Poland Sweetens Shale Licensing Terms as Drilling Results Improve
Poland is overhauling its regulatory and fiscal regime to tempt shale-gas operators back, following
the departure of several international companies over recent years. The old terms and delays to new
legislation have led to criticism of the Polish government – which is eager for development to
accelerate - but 27%-state owned PKN ORLEN now claims operators are happy with the proposed
changes, which should be passed into law by the end of the year.
The timing coincides with encouraging exploratory drilling results from both PKN ORLEN and San
Leon, after years of disappointing shale wells in Poland. Fellow explorer, BNK, is poised to release
even more positive results from the Gdansk (Baltic) Basin, according to shale gas expert Nick Grealy.
Together the results are reversing some of the initial concern over geological potential in the
country, and Poland’s Deputy Environment Minister says commercial shale gas production will start
in earnest this year, although significant quantities are still some way off.
Poland would really benefit from the gas. The coal-dependent country currently imports about 60%
of the 16 bcm/yr of gas it consumes from Russia, and recent tensions with Ukraine have added wait
to strategic and supply concerns. With few alternatives, Poland pays one of the highest prices in
Europe for Russian gas – about $500 per 1,000 cubic metres compared to about $370 paid by
Germany. If the country is to stand any chance of meeting EU climate change goals it must switch
from heavy coal use to more gas and renewables.
Adam Czyżewski, Chief Economist at PKN ORLEN said: “We can generally say operators are satisfied
with the latest [license] proposition. The Ministry of Environment’s intention of withdrawal from the
NOKE concept [farm-in of state company] was appreciated, as well as introduction of a single
concession for hydrocarbon exploration and production.” This replaces one license each for
geological surveying, exploration and extraction. The government also plans to “accelerate
development and limit taxation up to 2020, after-which the government take should not exceed
40%,” said Adam.
Explorers had “left in frustration” at the existing licensing procedures, according to Nick. “These
changes are very important; state company involvement particularly had been putting people off.
Ministers are very keen and have been visiting drill sites and pressing operators hard, so they had to
do something to improve terms.”
In March 2014 the Polish Council of Ministers approved two draft laws, which passed a first reading
in parliament on May 8. Final approval is expected in June and they should become law by the end
of this year. New licenses will be granted in tenders or based on an open door procedure for terms
of 10 to 30 years, and it will be easier to establish a joint operations agreement. However,
exploitation fees will be increased for all hydrocarbons from 2016.
Glimpses of potential
“Polish state representatives are very excited about the latest developments in the Gdansk Basin”,
said Nick. “We should expect news from BNK any day. It has been fracking at a well in northern
Poland, and has now stopped to run flow tests,” he explained. Three small overseas exploration
companies are active in the basin - San Leon and Three Legs, as well as BNK – which is liquids-rich to
the northeast. All are short of financing said Nick, so good news for one should help boost financing
for all three, helping speed up exploration.
It’s not just BNK - which holds stakes in 6 Polish concessions - that has had success this year,
although theirs is expected to be the most significant. San Leon completed a vertical shale well test
at the Lewino-1G2 well on its Gdansk W concession in January this year, calling it "the most
encouraging vertical shale well test in Poland to date." The firm said it expected commercial flows
from Lewino-1G2 well by October following a planned ten-stage frack of a planned horizontal well.
The company also plans exploration drilling at the Lewino 2H well in northern Poland in the late
summer, followed by hydraulic fracturing. It wants to extend its Gdansk W exploration concession,
which is currently only valid until the end of the year. San Leon also has operations in Poland’s
conventional gas sector.
Adam said PKN ORLEN had “completed 10 exploratory wells for shale gas, including 3 horizontal
ones in Syczyn, Berejów and Kisielsk in the Lublin region. Parallel with drilling works in the Mełgiew
Commune (11th well), preparations are being carried out to start another horizontal drilling on the
Wierzbica licence.” By the end of 2014, ORLEN is planning to conduct at least three exploratory wells
and “further stimulation treatments in the horizontal sections of wells drilled”, with PLN 5.1 billion
($1.7bn) earmarked for exploration and production.
In total operators carried out “57 exploration wells (12 directional) for shale gas in Poland and 21
hydraulic fracturing,” up to the end of April, according to Adam. In comparison to last year he said
the number of exploration licenses had fallen, with 92 concessions now held by “34 Polish and
foreign entities.”
This year the Polish Geological Institute is expected to publish a new report on the country’s shale
gas reserves, which should be the best informed yet. Poor initial drilling results caused the US Energy
Information Administration to cut its estimates for Polish shale gas to 4.6 trillion cubic meters (Tcm)
last year, down from 5.8 Tcm in 2011. So far the Polish geological institute have been far more
conservative, at between 346 and 768 bcm of recoverable gas.
“It will inevitably take time to adapt drilling techniques suited to US shale,” said Nick. Shale deposits
are 2km down below impermeable rock and in a non-seismic area. ExxonMobil ceased exploration at
the end of 2011 after going into partnership with Russia’s Rosneft, followed by Marathon, which said
it was going because of unsatisfactory test-drilling results. Also joining the exodus were Total –
which was drilling in eastern Poland, and left in April - and Canada’s Talisman, although Talisman
said it left entirely to focus production in its core areas outside Europe.
That leaves Chevron as the only active major in Poland. Speaking at a conference in the UK in May,
Chevron’s senior technical director onshore Europe, Connie Jump, spoke of a new partnership with
PGNiG: “In Poland we've finished the 3D and have a memorandum of understanding with the Polish
national oil company, so now maybe things will go smoother – we may possibly combine acreage.”
Chevron is active right across Eastern Europe. In Lithuania it has just finished its third well, and in
Romania a 2D seismic line had been started, while a production sharing agreement was signed in
Ukraine last November. “In Romania, we finished the 2D seismic down in the South and [are drilling
our] first well in northern Romania.” We've used 50-60% local companies at our Poland and Romania
wells, so it does have this local impact and benefit to the community,” said Connie.
There is little public opposition to shale gas in Poland as there is in some other parts of Europe.
Adam said the latest public opinion survey in late 2013 showed 72% of Poles in favour of shale gas
extraction, with just 7% against. While some overseas companies had problems with local permits,
ORLEN say they have had no problems with permits or local communities. “[ORLEN] has not faced
difficulties in gaining a social licence for its operations, or the agreement to lease someone’s land.”
Oil and gas deposits are owned by the State, which grants exploration permission (license), while an
agreement between operator and landowner must be arranged before any operations can take
place. Adam said revenues to local communes will rise under the new framework.
Alternatives to Russia
Any shale gas production will add an additional alternative to Russian gas, alongside a new LNG
regasification terminal in 2015 - a contract with Qatar is already in place – and rising domestic
production of 7 bcm/yr. Currently, however, both Poland and the EU are becoming more dependent
on Russia, with Gazprom delivering 138 bcm to the EU in 2013, a 28% market share, compared with
24% in 2010. This rise was achieved with Gazprom maintaining its oil link, although Nick said it had
been selling increasingly large amounts on European spot markets recently. Gazprom’s dominance
prompted Poland’s prime-minister, Mr Tusk, to propose that the EU establish an “energy union”
which would feature a "single European body charged with buying [and distributing] all of Europe's
gas".
As far as shale gas goes, Poland remains concerned that a super-imposition of EU regulation could
make development even more difficult. But Adam said these concerns were receding: “In light of
recent political events we may expect some support for the regional E&P sector from European
decision-makers; EU member countries seem to understand today the need to ensure a common
European policy”. He suggested a sceptical pubic elsewhere in Europe needed educating as to the
many benefits of shale gas.
Poland may have experienced early problems, but it shouldn’t be written off, especially with energy
security coming to the fore. The gas is there, it’s just a matter of working out how to get it out. With
support infrastructure slowly being established – for example, Poland's Baltic Ceramics announced
the EU’s first proppant factory this week - and public opinion onside, improved drilling results and
licensing terms could see the sector take off.