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New gas fields in Poland

25-05-2010  

Orlen discovers gas-bearing shales in the Lublin voivodeship

This is not scientists’ wishful thinking nor illusions concocted by the extractive industry. Poland has shale gas. The country's biggest oil refinery has discovered gas-bearing rocks ready for extraction. The fields are located within the area of Orlen's extraction concessions in the Lublin voivodeship. Seismic studies concerning aspects, such as the rock layer configuration, provided very promising results. They demonstrated that rock layers located at depths of 2.5-4.5 does contain gas. “Our initial assumptions have been confirmed. We have already identified the most promising areas,” said Wiesław Prugrar, CEO of Orlen Upstream Ltd., an extraction company owned by PKN Orlen S.A. What comes next? The complete results of the ongoing studies will be ready in October. Orlen will decide on the direction of further exploration in fall. And afterwards, it will begin drilling through to the gas-bearing rock. The first 2-3 wells may be completed no later than next year. Orlen is planning to spend as much as over 100 million PLN in the exploration stage. If everything goes well, the concern will invest in shale extraction. However, it will not conduct the process alone. Because our companies do not possess the sophisticated and expensive technology necessary for the extraction of this type of gas, the concern is searching for strategic partners. As far as we have been able to establish, PKN Orlen has already signed letters of intent with Lane Energy, South West Energy, Eni and Shell. The quantity of the gas contained in the rock in the area of Orlen’s concessions still remains unknown. Based on estimates by American consulting companies, Polish gas fields may yield as much as 3 trillion cubic meters. In comparison, our country’s yearly gas demand is currently 14 billion cubic meters. Therefore, if these estimates prove to be true, Poland will not have to rely on gas imports from Russia and could even become a gas exporter in its own right.
“Poland is Europe’s Energy Tiger” – similar titles could be seen in Polish newspapers very soon after it was announced that the geological structure of rock layers in Poland may be identical to the shale that serves as a source of gas for the US extraction industry. The high probability of the existence of considerable gas deposits in Poland is certainly good news, as is the fact that everything is being done to begin the extraction as quickly as possible. However, in this industry, “quickly” translates to a few long years. It seems too easy to raise the shale flag, while the country has still not become a “gas power” and the oft-repeated phrase “energy safety” has not yet gained any substance. At the same time, Poland is faced with many natural gas-related issues and every failure can cost us dearly. In particular, this refers the construction of the LNG terminal and signing the contract with Russia. Although the negotiations have been completed, the contract is still in limbo and official signatures have not been put on paper. Russia is certainly not and will not be happy about the progress of shale exploration in Poland. It can complicate their business. However, the LNG terminal is still a few years in the making, and shale-gas extraction is probably even more remote. While we are trying to develop into a gas power, we must also remember to try to avoid creating a gas deficit on the way. According to US estimates, Poland may have as much as 3 trillion cubic meters of shale gas. If these estimates prove true, the gas reserves at our disposal would be 200 times greater than the country’s yearly demand. This would allow us to become completely independent of Russian gas imports. Today, 73% of our gas is imported. With the help of unconventional gas, Poland would not only be self-sufficient in terms of gas demand, but also become an exporter. American corporations have already realized the business opportunities and purchased most of the Polish exploration concessions. “It’s obvious that giants like Exxon, Chevron, Conoco and Marathon do not enter Poland to compete in our local gas market, which is well-settled and divided monopolistically. Their goal is to export to major, lucrative markets – Germany, France, the United Kingdom and Italy,” says Sobieski Institute expert Grzegorz Pytel. For all intents and purposes, the Polish shale gas exploration market has already been divided since the Ministry of the Environment has issued 58 concessions that cover almost all of the country’s regions that are attractive to the industry. Although the Polish Geological Institute is working on new concessions, the areas they will cover are not as promising. The US company Lane Energy together with ConocoPhillips is scheduled to launch the first drilling operations in two weeks’ time. Other drilling projects will follow shortly, conducted by major global corporations (including Exxon and Chevron) as well as local concerns, PGNiG and PKN Orlen. However, the effects of these projects will only show in 3-5 years, this being the time necessary for the required studies and the assessment of their results. We have established that Orlen has completed the first stage of the study, demonstrating that the American estimates may indeed prove correct. The results of the seismologic analysis of five concessions in the Lublin voivodeship are promising. The corporation is currently searching for a partner in further exploration in order to gain access to the necessary technology and know-how as well as to minimize the risks inherent in the search for natural resources. PKN has already signed letters of intent with 15 companies. This will allow the corporation to share exploration costs estimated at over 100 mln PLN. However, Orlen wants to ensure that it will have extraction priority over the fields that will be discovered. Admittedly, the question of whether this enterprise will turn out to be profitable will be decided by the market price of natural gas. “It is possible that although we will have access to our own shale gas, it will not be commercially sound to extract the reserves, if gas prices drop too low," said Henryk Jacek Jezierski, Vice-Minister of Environment and Chief Geologist of Poland. It has been emphasized that shale gas is usually priced higher than conventional gas. Among other things, this is caused by the steep cost of drilling for this resource. “One borehole of 3.5 thousand meters in depth can mean an expenditure of as much as 30 million PLN," said Wiesław Prugar, CEO of Orlen Upstream Ltd. According to estimates, companies interested in investing in the extraction of unconventional gas may have to spend several billion PLN per year. Although the cost of the technology will continue to decrease, low conventional gas prices can still kill the shale gas project. Credit Suisse estimates that currently the break-even point for unconventional gas extraction is $280/thousand cubic meters. This is approximately how much we pay for gas imported from Russia, but about 40-80 dollars less than the price of Norwegian or Qatari gas. The extraction of gas from unconventional fields would, thus, be only marginally profitable today. But what will the gas prices be in 10-15 years when shale gas extraction begins in Poland? Nobody knows, of course. However, experts point out that such gas fields are also important for another reason. Even if the extraction proves unprofitable, thanks to these resources, Poland will gain low prices of conventional gas. Analysts believe that Gazprom will do all it can to make the extraction of unconventional gas in Poland profitless. “For this reason, we can expect that it will lower the prices of the resources provided to Polish Oil and Gas (PGNiG),” said an industry representative.

HENRYK JACEK JEZIERSKI discusses the benefits coming from the sale of exploration concessions:
US estimates predicting the Polish shale gas reserves at as much as 3 trillion cubic meters are impressive. However, some geologists remain skeptical. Are we already able to confirm the reliability of such estimates? We are not. They were only based on the comparison of the geological conditions in Poland and the USA. Of course, scientists can make predictions, but as the country’s Chief Geologist, I myself will only be able to talk about the extent of our resources when I receive documentation that actually confirms their existence. Because no estimates of possible fields have been substantiated so far, I can only say that there are no Polish shale gas reserves. So the rampant optimism should be cooled down? I am glad that the American estimates have been announced because they made Poland an attractive market for exploration investment. There are enormous risks and costs connected with the exploration, and the Polish taxpayers could never afford them. The American companies that secured most of the exploration concessions are able to afford those costs. How much has the Treasury earned from their sale so far? The concession fees are not high because the Treasury’s goal is not the financial gain in selling concessions, but arousing the general interest in investing in Poland. And we have been successful in doing this. We expect that these companies will now engage their financial resources in the risky geological investigation. Profits will come when this gas has been found and the extraction begins. These will involve extraction fees, mining fees, local taxes, etc., all of which will benefit the Treasury. Not to mention the fact that the gas resources will be native to our country, which we are really looking forward to. But there are many more benefits. This will be a source of income for those who sell or lease the areas where the work will be carried out. Additionally, once the extraction process begins, somebody will have to drill hundreds of boreholes. This is an opportunity for the development of the whole Polish mining and gas extraction industry. It will result in the creation of new jobs. Provided that the exploration proves successful, when can the extraction begin and who will exploit these fields? Probably the companies who own exploration concessions. According to geological and mining law, whoever has the appropriate documentation to prove it receives priority for their field exploitation proposals for the first two years. Tenders for the fields can only be started after this two-year period has elapsed without any proposals from the particular company. Right now, it is difficult to say when exactly the extraction can begin. We are currently engaged in the exploration stage, which will be completed in five years. Afterwards, we will know whether we actually have any fields at all. The next stage is the long-term process activating the field. It involves securing permits, negotiating the conditions of exploitation, and conducting environmental impact studies.

4-5 years ago, Americans, who were busy expanding their LNG terminals and looking for places to import gas from in order to meet the country’s demand for the resource, have now become self-sufficient thanks to their shale gas. The increasing extraction of shale gas in US as well as European extraction plants have suddenly become one of Gazprom’s biggest problems. New gas extraction technologies have already impacted the Russian giant’s market standing and can soon shake it even more. Thanks to shale gas, the deficit-driven US gas industry became self-sufficient. This in turn caused a surplus of gas and liquefied natural gas (LNG) on the world's markets. Results? The competitive edge of Russian gas in the European Union was greatly reduced. Today, Norwegian and Qatari gas is cheaper. And things will continue to get worse. In a dozen years or so, the nightmare of Gazprom’s CEO’s can become a reality since the current situation suggests that unconventional gas extraction can be launched in Poland, Germany, France, Hungary, Ukraine, etc. For Russia, this means the loss of more markets. The US will win over Russia. Moscow’s role as the grand master in the game of gas chess will go to Washington. The US is the leader in the world’s shale gas extraction and also possesses the expensive technology necessary in the process. Thanks to this, US corporations have already secured most of the gas exploration concessions for Europe. Once the extraction of gas from these fields begins, it may turn out that Europe’s source of gas will no longer be Gazprom and its affiliates, but companies like Chevron, Exxon and ConocoPhillips. However, analysts believe that the extraction of shale gas in Europe may be not be without its difficulties. One of the issues is the lack of equipment. There are 2 thousand onshore drilling rigs in the US, while Europe has only 70. There are also environmental issues to be considered since the chemicals in the well must be prevented from seeping into ground water.
 
Dziennik Gazeta Prawna, page: 1, 2010-05-25, author: Michał Duszczyk, Marcin Piasecki

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