Eulogy on Polish shale gas

By Benedict De Meulemeester

By Benedict De Meulemeester on 23/05/2013

Last week’s E&C conference on energy procurement in Warsaw brought us a strange surprise. We had programmed Greg Pytel from the Sobieski Institute to speak on the topic of the development of shale gas in Poland. Like many buyers from Western Europe we are also eagerly looking at the developments of shale gas in Poland. Like another speaker, Patrick Heather of the Oxford Institute of Energy Studies, said: “before I came here, if you would have asked me which country had the best prospects of developing anything like the US shale gas boom, I would have said ‘Poland’”. We all observed the enthusiasm of the Polish public and politicians regarding their shale gas reserves. They didn’t hesitate in pointing at shale gas’ potential of unchaining the Polish gas market from the omnipresent Russian supplies. Those illusions were shattered apart when Greg Pytel bluntly announced in his first slide of his presentation “Shale gas in Poland is dead”. How could this have happened?

 Before plunging into the analysis, let’s first recount the facts that cause such deep pessimism over the future of shale gas production in Poland. In the last weeks, Marathon Oil and Talisman, holders of rights to explore for Polish shale gas, have announced their withdrawal from Poland. They were quite vocal about the reasons for doing this, which has caused quite a shock across the European energy market community. They are following the example of ExxonMobil, the world’s biggest energy company, which pulled out in 2012. To the defense of Poland, we have to point out that Chevron, Total, some smaller international companies, Polish Orlen and – keep this in mind - state-held PGNiG are still active in Polish shale gas exploration (we are still very far from the production phase).

However, the fact that three important companies have pulled out seems to signal that something is going terribly wrong in Poland. Or isn’t it? Maybe it just shows that hydrocarbon development never is an easy thing. For all the boom-talk of the moment, shale gas development in the US wasn’t an easy piece of cake either and took more than a decade to materialize. Many in the industry think that without the stubborn persistency of one man, George Mitchell, it wouldn’t have happened at all. But then, of the 39 exploration wells planned for 2013, by May only 2 had been drilled. That doesn’t look like a shale gas rush.

 So let’s get back to the question. What is going wrong in Poland? Greg Pytel said that the problems were above and not below the ground. He clearly states that Polish shale gas is failing due to a lack of political willingness to develop it and not due to a forbidding geology. That being said, the shale gas layers in Poland are said to be more difficult to drill than anything encountered in the US. But, as Greg rightly points out, that just means that more effort needs to be done. Some of the world’s tight gas wells are producing despite very challenging conditions. Such challenging production means that more money needs to be invested. And for that investment to happen, you need a rewarding, business-friendly climate. And that seems to lack in Poland.

Very soon after the first wells had been drilled, stories surfaced of bureaucracy slowing down the development. In heavily regulated Poland, obtaining drilling permits turned out to be a nightmare. To give just one example, if companies wanted to drill in a different direction or at greater depth than initially planned, they had to apply for new permits, losing valuable time in the process. That is hardly the right approach for the trial and error development of a new hydrocarbon region. On top of that, the Polish government was never very clear about its willingness to let the foreign companies reap the benefits of their investments.

Apparently, there is no clear guarantee that holders of an exploration license will also get a production license when they have found the gas. That is a strong disincentive to invest in exploration! This cold feet behavior regarding production licenses can be described as avarice on behalf of the Polish government that wants to reap in shale gas benefits. There are rumors that international companies will be obliged to enter into joint venture structures with state-held PGNiG (there they are again) to produce the gas. Other rumors cite tax rates as high as 80% on future production.

Excessive permits bureaucracy, lack of clarity regarding licenses, threats of nationalization of production, excessive tax rates: that’s hardly the sort of business-friendly climate to stimulate investment in technologically and financially complex hydrocarbon production. Is this due to a general lack of a good business climate in a former communist country such as Poland? Or is it a general European problem? Shouldn’t we consider the reluctance to allow the hydraulic fracturing necessary to drill shale gas in countries such as France or the UK as another example of how European politics are lethal to the development of shale gas?

 It is clear that the differences in property legislation are contributing to the problem. In the United States, the owner of land almost always owns the mineral rights to that land. That means that if any gas is found on the land, it belongs to the owner of the land. The shale gas boom in Pennsylvania started when people with cowboy hats turned up on farmers’ driveways with million dollar contracts in their briefcases to buy up the mineral rights. That means that there is a large group of Americans that have a direct financial interest in the development of shale gas. The owners of the land will not impose unreasonable environmental demands (some say: not enough).

And the price of using the land is determined in a free and open market where a multitude of potential producers negotiate with a multitude of owners. This is totally different in Europe where mineral rights belong to the government. Poland is an illustration of how the government squanders the bounty by not displaying rational economic behavior. On top of that, the local population in the gas-producing areas is only getting the trouble and not the benefits of production on their land. They are therefore not pressurizing their politicians to treat the bounty more sensitively.

 Is the death of shale gas signaling the death of shale gas in Europe? I would say that countries like the UK or the Netherlands with their history of hydrocarbon development might take the lead. However, as far as the UK is concerned, we have to consider that most of its hydrocarbon production until now was offshore. And the UK has a long history of strong local resistance against onshore industrial initiatives. Patrick Heather – who apparently is partly French – surprisingly remarked that France might be the first country where shale gas is developed on a large scale. Indeed, France has the sort of strong centralized political power to decide on nation-wide industrial projects. Think about high speed rail or nuclear power development. Up until now, that central force decided that hydraulic fracturing was a bad thing. But France is also very sensitive about energy independence. If for some reason, it has to scale down its nuclear energy, it might decide that developing its shale gas reserves isn’t such a bad idea after all.

 All in all, the developments in Poland show that unless we see a rapid reversal of current developments, European shale gas production is not for the near future. And that despite the fact that due to the shale gas revolutions elsewhere, Europe is becoming the only continent that remains dependent on imported energy, as European Council President Herman Van Rompuy observed yesterday.

Keep up to date with E&C