Poland Pins Hopes On Shale Gas
With the election this week of President Bronislaw Komorowski, Poland will likely attempt to renegotiate its energy relationship with Russia and the Poles believe their huge shale gas potential provides them with new bargaining power. The only problem is that Warsaw’s leverage is far from proven.
Recent studies put Poland’s gas reserves at anywhere between 50 and 100 trillion cubic feet of recoverable shale gas reserves, potentially more than 200 years of its domestic demand.
But Polish annual gas demand is almost 500 bcf, with Russia supplying more than half of that and 70 percent transiting through Russia’s pipelines. The country’s annual shortfall into the future is estimated at almost 90 bcf a year.
That explains why the Polish gas monopoly, PGNiG, signed a long-term gas supply contract with Russia’s Gazprom earlier this year for 360 bcf of annual supplies until 2037. Liquefied natural gas supplies and domestic production will simply be insufficient to fuel the country’s growing economy. But the contract still needs to be ratified by both governments, something Komorowski is now suggesting will be impossible without including a renegotiation clause in case Poland one day doesn’t need as much Russian gas.
“If we find out that we have enough of shale gas, we want to have the right to renegotiate the deal with Russia, or maybe we will step aside from it,” Komorowski said in a televised debate weeks before he was elected with a razor-thin margin last Sunday.
Komorowski’s demand can’t be played down as an empty political promise to squeeze votes away from the more hard-liner and anti-Russian candidate. The Polish government has aggressively sought to portray its shale gas as a game changer. Almost 60 exploration licenses have already been awarded to dozens of companies, including majors like ConocoPhilips, Marathon Oil, Chevron and ExxonMobil. Other foreign smaller players in Poland’s shale oil flury are Talisman Energy, Lane Energy, BNK Petroleum, Halliburton, Emfesz, EurEnergy Resources, RAG, San Leon Energy and Sorgenia E&P.
ConocoPhilips and Lane Energy were the first last month to drill an exploratory well.
Poland last week also joined the Global Shale Gas Initiative during the visit of Secretary of State Hillary Clinton. “Through the GSGI, Poland and the United States will expand our cooperation to promote environmentally-sound shale gas development,” a press release following the visit said. In fact, Polish Foreign Minister Radoslaw Sikorski last month went as far as to claim that in ten to 15 years, “Poland has a chance to become second a Norway.”
Polish flaunting remain unconvincing though. “Nothing has changed since the new president. There’s a lot of hype and excitement that Poland could experience an unconventional gas expansion like the US. But there are a lot of reasons why that is not likely,” said Paul Stevens, a senior research fellow in Chatham House’s energy program.
Significant production of Polish shale gas is years, if not decades, away. Poland’s real potential won’t be conclusive until as far as 2015. And increasing production to actually dent the country’s dependence of Russian supplies will take years. It took the US two decades to develop its successful shale gas industry with numerous advantages Poland, indeed Europe, won’t have. Shale gas production requires vertical drilling, followed by horizontal drilling with the help of water pressurized water and sand, a technology known as hydraulic fracturing.
In short, Poland’s flaunting of its shale gas potential is simply premature. In 2000, US shale production accounted for a fraction of total production. It is currently supplies around a tenth and by 2025 it could reach almost 25 percent, according to the Energy Information Administration.
“But there will be problems with replication the US experience,” Stevens said. “The geology is wrong. There are not enough rigs and insufficient service industries. Deposits are deeper and smaller, with high clay content, which means the hydraulic fracturing won’t work so well. And the country is more densely populated.”
US property owners are also reaping the benefits of shale gas, which would not be the case in Europe because the state owns the mineral rights. Labor costs are also higher. A Wood Mackenzie study estimates break even prices in the US between $3 and $7 per million British thermal unit, compared to at least $10 per Mbtu in Europe, decreasing margins.
Regulations and slow decision-making processes in the EU will also likely delay corporate commitment to shale gas production. Another question is whether there is enough sweet water availability, considering environmental and human water supply concerns. And that is before seeking broad public support.
“There are other areas of the world were unconventional gas can play a bigger role, like China,” Stevens said, which would further delay Poland’s bid to become a major global shale gas player.
“Given the other aforementioned constraints, however, it remains to be seen whether Poland will indeed be able to fully reap the benefits of its shale gas stocks,” Roderick Kefferputz, an analyst in the Centre for European Policy Studies, wrote in a recent study.
Still, Poland’s shale gas reserves are significant enough to likely draw Moscow into negotiations with Poland one day, but not in the short term. “Companies are looking with some interest, but I suspect what the new president is doing is playing politics,” Stevens said.
The question is how far Poland, with Komorowski as its new president, will go to pressure Moscow with its new reserves. “They can rip up the contract if they want,” said Stevens. “But this is not a costless exercise. People will wonder whether they are good trading partner. They can rip agreements, like Ukraine, but you would have to be very confident that you have enough gas.”