Reinvigorating Interest In Poland's Shale Gas Sector

BMI View: The announcement of a shale gas draft law and positive results from San Leon Energy's Lewino-1G2 well could provide important boosts to the country's shale ambitions, after several difficult months due to above and below-ground concerns. However, while these could help lift the negative exploration climate and reassure investors, we maintain that the draft law will not cover the taxation regime, which will be addressed in a separate bill. This bill will be equally important in determining the country's future shale gas prospects.

Poland's Minister of the Environment Maciej Grabowski said that a draft law on shale gas would be ready by the end of the year, as according to a report by the newspaper Dziennik Gazeta Prawna. In addition, Poland-based San Leon Energy reported on the 26th of November that the hydraulic fracturing from its Lewino-1G2 shale well at Gdansk W Concession in Poland's Baltic Basin had been successful and that the results from the well were much better than expected. This comes after its initial report in August that the well was subject to the highest hydraulic fracture pump rate outside the US.

These two pieces of news could provide an important boost for the country's shale ambitions, after several difficult months whereby optimism had faded due to the country's difficult below-ground environment, and unsatisfactory above-ground conditions.

Shale Gas Effects From 2019 Onwards
Poland Gas Consumption and Production (bcm)

BMI View: The announcement of a shale gas draft law and positive results from San Leon Energy's Lewino-1G2 well could provide important boosts to the country's shale ambitions, after several difficult months due to above and below-ground concerns. However, while these could help lift the negative exploration climate and reassure investors, we maintain that the draft law will not cover the taxation regime, which will be addressed in a separate bill. This bill will be equally important in determining the country's future shale gas prospects.

Poland's Minister of the Environment Maciej Grabowski said that a draft law on shale gas would be ready by the end of the year, as according to a report by the newspaper Dziennik Gazeta Prawna. In addition, Poland-based San Leon Energy reported on the 26th of November that the hydraulic fracturing from its Lewino-1G2 shale well at Gdansk W Concession in Poland's Baltic Basin had been successful and that the results from the well were much better than expected. This comes after its initial report in August that the well was subject to the highest hydraulic fracture pump rate outside the US.

These two pieces of news could provide an important boost for the country's shale ambitions, after several difficult months whereby optimism had faded due to the country's difficult below-ground environment, and unsatisfactory above-ground conditions.

Positive Below-Ground News Could Reassure

Good news from San Leon's shale well will further reassure companies drilling for shale gas in Poland, which has experienced a considerable learning curve with regards to geology and below-ground conditions.

Over the past two years, shale gas drilling results suggested that potential gas-prone rocks are less porous than expected, thereby raising the technical difficulty and costs of extraction. Other geological challenges cited include a high clay content within targeted source rocks and poor understanding of local structural geology. Moreover, a lack of oilfield support services has increased exploration costs relative to the US, which benefited from a well-established onshore oilfield service sector prior to its shale oil and gas boom. A Schlumberger report estimated that the average cost of drilling a 2,000m-deep well to extract shale gas in Poland is US$11mn in Poland, compared with US$3.9mn in the US.

As a result, some private firms and several big-name players, including ExxonMobil, Marathon Oil and Talisman Energy, have exited Poland's shale gas sector over the past year.

San Leon's positive news from its shale well therefore comes as a much-needed good news for Poland's shale gas industry, and adds to the previous positive development reported by Lane Energy Poland in August 2013. The company had announced positive flow rates in the Lebien LE-2H well in Northern Poland. The ConocoPhillips controlled exploration company stated that the well is flowing approximately 8,000 cubic metres of gas per day. While further test drilling will be necessary to evaluate whether the well can produce at commercially viable levels, this represented the largest quantity produced in any shale gas well in Europe to date.

These encouraging exploration developments could help lift the negative exploration climate. It could reassure shale gas exploration companies drilling in Poland, and encourage companies to accelerate exploration work on their concessions.

Shale Gas Law To Partially Ease Above-Ground Concerns

In addition, news of a draft shale gas law by the end of the year could further reassure investors. Several companies, such as Total and Chevron had warned that an unsatisfactory shale oil and gas regulatory regime - which in its current draft contains tax terms deemed too high to justify the risks in Poland - could lead to further departure. Companies have also complained that red tape is delaying commercial output, and that Warsaw's draft proposals to cut bureaucracy do not go far enough.

The new draft law would facilitate shale investments and simplify the procedures to explore for shale gas in Poland. This would ease the process of obtaining regulatory clearance for operations, which in turn will reduce the potential risks to investors and therefore come as welcome news by companies. It could result in a regain of confidence in investing in the country' shale gas sector.

However, we note that this draft law will not cover the taxation regime. According to the Environment Minister, the Finance ministry will legislate on shale gas taxes in a separate bill. Tax issues had previously disincentivised companies from further exploration in Poland. Tax laws which could be as high as 40% of companies' revenues could see a decline of interest in exploiting the country's potential ( see 'Fracking Regulations To Ease Above-Ground Concerns', May 15). As a result, while the draft law put forward by the Minister of the Environment will come as positive news to Poland's shale gas sector, equally important will be the shale gas tax bill. Chevron for example has warned that industry interest in Poland's unproven shale gas potential would be highly dependent on the outcome of its draft hydrocarbons bill, which would decide the risks and rewards of engaging in Polish shale plays.

Shale Gas Effects From 2019 Onwards
Poland Gas Consumption and Production (bcm)

We remain cautiously optimistic with regards to Poland's shale gas prospects. While the announcement of a shale gas draft bill and San Leon's positive well results Lane Energy's are much needed positive signs for the country's exploration efforts, we remain sceptical of Poland's ability to produce commercial shale gas or oil by 2015. However, this is not a dismissal of Poland's potential, with strong government support and industry interest in developing the nascent shale gas industry . In view of the current rate of exploration and discovery, we expect shale gas to have a real impact on total output from 2019, with gas production to hit 13.0bcm by 2022, up from its current level of 6.2.

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Sector: Oil & Gas
Geography: Poland
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