospectors, including Chevron Corp. and Talisman Energy Inc., are probing Poland’s vast shale deposits to see if intensive drilling techniques that revolutionized U.S. gas production can unleash reserves big enough to supply Polish demand for more than three centuries. Exxon’s setbacks suggest Poland’s shale poses unique challenges that may increase costs and delay output, said Gianna Bern, founder of Brookshire Advisory & Research in Chicago.
“Shale exploration is a very high-cost and high-risk business and the Polish shale market is still in its infancy,” Bern, who advises major oil companies on risk management and strategy, said in a telephone interview yesterday. “It’s early in the game for Poland, and they have significant potential reserves over there.”
Poland’s shale formations hold 187 trillion cubic feet of recoverable gas, according to an April 2011 assessment by the U.S. Energy Department. Those resources are 32 times larger than the country’s conventional gas reserves, and enough to supply domestic consumption for 322 years.
Six Times Costlier
For Poland, successfully unlocking gas from shale would be a boon to domestic manufacturers and power producers by diminishing the need for Russian imports that now supply two- thirds of demand, said Benjamin Schlesinger, president pf Benjamin Schlesinger and Associates Inc., a Bethesda, Maryland- based adviser to gas producers, utilities, regulators and financial-services firms.
Poland’s dominant gas company, Polskie Gornictwo Naftowe i Gazownictwo, pays Russia’s state gas company Gazprom OAO $500 per 1,000 cubic meters ($14.16 per million British thermal units) of gas. That’s six times the benchmark U.S. price for the fuel.
“Poland’s shale resources are enormous,” said Schlesinger, a Stanford University-trained engineer who helped the New York Mercantile Exchange design its natural-gas futures contract. “Poland should be able to capture a good deal of those resources and reduce reliance on the Russian Federation.”
Exxon’s failures followed disappointing results at Polish wells drilled last year by 3Legs Resources Plc and BNK Petroleum Inc. London-based 3Legs’s Lebien well and BNK’s Lebork well flowed at lower rates than similar prospects in the Barnett and Fayetteville shale regions in the U.S., Bernstein Research said in a Nov. 10 note to clients.
The Polish shale results come after Exxon encountered a dry hole in Hungary in late 2009 drilled in a tight-sand deposit similar to shale. Exxon walked away from the $75 million project after striking more water than gas.
Exxon and other major North American energy producers have been lured to explore shale prospects from Germany to Argentina after largely missing out on the boom in shale extraction in the U.S. that began in the middle of the last decade.
Small Explorers Dominate
Smaller explorers such as EOG Resources Inc., Chesapeake Energy Corp. and Range Resources Corp. came to dominate the U.S. shale industry by default as the biggest international companies focused on locating billion-barrel offshore crude fields in places like the Gulf of Mexico and West Africa.
Shale formations were ignored by much of the energy industry for most of the past century because the rocks were considered too hard to crack using traditional drilling techniques. That began to change in the late 1990s with the development of new horizontal drilling practices and more- intensive hydraulic fracturing that succeeded in unlocking gas and crude from shale and similarly dense geologic deposits.
Exxon sought to jump-start its shale program in June 2010 with the $34.9 billion acquisition of XTO Energy, a Fort Worth, Texas-based pioneer of shale development. In addition to shale wells and undrilled prospects that stretch from the Mexican border to Canada, Exxon wanted to transfer XTO’s in-house expertise to foreign shale fields.
Exxon has not disclosed its plans for further drilling in Poland. Shares fell 2.1 percent to $83.74 at the close of trading in New York yesterday.
Tempting Polish Geology
Poland has led European shale exploration by virtue of its tempting geology and by offering “attractive fiscal terms” to prospectors, the Energy Department in Washington said in a September report.
Still, a “likely aggressive tax burden” to be imposed on shale gas producers may damp investor enthusiasm for Poland’s nascent shale industry, analysts at Bank Zachodni WBK SA, based in Wroclaw, Poland, said yesterday in a note to clients.
Polish drilling also has been hindered by a scarcity of rigs, water and specialized equipment needed for shale wells, Bern said.
“Getting the things you need to drill these wells is much more difficult in Poland than in the United States, where the shale industry is very well-developed,” Bern said.
--With assistance from Marek Strzelecki in Warsaw and Ben Farey in London. Editors: Susan Warren, Charles Siler
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