Poland’s state-owned Grupa Lotos oil refiner is the latest to benefit from the “Buffet Effect”.
Lotos received a major boost this week when investor extraordinaire Warren Buffet’s CalEnergy announced it was teaming up with the refiner to explore Baltic Sea gas.
CalEnergy Resources Poland, part of Buffet’s Berkshire Hathaway company, will join forces with Lotos Petrobaltic, a subsidiary of Grupa Lotos. The announcement caused Lotos’ stock prices to soar immediately.
It is a major boost in confidence for Lotos, which has taken this opportunity to announce that drilling will begin already next year.
Lotos has an estimated 4 billion cubic meters of Baltic Sea gas reserves, which is just under a one-third of Poland’s total yearly gas consumption. With CalEnergy in play, Lotos will have increased capabilities for tapping into these reserves and getting them to market.
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Under the deal, Lotos will hold a 51% share in the exploration joint venture, with 49% for CalEnergy. For now, those exploration areas include B4 and B6, but plans for expansion are also in the works.
Buffet—recently ranked the 4th richest person in the world by Bloomberg (and the 3rd richest by Forbes)—recognizes the gas potential of Poland and the wider Baltic. Certainly, Russia does, too. One of Lotos’ key aims is to reduce dependence on Russian product and refining. To that end, it has been piling up acquisitions not only in Poland, but in Lithuania and further afield in Norway.
Poland’s dependence on Russian gas rankles. Poland imports 10.2 bcm of gas a year from Gazprom. Its total consumption is 14 bcm/y. Its current contract with Gazprom expires in 2022.
In the meantime, Poland is growing increasingly anxious, but so is Russia.
Last year, a US Department of Energy report estimated Poland’s shale gas reserves at 171 trillion cubic feet. Gazprom got nervous.
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In March this year, the Polish Geological Institute suddenly felt compelled to contradict that report, saying reserves were only around 24.8 trillion cubic feet. In June, Exxon (NYSE: XOM) announced it would pull out of its shale gas projects in Poland.
Investors started getting cold feet and shares began to drop. Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP) are plodding along with their shale gas operations, for now.
The only thing keeping the shale gas revolution from hitting Europe as it has in the US is technology: the shale reserves in Europe are on land that is more inaccessible, there is a lack of necessary infrastructure and fracking equipment, and protests against the environmental impact of fracking are more serious.
This is what makes the Lotos-CalEnergy marriage so fortuitous.
There is one potential spoiler: Poland is trying to push through new hydrocarbon legislation. Let’s hope it’s up to Buffet’s standards, or this convenient marriage will be annulled.
By. Charles Kennedy of Oilprice.com