View of a drilling rig exploring for shale gas in the eastern Polish village of Grzebowilk April 27, 2011. Initial estimates had suggested Poland has huge reserves of shale gas, and authorities in Warsaw hoped development of the sector would boost national energy security and turn the country into a source of nearly unlimited energy supplies.

Poland rethinks its strategy for shale gas production

Officials scramble to attract investors after multinationals’ exit

Poland’s government has announced plans to improve regulation and postpone tax collection on shale gas production in hopes of encouraging investors to continue their explorations for the fuel, following the withdrawal of three North American companies from explorations in the country.

Doubts over the scale of Poland’s shale gas reserves began surfacing last June after ExxonMobil announced plans to cease exploration in the country, citing disappointing test drilling results. The dramatic withdrawal last month of two more multinationals – Talisman Energy of Canada and U.S. oil giant Marathon – has now cast significant doubts over the commercial viability of shale gas in Poland.

Marathon stated it decided to end its Polish operations after “unsuccessful attempts to find commercial levels of hydrocarbons.”

Talisman meanwhile announced the sale of its Polish operations to the Ireland-based San Leon Energy group.

Company executives complain that complicated environmental regulations in Poland, along with a lack of legislation on shale gas, has also caused difficulties. Some foreign firms also found the legal framework for shale gas investment in Poland to be less straightforward than expected.

Hydrocarbon mania was triggered in Poland when a report from the United States Energy Information Agency estimated the country to have untapped reserves of some 5.3 trillion cubic meters – enough to meet domestic demand for 300 years. Poland’s leaders quickly made shale gas exploration a priority, voicing ambitions that the country could surpass its own domestic requirements and becoming a gas exporter.

Policymakers had high hopes that shale gas would provide Poland with a boost to its slowing economy and help reduce its high unemployment rate, currently around 14 percent. The strategy was also touted as an energy diversification tool that would lower dependence on Russia’s Gazprom, which currently supplies around two-thirds of Poland’s gas at some of the heaviest prices in Europe. The Russian energy giant provides around one-quarter of all gas in the European Union, and prices across the Continent vary wildly.

The lower shale gas projections arrived at by the government would still be enough to meet Polish domestic demand for some 70 years, and while the initial excitement over a possible shale gas bonanza is fading, some companies remain hopeful. Chevron is one of the multinationals continuing explorations in Poland, where it is currently drilling a fourth well and planning two more this year.

Ministers are now working on a raft of new regulations that they hope will prevent further departures of these firms, whose expertise and prior experience in North America is thought to be vital.

“Yesterday I told the environment minister very clearly that I expect him to prepare regulations that won’t scare off investors,” Prime Minister Donald Tusk told journalists in Brussels in May. “He must either acknowledge that this project requires a business-oriented mindset, or someone else will take over the task.”

Tusk added that the biggest concern for investors is whether they will be guaranteed rights to pump the gas after making the initial investments in exploration.

Meanwhile, tax collection on any future shale gas production has been postponed. “The law on hydrocarbon taxes will come into force in 2015, but taxes won’t be collected until 2020 to encourage investors to explore for the fuel,” Finance Minister Jacek Rostowski stated at a Warsaw conference in May.

New regulations will also give North American companies the same rights as EU companies in hopes their expertise will allow Poland to replicate the recent U.S. “energy revolution” brought about by hydraulic fracturing, or “fracking,” which allows previously inaccessible pockets of natural gas deep underground to be extracted. This technology has increased the United States’ domestic natural gas reserves 25 percent since 2000.

“The proposed regulations put the North Atlantic Treaty countries, including American entrepreneurs, in a privileged position, because they equate the rights of companies from EU member states. Nowhere else in Europe will U.S. companies have these rights,” Piotr Woźniak, chief national geologist and deputy environment minister, told Polish Television (TVP) last month. “We highly appreciate the experience of U.S. companies in the field of exploration and production of shale gas. Their investments are necessary for the development of oil and natural gas extraction in Poland.”

However, some experts believe that attracting U.S. companies may not be the answer.

“The Americans have one problem: Their techniques don’t work here,” Andrzej Szczęśniak, an expert on liquefied and natural gas and energy security and policy, also told TVP. “Exxon, for example, said that what works in America, where the gas is found at significantly shallower levels, doesn’t work in Poland.”

So far, Poland has granted more than 111 permits to at least 30 investors, many of them from the United States and Canada, to explore what the Polish government has touted as Europe’s richest shale gas deposits.

Thirty-nine wells were planned for 2013, but according to Environment Ministry data only two had been drilled by May this year. It is thought that 300 wells are needed to determine whether Poland could realistically be self-sufficient.

Currently, the biggest holders of shale gas concession in Poland are companies owned by the state, such as PGNIG (Polish Petroleum and Gas Mining). Some of the state-run companies concerned have no background in energy exploration, such as the copper miner KGHM and oil refiner PKN Orlen.

This has prompted criticism from some minority stakeholders in these companies, who say that the government’s enthusiasm for shale gas means it is putting politics ahead of industry expertise.

There has so far been little criticism of fracking in Poland from environmental watchdogs. Groups in the United States and other shale-rich countries have voiced fears the practice may pollute ground water and cause geological disturbances, and France has put a ban on fracking for shale gas amid environmental concerns.

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