Shale gas in PolandAuthor: Tomasz Weigensperg

September 2012

FREE ARTICLE

www.pmrconsulting.com

� www.pmrconsulting.com

Shale gas in Poland

Poland is undoubtedly a front runner for unconventional gas exploration projects in Europe and potentially a centre of future shale gas development in the region. The growing interest in the country’s unconventional resources is driven by strong need for supply diversification and relatively easy access to the market for foreign investors whose operations are additionally supported by the Polish government, at least on the level of official political statements and declarations.

The largest exploration and production (E&P) companies, including Chevron, Marathon Oil, ENI, BNK and Talisman Energy, were granted concessions for exploration projects. In the wake of the E&P companies, major service contractors, including Schlumberger, Halliburton, Weatherford and Baker Hughes, entered the market or expanded services from drilling to completion activities, including hydraulic fracturing. More importantly, the industry has observed an increase in demand for fracturing and drilling technology as well as the entry of a new service company, United Oil Services, which is backed by one of leading private equity funds and seems to prove growing interest of the shale industry in Poland. In fact, market entry of leading global players is critical for the significant acceleration of commercial production in Poland where, according to Poland’s Ministry of Treasury, the first shale gas mine is to begin operations in 2015.

Approximately 37,000 km2 – 12% of Poland’s surface area – is covered by a “shale gas belt” that runs from northern Poland (Baltic basin) through the central (Podlasie basin) and the eastern (Lublin basin) parts of the country. Most recent exploration activities seem to prove that the Baltic formation is the most promising; currently, the majority of operations and testing wells are conducted in that area.

�www.pmrconsulting.com

Shale gas in Poland

As of August 2012 the Ministry of Environment has handed out 111 shale gas exploration concessions. The highest numbers were granted to: state-owned PGNIG (15), Petrolinvest (14), Marathon Oil (11), Orlen Upstream Sp. z o.o. (7), 3legs resources (9), and BNK Petroleum (6).

When it comes to operations and drilling activities in particular, approximately 25 wells have been drilled to date, 12 more have been started but not completed, and, based on PMR estimates, up to 20 testing wells will be commenced by the end of 2012. The most recent drilling activity in Poland has focused primarily on science wells to acquire core samples from which further development plans are to be devised.

Yet, big questions about investment opportunity and industry potential hang out there with major ones including the exact numbers of unconventional resources and how easy it is to extract the resources.

According to different sources, Poland’s technically recoverable shale gas reserves may range from 346 billion m3 up to 1.9 trillion m3 (Polish Geological Institute – PGI), 1.4 trillion m3 (Wood Mackenzie), and 5.3 trillion m3 (US Energy Information Administration – EIA).

The truth be told, neither the EIA’s nor PGI’s estimates are reliable enough, since what really matters at this stage is the information provided by the industry’s E&P companies and the results received based on of their drilling activities and testing wells. In fact, the more wells that are drilled, the better visibility the shale gas market will get, and thus its real potential will be easier to define and verify. It is important to note that, as experts claim, more reliable initial data concerning confirmed resources available are expected by the end of 2013 when approximately 100 wells are drilled based on the plans of E&P companies and the concessions they hold.

Wells drilled (completed or commenced) to date, August 2012

Note: Based on initial results Pomorskie region seems to be the most promising areain terms of shale gas reservoirsSource: PMR www.pmrconsulting.com

Pomorskie

Mazowieckie

Lubelskie

Podlaskie

Warmińsko-Mazurskie

Łódzkie

Świętokrzyskie

Podkarpackie

Małopolskie

Śląskie

Opolskie

Dolnośląskie

Wielkopolskie

Zachodniopomorskie

Kujawsko-Pomorskie

Lubuskie

Pomorskie

Mazowieckie

Lubelskie

Podlaskie

Warmińsko-Mazurskie

Łódzkie

Świętokrzyskie

Podkarpackie

Małopolskie

Śląskie

Opolskie

Dolnośląskie

Wielkopolskie

Zachodniopomorskie

Kujawsko-Pomorskie

Lubuskie

� www.pmrconsulting.com

Shale gas in Poland

Even so, Poland currently uses 14.3 billion m3 of natural gas per annum, of which only 4.1 billion m3 is covered by local production. The country, having insufficient conventional gas and oil resources, is highly dependent on import deliveries mainly from Russia. It is believed that even the lowest estimates of shale reservoirs (reaching 346 billion m3) would greatly decrease dependence on overseas supplies or perhaps even satisfy total gas domestic consumption for decades (the next 30-50 years, roughly).

On the other hand, the legal and regulatory environment, with its taxation level and concessions procedures specifically, is still unclear for business stakeholders. It is obvious that both international and local investors need to have a full understanding and information on the level of taxes they will be charged for production and operation on their concessions. The current very attractive fiscal terms need to change and also the industry admits that current tax level on gas production is way too low. Yet vague declarations as to the government’s plans and strategy in that respect, by all means, do not encourage E&P companies to increase their activity and exploration operations. The highly anticipated draft of the legal framework and tax regulations for concession procedure process and shale gas production, for which the industry has been awaiting, has been constantly postponed for the past few months. Now, the final release is to be presented at some point in autumn 2012, the Ministry of Environment claims.

Regardless of the quite gloomy prospects for commercial development in Poland, local government tend to be enthusiastic and optimistic about the Polish shale gas project. The recent agreement for collaboration in the field of shale gas development made between five leading state-owned players from energy sector (PGNiG, Tauron, KGHM, Enea and PGE), who are to invest PLN 1.72bn for this purpose, seem to support this theory.

With quite promising estimates about resources, the most intense exploration activities across Europe, possible gas market liberalisation in the mid-term, and the presence of leading E&P and service companies, shale gas in Poland is regarded as an attractive project for further investment. As soon as certain answers are provided, especially including the vague legal and tax environments, and actual shale resources are confirmed, there opens a strong potential for development of a new, strong and important energy branch in the country that shall also influence the whole region.

Moreover, it seems that coming months will be critical for the industry and anyone interested in the subject should stay focused to seize the opportunity and cut a nice piece out of the Polish shale gas market.

PMR Consulting (www.pmrconsulting.com)provides a wide range of services in 20 countries of Central and Eastern Europe, including market entry feasibility studies, sourcing, CI (competitive intelligence), strategic advisory, FDI assistance (M&A and greenfield projects), quick consulting

as well as any other services and support a company might require to enter a market, find a business partner or gain reliable information. Our services are always tailored to the specific requirements of our clients,

many of which are Fortune 500 companies.

PMR Research (www.research-pmr.com)iis the specialised custom research unit of PMR. It offers a full array of qualitative and quantitative research methodologies,is the specialised custom research unit of PMR. It offers a full array of qualitative and quantitative research methodologies,

providing services such as customer satisfaction studies, brand awareness and brand image research, distribution and competition studies, segmentation analyses, fieldwork, online surveys and customised analyses of selected branches

of the economy. PMR Research’s services are available in over 20 countries of Central and Eastern Europe.

PMR Publications (www.pmrpublications.com)provides reliable market intelligence for business professionals interested

in Central and Eastern European countries as well as other emerging markets. Publications by PMR analyse the business climate in the region, in particular in the construction,

retail, IT, telecommunications and pharmaceutical sectors. PMR Publications offers both free and paid subscription newsletters, internet news portals and in-depth reports.To find out more about Poland and Central and Eastern European countries please visit www.polishmarket.com

and www.ceemarket.com as well as regional and national sector portals dedicated to construction (www.constructionpoland.com, www.constructionrussia.com, www.constructionukraine.com),

IT and telecom (www.itandtelecompoland.com, www.ceeitandtelecom.com, www.ictrussia.com), retail (www.retailpoland.com, www.ceeretail.com, www.russiaretail.com)

and pharma (www.pharmapoland.com, www.ceepharma.com).

About PMR

Contact PMR

PMR Consulting

tel.: /48/ 12 296 22 50fax: /48/ 12 296 22 99

e-mail: info@pmrconsulting.com www.pmrconsulting.com