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Gefira

The Gefira Foundation is a part of the Pan-European think-tank focused on current geopolitical and financial instabilities.Gefira provides in-depth and comprehensive analysis of and valuable insight…

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Is The Polish Shale Gas Industry Set For A Comeback?

Shale

Ten years have passed since the first concession to search for shale gas was issued. There were several problems of technological, economic and legal nature, which prevented Poland from becoming potentate in extracting this resource. It may seem that Poland missed its chance. However, monitoring and using new methods of shale gas production together with legal framework implementation, which would encourage the investors, can mark a new chapter in history of the Polish gas industry.

Shale gas in Poland: from euphoria to disappointment

According to the data provided by the Ministry of Environment the first concession to search for shale gas was issued in 2007, and the first drilling took place three years later. In the peak moment in 2012 111 exploration concessions were in force.1)This year was also marked by the publication of the Polish Geological Institute, in which the deposits were estimated at 346-768bn cubic metres.2)In 2011 the Polish Prime Minister anticipated that the commercial production of shale gas will have begun after three years.3)According to the observers, for instance former Minister of Economy Janusz Steinhoff, thanks to shale gas extraction Poland would have an opportunity to become independent of its imports while causing the lowering of prices on the domestic market.4)

Yet, in 2015 foreign investors started to withdraw and Polish state companies PGNiG and PKN Orlen abandoned their projects last year.5)

Reason No. 1: Mistakes made in communication with the investors and legal issues

Up to January 1st 2015, when the amendment of the Law on Geology and Mining came into force, there were three different types of concession, which related exclusively to exploration, appraisal and production. In practice, the investor that found gas deposits and bore the costs related to research could not be sure that he would have the right for extraction.6)Not until 2015, when one concession for exploration, appraisal and production was introduced could companies have greater certainty that the business would be profitable.

Furthermore, the foreign media informed that the concessions for exploration were granted for a five-year period with the possibility of one-time extension for a further two years. As the exploration is a long-term process, the investors feared that if they did not start the production in appropriate time, they would lose their place in the market. What is more, the news broke that failure to strictly follow the schedule of whatever reason would result in financial penalties.7)

By this time such foreign corporations decided to resign. In sum, by the end of 2014 of 11 foreign investors 7 lost their interest, even though they spent £500m.8)

Before the new law was implemented, different propositions were discussed in public. Those resulted in further uncertainty related to the business profitability. An appointment of the National Operator of the Energy Fossils was mentioned as a strategic state company which would supervise the production sector and would be the shareholder of all the investments connected to the extraction. Except for that, the maximum tax rate of 40 percent of profits was under consideration, which also prompted the doubts about the profitability of further operations.9)

It the report prepared by the Supreme Audit Office it was pointed out that not only were the proper regulations introduced too late, but also that the concessions were granted in a protracted manner. According to the institution the applicants were treated unequally and the auditors underlined the potential for corruption as an outcome of such a situation.10)

Reason no. 2.: The situation on the global markets

When the interest in Polish shale gas was the greatest, the prices of the resource went rapidly down. In March 2012 the media informed about the highest decrease in the decade.11)In the end of 2014 the price dropped to $2.322 per million British thermal units, which means it was lower by 85 percent than 9 years earlier. The vehement decrease was the aftermath of the development of gas extraction industry in the US and the appearance of large amounts of American shale gas on the market.12)

Large gas deliveries from the deposits that enable easy extraction resulted in the conviction that investments in Polish shale gas are not viable, especially if we consider bureaucratic matters and the need to develop other production methods.

Reason no. 3.: The geological and litological characteristics

The first problem is the shale deposit thickness. In Poland it is considered to be thin as in the most favourable areas it is 50m thick.13)In other words, the exploration is more difficult because there is no easy way to estimate how large a deposit will be exposed. Related: Shale Rebound Runs Out Of Steam At $40 Oil

Also the depth of the deposits is crucial. In Poland shale is present in Silurian sediments, i.e. they are placed between 2,5 up to 4km beneath the surface. It means that in Poland the technology of resource extraction is more complicated.

Another problem is the large amount of clay minerals in shale. Those result in low sediment permeability. It is a huge difficulty for the companies.

For the geologists the TOC (Total Organic Carbon) index is important since it determines the percentage of total organic carbon in sediments and points at the potential quantity of the resource which may be extracted. In Poland this indicator equals usually between 3-5 percent and is similar to the Chinese, but there are many areas where it is as low as 2 percent and some where it as high as 11 percent.14)It means that in many regions the extraction is unprofitable, considering the fact that American shale is characterized by an average TOC of 10-12 percent.

Reason no. 4: The technology of hydraulic fracturing

Commonly, the resource is extracted from highly permeable sandstone, so the production is quite easy. Shale gas is considered as “unconventional” because it is nested within poorly permeable deposits. In order to release it, it is necessary to fracture the rocks.

However, clay minerals made the method ineffective as the rocks swelled and prevented the gas from flowing. Meanwhile, for the last few years the technology of using CO2 as fracturing fluid has been developed. It is successfully employed in China, where shale has similar parameters.

What future awaits the Polish shale gas industry?

Considering the discussed issues, extraction of Polish shale gas may be profitable for the investors if its costs of production drop or if the quantity of the extracted resource is higher. Right now the geological and litological conditions together with the applied technology enable the companies to produce 10 thousand m3 of gas per day while the investments would be viable if the output was twice as high.15)Though the discussions referring to the potential resource quantity in Polish shale continue, the truth is that not enough studies focusing on identifying gas-rich areas have been conducted. Except for that, the technologies that are becoming more and more popular in other states and may be appropriate for Polish conditions were not employed.

Firstly, Poland has to simply wait for price changes on the global markets. While gas remains cheap, there will not be any interest in extracting a resource that generates difficulties. This factor is external and it may result in production delay of a few years.

Secondly, though the new law has been introduced, there is a need to work on other provisions that would attract the investors. For instance, different tax mechanisms and their market consequences are worth considering. As one researcher argues, the lump sum tax might be the most beneficial to all parties.16)Above all, the climate of uncertainty should be eliminated. Related: $30 Oil Could Spark Contagion In Energy Markets

Except for that, state’s central institutions should solve the problems identified by the Supreme Audit Office. To start with, it is important that the financial capabilities of entrepreneurs and their ability to carry out actual resource exploration and extraction projects are taken into account.

Thirdly, it is in the state’s interest to support domestic initiatives oriented on developing new technologies of shale gas production such as BlueGas Project,17)which aims at introducing a new method of fracturing based on liquid CO2.

Only if such conditions are met could the interest in Polish shale gas re-emerge. It is even more important, considering the fact that Poland will probably resign from acquiring Russian gas in 2022.18)The policy-makers should be advised to prepare the ground for the development of initiatives in the field of unconventional gas extraction, so when the renewed interest occurs, there would be no investors that abandon their projects before they are actually started.

By Gefira

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