Hopes kindled just four years ago that Poland would become a gas exporter — a “second Norway,” in the words of then-foreign minster Radek Sikorski — have been doused by the decision of U.S. energy giant ConocoPhilips’ Polish subsidiary of to halt exploration.
The exit this month of the last global player from Poland’s shale gas market, leaving just a few domestic and smaller foreign firms among whom drilling has come to a near halt, further undermines the case for fracking in the European Union, where Poland and the UK have been its strongest backers.
“The appetite for drilling has dried up,” said Tomasz Chmal, an expert on shale gas with law firm White & Case in Warsaw.
The industry’s fall is hard to swallow for those who had hoped for 300 years worth of energy independence from Russia, where Poland gets just over half of its gas imports. Such predictions were being made in 2011, after the U.S. Energy Information Administration estimated Poland’s shale gas reserves at 5.3 trillion cubic meters, albeit based on historical data rather than new exploration.
Politicians salivated at the thought of the taxes and royalties, while the media played up hopes of an economic boom. Investors poured in, encouraged by legislation from the mid-1990s that meant exploration could be done relatively cheaply. Barriers for entry were low. Concessions were granted on a first-come, first-served basis; one optimist even paid for some with his credit card.
But the government made several critical missteps.
Spurred by criticism it was selling off valuable resources to foreigners too cheaply, Warsaw introduced legislation in 2011 to modernize regulation and maximize income for state coffers. A new state-run institution would take a stake in each concession, while companies that actually found gas weren’t guaranteed the right to extract it.
The scheme spooked investors and the government was forced to amend the law last year.
“The execution of this project was a disaster,” Chmal said.
Problems above ground were mirrored by growing concern over just how much gas Poland actually had. In 2012, the Polish State Geological Institute put extractable shale gas deposits at between just 346 and 768 billion cubic meters — some 85-95 percent less than the U.S. Energy Information Administration’s initial estimates.
Prospecting companies were also coming up dry; Poland’s shale gas was much harder to get at than expected. Poland’s shale formations are “significantly different and much more difficult” than their U.S. counterparts, Wiesław Pruger, the head of Orlen Upstream, a subsidiary of Poland’s state-controled refiner PKN-Orlen, told the Polskie Łupki energy portal.
In four years 70 wells were drilled and 25 underwent hydraulic fracturing, the controversial process used to extract gas from rock by pumping water and chemicals at high pressure deep underground. None produced flows large enough to establish commercially viable production.
When oil prices started dropping, bringing gas prices down with them, it became impossible for firms to justify the risk and expense of continuing operations in Poland. Major global energy firms began cutting their losses. In 2012 Exxon Mobil announced it would stop exploring in Poland, Marathon exited in 2013, Total in 2014 and Chevron earlier this year. All cited lackluster results from test wells as the main reason for leaving.
ConocoPhillips said its subsidiary, Lane Energy Poland, had invested around $220 million since 2009. It drilled seven wells over its three Western Baltic concessions, but “commercial volumes of natural gas were not encountered,” according to a statement from the country manager, Tim Wallace.
Lack of enthusiasm
Among the firms left with concessions in Poland are gas monopolist PGNiG and Orlen — both controlled by the state. But the pace at which they’re searching is “much slower” than in previous years, said Piotr Wdowiński, head analyst at Cleantech Poland, an industry consultancy. PGNiG is currently working on just two drilling operations of 10 originally planned for this year, while Orlen planned four wells this year and has so far finished just one.
Smaller international firms, including Dublin-based San Leon Energy and ShaleTech Energy, a subsidiary of Sweden’s Stena, as well as Poland-based BNK Polska, are still present. But with global energy prices so low, these companies are unlikely to pump large sums into exploration in Poland for the foreseeable future.
Outside of Poland and the U.K., the EU is wary about fracking. France and Bulgaria, among others, have moratoriums, while Germany to all intents and purposes has a ban. This could change, of course, if significant deposits of gas are discovered.
“If any of the current operators achieved commercial flows it would definitely attract foreign investment in shale gas exploration back to Poland,” Wdowiński said. “I believe that exploration activity could revive in the future. Even if Poland doesn’t have five trillion cubic meters of shale gas, producing five billion cubic meters a year would still be worth it.”
“What goes down must come up,” said Chmal at White & Case. “I don’t treat this as a national tragedy.”