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Story Publication logo December 2, 2013

Poland: After the Shale Gas Bubble

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Shale gas has become something to everyone. In the last few years, no other energy topic has managed...

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A shale gas pad at sunset. Image by Dimiter Kenarov. United States, 2012.
About a year ago, I traveled to Poland to report on the country's shale gas boom as part of my Pulitzer Center project "Shale Gas: From Poland to Pennsylvania." Although several other European countries were trying to emulate the U.S. "energy revolution" by launching their own exploration programs for shale gas, Poland was considered the indisputable leader at the time, fully committed, politically and economically, to developing its own unconventional hydrocarbons through the process of hydraulic fracturing, a.k.a. fracking. The country's historically fraught relationship with Russia and dependence on Russian natural gas imports, as well as the close diplomatic ties to the United States, created the perfect conditions for the fledgling industry.
There was much hype. In 2011, the U.S. Department of Energy had announced that Poland may hold as much as 5.3 trillion cubic meters of shale gas, enough for 300 years of the country's consumption. A few months later, the Polish Geological Institute, along with the U.S. Geological Survey, had lowered those numbers by nearly 90 percent, but the stakes remained high. By the time I arrived in Poland in late September, the government had granted more than 100 concessions to about 30 companies, foreign and local, in an area that encompassed 90,000 square kilometers, nearly a third of the entire territory of Poland. Shale gas was the magic mantra in the country: Everybody knew about it, from school children to the elderly, in the cities and the countryside. And most people supported it. Shale gas would make Poland energy independent from Russia, the media and politicians claimed; it would create hundreds of thousands of jobs; it would significantly lower the price of energy. In the words of the Polish foreign minister, Radoslaw Sikorski, Poland was on its way to becoming "a second Norway."
To understand the subject in depth and assess the situation objectively, I set up over 30 interviews with energy experts, industry representatives, geologists, environmentalists, politicians (from high-ranking government ministers to small-town mayors), as well as numerous local residents affected by the drilling. I was particularly interested in the environmental impact of fracking – the risks associated with water usage, potential groundwater contamination and flowback (the produced waste water), but the more I delved into the subject, the more my focus began to shift toward the economics of shale gas development in Poland. It was an issue that almost nobody talked about. There were quite a few institutional reports and think-tank papers predicting a bright future, with large numbers of new jobs and cash revenue flowing like honey into the country's coffers, but none of them addressed the main point: how to actually get there. Shale gas on paper was fine and dandy; but the world was more than piece of paper.
I explored the issue last year in two articles I wrote for Foreign Policy and McClatchy, and came to the conclusion that the shale gas project in Poland was economically doomed — a claim that, at the time, was met with skepticism by many experts. Yet, the facts spoke for themselves. On the one side, there were the purely technical problems: not enough modern rigs for horizontal drilling, not enough equipment, no competitive services for hydraulic fracturing, no gas infrastructure, poor roads. In addition, the shale rock layers were very deep underground, which increased the price-tag of drilling and fracking. Overall, one exploratory well came up to nearly $15 million, compared to about $4 million in the Barnett Shale in Texas. The price of natural gas in Europe was significantly higher than in the U.S., but even that could hardly make up for the expensive production costs.
It seemed that the only way to make shale gas viable in Poland was to create economies of scale, which would eventually bring down prices. At the same time economies of scale required huge investments in equipment and infrastructure, while exploration results were not exactly encouraging. After several years of intense exploration, companies in Poland had drilled 30 exploratory wells by late 2012 (today there are about 50), while, according to various research institutions, between 200 and 300 were needed just to assess the reserves—modeling of shale gas reserves is notoriously difficult and uncertain. And then, for the actual, commercially viable exploitation, the number of new wells had to be around 500 annually. It was a vicious circle: Many more investments were required for exploration, but no additional investments were forthcoming until there were sure guarantees of significant reserves and large enough markets. Simply put, small-scale shale gas development was an economic oxymoron.
There were a number of other obstacles, related to the way gas markets function in Europe, as well as regulatory practices and energy politics that are too complex to discuss in the short space here, but Poland's shale gas prospects seem even less rosy today (confirming my analysis from last year). All those factors—and generally disappointing exploration results—were the reason the giant ExxonMobil decided to abandon its efforts to extract shale gas in Poland in 2012. ConocoPhillips, another major company, sold off its shares in three concessions. This year, the steady exodus continued: Marathon Oil and Talisman Energy also withdrew from Poland, leaving only a few smaller companies—their shares plunging—and Chevron, to search for purported gas treasures. Even the largest and most enthusiastic investor in Polish shale, the state company PGNiG, could not achieve any success. It has set up a committee to investigate why shale gas exploration has proven a failure so far. Its attempt to raise additional funds for exploration by bringing in other state companies that have nothing to do with hydrocarbon development is also facing substantial difficulties—spending public money in a high-risk venture could prove politically toxic even in a country that firmly stands behind the shale gas project. (Both the CEO of PGNiG and the Minister of Treasury, who oversees the company, were sacked this year.)
The simple fact is that even the discovery of a couple of productive wells (one such well was discovered this year) would not solve the major problem facing the shale gas industry in Poland, namely, the lack of scale, both technical and financial. Possibly, if other countries across the region like Germany, France, England, Romania, Ukraine, and Bulgaria join in the search for shale gas, economies of scale could somehow spring up. However, considering the divided political environment in Europe, the deep economic stagnation, the large public opposition to fracking, the fairly strict environmental regulations, Gazprom's falling prices after EU's recent antitrust action, and the global decline of investment interest in shale gas, that would hardly be realistic.
The shale gas bubble in Poland has burst under the pressure of its own economic contradictions. And in neighboring Lithuania, until very recently another European country with shale gas hopes, Chevron has just decided to leave. With the news that Royal Dutch Shell is also selling off its shale gas stakes in the Ford Eagle Shale in Texas, one of the iconic shale plays in the United States, it seems that the very heart of shale gas is about to burst too.

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