The announcements this week by North American energy companies Marathon Oil and Talisman Energy that they are pulling out of shale gas exploration in Poland seems to have finally killed the government's initial hope that the former Soviet bloc country could wrestle free from its dependence on Russian gas imports and become a gas exporter itself.
The companies said they were withdrawing after unimpressive well test results plus, in the case of Canada's Talisman, a decision to refocus its exploration activities.
It follows ExxonMobil's decision to quit last June and is a further blow to Poland's shale gas ambitions, which started with such high expectations as companies rushed to buy up acreage attracted by a captive market and a gas price considerably higher than in the US.
In April 2010, the Polish Foreign Minister, Radoslaw Sikorski, spoke of Poland becoming a "second Norway."
It is worth stating, however, that supermajors Chevron -- although rumors are circulating about its possible withdrawal too -- and ConocoPhillips are still in the game. But the mood is definitely bleaker.
"I suspect that by this time next year you will have the Polish companies and companies who have nothing else to do in life, plus maybe Chevron, the last supermajor left with pockets deep enough to ride out the insanity," one industry executive told Platts.
'DESTRUCTIVE IMPACT'
To date, both foreign operators and Poland's PGNiG and PKN Orlen have drilled 44 exploration wells since mid-2010.
PKN and Marathon drilled the most, with six each. Talisman drilled three vertical wells.
Just four horizontal wells have been drilled and fractured. The results have underwhelmed and everyone describes the geology as "difficult."
An industry source told Platts companies are more likely to focus on regions with a chance of success in the short to medium term.
"Poland isn't one of them," the source said.
All this does not mean, however, that shale gas will not be commercially produced in Poland, Pawel Poprawa, a geologist and shale gas expert for the Polish Energy Studies Institute, said.
"There is no doubt the climate is worse and companies are changing their minds but it's not the end of the story," Poprawa said.
"Exploration will continue on a smaller scale. The geology has proved difficult but the well test results are not the only factor because there's been too few of them. They come on top of the regulatory mess and together it's having a destructive impact on investment in Poland," he told Platts.
The "mess" or "insanity" refers specifically to the government's plans to introduce a new regulatory framework for all hydrocarbons production.
The Ministry of Finance is also drawing up a law to introduce new taxation but that is much less controversial.
Operators are particularly unhappy about the proposal, inspired by the Norwegian system, to create a 100% state-owned company, Narodowy Operator Kopalin Energetycznych (NOKE), which will have the right to take capital stakes in all future production licenses and participate in decision making.
Companies are concerned that unlike Norway, NOKE will employ inexperienced public administrators, the same officials that they have had considerable difficulty dealing with to date.
"State participation in concessions by NOKE has the potential to add complexity to the process and slow down activity," according to the OPPPW, the association of Polish and foreign operators.
PRODUCTION LICENSES
Another controversial proposal concerns production licenses.
Companies that have exploration concessions say the proposed regulation does not give them legal entitlement to automatically obtain a production license for that concession.
In future only combined exploration and production licenses will be issued following a tender.
Operators are incredulous that the government could really be proposing that they compete for a production license in an open tender after investing millions of dollars in exploration.
The Ministry of Environment is proposing that companies that possess exploration licenses will have a two-year grace period to apply for a production license without the need for a tender.
However, operators, together with their new partner NOKE, must officially document a proven field in that concession during those two years.
Poprawa believes that companies will struggle to do so in that timeframe given the challenges and bureaucracy.
While industry participants will tell you that shale gas in Poland has fallen victim to politicians and their need to show that foreign companies will not be allowed to exploit Polish gas resources on the cheap, the regulations also apply to conventional concessions and potentially hurt domestic companies.
PGNiG has more than 200 conventional exploration concessions.
"Two years after the law is passed every exploration concession in Poland will go for tender. It will kill PGNiG's role as an exploration company in Poland because they cannot compete. They will be destroyed by this regulation," Poprawa said.
Poprawa says Poland's shale basin is facing a hierarchical division into good acreage and less attractive areas that are abandoned by the larger companies and perhaps picked up by smaller ones.
He also notes that service companies like the Czech Republic's MND, which drilled wells for PKN, are no longer offering their services in Poland.
"We can't talk now about large scale potential. There is still potential but it won't change the European market as was once hoped," he said.
