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Shale Gas in Europe: Poland and Ukraine as Pioneers

The biggest and most promising European shale gas deposits are located in Poland. The EIA estimates that the Polish shale gas reserves cover more than 300 years of domestic consumption. The unconventional reserves exceed the conventional ones by the factor of 32. So far 109 licences have been granted to national and international groups in Poland. Poland imported more than 10bn cubic metres of natural gas from Russia in 2011. On top of it, coal is used for 90% of electric power generation. Therefore the political support for the development of domestic shale gas production is exemplary.

However, the so far disappointing results from test drillings have somewhat dampened the hope of an imminent “sheikdom at the Vistula”. ExxonMobil announced that the results of the two exploration drillings in the Baltic Sea Basin had fallen short of expectations. The gas flow was significantly below comparable sources in the Marcellus and Barnett Shale in the US, making industrial-scale extraction impossible. Last year, 3Legs Resources and BNK had already reported disappointing results. That said, we believe that a trial and error process is normal at the beginning of such a development. The initial results were disappointing in the US as well. Explorers were moving along a learning curve of seismics and geological understanding, and eventually the exploration success rate improved.

Europe still has to deal with infrastructural bottlenecks. Pipelines, storage facilities, and specific drilling equipment are still not widely available. As a result, the capacity of hydraulic fracking and specialised drilling equipment in the US is 80 times higher than in Europe. The sector is developing at a slow pace, but we do not believe that costs can be pushed down to levels as low as in the US.

Along with Poland, Ukraine seems to become one of the biggest players in the European shale gas sector. According to IEA Ukraine holds the fourth-largest shale gas deposit in Europe at 1.2 trillion cubic metres. Not the least because of its relatively low density of population, Ukraine seems made for the development of shale gas deposits. However, so far the Ukrainian politicians have mainly paid lip service and not taken any significant steps.

At the moment, Ukraine consumes about four times more gas than the European average, when related to its GDP. It has therefore one of the lowest rates of energy efficiency in the world. The potential in the Lublin Basin could turn Poland and Ukraine into a net exporter of natural gas. Estimates expect 1.4bn cubic metres on the Polish side of the Lublin Basin alone. On the Ukrainian side the deposits should be at least of equal magnitude. Geologists can see a striking similarity between the Lublin Basin and the Barnett Shale in Texas, and indeed the more substantial thickness of the Silurian layers should result in significantly higher potential than in the US. In the Lublin Basin the Silurian layers seem to be ten times as thick (1,300 metres) as in average US shales.

Within the next five years, capital expenditure of USD 10bn is required. The majority of these investments are supposed to be provided by foreign investors. A first preliminary agreement has already been signed with ExxonMobil about the development and production of shale gas. On top of this, there are agreements between Shell Exploration and a subsidiary of Naftgaz worth USD 600mn. On top of shale gas, Ukraine also sits on sizeable CBM deposits.

Conclusion Shale Gas

The production of shale gas in Europe would come with numerous long-term implications. In comparison with the prices the North American consumers pay, prices in Europe are often many times higher. Russia frequently threatens to suspend its deliveries, and the political dependence of countries such as Austria, the Czech Republic, Poland, or the Ukraine is enormous. Should the Polish deposits get even close to what has been expected, the country could quickly turn into a net exporter of natural gas, which would be crucial for the entire EU. We believe that clean fracking constitutes the right answer to the current environmental concerns.

By. Ronald Stoeferle of Erste Group

Erste Group is the leading financial provider in the Eastern EU. More than 50,000 employees serve 17.4 million clients in 3,200 branches in 8 countries (Austria, Czech Republic, Slovakia, Romania, Hungary, Croatia, Serbia, Ukraine). As of 31 December 2010 Erste Group has reached EUR 205.9 billion in total assets, a net profit of EUR 1,015.4 million and cost-income-ratio of 48.9%.

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