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Shale gas in Poland: why companies abandon exploration?

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Shale gas in Poland: why major companies abandon exploration?



Mariusz-Orion Jędrysek, Ph.D., full professor of geology, has initiated shale gas and oil exploration in Poland (and Europe) granted first licenses in 2006/7 being state chief geologist and deputy minister for the environment (20057). Now Member of Parliament (Sejm) in Poland, head of the Parliamentary Team for Raw Minerals and Energy, and vice-chairman in the Commission for the Environment and Natural Resources.



"Welcome" we so say - we mean"Go away"?

Yesterday, a major daily in Poland "Rzeczpospolita" revealed apparently a secret note reporting discussion on March 8th this year. This discussion was between the State Chief Geologist (SCT) and foreign investors (mainly US companies) regarding planned legal regulations. In Poland, the SCT (deputy minister for the environment) on behalf of State Treasury, grants geological licenses according to Geological an Mining Law. Several months ago two legal models were proposed by the government: one dealing with taxation (by Ministry of Finance) and the other dealing with exploitation (by SCT) of hydrocarbons including unconventional gas and oil deposits in shale formations. The government is planning to set up the National Operator for Energy Resources (NOKE Polish abbreviation). It is aim is to guarantee Polish interests in future production of the shale gas. This is nearly a copy of the regulations prepared in 2006/7, with one crucial difference: the NOKE is supposed to be a limited company, not the state agency (with much wider activity and responsibility Polish Geological Survey).

Serving in a capacity of the SCT between 2005 2007, I awarded first licenses, thus initiated exploration of shale gas and shale oil in Poland (first in Europe). It was done under a very strict regime: I granted 11 (i.e. c.a.10% of licenses available, in a very dispersed fields), to four different companies. Afterwards, granting licenses was halted, and meanwhile we were preparing Poland to new investments: setting up a new special state agency and advisory controlling governmental bodies, new Geological and Mining Law, developing new own technologies and know how, etc. In my opinion, the State Treasury should have a direct stake in each license, and shares should depend on quality of the deposit. The crucial problem is that in contrast to governmental agency planned in 2006/7, the shares of NOKE Ltd. can be sold any moment. One cannot exclude such action to be carried out in the future and the political situation of Poland can have a bearing upon that.

Both the role of NOKE and the financial model, are highly criticized by investors. This resulted in strong tensions between the investors and the government. In my opinion the taxes should be as low as possible while the state should create its revenue via a fixed stake in each of the license. The induced economic benefits from shale gas and oil are the most important. Fiscal regulations are important from the point of view of investors, while transparency of licenses ownership and exploitation process, are crucial from the point of view of the state. The above mentioned confidential report, contained serious accusations that the goal of the SNG, hence it was the policy of the government, was to squeeze out all US shale gas companies from Poland. However, the present SNG called US companies to stay and promise to treat all NATO state companies equally to all the European Union companies. Sluggish or rather no activity and total mess regarding preparation of legal background increase political risk to extremely high level, far beyond expected profits. This is in addition that gas in Poland is 7 fold more expensive to produce than in the USA.


European perspectives

From European perspective the approach to accept NATO state companies make sense, because there is a hard geopolitical competition in which artificial limitation in access to fossil fuels is used as an important tool. In fact, recent advances in geological exploration and mining technologies proves that there is no global problem on energy resources, and Europe is rich in shale gas and oil, enough to be self-sufficient and independent by far. This is very dangerous for Russian economy. Hence Russia would do as much as it can, by any available method, to ensure high price and monopoly for gas supply to Europe (incidentally, contracts forecasted by me one year ago with Japan seem to be fixed now see "Nikkei Asian Review" 2012.05.20, Japan). The North Stream and South Stream ((Balkan states and Hungary are close to join) gas pipelines surround Europe, and long terms contracts (30 years or so) make position of Russia stronger. Peculiarly, all newly gas pipelines show much higher capacity for gas flow than needed in the predictable future. Russian companies show also strong interest in purchasing shares in major gas consuming companies, especially chemical ones. Such activities have occurred in Poland recently. An alleged lobbying by an ex-prime minister(Bielecki) and an ex-president (Kwaśniewski) shows that this game is of the first importance. This confirms the view that major politicians became a kind of well paid tool of the Russian interests (compare the role of Germany ex-canceller Schroeder in Nord Stream). Anyway, rich gas and oil unconventional deposits, including shale gas and gas hydrates, evidence that the energy temblors, often experienced in Europe, are due to Russian near monopoly gas supply, and have little to do with energy availability and potential of the globe in general.

In this contexts, the Roadmap EU-Russia Energy Cooperation until 2050, signed in February 2011 seems rather suspicious. The European Commission and the Russian government agreed to establish a long-term perspective to their mutual energy relations. The relevant document specified that the Roadmap "should concentrate on an analysis of different scenarios and their impact on EU-Russia energy relations, look into their consequences for the energy sectors, elaborate longterm opportunities and risks of the overall energy supply and demand situation and investigate the potential for long-term cooperation in the field of energy. After approval of this Roadmap by the Coordinators of the Dialogue, the EU and Russian sides should provide for using the respective potential for long-term cooperation as one of the priorities of their energy policies." It seems that sluggish and messy activity in shale gas in Poland confirms that the Roadmap is perfectly put into reality. The chapter on gas has nothing to do with own EU deposits.

This confirms the opinion of a well known expert Grzegorz Pytel wrote two years ago, with reference to gas from Russia, calling it a Yalta - 2 scenario.

It is odd that since the first license in Europe has been granted 6 years ago, there are still no regulations in this matter and they are definitely needed, especially in Poland where the law is still tailored for state controlled geological and mining companies. This is due to the fact that all measures done in 20067 has been abandoned. It has to be kept in mind that in Poland literally all geological deposits are state owned, regardless who owns the soil. Nobody in their right mind would grant all licenses to foreign or private companies, without any control and for free. It can be done only under certain conditions, on a very limited scale and in order to attract investors at the very early and extremely risky stage, to gain time and urgently get first information on geological potential.

Likewise, nobody sane would invest when regulations do not make the business reliable, profitable and safe. Consequently, beside one state controlled company PGNiG, other companies show little or no activity in exploration. Consequently, any details regarding efficiency, geology, appropriate technologies are still not known. We still have no clue how much oil and gas and where we have. Four horizontal wells have been drilled up to now, instead of around 100 expected. Obviously, until now, there is no service market in Poland, no standards, etc. thus nobody can prepare any reliable estimates.

Therefore, ExxonMobil, Talisman and Marathon Oil after altogether several drillings, abandoned their licenses. Talisman is in a very bad financial situation but ExxonMobil moved to Ukraine and Russia. Marathon Oil probably has enough licenses in USA. Probably one of the largest up to now, in a global sense, energy sources deal is between ExxonMobil and Rosnieft signed around one year ago in New York. According to the agreement, the companies will exchange 30% of their potential. In the beginning they share the Arctic vast oil and gas deposits, leaving behind Canada, Norway and Denmark which apparently also claim to be owners of large parts of these deposits. On the other hand, the American company will share with its Russian counterpart their shale gas deposits. This is not clear which one, but it is possible that this could be ExxonMobil's shale gas and shale oil fields located in Poland. Such scenario can be copied in other shale gas licenses granted in other European countries.


More than mistake

It seems that the main reason for leaving by ExxonMobil, Talisman and Marathon Oil, is the lack of regulations in Poland. This is due to the fact that surprisingly, new government, at the very end of 2007, has waved all measures prepared by me and granted all licenses (115) without any sensible guarantees to control of exploration, expected exploitation and trading (selling) licenses. The licenses were mostly handed out to foreign firms, at around €100 per square kilometer. Some companies acquired licenses just for speculations. Licenses have been granted without any control of reliability and owners. Poland lost billions of dollars and control over licenses. Therefore, there is double trouble with licenses as no exploration is taking place and once licenses are sold on, Poland have no knowledge or control over the ownership. Although low price was good and safe at the early stages, granting all licenses in the same system was very unwise. This is especially true, when exploration licenses granted oblige the State to grant exploitation licenses on the same conditions as it was done before, so practically for free. As a matter of fact, Polish government collected about €10 mil. instead of well over €1 billion for all the 115 licenses. I warned Polish Prime Minister on June 2010 (when less than 50% of licenses has been awarded) about destructive licensing, planned Geological and Mining Law and potential hostile takeover, but this warning has been ignored and the remaining rest of the licenses has been granted under the same inadequate State conditions (see Nikkei Business, 2011 August, and Global shale gas loop endfold Asian consumers "Nikkei Asian Review" 2012.05.20, Japan). Consequently, Poland lost its benefit of being the leader, and is walking backwards, after such a promising start 6 years ago when the first license for shale gas exploration in Poland, and Europe, was granted.

Granting of licenses in Poland was accompanied by corruption scandals in the Ministry for the Environment and State Geological Institute. Thrust to the authority of the state collapsed completely. Beside many other negative effects of release of all licenses, important also is the fact that abundant and valuable geological information has been distributed without any control mostly in digital form for less than its 106 value. Summing up, not only catastrophic financial loss but also broad economic and social negative effects have been resulted.


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