Since 2008, Poland has been the European Union’s best performer by far. It is the only economy to have avoided the recession and has held the highest GDP growth.
Yet Poland is floundering in an attempt to develop a shale gas industry.
The country hasn’t even made it out of the exploration and testing phase. Only 10 percent of the wells needed to assess reserves have been drilled.
A few years back Polish officials boasted about its future as an energy superpower and potential exporter of natural gas. It had good reason to – the U.S. Energy Information Administration estimated 5.3 trillion cubic meters of reserves in a 2011 report.
These predictions drew in several foreign companies looking to take advantage of a potential Polish shale boom. But there has yet to be a boom (let alone a fizzle).
A recent report from the Polish Geological Institute puts estimates as low 346 billion cubic meters.
One heck of a difference.
On top of this major decrease in expected reserves, the Polish government proposed hydrocarbon taxation totaling about 40 percent of profits alongside regulation that was labeled a “serious concern” by industry lobby groups in 2012.
One concern was that additional taxes would be imposed well before the foreign companies were projected to draw in any profit. Combined with a decrease in reserve estimates, the shale gas climate in Poland quickly became far riskier and far less appealing.
In addition to a crippling tax structure, there is also disconcerting red tape due to environmental regulations. Companies need permission from several overlapping government agencies before beginning to drill.
Another concern was the insertion of a state owned company, National Energy Mines Operator. The operation would receive an automatic share of concessions and hold rights to invest in the secondary market while also holding regulatory privileges.
Can you say, ‘conflict of interest’? It’s almost as if Poland thought it could tackle this alone.
It makes a little more sense when you realize that the top two Polish shale gas companies are both state operated. Any accusations that Polish government officials were initially attempting to drive out foreign investment (or at least strongly favor internal investment) wouldn’t be far fetched.
The fact is that the initial legislation was a major mistake. Canadian and American companies have technical fracking capability and experience that are superior to Poland’s. By strongly favoring Polish operations over foreign investment. the nation has begun to drive out important foreign companies.
Running for the hills
Exxon Mobil (NYSE: XOM) was the first to abandon ship. The oil giant decided to leave last year. Exxon cited difficulties in analysis and exploration due to “complex geography”.
Canada’s Talisman Energy Inc. (TSE: TLM) has announced its intent to drop its share of Polish allowances on partner San Leon Energy (LON:SLE) in an official statement earlier this month.
Marathon Oil Corporation (NYSE: MRO) had the following to say about its departure:
“After an extensive evaluation of the company’s exploration activities in Poland and unsuccessful attempts to find commercial levels of hydrocarbons, Marathon Oil has elected to conclude operations in the country,”
This exodus is desolating what were once promising ambitions for a booming Polish shale gas industry and Poland is beginning to realize its mistake.
Don’t know what you got till it’s gone
In response to the withdrawal of multiple foreign firms, Poland is now desperately trying to pull foreign investment back into the country by reestablishing what was once an encouraging environment.
Poland has recently announced a change in plans – hydrocarbon taxes will go into effect in 2015 but taxes will not be collected until 2020.
The five year postponement is definitely a start, but the concerns over debilitating red tape and regulation still exist. Until Poland addresses these issues, the environment for foreign shale gas investment in the country will remain troubling at best.
There are currently only 40 wells in operation. Only four of these wells have been horizontally fracked and none of them are expected to produce gas before 2015.
A better climate
The most important thing to remember here is even if you are sitting on a massive amount of liquid-gold, it isn’t worth jack if you can’t bring it to the surface. The physical and political climates of a region are absolutely essential to industry success, and there has been no greater oil and gas climate than in the United States.
Earlier this week I looked at fracking regulations proposed recently by the Department of Interior’s Bureau of Land Management. There have been minor amendments to the document since then, but the gist is still clear – the U.S. government remains largely supportive of fracking and is making sure that the shale gas industry continues to thrive.
In addition to conducive regulation, the United States continues to enjoy bountiful geography. With established plays like the Bakken, Marcellus, and Eagle Ford, the U.S. is leaving opposition in the wake.