No Shale Gas for Poland?

Two Companies Sell Assets


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By Jon Carter
Thursday, May 9th, 2013

Shale gas may not be the cherished source of revenue that Polish politicians were hoping for.

Marathon Oil Corporation (NYSE: MRO) and Talisman Energy Inc. (NYSE: TLM) have both announced withdrawals from shale gas reserves in Poland.

fracking rigIn its first quarter 2013 results, Marathon found little in the way of commercial hydrocarbon reserves and will begin plans in selling off its assets in the region. Talisman will be transferring 100 percent ownership to San Leon Energy Plc (LSE: SLE), with the inclusion of any assets and drilling equipment.

The transfer will leave Talisman entirely free of its Polish obligations.

By the same token, Talisman also announced its intentions to focus on operations in the Americas and Asia-Pacific.

On San Leon Energy’s end, the company is excited about the deal.

The European-based company will attain 100 percent shares in Talisman subsidiary Talisman Polska. The company will also get 100 percent interest in the Gdansk W and Braniewo S concessions, and a 50 percent interest in the Szczawno concession, located in the Baltic Basin of Poland.

Talisman Polska is valued at $10 million, with no debt incurred by the subsidiary.

San Leon already will use the new cash flow to fund a vertical fracturing operation in the Lewino-1G2 well of the Gdansk W concession.

The Polish government was betting heavily on Polish shale to help its slow-growth economy and high unemployment rate, which hovers around 14 percent.

Polish leaders were also aiming to reduce foreign imports from Russia.

Russia and Poland have shared a contentious history, so it is not surprising that the Polish government is trying to drive down Russian imports.

And Polish officials are quite justified in doing so.

Poland pays nearly $500 per 1,000 cubic meters of gas, some of the highest rates for gas imports in Europe. Russia has also been known to use its gas industry as leverage in political disputes.

Poland has few options when dealing in gas imports. Russia is the most dominant power in Eastern Europe, and much of Western Europe does not favor fracking in the name of finding shale reserves. Western Europe is also relying on cheap coal imports from the United States as a way of cutting energy costs.

Polish officials were hoping to break Russia’s virtual monopoly over Polish imports, but there is still hope.

While Marathon and Talisman were not enthused by their exploits in Poland, this does not mean shale gas extraction is hopeless.

Analysts on the more optimistic side believe it will take more time than anticipated to reach the best reserves that Poland has to offer.

Polish Shale

The Polish government has handed out more than enough drilling permits, but most production will not begin until 2015.

According to data by the Polish Geological Institute, shale gas in both onshore and offshore reserves amounts to anywhere from 346 bcm to 769 bcm.

The largest concentration of reserves are said to be in the Baltic Basin.

Polish leaders strove for an imitation of American successes in the Bakken, but the differing geological landscape and limited investment prevents that from happening.

However, the recent estimates are subject to change if the Polish government can attract more oil and gas companies to their nation.

Also, the already proven reserves are enough for Poland to gain economic independence from Russian imports, but major muscle power needs to be in place for any semblance of commercial gas production to begin.

So what can the Polish government do?

For starters, they could provide more benefits in the form of tax breaks or specialized programs for energy companies, similar to what the British are doing in hopes of reviving drilling activity in the North Sea and Atlantic.

But such a move is based on whether or not parliamentary procedure in Poland would permit this course of action.

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Companies in Poland

Companies working in Poland have complained about Poland’s entangled bureaucracy when it comes to drilling permits, rendering the process cumbersome and frustrating. Companies also face uncertainty with no Polish tax policy in place for shale gas.

Talisman and Marathon are not the first companies to pull out of Poland. Exxon Mobil Corporation (NYSE: XOM) gave up on its shale aspirations last year.

Chevron Corporation (NYSE: CVX) is still invested in Poland, along with Italian company ENI S.P.A. (NYSE: E).

The Polish have quite an uphill battle if they expect to win investor confidence in the short-term.

Shale gas will do its part in providing a financial buffer against Russia, but a Bakken-like boom in Poland from shale gas is unlikely any time soon.

But don’t write off Poland just yet; the reserves still show promise, and current estimates could change with future investment.

For now at least, it may be best to look elsewhere.

If you’re looking for a Bakken-like model in other parts of the world, then keep an eye out for New Zealand.

One well off the coast of D’Urville Island may contain 100 million barrels of oil. Companies like Royal Dutch Shell (NYSE: RSD-A), Exxon Mobil and BP (NYSE: BP) are itching to begin production in New Zealand.

As of now, the New Zealand oil market is limited in competition and will prove to be fertile ground for investors quick enough to claim a stake of their own.   

 

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