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SHALE GAS INVESTMENT GUIDE

SHALE GAS

investment /POLAND

GUIDE

SUMMER 2011

Water Sourcing

Got Innovation?

FIRST WELLS ARE WINNERS

HUGE SCARCITY OF SUPPLY

TOP 10 OPPORTUNITIES IN SERVICES

Gas Shows

SUMMER 2011

Pioneers of the

OLD WORLD WHO’S WHO IN CONCESSIONS

PIPELINE NETWORK | HYDRAULIC FRACTURING | GEOLOGY OF THE BALTIC BASIN | NATURA 2000 USA $18 - $18CAD - POLAND 50 PLN + VAT - EU €12 - UK £11


CleantechPoland.com

INFORMATION is the

RESOURCE PLAY

get it in english


CONTENTS

CONTENTS 86

p / 1 0 OPINION p / 1 8 BUSINESS p / 2 9 ENVIRONMENT p / 3 8 LEGAL p / 4 6 INNOVATION p / 5 6 ECONOMICS p / 6 2 INFRASTRUCTURE p / 7 2 GEOLOGY p / 8 4 POLITICS p / 9 0 WHO’S WHO p / 9 9 EVENTS CALENDAR A FORMER SYMBOL OF SOVIET INFLUENCE IN A COUNTRY LOOKING TO THE WEST SHALE GAS INVESTMENT GUIDE

SHALE GAS

investment

GUIDE/POLAND Gas Shows

FIRST WELLS ARE WINNERS

Water Sourcing

HUGE SCARCITY OF SUPPLY

SUMMER 2011

Got Innovation? TOP 10 OPPORTUNITIES IN SERVICES

SUMMER 2011

Pioneers of the

OLD WORLD WHO’S WHO IN CONCESSIONS

PIPELINE NETWORK | PGNIG, STATE GAS COMPANY | GEOLOGY OF THE BALTIC BASIN | NATURA 2000 EU €12 - UK £11 - USA $18 - $18CAD - POLAND 50 PLN + VAT

ON THE COVER: Flip to page 90 to the section WHO’S WHO to see who’s got a stake in Poland’s unconventional gas concessions

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PUBLISHER

SHALE GAS

investment / POLAND

GUIDE

EDITOR WOJCIECH KOS´C´

PUBLISHER PARKER SNYDER

WRITERS DREW LEIFHEIT EVA-MARIA MACI ĄŻ EK PAWEŁ POPRAWA GRAHAM STACK

ANALYSTS FLORENCE GÉNY TIM GOSLING DREW LEIFHEIT

FOREIGN MINISTER RADOSLAW Sikorski held an April 2010 press conference, along with American majors ConocoPhillips, ExxonMobil and Chevron. “In ten to fifteen years, Poland has a chance to become a second Norway," he remarked. Not everyone is dancing happy. Gazprom, Poland’s principal gas supplier, has tried to downplay the importance of shale gas. Chief Executive Alexey Miller called the shale gas boom in the U.S. a “bubble.” A legion of analysts were dispatched on a march across Europe talking about how shale gas is not sustainable. On the other hand, Polish officials have welcomed investors with open arms. For good reason. Poland is a country that’s 90% dependent on hard coal and lignite. In a carbon-capped EU, natural gas is a better alternative to coal because it helps to balance power dispatch in a low emissions economy based on renewable energy. That’s why in January of this year, the US State Department sent a delegation of Polish officials to visit the Barnett and Marcellus. The Shale Gas Investment Guide is about Poland’s shale plays. The publication targets operators, vendors and service providers in North American unconventional gas. In early June, the guide will be sent to an insider’s network, 350 targeted companies in the Marcellus, Barnett and Alberta oil and gas regions. Cleantech Poland is a consulting company that produces business intelligence. Subscribe to Cleantech Poland to track shale gas development in real-time.

PHOTOGRAPHY KASIA SNYDER

PUBLISHED BY CLEANTECH POLAND LLC UL PUSTELNICKA 48/22 04-138 WARSAW, POLAND

EDITORIAL CONTACT WOJCIECH@CLEANTECHPOLAND.COM (+48) 602 458 099

ADVERTISING CONTACT PARKER@CLEANTECHPOLAND.COM (+48) 517 469 881

GENERAL REQUESTS INFO@CLEANTECHPOLAND.COM

ART DIRECTION PAIGE WEIR

PRINTER DRUKARNIA BELTRANI

Information is the resource play. Get it in English.

Parker Snyder

PUBLISHER CLEANTECH POLAND

4 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

Cleantech Poland


TABLE OF CONTENTS

CONTENTS

p/29 Wa t e r I s s u e s Is Poland water scarce already? p/3 4

90

Natura 2000 How to drill in a protected site

p/4 0

Mining & Geology Law An easy explanation for investors

p/4 6 TOP 10 Opportunities for Innovation in Services p/58 Costs from Florence Gény’s point of view

16

p/62 GAS TR A NSMISSION SYSTEM p/69 Roads in Poland (They’re getting better)

p/72

Geology report on Polish shales: Paweł Poprawa

p/79

/8

Interview with the Chief Henryk Jezierski

Well Results Who’s been making the news?

p/88

p/16

GASLAND (Coming to a theatre near you)

p/18 A short history of Polish oil & gas exploration

It’s an election year!

p/90

WHO’S WHO IN CONCESSIONS

p/99 EVENTS CA L EN DA R

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PA RT N E R’ S PA G E

“Without the support of Dorota Dabrowski, Christian Schnell, Florence Gény and Alexander Robart the Shale Gas Investment Guide would not have been produced.” -Parker Snyder, Cleantech Poland THE AMERICAN CHAMBER of Commerce in Poland (AmCham) is a business organization that serves and promotes its member companies. It fosters a positive relationship with the government and promotes the free market spirit for the benefit of business. www.amcham.pl. ul. Emilii Plater 53, 00-113 Warsaw BSJP | TAYLOR Wessing is an international law firm with a focus on cleantech. The legal team in Poland assists shale gas investors with respect to a range of services, including hydrocarbon and commercial legal transactions. wwww.bsjp.pl, Al. Armii Ludowej 26, 00-609 Warsaw FLORENCE GÉNY IS a research Fellow at the Oxford Institute for Energy Studies and a member of the Natural Gas Programme. The Oxford Institute for Energy Studies was founded in 1982 as an autonomous centre for advanced research. The Natural Gas Research Programme, launched in 2003, has become one of the foremost sources of independent academic research. CTP PUBLISHES THE Shale Gas Investment Guide. In these pages you’ll find business intelligence about Poland’s shale basins: regulatory information, environmental laws, royalty rates, concessions details and a special section dedicated to innovation. Subscribe to the media site, CleantechPoland.com, to track shale gas development. Try it free for two weeks.

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PACWEST IS A botique consulting firm out of Austin Texas, providing market analysis and market entry services. PACWEST has teamed up with Cleantech Poland to provide North American firms with a package of market entry services, including market/risk analysis, partner/JV identification and networking/introduction to the Polish shale markets. www.pacwestcp.com

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December 20, 2010

LANE FLARES IN THE BALTIC BASIN ACCORDING TO NOHOTAIR.CO.UK, a consultancy run by Nick Grealy, Lane Energy flared their Lebien well in November. Citing photos taken by a resident who lives nearby, the flares lasted for three days, and possibly up to seven. The flames may have reached a height of five meters. Mr. Grealy reports that the well has been drilled, fracked and flared, which according to industry experts, is a "very positive sign" that gas is there. While flaring a gas well may indeed provide evidence that there is gas, a better indication is the production curve, which measures how much and for how long the gas can be withdrawn.

Source: Nick Grealy, NoHotAir.uk

March 15, 2011

LNG SPUDS SECOND WELL

February 15, 2011

BNK PETROLEUM GAS SHOWS BNK PETROLEUM REPORTED that during the drilling of the Wytowno 1 well, on the Sławno concession in Poland, numerous gas shows were recorded over 220 meters in lower Silurian, Ordovician and Cambrian shales. A further 450 meters of gas shows were recorded in the middle and upper Silurian shale. The strongest gas shows were encountered in the Ordovician shale. The gas shows consisted of mainly methane, with ethane and propane. BNK Petroleum anticipates being able to fracture stimulate the first interval in the Wytowno 1 well and provide results during the second quarter of 2011. The well will be drilled on budget at a current estimated cost of $6 million (€4.4 million), which includes estimated costs to run and cement the production casing. Once casing has been run and cemented in the Wytowno 1 well, the rig will move over to the Lebork location, on the Słupsk concession, to immediately begin drilling operations. The Lebork location has all permits are in place, according to BNK Petroleum.

AFTER RAISING THEIR learning curve on the Wytowno 1 well, LNG Energy announced it had spudded its second Poland shale gas well, Lebork S-1. The second well is located about 30 km to the southwest of Lane Energy's Lebien LE-1 well. Lane Energy was pioneer in Poland, drilling and completing the first shale gas well in late 2010 in cooperation with ConocoPhillips. The Lebork S-1 well was drilled in cooperation with BNK Petroleum, by Schlumberger, the same contractor as the first two wells, Wytowno 1 and Lebien LE-1. According to David Afseth, CEO of LNG Energy, using the same contractor helped to optimize the process and reduce overall costs. In 2011, LNG Energy acquired the Joyce and Maryani concessions in Poland.

BUSINESS INTELLIGENCE REPORT www.CleantechPoland.com DO YOU HAVE NEWS TO REPORT? WRITE TO THE MANAGING EDITOR WOJCIECH@CLEANTECHPOLAND.COM OR CALL (+48) 602 458 099


NEWS BRIEFS

What’s happening in Poland’s shales? News from Q1|Q2 of 2011 March 29, 2011

PRIME MINISTER GREEN LIGHT TO SHALE GAS PRIME MINISTER DONALD Tusk gave his support to Polish shale gas production at a shale gas conference on March 29th. “I will be engaging myself personally, as the head of the Polish government, in the optimization of conditions for the exploration, research and business related to the production of shale gas,” Mr. Tusk said. The prime minister’s comments came during a two-day conference on innovation. The subject of the industry-sponsored event was the current tools and methods for visualizing and exploiting shale gas. “It may happen that one of the fruits of this debate will be priceless: a feeling of security and a hope for millions of people. Poles are waiting for this gas,” Mr. Tusk said. The event was organised by ORLEN Upstream, the Energy and Geoscience Institute, and the Schlumberger Innovation Center. The organizers held the event at the Copernicus Science Center in Warsaw, a facility that opened last year to promote innovation.

Shales" event at the Copernicus Science Center. In early April, a "Shale Gas Eastern Europe" event was held at the Sofitel Victoria Hotel. At least three international shale gas events were held in May 2011. Warsaw-based organizers, such as Seminars Careers Consulting (SCC) have expanded the scope of their events, adding international recognized speakers. Under the scope of PowerMeetings.pl, an unconventional gas event will be held in late October at the Intercontinental Hotel. These events come at the start of Poland’s appointment to host the Presidency of the European Union, which begins July 1st and will end in December of 2011.

April 14, 2011

OFFSHORE APPLICATIONS PENDING ACCORDING TO POLISH industry portal wnp.pl, Baltic Energy Resources has applied for six concessions to search for unconventional gas offshore. As of the start of Q2, Lotos Petrobaltic was the only concession holder with unconventional gas acreage in the Baltic sea. Lotos has acreage on 11 concession blocks reaching as far as 300 km offshore, some obtained in 2001. Of their 8 concessions, 6 are for unconventional gas; an additional 2 concessions are for hydrocarbon production. Though Lotos Petrobaltic is currently alone offshore, that's not likely to be for long, as Baltic Energy Resources hopes to step in quickly. The cost of drilling a well onshore has been estimated at between $510 million. The added costs of drilling offshore may as yet be uneconomic.

April 6, 2011

WARSAW HOST TO A BOOM IN EVENTS A NUMBER OF event planners are choosing Warsaw as their host city for unconventional gas conferences. International organizers such as Terrapinn and American Business Conferences have picked Warsaw because Poland’s capital is centrally located and not far from the shale with the most potential in Europe. In early March, a "Shale Gas, Tight Gas" conference was held at the Hotel Kyriad. In late March a "Mental Picture of Tight

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OPINION Parker Snyder is a consultant who helps investors enter Poland’s shale gas market.

What do Poles twitter? MR. PARMAR didn’t speak a word, and the attendees that day had to leave the conference disappointed and empty handed. But the signs in Poland are positive. Lane Energy’s first well had to be flared, and the flames were reported to reach as high as five meters. As far as shale gas goes, Lane Energy (part of 3 Legs Resources) was pioneer in the old country. But they’re not the only one in town. According to geologist Paweł Poprawa, interest spiked about the time ExxonMobil entered the market in late 2008. A land grab followed as Chevron, Talisman, BNK and Marathon moved to buy up concessions. The influx of foreign investment comes at a time when the Polish economy is expanding at around 4%. In the post Lehman Brothers era, Poland can lay claim to being the only country in Europe to boast positive growth. During the financial crisis in 2009 Polish banks proved resilient because of conservative lending habits, which buffered them from global financial shocks. The boom in interest in Polish shales comes at a time when Poland had been looking to diversify its source of natural gas. A new port will be built along the Baltic coast (north Poland) to accommodate liquid natural gas tankers at Swinoujscie. The port is being designed to take in LNG and reconstitute the gas for transport by pipeline. By the time the port comes online in 2015, there may be ample evidence that Poland could one day become a net exporter. This LNG port investment

When Kamlesh Parmar, country manager for Lane Energy, got up to speak at November 2010 conference, everyone was dying to know - did you find gas?

highlights to the need for medium term clarity about the investment prospects for shale gas. Given the abundance of interest in what could very well be a domestic game changer, it’s worth asking, what do Poles think? Are they eager for the foreign investment? Do Poles twitter? And if so, what are they twittering? COOL RESERVE According to Henryk Jezierski, Poland’s chief geologist, 95% of his colleagues didn’t even know what shale gas was when the majors started buying up exploration concessions. But today, there isn’t a geologist

“3 trillion cubic meters is an overshot. I’d cool that number down, considerably.”

10 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

in all of Poland who hasn’t dreamed about a future free of a dependency on Russian gas. Polish shales, some believe, may be a rich source of natural gas with CO2 emissions about half that of hard coal. Just how much gas is present in Polish shales? According to Mr. Jezierski, the estimate of 3 trillion cubic meters is an overshot. “I’d cool that down a bit,” he remarked at a February 2011 conference in Warsaw. In fact, he’d like to revise that number down considerably.

In an interview with Cleantech Poland, Mr. Jezierski put his estimate of Poland’s shale gas resources closer to 150 billion cubic meters (BCM), reffering to a cursory estimate made by the Polish Geological Institute. That’s about one tenth of the estimate provided by Wood Mackenzie in 2009 (1.4 TCM) and one twentieth of the estimate of Advance Resources International (3.0 TCM) Mr. Jezierski may be right to be cautious. Since just a few wells have been drilled, any estimate at this stage could be a gross overshot, as gas shales are highly heterogeneous. Nonetheless, such frothy estimates are what stirred the concession grab. Over the last three years, nearly 70 concessions have been bought by more than 20 operators. [See Who’s Who on pg 92.] Mr. Jezierski’s skepticism of his country’s shale reserves comes partly from sheer uncertainty, as no one really knows how much gas sits in resource plays such as the Polish Baltic Depression and the Lublin Trough. Partly, it’s pragmatic. Even if Poland is a wonderland for shale gas, it will take years to move to industrial-scale production. “We have to remember that we’re in the European Union and we can’t forgo public consultation,” added Mr. Jezierski. Even so, he still believes Poland is an attractive place for investment. “The legislation here is not bad. This has helped to attract exploration,” Mr. Jezierski said. LEADING VOICE Paweł Poprawa, a geologist at the Institute of Geology, has taken on the role of chief emissary, explaining shale gas


to his fellow countrymen. At a March 2011 Warsaw conference, Mr. Poprawa explained why Poland is an attractive place for investors. “For one, the concession procedures are clear and transparent,” Mr. Poprawa said. “The Ministry of Environment, specifically the Department of Geology and Concessions, updates the concessions map regularly and publishes a table of legal ownership. Concessions in Poland are large at around 1200 km2 (460 sq miles). Mineral and resource rights are owned by the government, eliminating the need to negotiate with land owners.” Mr. Poprawa added that because revenue is shared with local municipalities - as much as 60% - small town

are suspicious of foreigners. Mr. Poprawa has tried to allay public fears that Poland will be subject to “energy colonization.” In a February 2011 article in “Wiedza i Zycie,” a popular science magazine, Mr. Poprawa explained how foreign companies will benefit the country. They’ll bring capital, equipment and know-how, while in turn, Polish companies will acquire the expertise. They’ll be better equipped to work abroad. EXPANDING DEMAND Many aspects of the gas industry, such as storage, are heavily regulated. For instance, a legal requirement for holding gas in spent geological formations could hamper production, as storage space is limited. Though Poland’s membership in the EU should in theory aid the cross-border flow of capital and equipment, there are regulatory hurdles to be overcome. According to Wiesław Prugar, president of Orlen Upstream, a license holder of unconventional concessions, the gas market should be deregulated. “The quickest way to bring down costs is to move to a deregulated market structure he adds. “I would be very happy to deregulate. I am in favor of market mechanisms,” Mr. Prugar said at a conference in January 2011. As for other hurdles, the financial one is the most formidable. “Inade-

“The financial hurdle is the most formidable. Inadequate capital is the main limitation to shale gas development.” mayors have in some parts of Poland become intrepid proponents. The royalty regime is favorable, $0.0509 per mcf, and the corporate tax rate is fixed at 19%. Some analysts regard Poland as more favorable than France or Germany. Mr. Poprawa alluded to a certain caution that runs in Polish society. For years, Poland lived under Prussian and Russian rule, and later under Soviet communism, so understandably, some Poles, particularly in the countryside,

OPINION

Poles are enthusastic, the chief geologist conservative, while the president of the regulatory office says the rules of the game are already in place: ‘Shale gas is natural gas.’

quate capital is the main limitation to shale gas development. In the United States it costs about ten million to drill a well, including pipeline and infrastructure. Here it will be much more,” Mr. Prugar added. Domestically, conventional natural gas is produced by PGNiG, the stateowned oil and gas company. Annual production amounts to 5 billion cubic meters (BCM). About 11 BCM is imported, mostly from Russian and Central Asia. Domestic demand is quite low, second only to Sweden in the European Union. Analysts expect demand to grow. As for Mr. Prugar’s plans to act on his concessions and explore for shale gas, Orlen Upstream is waiting to see what others find. Mr. Prugar is however optimistic. “The shale gas is there and we’ve known it for years. Even if there’s only 10 to 15 percent of the estimate, it’s considerable. This is a great opportunity for Poland,” he said. REGULATION NATION Marek Woszczyk, President of URE (Energy Regulatory Authority) has the difficult job of answering questions about a future scenario nobody knows. For this reason, Mr. Woszczyk tends to simplify questions, especially one posed to him at a recent energy conference: “Does Poland need a new regulatory body?” “The regulatory instruments are already in place,” Mr. Woszczyk said. “Asking about shale gas is really asking about natural gas.” He puts the bulk of responsibility with the Ministry of Economy, who he views as chiefly responsible for implementing EU regulations that pertain to hydrocarbons. Mr. Woszczyk points out that the current

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market is effectively a “quasi-monopoly,” making the proper function of a market for goods and services difficult. For instance, there are no drilling operators in Poland not owned directly or indirectly by the state monopolist PGNiG. If the chief geologist is quick to reduce gas estimates and the chief regulator cautious about a gas boom, who’s the most optimistic about the future? Marek Kijowski, a lawyer at Maminski and Partners, says shale gas may give Poland something it has never had be-

fore, a strong arm. “Soon we will have greater impetus to push Brussels,” Mr. Kijowski believes. In this point, he’s in agreement with President of the regulatory authority, Mr. Woszczyk, who acknowledges that only one-third of Polish gas is produced domestically. “However, if indeed there’s a gas boom, we would be in a stronger negotiating situation with Gazprom,” Mr. Woszczyk remarked, referring to Russia’s state-owned gas company that recently signed a long-term contract

OPINION

“If indeed there’s a gas boom, we would be in a stronger negotiating situation with Gazprom,” -Marek Woszczyk President, Energy Regulatory Authortiy

with Warsaw. As for Poland’s regulatory regime, Mr. Kijowski believes the current one is sufficient. “What’s needed isn’t an overhaul but an evolution with gradual modifications.” Mr. Kijowski believes the regulatory body URE should have additional powers or competencies, foremost because shale gas requires safeguards due to new technologies, such as hydraulic fracturing. Over the last few years, the Polish marketplace proved robust at withstanding international shocks during the financial crisis when liquidity was an issue. What remains to be seen is whether Poland can handle the onslaught of foreign investment, and inversely, a rush of foreign capital to the markets. WHAT ARE THEY TWITTERING? Of course, all this talk of Poland’s shales doesn’t answer the question, what do Poles twitter? A search in early May couldn’t really answer that question. One tweet with the search terms: poland shale gas had overwhelmed the return results. The tweet, which had been re-tweeted again and again, had to do with an article that appeared in the Associated Foreign Press: “Poland dreams of becoming the European shale gas El Dorado.” ***

SOURCE: MINISTRY OF ENVIRONMENT, CONCESSIONS MAP IS A CROWDED PLACE

PARKER SNYDER IS co-founder of Cleantech Poland, a consultancy which connects capital to clean technology in Poland’s transition to a lowcarbon economy. Mr. Snyder can be reached at Parker@cleantechpoland. com.

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Poland, the bright spot BY FLORENCE GÉNY

14 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

Resources are considerable. Political support abounds. On a map of Europe, Poland is the bright spot. But let’s be clear, these new sources of unconventional gas won’t change European dependence on imports anytime soon. PHOTOGRAPHY BY KASIA SNYDER


ALTHOUGH GEOLOGISTS STILL have little data on the subsurface potential of European tight reservoirs, it is clear that Poland has done a good job in promoting their resource base in the United States and Europe. Within only three years, between 2008 and 2010, most of the available acreage in the Polish unconventional plays has been awarded, and many foreign companies have shown strong interest, entering the long-ignored Polish oil and gas upstream sector and changing quickly the energy landscape in the country. The government has given out about 70 licenses for shale exploration to at least a dozen international investors, and almost all majors have acquired some land there. Several exploration wells have already been drilled and completed, and more are in the pipeline. The drilling activity related to unconventional gas is much higher in Poland than in any other European country. If you add very high national energy security concerns toward Russia to the perceived attractiveness of the resources, then the business case for developing new domestic gas supply becomes even stronger. Poland imports around 80% of its gas from its Russian neighbour. The question is how much quantities the country will be able to produce and at what cost. And it is not just valid for Poland, but also other European countries holding unconventional resources. Nobody really knows the answer today. It will depend very much on the quality of the subsurface reservoirs of course, but also on the operating environment across Europe. And this environment appears to be

very challenging. We think three main factors will limit large-scale unconventional operations in Europe: the ability to access land surface, water allocation rules, and investment costs. Most operators cannot access 100% of the block surface they were awarded for physical and regulatory reasons, and also because in many places inhabitants will oppose it. It is a fact that Europe is a densely populated continent, much more than the US on average, with dense infrastructure networks. In addition, the industry faces tight regulations related to the exploration & production of hydrocarbons, the protection of the environment, health and safety. The legal set-up is complex and in many cases not suited to the features of shale gas exploitation. Germany and the UK appear to offer the most challenging environment in that respect. Another hurdle operators need to overcome is local hostility to unconventional gas exploitation. Contrary to the US, landowners in Europe do not hold mineral rights (governments do) and therefore do not get a share of profits generated by hydrocarbon exploitation. The population is also generally more sensitive to environmental issues. Sweden and France, two countries with little recent history of hydrocarbon production, provide very good illustrations of this environmental awareness, which is fuelled by ongoing debates in the US on water contamination by shale gas activities. The controversial movie Gasland has now reached a wide audience in North Western Europe and this will not help. Within Europe, Poland is a relatively bright spot. Several ingredients

for a shale gas kick-off are already in place and potential improvements in the operating environment could occur. Surface land access could be less of an issue as this predominantly agricultural country is not all that densely populated, although the situation is not uniform locally, and investments from oil and gas companies to improve infrastructure in the Northern region is a welcome factor. The size of licenses awarded is also very large compared to other European countries. And the Polish seems more sensitive to its energy dependence on Russia than to environmental issues. There is a real intent from politicians to promote the development of their domestic unconventional gas resources in the European political arena, a memorandum of understanding was signed with the US in 2010, and a specific fiscal regime for coalbed methane exploitation has already been in place for some time. The national mining and hydrocarbon law is being reformed, which offers decisionmakers a window of opportunity to modernise it and adapt it to the needs of the new shale business. All eyes are currently on Poland, and this country is definitely a showcase for shale gas investors worldwide. Success or failure there will significantly affect the future of this nascent industry in Europe. *** FLORENCE GÉNY FOCUSES her research on unconventional hydrocarbons, in particular shale gas, and has become an acknowledged expert in this field. Ms. Gény published a comprehensive paper on Unconventional Gas prospects in Europe in December 2010.Florence.Geny@oxfordenergy.org

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OPINION

“Contrary to the US, landowners in Europe do not hold mineral rights (governments do) and therefore do not get a share of profits.”


The Gasland Effect BY DREW LEIFHEIT

16 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

In a scene from the trailer for the American documentary Gasland, a rural homeowner holds his cigarette lighter up to the water coming out of his kitchen faucet, and after a bit of coaxing, the water blows up dramatically in his face. P H O T O G R A P H Y C R E AT I V E C O M M O N S | J O S H F OX


GASLAND IS A 2010 film broadcast on the American pay-TV network HBO. It is a personalized “road movie” in which the producer travels across the United States showing how the hydraulic fracturing technique is creating toxic drinking water, causing residents who live at or near drilling sites to become mysteriously ill, and even killing surrounding wildlife. The film is visually compelling and has received plaudits from critics in the US. While the gas explosion scene in the movie makes for dramatic video footage, some believe it is misleading, and that hydraulic fracturing is not responsible for gas in the man’s drinking water. Still, Gasland has been making big trouble for a nascent hydrocarbon industry in the US: shale gas. The negative publicity generated by the film may have even spurred a study by the US Environmental Protection Agency (EPA) on the environmental effects of hydraulic fracturing, and a moratorium on shale gas drilling in some states until the EPA releases the results of its study. Industry experts contend that scientifically it is difficult to prove that hydraulic fracturing is responsible for the contamination of drinking water, as drilling occurs several thousand meters below aquifers. How fracking fluid could penetrate say 3 kilometers of rock back up to an aquifer seems unreasonable to many. Given the industry’s desire to export North America’s so-called shale gas revolution to other places around the world like Europe, concerns over the possible hazardous effects of hydraulic fracturing and public acceptance issues may be emerging as the biggest potential problem for those who want

to produce natural gas from shales in places like Poland. Recently, Gasland has earned an Academy Award nomination for best documentary, and its trickle-down effects are slowly being felt in places like Europe, where this correspondent recently witnessed several dozen people protesting against hydraulic fracturing in France. While public protest against hydraulic fracturing still appears to be minimal in Europe, similar demonstrations are likely to be on the horizon. Just recently, governments in Western Europe have started to get the jitters over development of what some believe could be a “game changing” resource for the continent. Given its pro-business attitude and desire for economic prosperity, public acceptance issues in a developing economy like Poland’s do not appear likely to be a major hurdle for the successful production of shale gas. Coupled with the fact that environmental groups have relatively short histories in post communist societies, lessening the chances for a great opposition movement to shale gas drilling, Poles are not only enthused about a “homegrown” energy resource, but also determined to carve out their country’s energy independence from Russia. So far, at six European unconventional gas conferences attended by this correspondent, surprisingly little has been said in the last half year about the possible environmental effects of unconventional drilling, whether real or perceived. But as members of the industry feel they are getting closer to honing in on the prospects for shale gas production in Europe, they seem to be slowly

OPINION

“The industry needs to make a concerted effort to explain to locals exactly what will happen in their area when shale drilling occurs.” but surely coming to grips with the “Gasland effect.” In connection with this, one thing that I’ve heard a few times is the need for the industry to engage communities. This means that the industry needs to make a concerted effort to explain to locals exactly what will happen in their area when shale drilling occurs, letting them know of potential risks, and using that transparency to build a relationship based on respect and trust. Part of building public acceptance, according to a scientist heading a coalition of industry leaders, a group called Gas Shales for Europe (“GASH”), is to present the economic and societal benefits of shale gas development to communities in question. Because of the public’s natural distrust of industry, some kind of outsider – a so-called “honest broker” – would be useful in Europe for helping to make the case for shale gas. GASH could be that voice if not for its financiers who comprise some of the biggest names in the hydrocarbons industry. Some in the industry contend that Europe has the advantage in that the political battle over hydraulic fracturing in America will be solved by the time shale gas drilling takes off in Europe. But I actually sense a great opportunity in acting now, before everyone has seen Gasland. *** DREW LEIFHEIT IS a journalist and publicist who provides public relations and new media services for clients in the energy sector. Mr. Leifheit has covered numerous unconventional gas events in Europe for www. NaturalGasforEurope.com. He can be contacted at: editor@OilandGasWatchEurope.com.

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THE ROOTS OF THE MODERN PETROLEUM INDUSTRY LEAD BACK TO POLAND

18 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011


IB NU TS E IRNVEI S E SW

Polish ‘El Dorado’ Trivia question: Who invented the first technique to distill oil from rocks? Here’s a clue. He was the same man who introduced the streep lamp to light cities. Still don’t know?

A short history of oil and gas exploration in Poland

HERE’S ANOTHER CLUE. He ammased a huge fortune, gave much of his wealth away to charity, and according to Harvard Historian Allison Frank, should be credited with giving birth to the modern oil industry. Give up? How about John D. Rockefeller? No, guess again. The man was Polish and his name was Ignacy Łukasiewicz (1822-82). He lived in southern Poland in what was then the Austrian empire. During the day, Łukasiewicz worked as a pharmacist. But in the evening he’d tinker with rocks. Since he had a knack for invention and an entrepreneurial spirit, it wasn’t long before he found a way to get the oil out of rocks. For years, he hammered away at the earth with wooden winches and braided ropes, and quite successfully, as he commercialized the first oil refinery. By the turn of the 20th century Łukasiewicz had helped to turn Galicia, a region in today’s southern Po-

land, into an oil producing mecca. Hands down, at the time Galicia was producing more oil than Texas. He was so successful there was a popular saying about him: “all roads are paved with his silver.” Not without reason, the region was known as the “Eastern European Pennsylvania” or the Polish “El-Dorado”. It may come as a surprise to know much of the oil industry’s earliest achievements can be traced back to Łukasiewicz. But it shouldn’t be, since much of American’s oil history was preceded by events in southern Poland. In fact, the southern Polish mountains have been home to oil and gas drilling for nearly 150 years. By the time Edward Drake discovered oil in Pennsylvania in 1859, it was five years after the first well was drilled in Poland. According to most technology historians, when Łukasiewicz gave the first kerosene lamp to a hospital to illumi-

nate a surgical ward on July 31, 1853, this single event spawned the modern oil industry. POLISH EL DORADO At its peak, Galicia was producing about 2 million tons per year - or 5% of world production - third in the world after the U.S. and Russia. Back then the most well known fields were Boryslaw, Mraznica, Horodyszcze, Schodnica, Daszawa, Drohobycz and Bitków. By about 1910, production in the region had already started to decline, and by the onset of the first world war, Gallicia was producing only small amounts of oil. (By the time Galicia was in decline the oil industry in Texas started to ramp up.) After World War II, Poland fell under the influence of the Soviet Union. For the next 40 years, Poland would be dependent on vast oil and gas fields in far away places bordering the Caspian Sea or in remote Siberia. Under com-

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“By the time Edward Drake discovered oil in Pennsylvania in 1859, it was five years after the first well was drilled in Poland.”

munism, nearly 70% of Poland’s hydrocarbon resources were imported. It was the Soviet Union’s policy to produce great quantities at home for export abroad. Not much has changed; Poland is still in large part dependent on Russian imports. But the region’s potential is still significant. Some 14 billion barrels of oil equivalent are documented reserves in the Carpathian thrust fold belt. The region which stretches eastward from the Czech Republic to Romania and Ukraine is believed to be the sixth largest hydrocarbon bearing thrust belt in the world, after the Middle East, Mexico and the Caspian. Bear in mind that this potential is largely in conventional resources, independent of the shale belt which runs from Gdansk in the north to Lublin in the southeast. So what’s kept Poland from being known to the rest of the world? It’s just underexplored. OIL AND GAS TODAY When communism fell in 1989, and Poland was opened to the West, several intrepid explorers came to the region. FX Energy has been drilling in western Poland for 20 years, now led by Scott Duncan out of Salt Lake City. Aurelian Oil and Gas, just under a decade, initially under Michael Seymour, and now run by Rowen Bain20 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

bridge. While oil production declined, gas production hasn’t. According to Marek Karabula, vice president of Poland’s Oil and Gas Company PGNiG, since 1981 there’s been 3042 wells drilled. The peak was reached in 1984 when 210 wells were drilled. In total, Mr. Karabula says as many as 10,000

IGNACY ŁUKASIEWICZ WHO STARTED THE MODERN OIL INDUSTRY, PUBLIC DOMAIN


BUSINESS

1822 
 Ignacy Łukasiewicz born 1846 Imprisoned as an activist for political reasons 1852 Graduated as a pharmacist University of Vienna 1853 Gave kerosene lamp to hospital and starts the modern oil industry 1854 First kerosene street lamp 1856 Opens first oil distillery 1877 First national oil society 1882 Dies of pneumonia ARTWORK DEPICTING GALICIA AT ITS PEAK IN PRODUCTION CIRCA 1900, PUBLIC DOMAIN

wells may have been drilled. There’s even domestic experience with hydraulic fracturing. According to Mr. Karabula, Krosno, a company whose roots can be traced back 150 years but which now functions as a well services subsidiary of PGNiG, has carried out 64 frack jobs, a third of which were in Poland. They’ve worked internationally as well, counting a coal-bed methane project in Belarus to their credit. PGNiG, the incumbent monopolist on the gas market, is surpisingly open to foreign partners. Mr. Karabula, at a shale gas conference in April peppered his presentation with good humor: “Wake up guys, we are ready to drill. So let’s do it. Poland is wide open. Information is freely available. Just remember (in the words of a Polish saying) dont’ kill the chicken who lays golden eggs.”

In the last three years, the shale boom has attracted oil and gas professionals with Polish roots. Among them, Thomas Maj of Talisman, who came from the UK, and spoke enthusiastically about a recent field trip for investors to the north where BNK Petroleum is drilling. As the story goes (and as the history books may some day repeat) someone dropped a piece of sidewall core into a glass of water, and to the delight of investors, it began to fizzle.

“This liquid is the future wealth of the country. A new branch of industry which shall bear plentiful fruit.” -Ignacy Łukasiewicz

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American Dream Chevron, Marathon, ExxonMobil and ConocoPhilips have secured access to exploration concessions. The field is packed tight. From the Baltic depression in the north of Poland to the Lublin trough in the south-east, most of the territory has been covered.

Abroad

WARSAW OLD TOWN LIT UP IN THE EVENING WITH THE ROYAL CASTLE IN VIEW

STATS 7 - number of wells drilled to date 20 - number of wells expected in 2011 69 - number of concessions awarded so far 12,000 - PGNiG’s concessions area in square km 66,000 - total concessions area for shale gas in sq km 100 million - investment in Polish złotys by PGNiG in 2011 15 billion - current annual gas consumption in cubic meters 100 billion - annual production potential in cubic meters, Polish GI 3000 billion - shale gas potential in cubic meters, Advanced Resources

22 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011


INTERVIEW WITH JIM WILSON, US COMMERCIAL SERVICE

BY PARKER SNYDER

TO GET A sense how North American companies are approaching the market, this correspondent talked to Jim Wilson, with the U.S. Commercial Service. For the past three years, he has been helping American companies gain access to the market. According to Mr. Wilson, Poland has thus far handled the process favorably. The department in charge at the Ministry of Environment has, at a reasonable cost and with a quick turnaround, made concessions information available on their website. The transparency has helped to stimulate development, as companies can approach one another for joint deals. LIKE BEES TO HONEY “As of now there are 69 license holders who have short term plans to invest hundreds of millions in shale gas,” Mr. Wilson said. “The state-owned national oil and gas company, PGNiG, has access to about a quarter of the unconventional concessions.” According to the press office, PGNiG

PHOTOGRAPHY BY KASIA SNYDER

sored by the Polish Ministry of Foreign Affairs and the U.S. Embassy. The global shale gas initiative was launched, to promote U.S. experience abroad. In ways both indirect and direct, the U.S. and Canadian experience in unconventional gas has been an enormous driver in the Polish market. “The purpose of the April press conference was to give Polish stakeholders information about the North American experience,” Mr. Wilson says, “We share mutual goals. We want to see Poland develop and we want to help them establish energy security,” he added. Mr. Wilson says one of the factors that attracted American companies was the fiscal regime. “What I’m hearing from U.S. companies is that Poland is attractive,” he says. Though current concession holders have only rights to exploration, the existing royalty for natural gas production stands at $0.05 per metric cubic foot, while the corporate income tax is at 19%, and end-ofyear tax losses can be carried forward indefinitely. These combined features rank Poland among the best in Europe. “Given the response the current incentives seem to be sufficient,” Mr. Wilson added. The royalty regime may improve further. Since Poland gives preferential treatment to developers of coal-bed methane, it’s likely to adjust the royalty rate to be favorable to shale gas production, just as Germany has a special royalty for tight gas. “Such a public policy instrument is likely to be short coming in Poland - but only after the

“Since Poland gives preferential treatment to developers of coalbed methane, it’s likely to adjust the royalty rate to be favorable to shale gas” will spend $100 million developing their unconventional gas potential this year. Since they’ve got their sights set on foreign markets, access to their concessions rights may be how new entrants gain access. In April 2010, a press conference was held, co-spon-

BUSINESS

“For a company that would set up shop in Poland, you’re looking at a package of incentives at about 30% of the investment.”

geology is proven,” Mr. Wilson said. When asked about the need for American service companies in the Polish market, Mr. Wilson believes that current concession holders have had little trouble finding services on the Polish market. According to data from the U.S. Commercial Service, only seven wells have been drilled. Mr. Wilson predicts about 20 wells to be drilled this year and up to 30 in 2012. “By then, the picture will have changed. The geology will be better known, and then you can expect demand for services.” TWO THUMBS UP Plenty of U.S. companies are here already, across sectors. According to U.S. Commercial Service data, about 300 American companies have invested over $20 billion in Poland. Future growth prospects are promising in the medium term. In 2009, while the rest of the EU was contracting, Poland’s economy was still growing, and most EU observers expect the economy to continue to grow above the EU average. That could mean that North American service companies, anticipating growth in shale gas, would open a service office here to do business. In this case, there are incentives in place in various places. “For a company who would come here and employ several hundred workers, you’re looking at a package of incentives at about 30% of the value of the investment. At the end of the day, Poland offers a competitive destination for American investment,” Mr. Wilson said. “I think if you’re a supplier of pumps, valves or compressors the investment isn’t warranted yet,” Mr. Wilson says. However he cautions that

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“The lack of regulatory clarity has given rise to a belief in industry that the Polish government will modify legislation to take into account the features of unconventional gas.” by the time Poland reaches a robust future scenario there will be competition from foreign service companies better positioned for the Polish market. Europe’s gas production is principally in the North Sea, so that means Norwegian and British companies. Britain is in the EU, which makes importing into Poland easier, as equipment can travel freely across borders. Mr. Wilson explains it this way: “There’s no demand yet for American companies to increase the size of their staff, let alone open factories to support domestic production. But that could change. The key is going to be if and when you go into full production. Now we’re at 20 to 30 wells a year but we’re talking about a future scenario of 300 to 500 wells per year.” Robust production will depend on production costs and gas price. On the revenue side, the price is to some degree tied up in long-term oil-indexed contracts with Gazprom, Poland’s chief gas supplier. [See economics section]. Production costs aren’t cheap. “But right now we’re in the exploration phase, so companies are prepared to pay higher costs,” Mr. Wilson said.

work here have interpreted this provision variously. Most agree it does not apply to their activities,” Mr. Wilson added. “The lack of regulatory clarity has given rise to a belief in industry that the Polish government will modify the legislation to take into account the features of unconventional gas. The question of when is an issue. Some people in the industry have told me that they don’t want to make a major effort to press the government until they prove the geology.” There are other hangups, such as the EU safety requirements for engines. This has led a few Poland-based importers of fire-fighting equipment to bring in everything but the motor, sourcing it locally. Since drilling and fracking is especially dependent on large quantities of horsepower, it’s an

issue service companies will want to look into. In North America, it was the small independents who developed the technology and got the industry running. But there’s reason to believe things will be different in Poland. For one, shale gas is a rich man’s game, requiring piles of cash. For two, drilling costs here are greater. Depending upon the future price of gas, margins could be narrower, meaning, it won’t be a game you can cash flow easily. These signs point to the majors. It’s no wonder they’re here already, providing development capital, and fueling the search for the shale this year. Since they’ve got their sights set on foreign markets, access to their concessions rights may be how new entrants gain access.

TWO THUMBS TIED There are hangups in the market and Mr. Wilson identified a few. For instance, it’s still not completely clear if the mining authority will accept the qualifications of a U.S. trained drilling crew, although the state authorities have already made an exception, allowing a Czech Republic crew’s credentials to qualify. The legislation governing hydrocarbon extraction will need changed. Currently, the laws were designed to ensure PGNiG put work out to public tender. “Foreign companies doing JIM WILSON, US COMMERCIAL SERVICE

24 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011


BOUPSI INNI E OSNS

Operators’ point of view

20 companies are on a search for shale gas. There’s been a half dozen wells drilled. By now, the operators have something to say.

BY WOJCIECH KOSC SO FAR THE news is trickling in at a slow pace. That there is something in the rocks became clearer last December when NoHotAir.co.uk published pictures of gas flares atop Lane Energy well in the company’s Lebien concession area. Then came BNK Petroleum’s announcement in February, from its Wytowno 1 well, in the Sławno concession area. “Gas shows were recorded over 220 meters of lower Silurian, Ordovician and Cambrian shales and a further 450 meters of gas shows were recorded in the middle and upper Silurian shale,” BNK Petroleum announced. BNK Petroleum and Lane Energy (in cooperation with ConocoPhilips) are just two of the 20 or so companies holding concessions for unconventional gas. Poland’s likely gas-bearing shales strech from the Gdansk region in the north, by the Baltic Sea across central Poland towards south east region of Lublin.

putting to use outside North America. So if you look at where shale formations are and also take into account transmission infrastructure, political stability, financial and tax conditions, then Poland must come up as one of locations of choice,” says Tomasz Maj, general manager of Talisman Energy in Poland. The impulse for a Poland-based Orlen Upstream, a subsidiary of the Polish fuels giant PKN Orlen, was,

formations are present, both Maj and Prugar give credit to the Polish statesponsored geological research in the areas in question. “The industry owes a great deal to the Polish ministry of environment and the State Geological Institute that in the last 20-30 years carried out several drilling programs for scientific reasons. We knew there was some shale in Poland and that it was potentially gas-bearing. The technology for extracting gas from shale came only later,” says Maj. Talisman Energy is active in three concessions in northern Poland: Braniewo, Gdansk W in the Gdansk province, and Szczawno in the Torun-Bydgoszcz province. Talisman became involved in those areas via partnership with the original concessions holder, San Leon Energy, which operates the concessions via its subsidiary Oculis Investment.

“We’re looking for financial partners. Not financial institutions but rather well-capitalized North American oil and gas companies.”

FARMING IN Companies seeking shale in Poland are generally either experienced firms from North America, bringing in their know-how accumulated in the last decade, or Polish companies, looking to attract foreign partners to their concessions areas. The Polish Oil and Gas Company (PGNiG) owns 13 concessions and is reported to aim to trade with a chosen partner for foreign concessions, which include possibilities for exploration off Norway, or in Egypt, Algeria or Tunisia. Possible partners include Shell, British Gas, and Eni. “We thought that our experience in shale gas business would be worth

predictably, somewhat different than Talisman’s. “[Our interest in shale] branched out of our earlier interest in conventional hydrocarbon resources as we were exploring roughly the same areas for conventional as we are now for unconventional,” says Wiesław Prugar, CEO of Orlen Upstream. Talisman’s Maj claims, however, that unlike in North America, shale rock formations in Poland were not well recognized as a source rock for unconventional gas. “In Poland, conventional gas isn’t generally found where shale formations are. So there was very little research into possibilities of gas in shales, because there was very little research related to gas or oil in those areas at all,” says Maj. Whatever the outlook on the potential for conventional gas where shale

POLISH PLAYERS Orlen Upstream has five concessions, acquired in October 2007, in southeastern Mazovia and the Lublin area. They cover 4,700 square kilometers, while the area where shale gas potentially is totals about 1,200 square kilometers, according to Prugar. Orlen Upstream doesn’t have any agreements with partners, but is looking for them. “We’re in conversations with several companies to partner with. We’d like to take advantage of the know-how in the first place. Know-how is about how you plan you work, how you handle shale rock, how and where to drill, how to frack – all to to avoid unnecessary long period of learning the ropes and unnecessary making of mistakes,”

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says Prugar. “We’re also looking for financial partners. Not financial institutions but rather well-capitalized North American oil and gas companies. Financing has to come from them because they understand the risks involved,” he says. So with the technology now all but coming to Poland and first encouraging signs coming from explorations of their concessions by Lane Energy or BNK Petroleum, concession holders are only looking forward for more. “At the moment we’re finishing seismic research that will help us fine tune where to start drilling so that we know where the Silurian and Ordovician formations are exactly. We should finish that by mid-2011. We think that the first two wells will be drilled towards

companies like Talisman Energy or Orlen Upstream are going to need. “Apart from fracking services that only a few companies in the world, like Schlumberger or Halliburton, can offer, we’re going to need drilling services, seismic research services, firms that can treat produced water, firms that will buy gas from us, so that means gas networks or firms offering gas tanks,” says Maj. “Then come all the ‘soft’ services: security, catering, transport, accommodation, and so on. Where there will be no roads for the equipment to go to the drilling site, the roads will have to be built. Finally come legal services, for example we’re using law firms that specialize in working out who owns the land that we’re going to drill and the best ways to secure

“We’re going to need drilling companies, seismic services, firms that will treat produced water, firms selling gas tanks and firms that will buy our gas.” October or November 2011, by early 2012 latest. Generally, we’re planning to drill six wells by 2013, two wells per each of the concessions that we have,” says Prugar. “We want to finish the seismic research and carry out 2-3 vertical drills by end of 2011. Once we have finished them, we will start fracking, in early 2012. If we’re successful, we will then carry out horizontal drilling and fracking. Production can start anytime, however, but it’s a process that will increase in scale. I think it will take about five years for the Polish economy to feel the impact of shale gas,” says Maj. NEED FOR SERVICES The impact has a chance to be rather profound. It’s enough to take a look at the scale of services that

our access to this land,” he adds. Assuming there’s indeed gas where companies are looking for it, a market will emerge. The Polish gas market isn’t big today, with gas making about 13 percent of the mix. Coal is dominant. “Once there’s more gas, perhaps coming from shales, a market will be established. It’s not going to happen in a day, of course. It’s a very infrastructure-dependent sector,” says Prugar. “The shape of the market isn’t all up to companies like us. There is already a lot of talk about energy companies interested in development of gas power plants, for example. It’s going to be a process on both sides: information from producers will come over a period of time, so will the business environment be shaped,” Prugar adds.


Bob Block is an American consultant with Block and Associates

Doing business in Poland

PHOTO COURTESY OF MR. BLOCK

BY PARKER SNYDER ALONG WITH CINEMAS, malls, credit cards, celery, charcoal and a whole lot of other western goods taken for granted, there were no limes. In the early 1990s, Poland still had one foot in communism. When Mr. Block went to buy bread, the old lady behind the counter would ignore him while she smoked and kept the store lights off, even at night. Times have changed. Today’s Warsaw is full of supermarkets. At Burberry, a fashion boutique, a pair of shoes will set you back $750. You’ll find plenty of western brands on the market - Tesco, Carrefour, McDonalds, Pepsi, Cadbury and General Motors. OF ALL CHANGES, WHICH STANDS OUT?

Back in 1990, there were no cars. You could drive through the city and never sit in traffic. The only cars on the road were old Polonez or Fiats. Today, you can’t find a parking space. And people are more fashion conscious. You can find Mercedes and BMW on the streets. Bentley just opened a dealership. WHAT WAS IT LIKE WHEN YOU MOVED HERE TO GET THE FIRST CABLE TELEVISION NETWORK STARTED UP?

I arrived 20 years ago. At the time, I was working for Chase International, in a venture called Greenfield. In those days, there was no one who could speak English. If you found an employee who could, you hired them right away. The biggest difference between Poles and American technicians was Americans had loads of experience but little higher education. Poles had PhDs but had never gone to work before. There was a huge need for on the job training,

BUSINESS

When Bob Block moved to Poland in 1990 to get the first cable television company started, there wasn’t even a Polish word for lime. Poles referred to this rare and hard-to-find fruit as a “green lemon.”

and a huge lack of resources. WHAT ELSE WAS DIFFICULT?

Customer service. Back in the 1990s, the concept didn’t exist. We’d have to teach our employees to take responsibility for the customer’s needs. Seems a simple concept, maybe to a westerner, but in Poland, customer service was a completely foreign idea. There was an anecdote I used to tell. In the USA, I told one of my employees, I’m going away on a trip for seven days. I don’t want a single call. Do whatever you do to take care of the customers, no matter what it costs. Well, when I was gone, a storm came through and knocked out a fiber optic line high on top of a mountain. So my manager, listen-

translation: “accountability.” I had to work real hard to install that concept in my employees, in everyone, from upper management to the guy who delivered spare parts. DO YOU THINK IT’S CHANGED? THAT NOW POLES TAKE ACCOUNTABILITY SERIOUSLY?

Well, if I was an drilling operator, I’d work hard to let my pipe supplier know that he is responsible for supplying pipe. So if there is no pipe on the day I go to drill my hole that guy will know he’s responsible. Keep in mind, getting a pipe might take you 24 hours in Texas. In Poland, it could take two weeks. So the last thing you want is excuses for why there’s no pipe. SO WHAT ARE THE POLES’ STRENGTHS?

“Hire a helicoper if you have to. Just get it done.” ing to what I said, hired a helicopter to fix it. When I got back, he said, hey boss, I have good news and bad news, I’ll tell you the good news first. Not a single customer called and complained about their service. Well, then I heard the bad news: $30,000 in expenses that weren’t budgeted for. But you know, I told my employee, you did what I would have done. This was the story I told my Polish managers to let them know that the customer is the most important person in business. AND DID THEY LISTEN?

It was tough. You know, there’s a word that doesn’t really have a Polish

You know, some of my best employees were budget managers. Poles can handle an excel spreadsheet as well as any financial analyst in New York. I think they have an aptitude for making numbers work. What I’ve done in the past is pair all of my employees with a counterpart in North America, so you can channel and focus the talent. Then whomever is responsible, let’s say, for managing an in-country budget, they are directly accountable to a budget manager in the US or Canada. I recommend a pairing system to all my clients. *** BOB BLOCK IS a consultant with Block and Associates. He came to Poland to get the first cable television station started. His clients include Comcast, Siemens and Nestle. He can be contacted at bob@blockassociates. org.

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BUSINESS Graham Stack is a journalist in Kyiv

Ukraine to Gain? BY G R A H A M S TA C K

THE RESOURCES LIE in the Donbass region legendary for its mining and metallurgy. Ukraine’s minister of environment and natural resources, Mykola Zlochevsky, claims that the Donbass holds 11.3 trillion cubic meters of coalbed methane gas – and says recent U.S. estimates even put the figure as high as 25.6 trillion. That’s not all. According to Zlochevsky, Ukraine has another 3 trillion cubic meters of methane gas in West Ukraine, and 8 trillion cubic meters of methane gas in the central basin, plus 8 trillion cubic meter of shale gas – adding up to a grand total of at least 30 trillion cubic meters. UKRAINE NEXT? And while Ukraine has no experience with unconventional gas, it can expect to get a powerful foot-up from the world’s leader in the field: USA.

IF SHE ONLY KNEW WHAT SHE WAS SITTING ON.

28 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

Ukraine’s energy authorities made headlines end of 2010 by announcing what they said was the largest unconventional gas reserve in the world. PHOTOGRAPHY BY KASIA SNYDER

It has long been U.S. policy to to boost Ukraine’s energy independence from Russia, but previously this was more visible in nuclear power, where the U.S. strongly lobbied American company Westinghouse as an alternative to Russia as provider of fuel and technology. So it is no surprise that the U.S. has taken a proactive role regarding unconventional gas in Ukraine, with an intergovernmental memorandum signed between Ukraine’s energy minister Yury Boiko and the U.S. envoy for Eurasian energy Richard Morningstar on February 15. The memorandum envisages Ukraine sharing its geological data with the U.S., with the latter then carrying out a free-of-charge study of the potential for unconventional gas, training Ukrainian specialists, and proposing changes to Ukraine’s regulatory framework. VIEW FROM THE TOP Russia’s powerful gas monopolist Gazprom has for its part expressed skepticism about unconventional gas in Ukraine, which could undermine it as supplier to the country. On the other hand, Russian company, TNK-BP, is set to be one of the unconventional gas pioneers in Ukraine, ready to start surveying and test drilling in the Donetsk region later this year, with the blessing of the Russian government. And Gazprom has also set-up a joint venture with Naftogaz to explore for methane gas. Ukraine’s next step towards tapping this vast po-

tential will be tenders in the coming months for production-sharing agreements (PSAs) for areas in West Ukraine that are an extension of Poland’s highly-regarded Lublin basin, and an area on the border of Kharkyv and Donetsk region in East Ukraine. Shell and Chevron initiated the tender process, and Exxon Mobil and Poland’s PKN-Orlen have also signed memorandums of understanding with Ukraine’s government. REGULATORY ISSUES But the tenders’ terms reveal shortcomings in Ukraine’s legislation. With unconventional gas exploration requiring significantly larger areas than conventional, Ukraine’s laws currently stipulate a production-sharing agreement (PSA) for all areas over 500km². This may not be what foreign investors or the state really want, especially after changes to Ukraine’s law on PSA in September 2010 removed its no-change guarantee. One company that is ironically unlikely to be doing much in the immediate future is Ukraine’s largest oil and gas producer, state-owned Ukrnafta, controlled by gas distribution monopolist Naftogaz. According to new CEO Peter Vanhecke, unconventional gas is an interesting project, but the company’s immediate priority is to reverse an ongoing slide in oil production and conventional gas. This means that the onus is on foreign companies, who have traditionally fared poorly at the hands of Ukraine’s no-holds-barred bureaucrats and oligarchs. Ukraine’s journey down the unconventional gas road is only just beginning, and just like Ukraine’s roads, it promises to be bumpy.


ENVIRONMENT

WATER FRACKING Gasland gave hydraulic fracturing a bad name, and may have contributed to a temporary moratorium on permits for gas drilling in the state of New York. To some, mere mention of the film by name brings recollection of that damning scene. But is fracking environmentally damaging? And in Poland, how should it be regulated? BY PARKER SNYDER

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“Though fracking can be based on oil, acid, gel, foam or even liquid CO2, in practice, water is most common, because it’s cheap and plentiful.” AT A U.S. film festival in 2010, the documentary Gasland caused considerable controversy when the film showed a homeowner lighting the water from his kitchen sink on fire. Hydraulic fracturing, the home owner claimed, was the culprit. (See also editorial on p. 16) The state of Colorado told a different story. When that same homeowner had called to complain, a state conservation agency investigated and concluded the gas in his well was naturally occurring biogenic methane. The gas had found its way into his drinking water because his well had been drilled through a coal bed. Hydraulic fracturing, the state agency said, had nothing to do with it. Regardless of the factual errors in the documentary, the scene raised a fuss when it went viral through the Internet. The film gave hydraulic fracturing a bad name and may have even contributed to a temporary moratorium on permits for gas drilling in the state of New York. To some, mere mention of the film by name brings recollection of that damning scene. Polluted rivers in Pennsylvania have added fuel to the fire. (see box) Understandably, the public fears for the safety of their water. Unsatisfied with the answers given to them by industry, they’ve managed to hold up exploration permits, wanting a basic answer to their question: is hydraulic fracturing safe? Will it ruin my drinking water? DRILL WELL Consider where shale gas comes from: geological formations deep below the earth. The depth varies depending upon the formation, but in most shale regions, such as Poland, the depth is at least 2,000 meters (6,000 feet). To get to the gas, an operator will usually have to drill through a subsurface 30 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

SURFACE WATERS CAN BE POLLUTED BY MINIMALLY TREATED PRODUCED WATER.

aquifer that contains fresh water, likely within the first 300 meters (1000 feet). For this reason, a casing program is industry standard practice, whether drilling for shale gas or conventional gas. To protect from contamination, thick metal tubing called conductor casing is put in place. Conductor casing stabilizes the soil, prevents cavein, and provides a structural foundation for the drilling equipment. Specifically to isolate the aquifer, surface casing is placed within the conductor casing, and both are cemented into place. The surface casing is responsible for isolating water bearing zones from both drilling mud and fracturing fluids. If the well bore will travel through other water bearing zones, intermediate casing is added to the casing program. To ensure it’s robust and does not leak, the casing must be verified by a

WATER WARS - industry may be to blame Pennsylvania is one of few US states that lets operators dump partially treated fracking water into streams and rivers. Maybe the state should think twice. It turns out, produced water released into rivers may be causing municipalities to flunk water quality tests. A recent case of water contamination in Pennsylvania points out, even more important than what goes into a well, is what comes out of it. Last year, a municipal water treatment plant 27 miles (43 km) north of Pittsburgh, Pennsylvania started failing tests for trihalomethanes. According to the Environmental Protection Agency (EPA), people who drink water laden with trihalomethanes over a long period of time face increased risk of cancer, liver disease and problems with the central nervous system. It just so happens that 18 miles (29 km) upstream, Advanced Waste Services had just

become the largest gas waste water treatment facility in the state of Pennsylvania. Although there aren’t typically trihalomethanes found in drilling waste water, there can be a link with hydraulic fracturing. The fracking waste stream often contains bromide, a dissolved salt. Bromides can react with the chlorine used by water treatment facilities, in a reaction that creates trihalomethanes. Beaver Fall treatment plant manager Jim Riggio says he doesn’t know what’s causing the elevated levels of trihalomethanes in his drinking water, but a chemical analysis seems to have found a link with the hundreds of thousands of barrels of partially treated produced water that flows past his intakes. According to Riggio, “It all goes back to frack water.”What will Pennsylvania do about it? It remains to be seen.

Source: Pittsburgh Post Gazette, January 2011.


ENVIRONMENT

number of mechanical checks, including acoustic cement bond logs and pressure testing. Bear in mind it’s in the operator’s interest to protect aquifers, because production depends upon a well that is bored and shored properly, not only to protect the workers and the surrounding environment, but to prevent leakage of valuable hydrocarbons. The American Petroleum Institute did a detailed risk analysis in the 1980s. They concluded that as long as the well was properly cased, the odds of pipe corrosion leading to contamination of groundwater was 1 in 200,000. This is the risk scenario for injection wells, which are wells under pressure. But shale gas wells are producing, meaning, it is far less likely that production gases will find an alternative pathway on their way to the surface.

Furthermore, hydraulic fracturing typically takes place at great distance from surface aquifers. For contamination to occur, a number of simultaneous events have to take place at the same time. Provided the casing is solid, according to the Groundwater Protection Council, the odds of hydraulic fracturing contaminating surface groundwater are less than 1 in 200,000,000. Again, its in the operator’s interest to keep aquifers isolated. If an aquifer is penetrated, time and money is lost. WATER YOUR CONCERNS? In order to stimulate gas flow, the shale formation must be fractured. Hydraulic fracturing is the process of pumping water, and lot’s of it, into a bore hole to open up the pores and induce matrix flow. According to Doug Bentley, with Schlumberger, getting

gas out of shales is just about as difficult as “sucking air out of concrete.” Though fracking can be based on oil, acid, gel, foam or even liquid CO2, in practice, water is most common, because its cheap and plentiful. Water is used both for drilling mud, which removes bits of rock from the path of the drill head, and for hydraulic fracturing, which stimulates the reservoir to produce. Just how much water? It depends on the formation and characteristics of the well being drilled. The deeper and more absorbent the formation, the more water that must be pumped. For drilling mud, as little as 60,000 gallons for air-mist drilling or 1,000,000 gallons for a deep conventional well bore. Fracturing requires a great deal more. According to estimates made by the US Department of Energy, between 2 to 4 million gallons (476,000 to 952,000 barrels), with 3 million gallons (714,000 barrels) on average. This is approximate for a four stage, horizontal well at a depth of about 3,000 meters (10,000 feet). In Poland, the shales are typically deeper, and due to surface space constraints, the horizontal laterals will likely be longer. An analysis by the Oxford Institute of Energy Studies puts the average water use per well in most of Europe at nearly triple that of the US, or approximately 7.5 million gallons (180,000 barrels). Some water flows back, though estimates of what percentage vary widely. As little as 10-25% of water flows back from some formations, while others can yield 30-75% or more. Produced water can be laiden with chemicals that can be harmful if they find their way into municipal water supplies. They can originate from both the operator’s own additives and the geological formation itself. Sourcing large quantities of water in Poland is likely to become difficult.

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ENVIRONMENT

ACCORDING TO THE UN ENVIRONMENTAL PROGRAMME, POLAND IS A “WATER SCARCE” COUNTRY

According to a study by the United Nations Environmental Program, Poland is a “water scarce” country, along with neighbors Germany and the Czech Republic. Since water for fracturing is typically collected from surface bodies, such as rivers and lakes, it will compete with the needs of farmers, who do not own royalty rights, and may perceive gas E&Ps as a posing a threat to their irrigation programs. Using municipal water supplies would mean trucking water long distance over notoriously bad roads. It may be sensible to source it from ground aquifers but operators in Poland have to pay a fee, unless the water can be returned to the watershed in equal or better condition. This regulation was put in place partly because Poland has rather feeble water resources of about 1600 m3/ year per capita.

Water is likely to get expensive. Estimates of the price per unit volume of water vary. In the USA, water can be obtained at €0.4/m3 ($0.57/m3). In Europe, its likely to have an average cost of €3.4/m3 ($4.90/m3), driving up the cost to completion. There is great room for innovation in the water space, which presents an opportunity for, among others, water filtration companies. (See innovation section). LET’S ADD TO IT Water for fracking contains proppant, typically quartz sand, which keeps the fractures open. Depending on the completions program, the water can contain a number of chemical additives. It’s important to bear in mind two features of “slickwater.” 1. The additives tend to be in proportion minor (0.5 to 2% of the solution) and 2. The solution is isolated from ground aqui-

fers by the casing program. The chemical additives include hydrochloric acid to dissolve minerals and initiate cracks, as well as mineral oil, a friction reducer. There is sometimes gel, potassium chloride, ethylene glycol, borate and ammonium, depending on the geophysical properties of the formation. Produced water that comes back to the surface will likely be brackish, saline or supersaturated brine, depending on its salt content (total dissolved solids). It may contain minor amounts of radioactive material. Water produced in a drilling or completions program must be treated before being released. An environmental impact assessment, including disclosure through the Ministry of Environment, is required of activities having an impact on the public watershed. Across Europe, activities which have an environmental impact are much more closely regulated than in America. Think of it this way: environmental restrictions give operators a chance to be innovative -- lined pits, closed loop systems, recycling programs and a water sourcing strategy. According to Poland’s Environmental Protection Act (EPA), fees must also be paid for the release of waste water and the long-term storage of waste. In legal terms, it’s not clear yet how produced water will be classified. Currently, the Mining and Geological Law that governs E&P activities does not restrict the volume of water that can be taken from the watershed, though this may change. Water is the public’s main concern, so operators would do well to select additives that are environmentally friendly. Better to improve fracking fluids and recycling programs in advance than incur a liability down the road.

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Natura 2000 BY WOJCIECH KOSC

34 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

The extent of the Natura 2000 wildlife protection scheme guarantees that quite a few operators will face extra work to carry out drilling programs on their concessions. It remains to be seen whetheroperators will have the same experiences as that of wind developers...more work, but still possible. PHOTOGRAPHY BY KASIA SNYDER


UPON ITS IMPLEMENTATION in Poland, the European Union’s flagship nature protection scheme Natura 2000 landed right in the middle of a heated discussion. At the time, there was a lengthy debate over whether the price tag for protecting wildlife was too high given other, perhaps more important needs. For example, the construction of transport infrastructure or the diversification of Poland’s energy sources. The network, nonetheless, was adopted. Across Poland, it forms a loose association of national parks and local areas protected under special laws. Within its boundaries, and up to 10 km (6 miles) beyond, certain restrictions on development apply. A BIT OF HISTORY Natura 2000 is a focal point at shale gas conferences these days and part of the behind-the-scenes conversations taking place between operators. A murmur of disdain came from one of the participants of a shale gas conference attended by this correspondent, when a representative of a major company showed a slide of his company’s concession area. The Natura 2000 map laid on top overlapped the concession area almost entirely. Keep in mind that the network has been in development since 1992, but in Poland only since the late 1990s. Natura 2000 is, however, the apple in the EU’s eye when it comes to protecting the environment. Getting drilling plans approved and deploying equipment on site will be complicated. There are strict guidelines as to how Natura 2000 sites should be managed and protected. These are issued by the European Commission’s Environment Directorate. From one point of view,

the guidelines are an obstacle that will generate considerable costs and require a serious effort. From another, they’re an important part of protecting the environment from overuse. In short, any development on a Natura 2000 site will be given green light only in “exceptional circumstances.” According to the Commission’s guidelines, “There can be no alternative solutions and the plan or project must be considered to be of an overriding public interest. In such cases, Member State must take appropriate compensatory measures to ensure that the overall coherence of the [Natura 2000 network] is protected.” NATURA 2000 & SHALE GAS According to Marek Madeja, country manager of Cuadrilla Resources, “Not only does Natura 2000 make the obtaining of a concession longer, but there are conditions that you need to live up to once you have the concession and are about to start working on it.” Cuadrilla Resources is a UK based operator seeking shale gas in the Lublin region. “The EU guidelines might be there, but what specifically one is going to do about a Natura 2000 site will depend on this site’s characteristics. So it’s totally a case-by-case thing,” Mr. Madeja adds. The EU identifies a few major compensation activities that an investor needs to carry out should it project have an impact of a Natura 2000 site: • restoration — restoring the habitat to its previous state • creation — creating new habitat on a new site or enlarged site • enhancement — improving additional habitat in lieu of what’s lost • preservation — maintaining a co-

EN IN VT IR EO RN V IMEEWN T

“Not only does Natura 2000 make obtaining a concession a longer process, but there are conditions you need to live up to once you have it.” -Marek Madeja, Cuadrilla Resources

herent Natura 2000 network. Compensatory measures must be: • appropriate to the site and the loss caused by the project • have the ability to maintain or enhance the overall coherence of Natura 2000 • feasible and operational by the time the damage to the site is effected At the moment, hundreds of Natura 2000 sites cover close to 20 percent of the Polish territory, even though the network isn’t evenly distributed. For example in the Białystok region where there are no shale gas concessions Natura 2000 makes up as much as 40 percent of the region’s area. That being said, the most likely shale gas bearing belt extends from the Baltic coast to the southeastern region of Lublin, and it’s at those two ends of the belt where Natura 2000 sites tend to be quite common. So far, it’s been wind farm development and road construction that have come into conflict with Natura 2000. The General Directorate of Environmental Protection via its 16 regional branches is the agency that monitors investments and has a final say whether an investment on a Natura 2000 area can go ahead or not. For all the strict guidelines and measures that investors need to take to reduce the impact of their projects on Natura 2000 scheme, actual refusals don’t take place all that often. In the case of wind power development, according to data for H1 of 2010, there were 800 procedures. In the Białystok region where Natura 2000 is most widespread, only one wind project out of nearly 300 was denied.

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Low Carbon

EU Willingly or not, Poland must put its economy on a low-carbon track but its official long term energy policy seems unaware of what shale gas can offer. BY WOJCIECH KOSC THE CURRENT INTEREST in shale gas exploration and production in Poland might seem perplexing from the point of view of the European Union’s long term policy of making the 27-member state bloc a world leader in cutting carbon dioxide (CO2) emissions. But it shouldn’t be. An obvious outcome of the country’s shale gas potential is energy independence. While shale gas stakeholders are embracing this angle, the other important angle has to do with lowering carbon emissions. This angle is getting much less press. But in many respects it seems as fundamental a policy goal as energy security, given that the EU aims to decarbonize primary energy production by 2050. It might be because Polish authorities are generally skeptical to this fundamental EU policy. The goal of reducing CO2 emissions 36 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

PHOTOGRAPHY BY KASIA SNYDER in the EU by 20 or even 30 percent by 2020 and by 50 percent by 2050 doesn’t go down well in Poland. Neither does the change in the EU’s emission trading scheme (ETS), which comes online in 2013, and by 2020 will gradually reduce the amount of free CO2 allowances available for industry until zero. After that, allowances will only be available for purchase at auction. It seems not a week can pass in Poland without someone raising alarm, especially the large, mostly stateowned power utilities, who are the largest emitters of CO2. They say that the auctioning of CO2 allowances will mean a halt to economic growth, maybe even death to their industry. They are lobbying hard for a so-called “derogation” or a right to obtain allowances for free, until 2019.

GAS VERSUS COAL In the power sector, production of 1 kWh of electricity from hard coal results in 0.33 kilograms of CO2. In the case of lignite coal, the emissions level is 0.4 kilograms of CO2. For natural gas, the CO2 emissions is 0.20 kilograms. That’s effectively 36 percent lower than from hard coal and 50 percent lower than from lignite. Even if one factors in CO2 emissions in the producing of natural gas from shales, which involves considerable use of diesel-powered pumps and motor vehicles to and from drilling sites, natural gas from shale plays seem to be the least emissions intensive fossil fuel. The fear of a low-carbon policy becoming a reality is unsurprising, given that the Polish power sector relies


on hard coal and lignite for some 90 percent of production. Some attempts – whether driven by the EU or coming from within – are underway to diversify energy supplies. Renewable energy production lags behind its legally binding target. It is supposed to comprise at least 15 percent of Poland’s energy mix by 2020, though analysts find this metric unlikely to be achieved. In April 2011, the government announced that not only will it achieve its obligatory share of renewables, it will exceed it by 1.7 percent. For good reason, the government’s plans were received skeptically by renewable energy interest groups, many of whom have struggled to implement their projects. Another way by which Poland could go in line with the EU’s low carbon policy is by development of a nuclear

power plant by 2020. The government has been slowly adopting new regulations to allow for the construction and operation of a plant. Just as renewables aren’t enjoying much state support, nuclear energy has a strong backing, even despite the Fukushima crisis and the strong anti-nuclear backlash that followed. GAS & ENERGY POLICY Poland faces a double conundrum. On one hand, it has to comply with the EU low-carbon initiative and on the other hand it has to appease the coal lobby. So where does natural gas fit in the picture? It doesn’t yet. The shale gas boom has taken policy planners by surprise. Poland’s key strategic document on energy issues “Poland’s energy policy by 2030” contains no mention of shale gas at all.

THINK WIN WIN - the environmental balancing act Poland’s a crowded place. It might not look that way flying over in a plane. But the population density is four times that of Texas. Though NIMBY (not in my back yard) is not as much of an issue as say, in Germany or the UK, landowners might very well get heated about foreigners coming to “buy up their land.” In rural Poland, over the last ten years, land values have grown by as much as 900%. Landowners have often been the beneficiaries. But in Poland landowners don’t own mineral resource rights, so they don’t have a royalty stake. Although the government’s revenue is shared with municipalities, gas producers may meet local opposition. But these challenges can be overcome if communities are made partners. Consider the work of Chesapeake Energy in Fort Worth, Texas. One of the company’s drilling pads was planned near a popular recreational area known as Trinity Trails, a wooded parkland.

When residents complained, Chesapeake did their best to placate what could have been an angry opposition. They held public consultations, conducted opinion surveys and created a detailed landscape plan. Chesapeake learned the local community cared so much about their forests because woodland habitat is quite rare in a mostly urban Ft. Worth. When they did drill, they designed the drilling pad to be as small as possible. Many of the existing trees were preserved. A tall 16 ft (4.5 m) barrier was constructed to hold the sounds of drilling equipment at bay. Chesapeake produced gas. The trail system remained open. The Ft. Worth community felt treated with respect. Both producer and community got what they wanted.

Source: US DOE, Modern Shale Gas Development in the United States, A Primer, Jan. 2010.

The closest it gets to shale gas is when it takes on the subject of diversification. Acknowledging that as much as 70 percent of natural gas comes from imports (mainly from Russia and Central Asia), the document states that in order to diversify, Poland must analyze “alternative possibilities of obtaining gas from national resources using new technologies.” The policy’s only mention of unconventional gas is a “pilot project to obtain coalbed methane.” Poland could diversify to natural gas from other sources. In fact, it plans to have gas imported by developing an LNG terminal on the Baltic Sea coast, currently under construction, which bears a corollary to the US push for LNG that was all but annihilated by the Barnett and Marcellus shale plays. Apart from the need to diversify gas supplies, Poland has to expand its gas transmission and distribution system. It must increase the capacity for gas storage (including salt caverns). To expand the transmission and distribution system, Poland will employ “a proper tariff policy to incentivize construction,” and introduce incentives for the gas sector. The Polish state will make sure that it secures its interests in “strategic companies of the gas sector,” according to official policy. Unfortunately, a switch from one fossil fuel to another won’t do it for Poland to live up to its targets in the EU-wide low-carbon world. Renewables and nuclear power will likely make up the shortfall. But an increased natural gas supply presents an opportunity to lower emissions. Making a lack of specific reference to shale gas in Poland’s key energy strategy document an issue that begs to be addressed, soon.

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EN IN VT IR EO RN V IMEEWN T

“Poland faces a double conundrum. On one hand, it has to comply with the EU low carbon initiative. On the other hand it has to appease the coal lobby. So where does natural gas fit in the picture? It doesn’t yet.”


TOP 20 LAW FIRMS

Based on ranking in Gazeta Prawna and a survey conducted by Cleantech Poland, April 2011*

LAW FIRM

SHALE GAS? TOPICS

Norton Rose

YES

Wierzbowski Eversheds

YES

White and Case

YES

CMS Cameron McKenna

YES

Concessions Equipment Field Services Concessions Equipment Field Services Concessions Equipment Concessions Equipment Field Services Concessions Equipment Field Services

DLA Piper Wiater

YES

Concessions

SK&S

YES

Concessions

Drzewiecki Tomaszek

YES

BSJP | Taylor Wessing

YES

CONTACT Christian Schnell Adam Kozlowski Maciej Jozwiak Tomasz Chmal Tomasz Minkiewicz

* LISTINGS

Krzysztof Wiater Krzysztof Cichocki

ON BROWN BACKGROUND SPONSORED

Zbigniew Drzewiecki

Hogan Lovells

YES

Salans

YES

Ewa Rutkowska-Subocz

Baker McKenzie

YES

Kamila Tarnacka

DomanskiZakrzewskiPalinka

NO

Krzysztof Zakrzewski

Weil, Gotshal and Manges

NO

Pawel Rymarz

Koksztys Kancelaria

NO

Jakub Pomorski

Gide Loyrette Nouel

NO

Marek Wroniak

INFO (+48) 609 293 802

Christian.Schnell@bsjp.pl

(+48) 606 991 941 Adam.Kozlowski@ nortonrose.com

(+48) 22 505 07 63 Maciej.Jozwiak@ eversheds.pl

(+48) 22 505 0101 Tchmal@warsaw. whitecase.com

(+48) 22 520 55 55

Tomasz.Minkiewicz@ cms-cmck.com

(+48) 22 540 74 00 Krzysztof.Wiater@ dlapiper.com

(+48) 22 608 70 00 Krzysztof.Cichocki@ skslegal.pl

(+48) 22 840 95 00

Drzewiecki@dt.com.pl

(+48) 22 529 2900 Marek.Wroniak@ hoganlovells.com

(+48) 22 242 52 52

ERutkowska-Subocz@ salans.com

(+48) 22 445 31 00 Kamila.Tarnacka@ bakernet.com

(+48) 22 557 76 00

Krzysztof.Zakrzewski@ dzp.pl

(+48) 22 520 40 00

C

Dariusz Tokarczuk

Pawel.rymarz@weil.com M

(+48) 22 331 07 10 J.Pomorski@ koksztys.com.pl

Y

CM

(+48) 22 344 00 00

MY

gln.warsaw@gide.com

CY

Chmaj i Wspolnicy

NO

Marek Chmaj

(+48) 22 841 40 00

Grynhoff Wozny

NO

Stanisław Grynhoff

(+48) 22 212 00 00

Chalas i Wspolnicy

NO

Jarosław Chałas

I. Korczynska i Wspolnicy

NO

Clifford Chance

NO

Marek@chmaj.pl

CMY

K

Agata.Stec@gww.pl

(+48) 22 536 0050 chwp@chwp.pl

(+48) 71 799 4150

info@korczynska.pl

Grzegorz Namiotkiewicz

(+48) 22 627 1177

Grzegorz.Namiotkiewicz@ cliffordchance.com


LEGAL

LEGAL SECTION At times, the Polish legal system can seem like Kafka’s Trial - opaque amd mysterious. Court appointments sometimes go on for years, only to end in a ‘no decision.’ So start with expert legal services, get everything written down, and when it comes to the Polish courts, be prepared for delays.

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Mining ^ Geology Law

In contrast to the United States and Canada, where regulatory regimes are determined by state or provincial law, Poland is much more centralized, and in practice, legal issues weigh more heavily on investment decisions. B Y E VA - M A R I A M A C I A Z E K , B S J P | TAY LO R W E S S I N G POLISH LAW IS based on Roman law, not case law. This means that many laws and regulations shape and restrict the rights of persons and companies. This principle can be seen in particular in the field of mining natural resources, which in Poland, as in the whole of Europe, is a highly regulated activity. CONCESSIONS Since shale gas is a natural resource, the provisions of the Polish Mining and Geology Law apply to its produc-

40 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

tion. This law regulates, among other aspects, the principles and conditions to which geological works may be conducted and natural resources may be mined. The first principle is that all commercial activities in the field of prospecting, exploring and producing shale gas be bound to a “concession.” The relevant authority is the Minister of the Environment. He issues the concession for prospecting, exploring and/or producing shale gas upon application

of a given company. In the application, the company must attach several supporting documents and specify the type and extent of its planned activities. With respect to the concession for prospecting and exploring shale gas, it would be a so-called “draft of geological works.” Regarding the concession for production it would be an evaluated draft of a shale gas management plan. The concession is issued for a period between 3 years and up to 50 years. It


contains requirements regarding activities covered by the concession, amongst other, in the field of general security and environmental protection. It defines as well the extent and area of the concession. GEOLOGICAL WORKS When it comes to geological works, such as prospecting and exploring for shale gas, Polish law imposes further requirements, besides the requirement to obtain a concession. Geological works may be conducted and supervised only by certain persons who possess the appropriate references which attest to their qualifications. The competent authorities for tests and references are Minister of the Environment or a Marshal. Geological works, comprising works beneath the surface, may be conducted exclusively on the basis of a so called “draft of geological works”. The draft plan describes the extent and scope of all planned geological activities. The applicant must produce a comprehensive geophysical study, within which, depending on the purpose of the geological works, may include certain information. The applicant may need to cite the location of the proposed excavations and provide archival material with reference to past geological works. The plan may need to include a detailed justification for why the geological works are necessary. There are technical requirements as well, including references to geological pressures, water discharge schedules and water retainment plans, as well as a proposed schedule of excavations. The applicant must submit topographical maps at a 1:100,000 scale

showing an overview of the proposal and a more detailed 1:50,000 site plan. There’s a requirement for excavation sections and a map showing the placement of utilities, such as gas, telephone and electricity, which could potentially interfere with subterranean excavations. This report must be submitted independent of any environmental impact assessments. In principle there are three requirements regarding geological works: qualification, draft plan and geological documentation. Upon the basis of geological works, geological documentation should be prepared and handed over to the competent authority. It serves the purpose of determining the limits of mineral deposits, its probable quantities and the geological conditions.

LEGAL

Eva-Maria Maciazek of BSJP | Taylor Wessing orients investors to legal terms and conditions for prospecting, exploring and producing. In a subsequent article, she deals with European hydrocarbon licensing. GEOLOGICAL INFORMATION The right to use the information obtained in the course of the geological works belongs in principle to the Treasury. Any person interested in having access to the information in general needs to conclude an agreement against payment with the Minister of the Environment. There are some legal exceptions as to situations in which the information may be obtained without payment, e.g. for the purpose of preparing a draft of geological works for prospecting and exploring shale gas deposits. For a limited period of time the aforementioned right of the Treasury to use the information obtained in the course of the geological works is restricted for the benefit of the persons who bore the costs of the geological works conducted

SHALE GAS EUPHORIA? - Think Natura 2000 The Ministry of Environment issued close to 70 concessions to prospect and explore gasbearing rocks across Poland. These concessions cover some 60,000 square kilometers (23,000 square miles) or 19 percent of Polish territory. Considering that about 20% percent of the country’s area covered by the European Union’s protection scheme Natura 2000, it’s not surprising that protected areas overlap with places where drilling could take place. This renders the exploration and production of shale gas quite difficult, since invariably there’s an environmental impact. Natura 2000 areas are protected territories drawn on the basis of the EU’s nature protection laws, which among others, are the birds directive and the habitats directive, approved in 1979 and 1992. A register of protected areas is available online at the Ministry of Environment website, and at certain other sites who monitor protected areas.

Operators should know it will be challenging to drill within the protected areas because of equipment, traffic and noise, as well as drilling methods. Protected areas can have buffer zones where the appropriate authorities might want to limit industrial activity, typically up to 10 km. The experiences of wind power developers show that getting projects approved in those buffer zones can be difficult, but not impossible. Obtaining an environmental permit, or the environmental permit for a Natura 2000 area, will hinge on whether a company can show that the impact is limited and that no alternatives are available. For example, investors may be required to restore the natural habitat, or bear the costs of relocating protected animals, or use equipment that reduces the overall impact on the environment.

Source: BSJP | Taylor Wessing

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“According to a new draft law, which is being worked on right now, public tender rules will change.” on the basis of a concession. These persons have the exclusive right to use the information obtained free of charge for 5 years after expiry of the concession allowing for the geological works, which were the source of the information. ZONING PLAN In order to start production of shale gas, generally a local zoning plan needs to be in force. In practice, this usually means the company will have to apply for establishment of such a plan, since in Poland, very few regions have zoning plans in force, especially when it comes to rural areas suitable for mining. Consequently, the company has to bear the costs of establishing a zoning plan. MINING DISTRICT In addition to the zoning plan, another formal requirement is the mining district. For each mineral deposit a mining district needs to be allocated, even if the deposits of different natural resources are located in immediate vicinity. The register with the mining districts is kept by the Minister of the Environment. MINING USUFRUCT Concession holders may be granted a “mining usufruct” by the Treasury. A usufruct is the legal right to benefit from an object one does not own, such as a natural resource. A company needs the mining usufruct for exploration and/or mining of natural resources since the exclusive right to the natural resources on the territory of Poland, including shale gas, belongs within legal limitation to the Treasury. The Treasury is entitled to confer mining usufructs to interested com42 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

panies by way of a written agreement against payment. Payment may be made once, or by installments, in the amount as established in the usufruct agreement. Within the legal limitations, the usufructuary has the exclusive right to prospect, explore and/or produce shale gas. PUBLIC TENDER In principle, before the mining usufruct is granted, tender proceedings need to be held. This is however not the case, if the Minister of the Environment publishes a list of mining areas not subject to tender proceedings publicly and in the Official Journal of the European Union. Polish law also stipulates a priority right for two years regarding granting of the mining usufruct right for the benefit of a company which previously explored and documented the mineral deposit and prepared the required geological documentation with the precision required for the purpose of obtaining the concession to extract the natural resources. According to a new draft law, which is being worked on right now, public tender rules will change.  Public tender proceedings shall precede the issuance of the concession and not the conclusion of the agreement on mining usufruct anymore. The mining usufruct agreement shall be concluded directly after obtainment of the concession by winner of the public tender. When this guide went to press, it was not known if this provision will be included in the final version of the new mining and geology law MINING ROYALTIES Irrespective of payment for the

mining usufruct, certain activities are subject to a fee (mining royalties). These activities include both prospecting and exploring for shale gas, as well as producing shale gas from a mineral resource. For prospecting and exploring shale gas the fee is based on the square area of the concession. Each square meter is subject to a fee of 110 PLN ($38 or €27). The fee is established within the concession. For the production of shale gas the mining royalties in principle amount to the product of the mining royalties rate for the relevant sort of natural resource (shale gas) and the amount which was mined during a given period. The mining royalties rate for shale gas amounts to 4.90 PLN ($1.70 or €1.20) per 1000 m3. The fee is to be determined and paid quarterly and is the company’s responsibility.


I N TL E ER GV A ILE W

NICOLAUS COPERNICUS KEEPS WATCH OVER THE ACADEMY OF SCIENCES IN CENTRAL WARSAW

EU Hydrocarbon Licensing Is the government obliged to tender shale gas activities by some form of public procurement? If so, this could jeopardize early-stage investments made by E&P companies whose concessions are limited to exploration. According to the EU Commission, yes. However Poland thinks otherwise and seems to give favor to incumbents. B Y E VA - M A R I A M A C I A Z E K , B S J P | TAY LO R W E S S I N G

COMPANIES WHOSE INVESTMENT decisions are based on the current regulatory regime will want to pay close attention to the debate taking place in the EU Commission. In December 2010 the EU Commission filed a complaint against Poland, alleging that shale-gas related activities are not regularly being put out to public tender. As is the case with other Member States of the European Union, anyone doing business in Poland has to comply with both national and EU legislation. European legislation may be either directly applicable to a member state (EU Regulations) or implemented into national law by separate national legal acts (EU Directives). EU hydrocarbon licensing legislation consists in principle in the Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorizations for prospecting, exploring and producing hydrocarbons. Since shale gas is a hydrocarbon, the content of this directive is relevant. EU HYDROCARBON DIRECTIVE The EU directive sets out general requirements related to hydrocarbon resources, such as authorization procedures, authorization criteria, duration of authorization, and conditions on the exercise or termination of an authorization. Authorizations are any law or decision by which a company is entitled to exercise the exclusive right to prospect, explore or produce hydrocarbons in a geographical area. This EU directive contains also provisions on payments in hydrocarbons, the state’s participation and relations with third-party countries. Member states retain the right to determine the areas to be made commercially available for prospecting, exploring and producing hydrocarbons. However when-

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“The EU Commission has argued that Poland does not ensure a fair choice between applicants on the basis of objective, non discriminating criteria.” ever an area is designated, member states are obliged to ensure there is not discrimination between entities who want access to the resources. In principle, all parts of the EU directive should be covered by the Polish Mining and Geological law, since Poland is obliged to implement the provisions. But Poland does not seem to have fulfilled its obligation. In December 2010 the European Commission filed a complaint against Poland to the European Court of Justice alleging failure to comply with several provisions of the directive. (See box Does Polish law discriminate?) PUBLIC NOTICE To ensure fair play, the EU law provides two procedures, by which all interested companies may submit applications to gain authorization. 1) Under a “licensing round” (tender) procedure, interested companies may apply for authorization during a specified time, after the round has been advertised by means of a notice in the EU’s Official Journal. The procedure for authorization may be initiated in one of two ways: the competent authority publishes a notice in the Official Journal of the EU or the company publishes a notice at its own initiative In both cases, all parties must be granted at least 90 days between the publication of the notice and the deadline for submissions of applications. Notices shall include the type of authorization, the geographical area, and the proposed date or time limit for granting authorization. 2) Under the “open door” procedures areas are available on a permanent basis. The application for authorizations may be filed at any time, without tender pro44 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

ceedings. The areas available are to be indicated by a notice published in the EU’s Official Journal. Generally, Polish law seems to have adopted a mix of “licensing round” and “open door” procedures, whereupon the “licensing round” procedures in form of the mining usufruct procedures seems to prevail. GRANTING AUTHORIZATIONS The EU Directive says that authorizations may be granted solely on the basis of the applicants’ technical and financial capability and suitability of methods for prospecting, exploring and producing. Authorization is granted depending on the price the entity is prepared to pay if the activities are put to public tender.

All these criteria must also be included in the notice in the Official Journal of the European Union. Member States may impose certain conditions concerning the exercise and termination of authorization. They may justify all conditions, requirements and detailed obligations for use of a specific authorization exclusively by the need to ensure the proper performance of the activities in the area for which an authorization is requested, by the need to protect important values such as national security, public safety or by the payment of a financial contribution or a contribution in hydrocarbons. And lastly, member states are allowed to refuse authorization to any company which is effectively controlled by third countries or third country nationals.

Does Polish law discriminate against outside investors? On December 10th, 2010 the European Commission filed a complaint against Poland to the European Court of Justice alleging its failure to comply with the EU Directive 92/22 on hydrocarbons. In the complaint, the EU Commission says Polish law discriminates against outside investors and favors incumbents. Poland would seem to do this by setting out requirements which companies must satisfy at the time they apply for a concession. Since there are companies already operating in Poland, it seems Polish law would favor incumbents. Thus, the principle of equal access could be endangered. Here are some facts which may support the EU Commission’s position. When looking at Polish legal provisions, there are a number of documents a company must deliver to be granted a concession. One document is the proof of the company’s right to use geological documentation for the purpose of obtaining a mining concession. At the same time, Polish law provides for an

exclusive right to use the information obtained as a result of geological works for the company which conducted the prospecting activities and therefore bore the costs of these geological works. The right expires five years after the exploration concession. This means that for a period of five years any other company in principle should have no right to the relevant geological documentation and information. Poland seems however to have recognized the allegations of the EU Commission to be true. In a new draft law, which is being worked on as this guide goes to press, the proceedings to obtain concessions for hydrocarbons are regulated in a different way than concessions for other natural resources. Interpreting the sequence and order of provisions in the draft law it might be possible that the proof of the company’s right to use geological documentation for the purpose of obtaining a mining concession will be no longer a requirement. Source: BSJP | Taylor Wessing


R. Adam Kozłowski is a lawyer with Norton Rose Piotr Strawa and Partners, LP

has exclusive exploration and exploitation rights, subject to certain regulations and according to the mining usufruct agreement. The mining usufruct is established for consideration. The amount of consideration is subject to the mining usufruct agreement and is not predefined by any regulations. Additionally, exploration and exploitation activities are subject to separate fees. A concessionaire may be required to establish collateral, securing any claims resulting from activities performed under a concession (such as a bank or insurance guarantee). The amount of the collateral not is predetermined but calculated on a case-by-case basis. A concession is transferrable, subject to specific requirements of the mining regulations. The mining regulations allow for cancellation or limitation of the scope of a concession without any compensation, subject to certain conditions. A concession expires within a certain

time limit, or if it becomes obsolete, as in the case of a concessionaire liquidation or in case of a waiver of a concession by the concessionaire. If a bankruptcy of a concessionaire is announced, a concession may be but does not have to be cancelled without compensation. Cancellation or expiration of a concession does not release a concessionaire from its obligations relating to environmental protection or obligations connected with the liquidation of mining activities. Considering the large interest in exploration and exploitation of unconventional gas the government claims that it shall be directly engaged in optimising exploration terms and conditions. Simultaneously, parliamentary works on draft mining regulations are ongoing. The new, proposed mining regulations deal with fees and payments for exploration and exploitation, planning and real estate issues, compensation and indemnification for damages, as well as tax issues.

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SPONSORED ARTICLE

CONCESSIONS FOR EXPLORATION of unconventional gas have been obtained by over 20 companies. The concessions cover an area of approximately 50,000 km2, mainly from the Baltic seaside south-east to Lublin, but also in the western part of Poland (Wielkopolskie and Silesia). This article explores general mining and mining-related regulations with respect to the exploration and exploitation of unconventional gas. Unconventional gas, just like other natural resources on Polish terrain, is owned by the State Treasury. The State Treasury is authorised to grant a “mining usufruct” to third parties. The mining usufruct is generally granted after completion of a tender, pursuant to an agreement. Execution of the mining usufruct agreement is directly connected with obtaining a concession. If a concession expires or is revoked, the mining usufruct expires. A beneficiary of the mining usufruct

Forthcoming changes to mining regulations require complex and continuous observation. The new laws may have significant effects on current and future operations.

LEGAL

Shale Gas Legal Challenges


NATURALLY, HE SEEKS OUT CREATIVE WAYS OF DOING THINGS. SO WHERE DO WE LOSE IT ALONG THE WAY?

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I N N O VAT I O N

TOP 10 OPPORTUNITIES

FOR INNOVATION IN SERVICES THE POINT AT which shale gas production reaches 10 BCM per year will depend in large part on well costs. In Poland, drilling cost to completion is likely to fall between $10 to $20 million per well. In the U.S. these costs are as low as $3 million per well. Finding ways to bring drilling costs down is one way to make natural gas from Polish shales competitive with alternative sources, such as imports from Russia and Algeria, and Liquid Natural Gas (LNG) from Qatar which could enter the new port at Swinoujscie as early as 2014. At a Schlumberger sponsored training in December 2010, Doug Bentley said that the easiest way to reduce costs is to bring innovation to the market. With this in mind, in the first quarter of 2011, Cleantech Poland conducted a survey of Polish concession holders to determine which were the most important areas for innovation. What follows is the top ten.

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TOP 10 OPPORTUNITIES FOR INNOVATION IN SERVICES

10. PUBLIC RELATIONS THE COMPANY ASSOCIATED WITH RED PUMP TRUCKS HAS BECOME SYNONYMOUS WITH CONFLICT IN THE MIDDLE EAST, AND MORE RECENTLY, ENVIRONMENTAL DISASTER, DUE TO THE PLATFORM SPILL IN THE GULF OF MEXICO.

SOURCE: KASIA SNYDER

9. DATA SHARING INITIALLY, KEEPING PRODUCTION DATA PRIVATE HELPS COMPANIES ESTABLISH A COMPETITIVE ADVANTAGE AND AWARDS FIRST ENTRANTS WHEN THERE’S HIGH RISK IN THE MARKET. BUT ONCE PRODUCTION scales, better reservoir characterization and improved production curves could depend on data sharing. The E&P companies themselves could even find this favorable. Currently, concession holders are obliged to hand over data to the Ministry of Environment, but neither the Ministry of Environment nor the operators themselves are required to make the data publicly available. This could change, if the market becomes robust enough. In parts of the U.S. and Canada, states or provinces obligate producers to make production data publicly available. In this way, operators can compare results, and theoretically, the best technologies win out. This

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MERE MENTION OF a certain well known global service company can get people’s eyes rolling. At a Warsaw shale gas conference in November 2010, one longtime industry professional explained: “The oil and gas fraternity doesn’t really engage the public. We just go wherever we can in the world and we get business done. If it get tough there, we just move on.” But it doesn’t have to be this way. Natural gas has positive benefits that don’t need spin. It’s clean (half the emissions of coal), it’s safe (diffuses and doesn’t puddle if a CNG gas tank is severed) and it’s secure (estimated reserves could provide Poland with a 200 year supply). These are messages that could go public, along with facts about gas exploration and production. What chemicals are being released into the watershed? What are the environmental consequences? How might our drinking water be affected? In contrast to parts of the UK, Germany and France - Poland stands ready to embrace shale gas. Further, the environmental message has yet to be crafted. It will take more than a savvy PR campaign to craft such a message. It will take meaningful and long-standing cooperation. There are a few environmental NGOs, such as World Wildlife Fund (WWF) and Greenpeace. In Poland, their operations are professional. Though without the power and clout of their counterparts in the west, the largest Polish environmental NGOs command the respect of politicians and are invited to discussions, which is all the more reason to go after their support.

has helped service providers, such as Packers Plus, an open-hole, multi-stage completion company, to show how their technology has performed with respect to the competition. Data sharing could be liberalized across energy frontiers. The wind energy market, for instance, stands to benefit were information about grid connection permits made public. This would allow investors to shop around for the best price and break-up the log-jam that slows development. SOURCE: KASIA SNYDER


GAS IS A REGIONAL PRODUCT, SUBJECT NEITHER TO A COMMODITY PRICE NOR A GLOBAL NETWORK OF PIPELINES, PORTS AND REFINERIES. IN THE UNITED States, deregulated since the 1980s, a consistent standard for gas logistics and transportation has yet to emerge. If Poland were to ramp up its production, it would likely reach a point in which domestic production outstripped demand, opening up the possibility for export. Even then, Gaz System S.A., will not likely have put in place a network of international transport pipelines. Enter logistics support: trucking, boating or piping gas to consumers in countries such as Sweden, Austria and Bulgaria. This will take innovation, given the poor state of Polish roads. Potentially, gas logistics companies such as ASCO (UK, Norway, Holland), BDP,

I N N O VAT I O N

8. LOGISTICS & GAS TRANSPORTATION

Agility, GAC (Caspian, Middle East) could make inroads. Companies whose presence has been registered on the Polish gas market include IMW (Canadian) and Galileo (Argentinian). Poland’s automobile fleet could be converted to run more substantially on natural gas. This would make necessary a network of filling stations, compressors and mechanical shops for engine-conversion. Upgrading, compressing, transporting and distributing services would be needed, domestically on the Polish market, and at ports and transfer stations in the event an export market opened up.

7. TURNKEY LEGISLATION FOR ADOPTION IN THE UNITED STATES, THE OIL AND GAS LOBBY PREPARES LEGISLATION AND THEN PASSES IT ALONG TO LAWMAKERS ON CAPITOL HILL. NOT SO IN POLAND, WHERE THERE EXISTS A GENERAL ANTIPATHY TOWARD LOBBYISTS. THIS IS DUE in part to profiteering among well-connected businessmen in the conversion to a market economy. Attitudes are changing, albeit slowly. The oil and gas lobby, OPPPW (Polish Exploration and Industry Production Organization), got its start in December 2010. There’s good reason to put the cart ahead of the horse. In the U.S., the federal government played a pro-active role in stimulating the development of unconventional gas, mainly through fiscal policies and R&D support. In Poland, there’s no specific preferential fiscal regime for unconventional gas (as there is in Germany for tight gas). But the Polish government heavily

SOURCE: KASIA SNYDER

subsidizes other sectors - the coal industry for instance - despite decreasing annual production and dilapidated state-owned infrastructure. Coal subsidies, over time, could shift toward unconventional gas. This would mean innovation in legislation. What could change? According to Florence Gény, improved flexibility in the application process, better water permitting procedures and changing the “block” concessions into “continuous play.” This would benefit E&P companies who identify large gas fields but whose concessions limit them to a square area. In the years to come, the oil and gas industry could be liberalized. This would open services such as drilling, testing, transportation and logistics, which could lower the cost of production.

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TOP 10 OPPORTUNITIES FOR INNOVATION IN SERVICES Dan Themig is the President of Packers Plus

Better way of doing things BY PARKER SNYDER

TRADITIONALLY, THE OIL and gas business has been vertically integrated. But unconventional gas production nowadays requires innovation in narrow specialties. As the best technologies win out, production curves improve and costs come down. Such is the case with open hole, multistage fracturing, which has made a big impact in North America. Less so in Europe. WHO IS PACKERS PLUS? We’re a multi-stage, open hole completions company. You might call us a company that challenges the status quo. Packers Plus began our work in 2001 with horizontal multi-stage fracturing. Since then we’ve continued to work on and innovate in that area.

According to the President of Packers Plus, North Sea operators are still using the same fracturing technology that’s been around for 30 years. That’s why Dan Themig is armed with data to show industry there’s a better way of doing things. PHOTOS COURTESY OF DAN THEMIG

their sand usage by half and increased their total stages. This way, they’ve improved both short term production and ultimate recovery. WHAT’S THE DIFFERENCE IN YOUR APPROACH? One of the key elements is that you get access to natural fractures. If you drill a long horizontal, whether it’s 4,000 or 8,000 feet, you’re going to cross a variety of rocks in the reservoir. Some areas will have higher porosity than others. With plug-and-guns, the first thing they do is cement off natural fractures. They then have to recreate the fractures.

ARE OPEN-HOLE COMPLETIONS COMMON? We’re a world leader, although our approach has not been widely adopted. The industry still uses technology that we would consider archaic, similar to what they’ve done for thirty years. We got the industry started on open hole, multi-stage fracturing in the Bakken Shale in Western Canada. In classic areas like the Barnett Shale, we’ve had increases in total recovery and a reduction in total water usage.

SO YOU GET BETTER RESULTS WITH OPEN HOLE? We’ve done studies in six different formations. Open hole tends to improve productivity by 25 to 70%. The difference lies in the mechanics of cementing off your natural fractures. If you’re using cement and casing, you have to go and re-perforate. If you’re using open hole, you get access to natural permeability. So, if you have a 6,000 or 7,000 foot lateral, with open hole you have access to the most productive surfaces. The rock will fracture where it’s most productive.

WHAT ARE THE DRAWBACKS OF CONVENTIONAL COMPLETIONS? The “plug-and-guns” method is what I’d call a sledgehammer approach. The thinking goes like this. If you pump more and more water and more and more sand, your wells will do better. Unfortunately, that’s not proven to be the case. You might see a short term improvement, but unfortunately, the results haven’t followed. In areas where they use a more technical approach, we have clients who have reduced their water volume by half and decreased

BUT ISN’T IT MORE COSTLY? Actually, it isn’t. The equipment required to run the open hole liner might be more expensive, but the operator saves more than that in fracturing operations. Typically per lateral with a Packers Plus system ‘it’s just 1 to 2 days, compared to 3 to 5 days with plug-and-guns. There’s an SPE paper written by Jones Energy, where they compared cost on both technologies, and found they saved 40% on the cost of the well and got a 33% improvement in production.

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AND ARE YOU POSITIONED FOR THE POLISH MARKET? Absolutely. We had discussions there with one company. They were completing one of the early wells using plug-and-guns. They did it that way because that’s what one of their partners was doing. The thinking is, “that’s what we did in the Barnett, so we should do it here.” So yes, we’re positioned for Poland. Schlumberger is our international partner for multi-stage fracturing. AREN’T THERE ENVIRONMENTAL CONCERNS IF YOU DON’T CEMENT? No, there is no compromise to aquifers using open hole. The only areas that are uncased are the areas that are within the formation. Using our method, you still cement the vertical portion of the well. It’s only when you get into the segment where you’re going to hydraulically fracture that you go open hole. SO ARE THERE ENVIRONMENTAL BENEFITS? The biggest one is water usage. Operators have reduced water usage by up to 50 percent. Not only we can deliver more gas with less water, the job execution takes less time, so fewer days with pumping trucks. DO YOU THINK OPERATORS SHOULD BE REQUIRED TO DISCLOSE WELL DATA? Here in Western Canada, you are required to share all of your well information, not right away, but after six months.. I’m all for full disclosure. It moves the technology ahead further and quicker. That’s the reason why Canadian companies are known as innovative, and why our technology has been used here.


QuickFRAC

6. DRILLING AND COMPLETIONS

A field-proven system that is now available worldwide.

CHESAPEAKE ENERGY PRODUCED A VIDEO RECENTLY THAT EXPLAINED THE REVOLUTION DUE TO HORIZONTAL DRILLING. INSTEAD OF 32 vertical wells needed to develop a 1280 acre (518 ha) tract, only one well is needed with just 6 horizontal laterals. In Poland, as elsewhere in Europe where land access is an issue, further innovation in drilling and completions will increase producing acreage. Integrated computer software programs could better predict rock fracture initiation and propagation, which depends on highly variable geophysics, including Poisson’s ratio and brittleness. Advanced software programs can identify candidates for re-fracturing. Geological steering capabilities combined with deep-well reservoir assessment can better identify sweetspots, as locating the horizontal lateral optimally is critical. Laterals that go further will help to maximize production while minimizing surface disturbance. Open hole, multistage fracturing can improve time to completion. However, in Europe, where multiple casing programs are typically required by law, it remains to be seen whether open hole fracturing programs will find their place. According to Dan Themig, President of Packers Plus, open hole completions tend to improve productivity by 25 to 70%. He says the difference lies in the mechanics of cementing off natural fractures. If you’re using open hole, you get access to natural permeability.

60 stages ... with only

15 treatments at surface.

• 60% reduction in fracture time • Use less water • Increase production flowback

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TOP 10 OPPORTUNITIES FOR INNOVATION IN SERVICES

5. SOURCING HUMAN CAPITAL ACCORDING TO ROWEN BAINBRIDGE, CEO OF AURELIAN, FINDING EMPLOYEES HAS BECOME EASIER SINCE THE LAND GRAB STARTED ABOUT THREE YEARS AGO. “IT’S MADE ATTRACTING talent to the region much easier,” Mr. Bainbridge said in a recent interview with

Cleantech Poland. Aurelian isn’t alone among operators who are looking to expand their staff. Most of the concession holders who are drilling or planning to drill will be increasing their staff: (read: ConocoPhilips, Chevron, Talisman and BNK) and drilling services companies (Weatherford, Halliburton, Baker and Schlumberger). Sourcing talent needs innovation. It can be helped by the Internet. Professional networking sites liked Linked-in and career jobs sites like Monster.com have a place, but highly trained technical employees in the oil and gas sector are comparatively fewer. Specialized intermediaries could help fill the gap. Companies who find a way to attract talent to the region, and can pair them with operators in need of that talent, will make this innovation niche profitable. Paul Higginson of Packers Plus sees labor shortages as the key impediment to developing shale gas in Poland. Florence Gény, in her study of Poland’s shale potential writes, “The most important bottleneck is not equipment, but rather people. In Europe there is a shortage of skilled labor able to operate sophisticated rigs and with knowledge of equipment.” Finding trained employees is always tough. Attracting them to the edge of the European Union, may be even tougher. They’ll need favorably compensated. Posts in the Polish countryside may be fine for technicians coming from rural parts of Texas, Norway or the UK. But language could be an issue, as drilling schedules and environmental impact assessments may be indecipherable.

SOURCE: KASIA SNYDER

4. GEOPHYSICS & SEISMIC

INNOVATION IN RESERVOIR CHARACTERIZATION HELPS TO IDENTIFY SWEET SPOTS, WHICH IN TURN CAN IMPROVE PRODUCTION CURVES. IN OUR SURVEY of concessions holders, most operators had either begun or were planning to shoot 2D seismic. Aurelian Oil, among others, said the need for better trained seismic experts was important. Especially in Poland, where surface land access is difficult, there’s even more of a need to integrate seismic studies with a study of well cores and logs. In Europe, where surface land access is an issue, a better understanding of what’s below the earth stands as an innovation opportunity. When it comes to reservoir characterization, there’s 2D seismic, 3D microseismic and magnetotellurics. These can be integrated with a study of well logs. Magnetotellurics involves measuring the electrical and magnetic fields in deep rock formations, while 2D seismic involves measuring wave propagation induced 52 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

by planned surface disturbances. 3D seismic is used to assess the propagation of micro-fractures during the hydraulic fracturing stage. The Barnett shale lies below Dallas/Ft. Worth, one of the most densely populated areas in Texas. Difficulties stemming from land access and a general resistance to drilling in populated areas motivated innovation in the market for reservoir characterization.

SOURCE: KASIA SNYDER


THE BP OIL SPILL IN THE GULF OF MEXICO DID TWO THINGS. FOR ONE, IT PUT THE ENERGY MAJOR IN THE HOT SPOT, AS VIDEO SHOWING THE LEAKING WELL WAS BROADCAST. FOR TWO, IT PUT WORKER SAFETY AT THE FOREFRONT OF ISSUES THE INDUSTRY NEEDS TO ADDRESS. EUROPEANS WATCHED AS the BP oil spill in the Gulf of Mexico unfolded. They’re likely to pay close attention to how shale drilling develops in their own countries. In Europe, safety restrictions tend to be more extensive. For instance, safety valves on wells and mandatory casing programs are required by law. But in Poland, safety is not top priority. International companies whose activities fall under close scrutiny by regulators in their home country or whose corporate culture is risk averse will likely put worker safety first. The industry, collectively, could take action. Here’s a few areas to look into:

2. LAND ACQUISITION AND PERMITTING IN POLAND, MINERAL RIGHTS ARE OWNED BY THE STATE, BUT OPERATORS WHO WISH TO EXPLORE, EVALUATE AND PRODUCE SHALE GAS STILL NEED TO ENGAGE THE OWNER OF THE LAND TO GAIN ACCESS. LACKING A DIRECT royalty stake, owners may be less inclined to allow drilling on their land. They may block access altogether, especially for roads or pipelines from which they might receive no benefit and in some cases even hardship. These challenges make landman services - or securing an operator’s logistical and legal access to land in the concession blocks - an area ripe for innovation. Jakub Kostecki, New Gas Contracting, works to secure that access for both  operators and vendors. He says that operators and their partners are cautious about stepping on owners’ toes. “It is a delicate subject matter and one that requires lots of direct contact,” Mr. Kostecki says.

Installation of fixed stairs and ladders. Eye and face protection, gloves, respiratory protection. Providing site sanitation for workers. Ensuring flammable materials are kept separate. Personal fall arrest systems. Protecting workers from noise and dust emissions. On-site space for welding, cutting and brazing. And lastly, stand-by medical services, first aid on site, and a dedicated health officer to look after the crew.

I N N O VAT I O N

3. SAFETY & WORKER HEALTH

SOURCE: KASIA SNYDER

Some operators are so careful that they have even requested the term natural gas be used instead of shale gas in order to ease owners into discussions about operating near their homes and farms. Working under confidentiality, his team seeks to negotiate the most favorable terms for operators. “The last thing we want to do is to stir a foul sentiment in the community. If one owner doesn’t let us in, we move on and try to negotiate with others,” Mr. Kostecki adds. On the operator’s side the chain of command goes through the local country manager to  his supervisor and then to an office in Texas, Calgary, Aberdeen or someplace else. There may be several people who have to sign off on decisions. The whole process can be time consuming because it involves multiple parties and multiple steps.  The same holds true for the local powiat or gmina, where a clerk, a supervisory and the office head are often involved in signing paperwork. This multi-tiered process, according to Mr. Kostecki, has made many operators and vendors apprehensive about land acquisition and permitting issues. “That’s why it’s important to jump-start the land process, whether it’s for well-site work or seismic acquisition, as soon as possible so that problems don’t pile up.” As production scales and land access issues grow more challenging land acquisition is an  area ripe for innovation. Florence Gény points to land access as one of the two biggest hurdles operators will face. “Accessing land surfaces is one of the two biggest challenges, together with higher costs,” Ms. Gény writes.

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TOP 10 OPPORTUNITIES FOR INNOVATION IN SERVICES

“Poland has among the lowest water resources per capita in all of Europe of around 1,600 m3 per person/year. According to the UNEP, Poland already experiences water stress due to excessive withdrawal.” Florence Gény, Can Unconventional Gas be a Game-Changer, 2010

1. WATER WATER SOURCING TENDS TO BE A SMALL PART OF OVERALL COSTS, BUT THE COST OF MISHAPS ARE MUCH GREATER. ONE POLLUTED AQUIFER COULD POTENTIALLY HALT PRODUCTION.

POLAND GREW UP ON THE BANKS OF HER RIVERS SOURCE: KASIA SNYDER

54 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

COMPANIES WHO FIND innovative ways of both sourcing water and re-using it will bring their costs down. Poland’s water resources on average are less than 2000 m3 per person per year. Germany and the Czech Republic are also “water stressed.” Surprisingly, Poland’s renewable water resources are less than Spain and southern Italy, both hot and dry regions. This will make water recycling programs an important part of any drilling and production plan. One area for innovation is fracking additives, namely, sourcing additives that don’t harm the environment when released in partially treated produced water. There may be alternatives to fresh water. In March of 2011, Poland approved the legal framework for carbon capture and storage (CCS). There are several high-profile CCS projects coming online in the next decade, including the power plant at Belchatów and the combined heat and power plant at Kedzierzyn. From these projects, there could be a plentiful source of industrial grade liquid CO2. It could be used as a working fluid to fracture tight gas and shale formations. Sourcing water from the sea could be possible, provided additives and processes can be developed to compensate for the high saline content. There is a near limitless supply within 500 km (310 miles) of suitable surfaces for drilling into the Baltic Depression. Reducing or reusing fresh water should be a top priority. It may be possible to do away with fresh water completely, using one of the alternatives mentioned. Industry has taken the first steps. Halliburton offers to source its chemicals entirely from the food industry, while Schlumberger owned M-I Swaco has developed a water-based drilling fluid for use in environmentally sensitive areas.


I N N O VAT I O N

POLAND & INNOVATION Despite centers like the Copernicus Center in Warsaw, or the real deal Pomeranian Science and Technology Park in Gdynia, it’s still one of the biggest and least talked about challenges in Poland: to foster innovation and compete in a global economy. There’s a lot of work ahead for decision makers, according to a 2011 report from the World Bank titled “Europe 2020 Poland.” The report says there’s insufficient funding of research and development and an overall lack of a push towards innovation. Below are a few milestones.

POMERANIAN SCIENCE AND Technology Park in Gydnia is currently under construction. The Park hosts entrepreneurs and businesses in the areas of biotechnology, environment protection, computer science, industrial electronics and telecommunication. It is run by the Gydnia Innovation Centre, a government office.

COPERNICUS SCIENCE CENTER opened in Warsaw in 2010 to foster innovation and appreciation for science in the public. It was host to a conference on innovation in the identification and characterization of shale plays in March 2011.

KRAKOW LIFESCIENCE PARK is a facility run by the Jagiellonian Center for Innovation. A business cluster built to the specific needs of chemistry, biology, microbiology, pharmacology and nanotechnology laboratories. It’s been in the works since 2006.

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Calling the gas price in 2020 BY PARKER SNYDER

56 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

Unlike corn and copper, natural gas is not a global commodity. It’s a regional fuel, whose price is tied up in long term contracts or set in regional exchange markets which makes predicting the spot price a decade from now all but impossible.

PHOTOGRAPHY BY KASIA SNYDER


THE FUTURE PRICE of gas in Poland will depend in part upon two factors. First, upon leverage the country can gain from its shale resources, which according to the president of the Energy Regulatory Authority, could leave Gazprom in a weaker bargaining position. Second, on efforts to liberalize a gas market whose price is set in a tariff system that tends to underprice gas with respect to costs. LOCAL ISSUE In Poland, the price of natural gas is set by the Energy Regulatory Authority (URE). The EU has been pushing Poland to liberalize the gas market and open it up to competition but it’s still regulated, and highly so, which can introduce price distortions, with end users often paying less than what it costs Poland to import it from Russia. A recent trend to raise the gas price and phase out the public subsidy has put upward pressure on the price. Over the last few years, the price has more than doubled. According to Europe’s Energy Portal, a commercial organization, industrial users will pay around $8/mmBtu (€0.02/kwh), while household consumers will pay around $21/ mmBtu (€0.05/kwh). The price of natural gas, analysts have pointed out, is higher in Poland than in most parts of North America. The Henry Hub price at which natural gas futures trade on the New York Mercantile Exchange (MNYMEX) is currently at around $4-5/mmBtu. In Poland, the price of natural gas is determined largely by its long-term contract negotiated with Gazprom, supplier of sixty percent of domestic consumption. FUTURE TRENDS Gazprom has given certain concessions to Germany, allowing them to

partly peg the price of gas to an oilindex. But not so in Poland, where the country’s limited domestic production puts it in a weak negotiating position. The current contract has been signed for 2012, at an annual important quantity of about 11 billion cubic meter (bcm) per year. In an April 2011 training, Ramin Lakami of Baker RDS, a consultancy, described how natural gas prices started to diverge from oil prices from about 2000 onward in the U.S. Upward price pressure, combined with better technology, helped to drive the development of shale gas. Poland, he argued, is in a similar position as the United States was ten years ago - but with one advantage - the technology is available. “It’s difficult to know the future price of gas in Poland,” Mr. Lakani argued, “although efforts to tie the oil price to gas doesn’t really work in complex markets.” Mr. Lakani cited the recent developments in North Africa and the Middle East as an example. “Political conflict and the subsequent reduction in Libyan oil output has sent oil prices on a record climb. You can see how these two markets can diverge. Oil and gas no longer climb hand in hand.” Florence Gény’s analysis of the European gas market through 2020 has led her to argue that the most important sources of gas supply will originate mainly from Russia, and perhaps new LNG projects from Nigeria and Russia, defining a long run marginal cost of around $6-8.5/mcf. Using a National Balancing Point (NBP) forward curve from June 2010, an estimating an average oil price of around $85 per barrel, she finds shale gas projects could go forward at a price of around $6-7/mmBtu. Adding

ECONOMICS

“Efforts to tie the oil price to gas doesn’t really work. Political conflict in Libya sent oil prices on a record climb. You can see how these two markets can diverge. Oil and gas no longer climb hand in hand.” costs for regulation and export duties on Russian gas, the breakeven price at which shale gas projects could go forward in Poland is about $8-12/mcf ($7.8-11.8/mmBtu). GAZPROM’S VIEW In an April 2011 shale gas conference in Warsaw, Sergei Komlev, head of contracts and pricing at Gazprom, presented a rather dire picture of the future prospects of shale gas. In his view, the low gas price makes U.S. shale gas unsustainable. Citing a recent study commissioned about the U.S. market, Mr. Komlev argued that production of shale gas at current prices is unsustainable. Given the low price of around $4-5/mmBtu, Mr. Komlev argued that the only reason that U.S. producers have been able to continue is because of hedging and contractual obligations that keep them producing no matter what. “Shale gas production in the U.S. reminds me of riding a bicycle,” Mr. Komlev said. “If you quit riding, you fall off.” He went on to say that Gazprom has no plan to invest in shale gas because of its higher costs. When the moderator pointed out that negative views of shale gas were in keeping with Russia’s political agenda, Mr. Komlev remarked: “I’m not against shale gas. I’m just calling for a realistic appraisal.” High prices Poland pays for its natural gas may give incentive to producers to make shale gas profitable. This in turn could put downward price pressure on Gazprom, bringing them back to the negotiating table. “But don’t expect too much bargaining power,” says Mr. Lakani. “Gazprom is not going to stand still. They’ve got the volumes. They’ve got the network, they’re going to be competitive.”

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Future Cost

Scenarios The exploitation of shales in the US is commonly compared to a manufacturing process where repeatable drilling processes are essential to make a project economic. News flash: “quick and dirty” operations won’t do the trick here. BY FLORENCE GÉNY

WHAT THAT MEANS is that we can expect exploration and production costs to remain higher than in the US in the medium- to long-term. There are many hurdles to achieving low costs and at levels comparable to the US, but we can expect exploration and production costs to remain higher than in the US in the medium- to long-term. How much are we talking about? Repeated drilling processes depend on good well designs, at high speed and low costs. Ideally this concept should also be applied to shale operations in Europe, as the big question for the future of shale oil and gas in the region is really about the level of costs. Let’s first look at the natural gas cost structure. The concept of costs is one of the most confusing aspects of the gas industry. If we only look at the full-cycle cost of producing natural gas, Finding and Development costs (F&D) and Lease Operating Expenses (LOE) basically account for 80% of the total. 58 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

PHOTOGRAPHY BY KASIA SNYDER

FINDING THE GAS F&D costs are capital expenditures associated with finding and developing gas reserves, i.e acquiring land, as well as drilling and completing (D&C) wells. While land acquisitions amount to almost half of total F&D costs, D&C costs are the most monitored sub-categories and account for close to 100% of well costs. As a rule of thumb, well costs are split 50/50 between drilling and completion costs. However, a new trend in the US is the rising share of completion costs due to the increased number and intensity of fracs per well. Directional drilling and cementing work captures the largest share of drilling expenditures, followed by rig (i.e day rates), casing and mobilisation/demobilisation costs. Stimulation (i.e fluid fracturing) work accounts for the highest share of completion investments. Moreover, horizontal wells generally have D&C costs two to four times higher than vertical ones as they

are more challenging technically and require more fracturing. In the US, drilling costs alone range from $0.5 to $10 million or more. Lease Operating Expenses are costs incurred to produce gas after the well has been drilled and completed. Therefore they include costs of gathering, processing and shipping the gas to a market point, in addition to labour, overhead, maintenance and work-over costs. Operating costs vary depending on the particular characteristics of each reservoir, the chemical composition of the gas, well pressure and distance to pipelines. Furthermore, as LOE costs are ongoing cash costs incurred in operating an existing well, they act as a “floor” price, below which producers will start losing money on a cash basis, and thus curb production. In the US, this floor price amounts on average to about $2/mcf. COSTS MORE HERE Shale gas wells in Europe are expected


ECONOMICS

“The depth of shale rocks in Europe is on average 1.5 times greater than in the US, translating into the need for powerful rigs, more powerful pumps and more fraccing fluids.” to be very expensive compared to the US, around twice as much, and also compared to conventional gas wells in the continent, especially in the early stages of resource appraisal and development. There are several reasons for this: generally greater reservoir depth and complexity than in the US, extensive regulations, high cost of services and high cost of building infrastructure. The depth of shale rocks in Europe is on average 1.5 times greater than in the US, translating into the need for powerful rigs, more powerful pumps and more fraccing fluids (especially as less is expected to flow back and be re-used), while the cost of water procurement is expected to be almost 10 times higher than in the US! On the regulatory side, requirements embedded in labour laws and environmental and safety regulations are stricter. Examples that differentiate Europe from the US relate for example to well design (around four casing programs are required versus only one in the US), and the higher level of wages and regulated working time which increase the size of manning crews per rig. As the service industry in Europe is far less competitive than in the US, with very few specialist companies and staff, the cost of services provided by contractors is also expected to be higher. For example, rig rates in the unconventional gas development phase in Europe would be on average 20% higher, in the order of $25,000-$30,000/day according to interviews with various service companies, compared to around $20,000/day in the US as of 2010. Finding & Development costs for unconventional gas can be and will be reduced in Europe, the question is how and to what extent. There are several factors that can contribute to cost reductions along the value chain: cost optimi-

sation from more efficient operations during the development phase, higher competition in the European service sector, and further technological progress. REDUCING COSTS Based on the US experience but in a European context, cost reduction can mostly be achieved through time saving and increasing quantities recovered, which can be achieved by faster drilling, drilling in pads, and fraccing more stages simultaneously. Faster drilling can be achieved by knowing how and where to drill with more accuracy, and this information is collected through the feedback loop provided by drilling and fraccing more and more wells and the continuous integration of this new information in new drilling operations. The other way of improving drilling de-

cisions and optimising well placement is by using subsurface mapping tools. Finally, another area of cost reduction shown is operational improvements in the supply chain. However, even in a successful development scenario in Europe, there will be fewer opportunities to realise operational efficiencies and optimise costs compared to the US. There is a structurally higher cost of doing business in Europe, and less possibilities to realise economies of scale, due to lower recoverable volumes, smaller surfaces to drill and a greater number of concession holders in a given area. Working together to plan operations in a way that ensures a continuous workload for rigs or fraccing equipment is key to driving operational costs down in Europe, but this is unfortunately unlikely to happen.

The way land is divided in Poland In Germany, land was consolidated after World War II in a process called Flurbereinigung, but Poland’s landowners - as far back as the Middle Ages - have been dividing land among successive owners. Take a look from an airplane, and here’s what you’ll see: a long, skinny and infinitely varied patchwork of farm land. Let’s take a look at the numbers. Poland and Germany have comparable land areas. Poland has 311,000 km2 of land and Germany 350,000 km2. But the land is divided differently. Most of the farms in Poland are between 10 and 20 hectares (25 to 50 acres), while most farms in Germany are between 50 and 200 hectares (120 to 500 acres). The number of small farms is much greater in Poland, 10,400 farms of 50 hectares or less (120 acres). Whereas the number of large farms is greater in Germany, 6,500 farms of greater than 50 ha (120 acres).

So that means two things for producers. 1. In most instances, you’ll have to engage several landowners for permission to construct a drilling pad and 2. the type of factory-scale production where well pads are staged at regular intervals is impossible. Those who are innovative and can drill multiple laterals from multiple vertical well bores will be rewarded.

TYPICAL LAND USE PATTERN, GOOGLE EARTH

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BY THE NUMBERS

Country by country comparison of Poland with respect to other European and North American countries

SOURCES: World Bank statistics, CIA World Factbook, (PA gas production from PA Geological Survey, TX production from Texas Railroad Commission) NORTH AMERICA

FISCAL REGIME * Royalty Rate **

USA (TX)

7.5%+ $0.0003/mcf

USA (PA)

CANADA

12-20%

5% (Alberta)

Corporate Income Tax ***

franchise tax

10%

15% (Alberta)

Income Tax Loss Treatment

carry forward

carry forward

carry forward

varies

varies

20%

Annual Production (BCM)

160

5

178

Domestic Consumption (BCM)

95

22

92

Net Exports (Imports)

65

(-17)

86

Gas Price ($/MMBtu) †

$4.20

$4.20

$4.20

GDP/Capita (2010 $USD)

46,000

46,000

40,000

Roadways (km)

405,000

156,000

1,042,000

0.017

0.013

0.032

24,000,000

12,000,000

33,000,000

696,000

119,000

9,900,000

34

101

3

Government Take ****

GAS PRODUCTION

COUNTRY INDICATORS

Roads (km/capita) Population Land Area (sq km) Population Density (pop/sq km)

* Methods of calculating fiscal regimes vary. For instance, Germany gives a preferential royalty to coal bed methane. Poland has a royalty rate that varies from high to low methane and might be revised under the new geology and mining law. France has both “community” and “department” royalties. In the US, royalty rates are negotiated with the landowner. In Alberta, the government has a low royalty rate to attract investment.


INTERPRETATION:

MEMBER COUNTRIES OF THE EUROPEAN UNION

POLAND

GERMANY

FRANCE

UK

TURKEY

ECONOMICS

POLAND PAYS A HIGHER PRICE FOR GAS THAN OTHER EU COUNTRIES POLAND HAS A ROYALTY REGIME THAT IS AMONG THE MOST FAVOR ABLE THE LARGEST ECONOMIES IN THE EU ARE NET GAS IMPORTERS

$0.05 / mcf

9-35%

$0.05 / mcf

20-30%

12.5%

19%

31%

34%

30%

28%

carry forward

carry forward

carry forward indefinitely

carry forward

carry forward 5 years

20-45%

35-50%

30-40%

60%

40%

5

20

2

84

1

16

97

47

91

26

(-11)

(-77)

(-45)

(-7)

(-25)

$14.60

$8.80

$8.80

$5.80

$5.60

11,200

40,600

41,000

35,000

8,200

424,000

644,000

951,000

398,000

426,000

0.011

0.008

0.015

0.007

0.006

38,400,000

82,000,000

64,000,000

61,000,000

76,000,000

312,000

357,000

640,000

242,000

783,000

123

230

100

252

97

** Royalties in the U.S. are agreed upon between gas company and landowner. *** France has an income tax deduction that is either 23% of revenue or 50% of profit. **** Government take is an estimate of total royalties and taxes †Gas Prices (2010) in USA & Canada given by average Henry Hub price on USMEX, EU countries from energy portal (www.energy.eu) for industrial users. Turkey price of gas from current contract price with Azerbaijan. Poland from negotiated price with Gazprom.


62 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011


E System pipelines 100 INFRASTRUCTURE

300 500 700 1000

Lw System pipelines 100 300 500 700 1000

Free-county cities Communes Commune borders

TRANS MISSION NETWORK It has 58 input points and 973 exit points. It relies on 14 compressor stations to transport 15 BCM over 9,000 km. Pictured at left, it consists of high methane and low methane pipelines, forming a loose ring connecting the capital Warsaw to the industrial heart of Poland in the south. Spun off from PGNiG in 2004, the transmission network is open to producers. How open, remains to be seen. BY PARKER SNYDER GRAPHICS USED WITH PERMISSION FROM GAZ SYSTEM SA PHOTOGRAPHY BY KASIA SNYDER

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SOURCE: EUROPOLGAZ

SOURCE: EUROPOLGAZ

“Theoretically, any transmission service user can enter into agreement with Gaz System. The application is available on the website (en.gaz-system.pl).”

WLOCLAWEK COMPRESSOR STATION

THE NETWORK IS operated by Gaz System SA the transmission service operator (TSO). Gaz System has legal standing to construct, supervise and maintain Poland’s gas distribution network. An entity who enters into agreement with the TSO is called a transmission service user. The relationship between operator and user is governed by a transmission network code (TNC). The Gaz System website has most documents in English, including a PDF of the TNC that defines contractual relations. The network consists broadly of two parts: transmission and transit. The Yamal transit pipeline runs from east to west through the territory of Poland. Yamal is owned and operated by EuRoPol Gaz SA, a company brought to life in 1992 by then President Lech Wałesa and Russian President Boris Yeltsin. The transit pipeline is owned by EuRoPol Gaz SA, a joint stock company owned in 48% by PGNiG, 48% by Gazprom, and 4% by Gas-trading SA. The pipeline has five major pumping stations and connects to the Polish transmission network in three locations: Mallnow (in Germany), Włocławek and Lwówek. Nearly twothirds of domestic consumption comes to Poland through Belarus vis64 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

YAMAL TRANSIT PIPELINE UNDER CONSTRUCTION

a-vis the Yamal pipeline. The transmission network carries both high and low methane gas. The vast majority of the network is for high methane gas (E) in pipe sizes of 100, 300, 500, 700 and 1000. There is a small network of pipes carrying low methane nitrified gas (Lw). The high methane network connects the largest cities in Poland, incuding Warsaw, Gdansk, Wrocław, Katowice, Kraków

and Rzeszów, by a circle linking the administrative capital Warsaw to the industrial south, southwest and west. The low methane network (Lw) is in the west, near Wrocław. The high methane network is not extensive, certainly less dense than in Texas. In north-east Poland it’s non-existent. It does however broadly intersect Poland’s “shale belt” which runs southeast from Gdansk to Lub-

Who owns the pipeline? The main pipelines in Poland are operated by the state-owned company Gaz System, which is the designated Transmission System Operator (TSO). This company operates 9,709 kilometers of pipelines, primarily transporting high methane gas and mainly concentrated in the south and southwest. The ownership of the pipeline network is divided between Gaz System, which owns 89%, and the Polish national oil and gas company (PGNiG). The latter owned and controlled the entire transmission network until EU rules forced the TSO to become separate in 2005. The main pipeline going through Poland is the Jamal-Europe pipeline operated by EuRoPol Gaz, a joint stock company owned by PGNiG and Gazprom, the Russian state-owned monopoly. Although Gaz-System technically became the independent operator of this pipeline in November 2010, in practical terms

there is no access to this pipeline, and it only accommodates the flow of gas from east to west. In addition to the main transmission pipelines, there are also about 125,000 km of smaller distribution pipelines. These are owned and operated by six regionally based, PGNiG-owned, distribution system operators (DSOs) and some private companies. DSOs are required to provide third party access. In practice, they have much of the capacity contracted out to their parent company. In addition to limited capacity, the pipelines need considerable investment. As many of these pipelines were built in the 70s, much of the system is as many as 40 years old. Sixty per cent of the pipelines are older than 26 years. Only five per cent are less than 10 years old.


INFRASTRUCTURE SOURCE: EUROPOLGAZ

THE YAMAL PIPELINE RUNS THROUGH FIVE COMPRESSOR STATIONS IN POLAND.

lin. In places it is only a single arterial and not a network. There is a smaller “ring” in the southeast that mimics the larger national ring. Gaz System SA aims to replicate the “southern ring” in the north to connect the LNG terminal in Swinoujscie [see box on new investments]. TERMS OF USE It’s important to keep in mind that until 2004, when Poland entered the EU, the transmission network was owned by PGNiG. Gaz System, as TSO, was only recently spun off to manage the grid independently. Because of Poland’s limited domestic production, few users besides PGNiG utilize the network’s transmission capacity. According to one source, nearly all transmission capacity is contracted

to PGNiG. The European Union requires that the TSO does not discriminate but rather promotes equal access to all users. There are provisions in the code to help private companies connect, for instance, only 25% of total connection costs need to be paid by the user. In practice however, since there are few applicants, it is not clear if the TSO will make connecting to the grid easy. Theoretically, any transmission service user (TSU) can enter into agreement with Gaz System. An application must be submitted, and if denied, the dispute is mediated by the Energy Regulatory Authority (URE). The user application is available on the Gaz System website (en. gaz-system.pl). It requires the user to

list their company address, list insurance obligations and write the numbers of its concessions related to: • Natural gas trans/distribution • Natural gas final consumption • Natural gas from mining • LNG final consumption • LNG installation • Gas storage Because the application requires the user to state which type of concession it has in connection with its application, it is likely that the concession holding company: Saponis, Indiana, Oculis, etc. will need to be party to a future agreement. The fees paid to the TSO consist of a one-time connection fee - 25% of total costs - and a transmission tariff. The transmission tariff is in three parts: a fixed fee based on flow rate, a variable

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Gas Transmission System Gdynia

Gdańsk

LNG Terminal

Świnoujście Gas Pipeline Świnoujście – Szczecin

Gniew

Szczecin

Gas Pipeline Włocławek – Gdynia (Gniew – Wiczlino section)

Gas Pipeline Szczecin – Gdańsk

Gas Pipeline Szczecin – Lwówek

Włocławek Gustorzyn

Lwówek

Rembelszczyzna

Warszawa Gas Pipeline Rembelszczyzna – Gustorzyn

Żary Gas Pipeline Polkowice – Żary Gas Pipeline Jeleniów – Dziwiszów

Polkowice Jeleniów Gałów Taczalin Dziwiszów

Wrocław

Gas Pipeline Dziwiszów – Taczalin

Zdzieszowice

Gas Pipeline Taczalin – Radakowice – Gałów Gas Pipeline Zdzieszowice – Wrocław Gas Transmission Pipelines: E high-methane gas

Oświęcim

Podgórska Wola Hermanowice

Skoczów Gas Pipeline Skoczów – Komorowice – Oświęcim

Lw low-methane gas transit pipeline of EuRoPol GAZ S.A. Gas Pipeline Zdzieszowice – Ołtaszyn

Gas Pipeline Gustorzyn – Odolanów

Odolanów

planned investments

Strachocina

Gas Pipeline Strachocina – Pogórska Wola Gas Pipeline Hermanowice – Strachocina

50

25

50

75

100 km

MAP COURTESY OF GAZ SYSTEM, THE PIPELINES IN DARK GREY WITH THE CALLOUTS ARE PLANNED INVESTMENTS BY THE TSO.

Pipelines of the Future Gaz-System plans to construct 1,000 km (600 miles) of new high pressure pipelines by 2014. A recent contract was put out to bid for supplying pipelines that are 70 cm and 80 cm wide. These pipelines are planned for the construction of what Gaz-System considers a strategic ring of pipelines for the north. The reason for the strategic designation is that they are designed to transport gas coming in from the new LNG terminal in Swinoujscie. Gaz-System’s wholly owned subsidiary Polskie LNG is currently constructing it. The terminal is scheduled to be finished in 2014. Upon completion, it should allow the offtake of 5 to 7.5 BCM of natural gas per year. The planned pipelines are meant to make a northwest “ring” of pipelines that is similar to the one in the southeast. The first of these pipeline projects will be a pipeline from the LNG terminal to Szczecin,

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where it will connect with the transmission system through the planned Goleniow interconnection point. The subsequent pipelines will accommodate the flow of gas from the LNG terminal to the city of Gdansk and other interconnection points through which gas can be directed to Poland’s southern cities as well as Warsaw. To complete the “gas ring” the first pipeline is about 100km (60 miles) between Swinoujscie and Szczecin. The second is 350km (150 miles) between Szczecin and Gdansk. The other three pipelines are located in centralnorth Poland and travel distances of about 150 km (90 miles) between Szczecin and Lwowek, Rembelszczyzna and Gustorzyn, and Gustorzyn and Odolanow.

Source: Gaz System press release

rate based on monthly volume, and a subscription paid per month. The tariff depends on the type of gas (high or low methane) and the flow rate: less than 1,800 m3/h, 1,800-4,000 m3/h, 4,000-12,000 m3/h, or more than 12,000 m3/h. There is an additional fee to odorize the gas. The contract period is for one year, but short term contracts are allowed if technically and economically feasible. The transmission network contract (TNC) seems to be clearly written. In parts, it seems to favor the user. For instance, there are discounts if the TSO fails to meet certain quality standards or if there’s an interruption to delivery. There are 37 standards governing the function of the network; about half are Polish standards and half are international (ISO) standards. These


INFRASTRUCTURE

MUCH OF POLAND IS WITHOUT GAS TRANSMISSION INFRASTRUCTURE SUCH AS IN THE NORTH OF POLAND, PICTURED AT RIGHT

SOURCE: KASIA SNYDER

standards control, among other aspects, operating pressure, gas composition and metering systems. POTENTIAL HURDLES In the transmission network code, there are signs of PGNiG’s dominant influence in gas distribution. For instance, PGNiG is given legal right to set the standards for measuring stations and gas meters. There are hurdles related to connecting to the grid. Gaz System has the authority to permit or deny a connection based on technical and economic feasibility. Gaz System, as TSO, may require producers to demonstrate a requirement for storage, or have them pay for it. These are loopholes which may allow the TSO to block a producer from accessing the grid. The transmission capacity is mostly contract-

ed out to PGNiG, so it may be easier to sub-contract capacity rather than to enter into contract with Gaz System directly. A grid connection hurdle may have a corollary in the power sector. Wind developers face difficulty connecting to the grid, even though the energy law is supposed to favor them. For instance, regarding the legally binding priority that is supposed to be given to renewable energy. In practice, wind developers pay the connection fee outright and in its entirety, even though the TSO is required by law to share costs. Gas producers may face a similar challenge gaining access to the transmisison network. Rather than be denied access altogether, a producer may elect to pay the connection fee outright. It remains to be seen whether a revised mining

and geology brings clarity regarding whose responsibility, and under what conditions, a connection to the grid is granted. Furthermore, the TSO requires a financial guarantee based on the applicant’s financial rating compared to a minimum (Standard & Poors: BBB+, Moodys: Baa1, Fitch: BBB+). Applicants with a worse credit rating will face more challenging insuring/bonding requirements. Finally, there is a future question about capacity. A planned LNG terminal in Swinoujscie is being built by Polskie LNG Sp z o.o., a subsidiary of Gaz System. The cornerstone was laid in March 2011 and the terminal is expected to come online as soon as 2014. Likely LNG from the Middle East will affect balancing, when and if new volumes enter the grid.

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Pipeline Pipedream The European Union is relying largely on natural gas coming into its borders via a network of pipelines. The construction of these pipelines is long-term and costly. If shales in Poland, or other plays in Hungary, France, or Ukraine, prove to be gas-bearing, companies building pipelines might want to think twice. BY WOJCIECH KOSC

ENERGY COMPANIES, NOT without reason, bet on certainty of supplies, not the best price. The cost, in fact, they shift onto the end users. But what happens when there’s a major shift in the source of supply? What happens when there’s a game changer? According to Artur Lorkowski, deputy head of the economic policy department at the Polish ministry of foreign affairs, the potentially strong reserves of shale gas in Europe could undermine the economic viability of forthcoming natural gas pipelines. “On the EU level, there’s uncertainty about what shale gas exploration may do to the European gas market. There are concerns about how feasible the business plans for major pipelines might turn out if potent gas resources are confirmed in countries like Poland,” Mr. Lorkowski said at a Warsaw conference in March 2011.

ects are Russia-led. The first one is Nord Stream that by 2011-2012 will link Russia with Germany via a pipe largely on the bottom of the Baltic Sea, at an estimated cost of €15 billion. The investor is Nord Stream, a joint venture of Gazprom, BASF, E.ON, Nederlandse Gasunie and GDF Suez. The second one is South Stream, a €19-24 billion project that is routed via the Black Sea from several gas companies, including Eni, EdF, Bulgargaz, Srbijagas, MOL, and Geoplin Plinovodi, with Gazprom as leader. South Stream is planned to go online in 2015.

the figure is undergoing review. Shareholders in the project are OMV, MOL, Transgaz, Bulgargaz, BOTA and RWE. MOVING FORWARD Nabucco Gas Pipeline International is however convinced of the pipeline’s viability. “The quantities of shale gas in Europe are too small to replace a big project like Nabucco. Also, in Europe, the laws regarding environmental impacts are stricter than in the USA and therefore political hurdles can be expected,” a representative for the company told Cleantech Poland in an email. Long term investments in strategic pipeline infrastructure are not, unsuprisingly, all that often based on a rigorous market analysis. Politicians too bet on certainty of supply, not price. Take for example, Asian markets that are almost wholly dependent on LNG and whose suppliers oil-index the prices. All that to say, shale gas presents a new-found complication. Although from the perspective of Russiandependent EU countries, a good complication. Shale gas, in the end, will be lauded by those who need it and poo-poohed by those who don’t.

“Nabucco will cost €7.9 billion, though, according to the operator, the figure is undergoing review.”

PIPELINES GO BUST? Which pipelines could be in jeopardy? There are several projects, in various stage of development, that aim to increase the volume and stability of gas supplies to Europe. These projects may just come online when confirmation of Europe’s shale potential is reached. Two out of three pipelines proj-

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The third key pipeline, although the one afflicted by the most geopolitical trouble, is Nabucco, planned to be operational by 2015. It will link Turkey to Austria, with suppliers being Iraq, Turkmenistan, Azerbaijan, and Egypt. It will cost €7.9 billion, though, according to the operator, Nabucco Gas Pipeline International,


BY WOJCIECH KOSC

INFRASTRUCTURE

Polish Highways

The shift towards faster roads construction is upon us, but there’s a lot of work ahead. The current government has jump-started the permitting process. As it happens, whoever’s in power when roads are completed, is likely to bask in the light of success.

P H O T O G R A P H Y S O U R C E D F R O M C R E AT I V E C O M M O N S GRAPHICS USED WITH PERMISSION

THE ROADS ARE FINE. THE PROBLEM IS THERE’S JUST TOO FEW. THE A1 HIGHWAY PICTURED IS ONLY PARTIALLY COMPLETE.

SOURCE: CREATIVE COMMONS

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Slow pace of road construction

SOURCE: FORUM DROGOWE SKYSCRAPER CITY

MORE THAN 20 years since the collapse of the communist regime, it’s hardly relevant to blame communists for the still underdeveloped road system in Poland. Subsequent governments of the 1990s and 2000s have done far too little, or simply nothing, to create such a legal framework under which construction would begin and keep going – until now. A comprehensive road network might be secondary when it comes to access to a particular drilling site. The seismic and geological tests are what ultimately determines where a particular drilling will take place, says Marek Madeja, country manager of Cuadrilla Resources, a company holding two concessions to explore shale gas in south eastern Poland. “Drilling must take place to maximize the results, gas-wise. If it has to take place away from the road network, so be it. There will just be an extra cost to make the site accessible to vehicles. If there’s access already, it’s a gain on time and money,” says Madeja. NOT YET THERE It’s not unthinkable at all, however, that the access to many sites will indeed be limited and companies will need to outlay more cash to carry equipment in and out of a given site. This is because the road system in Poland might be growing at last, but the very nature of investments is that it will still take some years for a com70 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

prehensive network to emerge. In brief, the core of Poland’s road transportation system will be formed by the A1, A2 and A4 highways, A1 linking the northern metropolis of Gdansk to Łódz and then to key southern metropolitan area of Katowice. The A2 will stretch across Poland from the border with Germany to one with Ukraine through Poznan, Łódz and the capital city Warsaw. The A4 will similarly link Poland’s west and east borders only through a more

southern route via Wrocław, Katowice and Kraków. There will also be shorter highway sections, named A6, A8, and A18. There are almost 900 kilometers of highways in Poland at the moment and 578 kilometers under construction. The completed system will be 2000 kilometers in length. A network of more than 5,000 kilometers of expressways (one grade lower than highways) is also under development, though only 17 per-

Missing links

THE RED AND GREEN SECTIONS ARE NEW HIGHWAYS THAT HAVE YET TO BE BUILT. THESE MAKE EAST-WEST AND NORTH-SOUTH TRAVEL EXTREMELY SLOW


INFRASTRUCTURE

Finally getting better

SOURCE: FORUM DROGOWE SKYSCRAPER CITY

“The current coalition government of Civic Platform and the Polish Peasants Party must be credited with having breathed life into road construction.” cent of the planned length has been completed at the moment, with 343 kilometers under construction and contractors’ having been signed on further 579 kilometers. The current coalition government of Civic Platform and the Polish Peasants Party must be credited with having breathed life into the road construction program that remained in stagnation in early 2000s. When the highway system of 2,000 kilometers has been completed in 2015, about a third of it will be the work of the current government, which will have led the permitting process to the point when the work - and responsibility - could be handed over to general contractors. It’s not easy to come up with specific figures that each of the recent few government allocated for roads building. The previous government, led by Law and Justice party,

approved a PLN 121 billion (€30.54 billion) road building program, but it lost elections shortly afterwards, while the new government was forced to downsize the program due to the crisis. The current figure for the road building program until 2015 stands at PLN 82 billion (€20.69 billion). ENVIRONMENTAL IMPACT Road construction in Poland goes by and large along the same lines as in any member state of the European Union, but there are some key areas on which the entire process hinges, like the public procurement law or the law on environmental impact assessment (EIA). Without a valid EIA decision no investment, not just roads, is possible to execute in any EU member state. The EIA had long been an element that protracted roads construction beyond reasonable extent, mostly

because EIA decisions have an expiry date after which the entire process must be started over. On the other hand, once there’s a valid EIA decision, all that the investor – the Polish state in majority of cases, via a dedicated agency – needs to do is to sign a general contractor. The accountability is then shifted onto the contracting company. The current government has indeed overcome the EIA languor so that it’s the contractors that are largely responsible now for the upgrade of the roads system. In fact, this year is going to be the first ever year since 1989 when contractors were sign on to build, and then delivered roads, within one government’s term in office. Of course, once the new roads are delivered in couple years from now, some other government will be getting all the media attention. Delivery is always more spectacular than work preceding it.

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Geology

Report

MAIN BASINS IN EUROPE THAT ARE TARGESTS FOR SHALE GAS EXPLORATION, SOURCE: PAWEŁ POPRAWA (PIG)

EXPLORATION

UN-EXPLORED

North American success in unconventional gas production had led to intense exploration across the world, with Europe being one of priorities for the oil and gas industry. At the current stage of exploration, a couple of sedimentary basins were selected in Europe as the main shale gas exploration targets. Poland has several of them. BY PAW E Ł P O P RAWA

72 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

PHOTOGRAPHY BY GRZEGORZ WROBEL


GEOLOGY

“The northern part of the Baltic Basin is characterized by very high organic content, a range of 3-12 % TOC” THIS INCLUDES PREDOMINANTLY the Lower Jurassic shale in the Lower Saxony Basin in Germany, the Alum shale in Scania (Southern Sweden), and to lesser degree the South-Eastern Basin in France with the Lower Jurassic and Lower to Upper Cretaceous shales. It also includes the Paris Basin in France with the Lower Jurassic shale, Lower Carboniferous in NW Germany and Netherlands, as well as the Upper Jurassic shale in the Vienna Basin, the Lower Cretaceous Wealden shale in England, the Bodensee Trough in SW Germany with the Permian-Carboniferous shale, and the Silurian in southern Romania and northern Bulgaria. However at present most shale gas exploration in Europe is in Poland. The main target for shale gas exploration is the Lower Palaeozoic shale at the East European Craton (Baltic and Lublin-Podlasie Basin), mainly the Upper Ordovician and Lower Silurian graptolitic shale (Fig. 2). Locally, in the northern part of the Baltic Basin, an additional target is the Upper Cambrian to Tremadocian Alum shale. These sediments are often rich in organic as well as in silica. For those formations Wood Mackenzie and Advanced Resources International estimated recoverable gas resources equal to 1.4 trillion cubic meters (tcm) and 3 tcm, respectively. The Lower Palaeozoic basin at the western slope of the East European Craton (EEC) is currently one of the

most attractive areas for shale gas exploration in Europe. The part of the EEC in Poland is the Baltic and LubinPodlasie Basins. Hereafter, EEC is the focus area. The advantage of the Lower Palaeozoic shale at the western slope of the EEC is their broad later extend, and relatively quiet tectonic setting. The later is particularly true in the case of Baltic Basin and Podlasie Depression. The structural development is to some extent more complex in the case of the Lublin region (further south), where the Lower Palaeozoic shale is involved into late Famennian to early Visean tectonics. ORGANIC CONTENT? Development of the organic rich Lower Palaeozoic shale at the western slope of the EEC is controlled by several factors. What’s very important is the rate of non-organic detritus deposition. Other aspects are organic productivity of the basin, subsidence, relative sea level changes, basin bathymetry, geochemical conditions at the sea bottom, mainly oxygenation, as well as the degree of bioturbation, the presence of topographic barriers at the sea bottom, the development of isolated anoxic zones, the configuration of sea currents and climate changes. The organic matter of the Lower Palaeozoic is characterized by II type kerogen. An appearance of organic rich shale within the Lower Palaeozoic

section at the western slope of the EEC is diachronic. In the following section, from the northwest towards the east and southeast, the intervals richest in organic appear at systematically younger strata, beginning with the Upper Cambrian to Tremadocian, as well as Upper Llanvirn and Caradoc in the Łeba Elevation (northern onshore Baltic Basin). In different parts of the western slope of the EEC, different formations are the targets for shale gas exploration. In the central part of the Baltic Basin, central part of the Podlasie Depression and northwest part of the Lublin region, the intervals richest in organic are observed within Llandovery section. While in the eastern part of the Baltic Basin and southeastern part of the Lublin region the highest total organic content (TOC) is observed for Wenlock. The Upper Cambrian to Tremadocian shale, present only in the northern part of the Baltic Basin, is characterized by very high organic content, with the average value for an individual section usually in a range of 3-12 % TOC. This shale formation has however very limited thickness, which in the onshore part of the basin is not greater than several meters. The thickness of the Caradoc shale in the onshore part of the focus area varies from several meters to more than 50 meters. The contents of the organic matter in these sediments is the highest in the Łeba Elevation

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“In the zones characterized by thermal maturity within a range of 0.8 to 1.1% Ro and very high TOC contents values, which exceed 15% at maximum, there is the potential for shale oil exploration.” zone (the northern part of the onshore Baltic Basin) and in the area of Płock-Warszawa trough (region between Baltic Basin and Lublin-Podlasie Basins). Within individual well sections the average TOC is in a range of 1% to nearly 4%. The Ashgill sediments are characterized by high TOC only in the Łeba Elevation zone, with the average TOC within an individual well up to 4.5%. The Llandovery shale has high TOC, particularly in its lower part, for a significant part of the western slope of the EEC. The maximum measured TOC within this sediments in Podlasie Depression is nearly 20%. The average TOC within an individual section of the Llandovery is usually from 1 to 2.5%, except the Podlasie Depression, where this might reach 6%. Thickness of the Llandovery shale increases from east to west to approximately 70 meters at most, however for the major part of the focus area it falls into a range from 20 to 40 meters. The lateral thickness of the Wenlock sediments is highly variable, from less than 100 meters in the southeastern part of the Lublin region, to more than 1000 meters in the western part of the Baltic Basin. The average TOC for the individual Wenlock sections in the central and western part of the Baltic Basin and in the Podlasie Depression usually is in a range of 0.5 % to 1.3 %. In the eastern part of the Baltic Basin and in the Lublin region the TOC is from 1 to 1.7%. The above mentioned values of TOC stands for its present day contents, which is lower than the primary TOC. The difference between present day and primary TOC is that it increases with increasing thermal maturity. It 74 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

is also highly dependent on the genetic type of kerogen. Taking into account the II type kerogen of the analyzed sediments, it may be estimated that for the zones located in the gas window the primary TOC was at least half as high as that indicated by present day laboratory measurements. COMMERCIAL POTENTIAL The characteristic feature of the western slope of the EEC is negative relation - from the shale gas point of view - between the depth of present day burial and the thermal maturity. In the zones where low burial depth allows for low exploration costs, the thermal maturity of shale is too low for gas generation. Maturity increases to the west, as does the burial, and

THE AUTHOR IN ARIZONA TO SEE THE GRAND CANYON AS PART OF THE GLOBAL SHALE GAS INITIATIVE

in the western part of the focus area, potential shale gas accumulation could be present at too great depths for commercial gas exploration and production. In between the zone of too low maturity for shale gas development and too high burial depth for its exploration there is a broad zone of the Lower Palaeozoic shale having higher shale gas exploration potential. In this area there are shale intervals of relatively high thickness and average TOC, exceeding 1 to 2%. Thermal maturity is sufficient for the generation of gas, and well test results for the conventional reservoirs below allows one to expect good quality dry gas with no nitrogen. There are also some gas shows documented for the


IN GT EE OR LV O IGEYW

SHALE PLAYS TIGHT GAS REGIONS WITH SHALE GAS AND TIGHT GAS EXPLORATION IN POLAND, SOURCE: PAWEĹ POPRAWA (PIG)

Lower Palaeozoic shale. Moreover, the depth of burial is not too deep for commercial shale gas exploration. Hydrocarbon shows and their composition in the Lower Palaeozoic section are strictly related to the thermal maturity of the source rock. In the zones of low maturity there are almost exclusively oil shows documented. Further west, in the zone transitional to the gas window area, gas is wet and contains a significant contribution of hydrocarbon gases higher than methane. Within the gas window there are almost exclusively methane shows observed. Moreover within the zones of low maturity high nitrogen content is observed. In the zones characterized by thermal maturity within a range of 0.8 to

1.1% Ro and very high TOC contents values, which exceed 15% at maximum, there is the potential for shale oil exploration. The zones with the highest potential are the eastern Baltic basin in southwest Lithuania and northeast Podlasie Depression. It is worth mentioning that the Lower Palaeozoic complex in Poland has some characteristics which points to higher exploration risk. Compared to classic examples of gas shales, like the Barnett shale, the average TOC is lower. Moreover, in the zone of optimal burial depth (less than 3000 - 3500 meters), thermal maturity is lower than in the case the Barnett shale core area. An important risk factor is the limited quantity, as well as the limited resources in conventional gas fields

in the Lower Palaeozoic complex. The amount and intensity of gas shows from the Lower Palaeozoic shale are also relatively low, and there is no evidence for the presence of overpressure in this complex. In the eastern part of the western slope of the EEC an additional risk factor is relatively high nitrogen content in the gas. The secondary target for shale gas exploration is the Lower Carboniferous shale in southwest Poland (ForeSudetic Monocline area). In this complex, gas shales might inter-bed with tight sandstones, possibly saturated with gas. TOC is variable, locally high enough for shale gas development. Thermal maturity is the equivalent of dry gas window to over mature. In this case, what limits shale gas potential is complex tectonic setting.

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Stratigraphy of Polish shales (A) LUBLIN BASIN

SOURCE: PAWEŁ POPRAWA (PIG)

(B) BALTIC BASIN

SHALE GAS? SHALE GAS? SHALE GAS SHALE GAS

(A) SIMPLIFIED LITHOSTRATIGRAPHIC SECTION OF THE LOWER PALAEOZOIC AT THE LUBLIN REGION

76 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

(B) BALTIC BASIN WITH POSITION OF ORGANIC RICH SHALES, POTENTIAL SHALE GAS FORMATION.


PawełPoprawa is a geologist with Polish Geological Institute (PIG)

GEOLOGY

The floor of Paweł Poprawa’s office is covered with them. There’s not a space a free space on his desk. Upon entering his office, you can tell by the look of things, he’s been busy.

The man loves rocks

I N T E RV I E W W I T H PAW E Ł P O P RAWA , H E A D O F P E T RO L E U M D I V I S I O N, P I G MR. PAWEŁ POPRAWA has worked for the Polish Geological Institute for 15 years. Back in 2006, he didn’t know much about shale gas, but over the last five years, he’s climbed a steep learning curve. Today, he’s regularly chosen to represent Poland abroad, and his publications have received international attention. In the last few months he’s given lectures in Dallas, Brussels, Vienna and Paris. These days, he’s the geologist most often called upon in local media to explain to ordinary Poles just how seriously they should take shale gas. On a working Saturday, Mr. Poprawa talked to us about Poland’s geological potential and what challenges his country is soon to face. CAN YOU CHARACTERIZE POLAND’S SHALE BASINS?

If you look on a map, there’s a band that runs northwest to southeast through most of Poland. You might say there are three basins, maybe five to be specific. There’s the Baltic basin, on and offshore, the Lublin trough and the Podlasie depression. You also have a very narrow band west of the Mazovian uplift and the BiłgorajNarol zone, where Chevron has concessions. Those are the five major regions. Generally, as you go west, the basins get deeper, and as you go east, the thermal maturity is lower. But keep in mind, these shale basins are all in different geological strata, even within the regions themselves, so the number of continuous plays is greater. AS A GEOLOGIST, WHAT ARE YOU LOOKING FOR WHEN YOU REVIEW A WELL BORE?

We look at the geochemistry, the

total organic content (TOC), the gas saturation, and if there’s any gas shows as you drill. You investigate gas quality. Is it wet or dry? Does it contain CO2 or nitrogen? Then, if you’ve fracked, you want to look at pressure profiles to get a sense of how the well is going to produce. THERE’S BEEN A COMPARISON BETWEEN POLAND’S SHALE BASINS AND THOSE IN THE UNITED STATES. LOOKING AT THE GEOLOGY, WOULD YOU AGREE?

You could compare a few of Poland’s basins with the Marcellus, but in general there’s still a great deal of uncertainty. There’s also a lot of variation, in any shale basin. The difficulty in evaluating Poland’s shales is in our

kept confidential, so I can only share with you my optimism. You may know that the Lane well which was vertically fractured had to be flared. The flame is of course proof that the gas is there. CAN YOU EXPLAIN WHAT MAKES AN ATTRACTIVE BASIN IN TERMS OF DEPTH?

The shallower basins are better because they are cheaper to drill. But their geological parameters might be worse. Shallow basins are usually not as thermally mature. In general, the deeper you go the better. Definitely, you have to go deeper than 1,000 meters so the sediment on top creates a stress regime, and you have no chance of fracturing up into aquifers. Most basins are between 2000 and 4500 meters. You could go deeper but you have to have over pressure from the formation itself. The Haynesville (in Louisiana) produces at 4500 meters, because it’s held under considerable formation pressure.

“Of the few wells that have been fracked, the information is being kept confidential, so I can only share with you my optimism.” historical record. We’ve drilled over 7,000 wells of at least 1000 km, but most of these wells were drilled in the 50s, 60s and 70s. During communism, the well cores were kept outside, or in poor conditions. Since the organic material was in contact with oxygen, generally, the well cores report less TOC.

YOU MENTIONED CONFIDENTIALITY. WHY DO SOME COMPANIES RELEASE INFORMATION ABOUT THEIR WELL BORES AND OTHERS DON’T?

SO YOU THINK THE TOC COULD BE UNDERREPRESENTED BY THE DATA YOU HAVE?

In general, small companies will release information to increase the value of their concessions. If the report is positive and they’re publicly listed companies, the value of their stock increases. This may reduce their borrowing costs and make farming out work more feasible. Larger companies keep quiet because they are better capitalized.

It could be. Of the few wells that have been fracked, the information is being

CAN YOU COMMENT ON ADVANCED RE-

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“The fact that Poland’s resources are government owned makes it easier. You really only have to deal with organizations, not individuals.” - Paweł Poprawa SOURCES ESTIMATE OF 3 TRILLION CUBIC METERS OF TECHNICALLY RECOVERABLE GAS. DO YOU BELIEVE POLAND HAS 200 YEARS OF DOMESTIC SUPPLY IN REACH?

I would treat that number with caution. From what I know, it was an estimation based on an average thickness, using U.S. shale basins as analogue. Recently, they’ve taken the report down from their website because of the unusual amount of traffic it was generating. Even so, I use that number when I give public presentations to impress upon people how we have to take shale gas seriously. So in a way, it’s been useful. WHAT ABOUT THE POLISH GEOLOGICAL INSTITUTE? HAVE YOU MADE AN ESTIMATE?

We’re about to. Sometime in the spring of 2011 we’ll release our estimate in collaboration with USGS. More than likely, it will be more conservative than the Advanced estimate. CAN YOU TALK ABOUT SUPPORT THE U.S. IS GIVING TO POLAND’S SHALE GAS DEVELOPMENT?

The U.S. State Department aims to promote shale worldwide. Polish officials in the Ministry of Environment and State Mining Authority went on a research trip to visit the Marcellus and Barnett. The first trip was aimed at the environmental challenges. The second will be about calculating production potential in cooperation with USGS. There’s two aims: one is geopolitical, to take bargaining power away from autocratic regions of the world, such as Russia and the Middle East. The second is commercial. Basically to promote U.S. business abroad. It’s not only Poland 78 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

who’s getting help, but China and India too. GIVEN THE CHALLENGES, DO YOU THINK IT WILL BE POSSIBLE FOR POLAND TO PRODUCE THIS GAS?

It could be a problem anywhere in Europe. With shale gas, in contrast to conventional gas, you have an earlier peak production and a more rapidly declining production curve. That means you have to keep drilling. There’s the population density which is greater than the US. There are environmentally protected areas. Both of these reduce working area on the surface. But, it will be easier to drill in Poland, especially in agricultural areas with low population densities. Well, easier than say Southern France, which is full of beautiful landscapes and makes a lot of money off tourism. The fact that Poland’s resources are government-owned makes it easier. You really only have to deal with organizations, not individuals. Basically, the Mining Authority and the Ministry of Environment, specifically the Office of Geology and Concessions and the Office of Environmental Protection. The challenge could be locally, because farms are small, so you may need to involve 2 or 3 owners to get a pad constructed. THE PRICE OF GAS IN POLAND IS FIXED IN A LONG-TERM CONTRACT WITH GAZPROM. BUT WHAT HAPPENS IF THE FUTURE PRICE OF GAS COLLAPSES?

Look at what happened in 2008. In the U.S. the methane gas prices collapsed, from $14 to $3. But industry responded by producing different parts of basins. First wet gas for the

chemical industry because it fetches a different price. Then light oil because of rising oil prices. I expect something similar could happen in Poland, one area will be good for shale gas and another for shale oil. WHAT ABOUT THE ROYALTY REGIME?

You have three fees. There’s corporate income tax (CIT) of 19%. There’s a fee for the use of the environment, 60% of which is distributed to the local municipality. There’s a hydrocarbon fee of €0.0509 per mcf produced (thousand cubic feet). Really, its quite low globally. The fact that revenue is shared with municipalities makes them favorable to development. Did you know that the richest gmina (local municipality) in Poland is a small town in the vicinity of an open pit mine in Belchatów? It’s one of the largest open-pit coal mines in operation, and the community is compensated because of the way land is used there. *** PAWEL POPRAWA, MSC Eng. studied geosciences and petroleum geology at Jagiellonian University in Krakow, AGH Technical University and University College Dublin, completing his MSc Thesis on the organic geochemistry of hydrocarbon source rocks. Since 1995 he has worked at the Polish Geological Institute in Warsaw, and since 2003 as Head of the Petroleum Prospection Division. His main interests are sedimentary basin analysis, thermal and burial history reconstructions, and the tectonic evolution of sedimentary basins. For the last four years he has been studying Poland’s shale gas potential.


Henryk Jezierski is Poland’s chief geologist.

GEOLOGY

Interview with

the Chief

Poland’s deputy environment minister and the country’s chief geologist Henryk Jezierski speaks to Cleantech Poland about keeping it cool amid the shale gas fever, and how there will be no compromise on environmental protection as the market’s shaping up. BY WOJCIECH KOSC

BEFORE JANUARY 2010, Poland’s deputy environment minister and chief geologist, hardly made headlines, being a figure better known to the titans of traditional industries such as coal and conventional gas. Today, as the shale gas sector is on the verge of making it big, he’s one of the most influential people in Poland. In an interview with Cleantech Poland, Mr Jezierski inventories Poland’s shale assets and pledges that there will be no cutting corners when it comes to making sure that shale gas exploration doesn’t clash with Poland’s EU-driven environmental regime. HEATING UP According to Mr Jezierski, the technology in the US and Canada might have made shale gas a viable business now, but in Poland, the sector is very immature. “Ten years ago no one talked about shale gas in Poland, as the technology was not even that well developed in the US. But I’d venture to say that 95 percent of geologists in Poland didn’t have a clue about shale gas potential until January 2010, when we organized a conference about it, which likened Poland to Texas,” Jezierski adds. When he says Poland is like Texas, Mr Jezierski means the geology - on a very general level. There are shale belts in both Poland and Texas that are similar, and that’s where the gas is likely to be found. Mr Jezierski says that one of Poland’s assets is that it’s

INTERVIEW WITH HENRYK JE ZIERSKI, CHIEF GEOLOGIST

geology has been so well researched. That’s what attracted operators to the region. COOLING DOWN Mr Jezierski might be saying that everyone is hopeful for the shale gas sector to develop in Poland but - maybe because he’s less of a politician and more of an industry expert - he also seems to have retained the coolest head about all that’s happening from GdaNsk to Lublin. “We are still where we were. We’re only going to know anything of substance when the concession holders finish their geological research and assess the results,” Mr. Jezierski says. No matter what shale gas estimates have been, be they from foreign consultancies or Poland’s own Geological Institute (PIG), real, palpable figures are hardly any closer since the ministry went public about shale gas possibilities. OPEN FOR INVESTMENT One of Poland’s advantages is that for years it has been open to foreign investors. Poland is an EU member state with a stable and predictable legal framework. “There’s not going to be a dictator here who’d drive away foreign companies at a whim,” Mr Jezierski says. He adds that in Poland there will be considerable demand for gas because the economy is growing, and furthermore, there’s a huge push to diversify energy sources.

The pressure might be there to develop shale gas quickly, but Mr Jezierski says there will be no cutting corners when it comes to what companies looking for sale gas can do in the name of increasing Poland’s energy security. “We won’t let them downplay environmental issues. The right procedures are in place concerning environmental impact. No one will turn a blind eye to the way they’re observed.” ENVIRONMENT FIRST Mr. Jezierski is quick to point out that companies shouldn’t try and circumvent environmental regulations. “The US experiences are that shale gas is safe. So we’re not going to cut corners, but on the other hand there’s no reason for shale gas fears,” he says. “Gas flowing from taps in people’s houses? That’s something that can happen whether there’s fracking or no fracking,” he says. Jezierski says that if there are confirmed results and the market will begin to shape up, there will be a need to carry out certain legal changes. “Geological and mining laws don’t require changes to catch up with the current early stage of the market. But if there’s enough gas for the production to roll out on a big scale, the market will need help being developed, for example by facilitating the build up of gas pipelines, which is one of the bottlenecks of the current business environment,” Mr Jezierski adds.

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SOURCED FROM THE CREATIVE COMMONS

POLAND HAS A LOT AT STAKE. GET THE RULES RIGHT NOW OR THE RIVERS WILL GET ALL FRACKED UP.


GEOLOGY

DON’T FRACK UP Chesapeake Energy came under fire recently after incidents of water contamination were publicized in local media. Cabot Oil and Gas Co., for instance, agreed to a $5 million settlement for natural gas contamination in the drinking water of 19 homes in northeast Pennsylvania. Though it’s unlikely hydraulic fracturing was the culprit, Cabot settled with the families to bring an end to the legal suit. BY PARKER SNYDER

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What’s in frack fluid?

SOURCE: HALLIBURTON

IN THE U.S. IT IS NOW STANDARD PRACTICE TO DISCLOSE FRACTURING FLUID SCHEDULES, SUCH AS THE ONE PROVIDED BY HALLIBURTON FOR A FRACK JOB IN PENNSYLVANIA.

INDUSTRY HAS DONE very little - until recently - to educate the public about hydraulic fracturing. That’s a shame because fear and a general lack of information has created paranoia in the state of New York, whose citizens have likened the practice to the Love Canal, an environmental calamity that surfaced in the 1970s and resulted in protracted legal battles. Comparing hydraulic fracturing to such a large scale environmental disaster like Love Canal is a gross misrepresentation of what’s become an industry standard practice. But the public fears have put hydraulic fracturing under the microscope of public pressure. Like it or not, industry should lead the way in explaining the practice to the general public. This article discusses hydraulic fracturing with an aim to put forward facts about the most controversial issue, environmental damage. WHY THE FUSS? Most concerns relate to small quantities of industrial chemicals that get pumped down the well. Typically 20-40% of the fluids return to the surface in the form of produced water. In Pennsylvania, produced water is treated minimally before its put back into rivers and streams. At least one municipal water source has been fouled by trihalomethanes, formed when bromide in produced water reacts with chlorine. Hydraulic fracturing in the United States has gotten a bad name. Fracking, which has been around for 70 years, takes place thousands of feet 82 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

beneath the ground, and in most cases, remote and isolated from underground aquifers. Hydraulic fracturing is the act of stimulating, or encouraging, natural gas to flow through tight rocks. This is done by pumping large amounts of fluid, typically water, into a vertical well bore and out a horizontal lateral. Done in stages, hydraulic fracturing creates a matrix of very small pores for the gas to flow out. The depth at which the hydraulic fracture takes place depends on the depth of the shale formation. Typically in Poland, these shale formations are found at depths between 2,500 and 4,000 meters. Aquifers from which private and municipal water comes are usually at depths between 50 and 100 meters. The Groundwater Protection Council, an independent organization in the U.S., estimates the odds of groundwater contamination from fracturing at less than 1 in 200,000,000. Before hydraulic fracturing takes place, a casing program is put in place to isolate the aquifer from the well-bore. After the aquifer is isolated, fracturing takes place. The fluid is usually water based, and contains a number of chemicals, including hydrochloric acid to wash away well-bore particles, a friction reducing agent to improve flow, and a gelling agent to suspend the sand. These chemicals vary in composition, but usually make up from 0.5 to 2.5% of total volume. They are kept isolated from aquifers by the casing program. An acid wash begins the process, followed by a “slick-water pad,” water mixed

with a friction reducing agent. Then follows a number of prop stages, in which the amount of water is reduced during consecutive props. Each arterial, or horizontal lateral, is fracked in multiple stages over several days. The total amount of water needed can be as much as 2.5 million gallons. At least 20% will return to the surface [see water article]. To fracture a shale, water pressure increases to overcome the internal pressure of the rock. The fractures are kept open by a mix of fine and medium grained sand or ceramic known as proppant. The process induces complex fracturing and improves the permeability of the formation by inducing matrix flow. Produced water and gas flow back, typically through the first weeks. Wells that are hydraulically fractured exhibit early peak production and may need re-stimulated. The combination of steep declines and the need to re-fracture means that a great number of pump trucks and drilling rigs will be called upon. At current measure, there are only 7 such rigs in Europe capable of unconventional gas production. Although fracturing is not a new practice, the availability of equipment is a new problem. EU LOVES ITS ENVIRONMENT Anticipating a heavily regulated European Union, and responding to environmental critics in the U.S., several wellknown industry service companies have created environmentally preferable fluid and fracking programs. Although many fracking additives are household chemicals already, Hal-


GEOLOGY

“Hydraulic fracturing is the act of stimulating or encouraging natural gas to flow through tight rocks by pumping large amounts of fluid, typically water, into a vertical well and out a horizontal lateral.”

HYDRAULIC FRACTURING CREATES PORES OF ABOUT 100 NANO-DARCIES, ABOUT ONE TRILLION TIMES SMALLER THAN THE CROSS SECTION OF A GRAIN OF WHEAT.

SOURCE: KASIA SNYDER

liburton promises to certify that all are sourced from the food industry. The program comes complete with a warning that although the ingredients are acquired from food suppliers, “the CleanStim fluid system should not be considered edible.” Halliburton has developed a program to recycle produced water through a process called electrocoagulation. The water that comes out of the well gets recycled and reused after an electric current separates out solids and gas. Another process aims to kill bacteria with ultraviolet light rather than chemicals, while another aims to source liquid gel concentrates (LGCs) from a dry polymer mix. “Just add water and blend,” according to the site. These programs are marketed not only to producers who aim to manage their environmental liabilities, but increasingly toward the public, who are going straight to the service company for information about their environmental practices. Schlumberger, through its subsidiary M-I Swaco, has developed a water-based drilling fluid called ENVIROTHERM NT that’s advertised for use in high temperature applications with long

idle times in environmentally sensitive areas. Packers Plus, a company who provides open-hole, multi-stage completions, is positioning their program as environmentally preferable. “By completing a well in ten days instead of thirty,” sales manager Paul Higginson remarked, “we can reduce our environmental impact.” Mr. Higginson is referring to the reduction in noise and emissions that occur when equipment is in operation for less time. The EU requires operators to disclose the chemicals they pump down the wellhole, so likely the information will make its way to the public. The casing programs are, by law, more extensive. Anticipating more stringent regulatory rules and more difficult surface conditions, companies have begun to respond by innovating in the environmental space. Hydraulic fracturing is a sure target. INNOVATE NOW, PAY LATER In March of 2011, Schlumberger held an innovation conference at the Copernicus Science Center in Warsaw to discuss the challenges Poland is likely to face in

ramping up to industrial scale production. [See innovation section] Because of more difficult surface conditions, sweet spot detection will have to be optimized with better data acquisition. Well placement plans will need reconsidered, as land in Poland is highly fragmented. There is room for improvement downhole. To enhance recovery, the understanding of petrophysics will need to get more sophisticated, as shales are highly heterogeneous. Over the last decade, many of the wells in the U.S. did not produce. To justify higher upfront costs, the percentage of non-producing wells in Europe will need to come down. 3D micro seismic, or monitoring small-scale fractures in the formation itself, can provide a better picture, as the results of one prop stage can create feedback loops which allows a stimulation engineer to make adjustments. Overall, producers need to engage the public before inevitable mishaps damage public reception. Much has been written about Polish society being favorable to shale gas, but it remains to be seen is at what cost to their lakes and rivers.

SOURCE:PACKERS PLUS

FRACTURING OF A SHALE TAKES PLACE MANY THOUSANDS OF FEET BENEATH THE EARTH, ISOLATED FROM AQUIFERS

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Poland

&

Russia

Russian officials do a passable impression of two of the three monkeys whenever the subject of shale gas rears its head. Determined to neither see nor hear suggestions that unconventional gas in Europe could prove a game changer, they line up to dismiss the idea that countries such as Poland could break free from dependence on Russian supplies.

BY TIM GOSLING, MOSCOW

IN APRIL 2010, Gennady Shmal, the head of Russia’s union of oil and gas producers, dismissed forecasts of “a revolution in the gas industry … [as] a propagandistic stunt,” while Gazprom CEO Alexei Miller stated, “We do not see the conditions for shale gas to have a serious impact on the European market.” Fast forward a year or so. Miller’s deputy, Alexander Medvedev, recently likened the shale gas boom to the internet bubble, “which first blew up enormously and then flattened itself out to some rational and logical size”. The issue is clearly sensitive, particularly for a company that has been fighting off calls from major European customers to drop prices in recent years as the revival of US production has helped promote a 84 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

PHOTOGRAPHY BY PARKER SNYDER gas glut in its primary export market. At the same time, a bevy of international reports backs up many of the Russian arguments, suggesting some of the more ambitious claims for European shale gas carry a tinge of the mistrust that ‘energy security’ whips up in relations between Russia and the West. For instance, Professor Jonathon Stern of the Oxford Institute for Energy Studies (OIES) says curtly: “I’m not that interested in Russia’s take on shale gas because, frankly, what do they know about it?” However, Russian analysts say it’s a storm in a teacup anyway, because even if Europe does manage to struggle past the numerous barriers to tap a significant portion of its estimated reserves, the volumes still won’t be big enough to seriously

disrupt Russian exports or associated development of upstream projects and infrastructure. “Shale gas could prove a game changer in Europe on a local, country-specific, level – in other words, the Polish market could be turned on its head – but not on a pan-European level,” says Lev Snykov of VTB Capital. Poland consumes 14 bcm of gas a year, with more than 70% of it imported from Russia. That represents no more than 8% or so of Gazprom’s European exports, according to Snykov. However, in November Gazprom signed a new agreement with PGNIG which boosted contract volumes by 2bcm per year through to 2037, with a discount available for the purchase of gas above minimum contract volumes,


which the Polish company says could save it $250m annually. A sign of Russian nerves over Poland’s push to raise its domestic production; or, as Snykov suggests, a “signal of uncertainty over Poland’s own production and shale gas development”? What does Russia know about shale gas? Only that it doesn’t need any more uncertainty as it faces major decisions on its strategy amidst an ongoing slump in its primary export market. Many analysts agree with the Russian view that European shale gas will simply cost too much to produce. “The massive production of shale gas is impossible against a price which is below $6-$8 per million BTU,” Alexander Medvedev claimed in February. That view is echoed in a report from OIES, which points out “Natural gas prices

in Europe have in the past (with the exception of 2008) been much lower than the $10 threshold for unconventional gas projects, and market expectations remain below that level for the coming few years.” However, the report leaves the future open for debate: “New Russian and LNG projects, as well as shale gas projects, will require prices higher than $6-7/MMBTU, and prices within a potentially overlapping range. Therefore these supply sources will compete for investments, and shale projects will influence future prices.” The prospect of significant gas production in Europe only muddies already murky waters, just as Russia is walking into the unknown upstream. “Shale gas adds an element of uncertainty for Russia’s major projects,” says Alex Nazarov of Metropol, “but it’s not the big threat to

WHAT DOES RUSSIA THINK? THAT SHALE GAS SHOULD JUST TURN AROUND AND WALK AWAY.

POLITICS

Professor Jonathon Stern of the Oxford Institute for Energy Studies (OIES) says curtly: “I’m not that interested in Russia’s take on shale gas because, frankly, what do they know about it?”

Russian gas exports to Europe; competition from LNG is the main thing.” The boom in nonconventional gas in the US over the past few years has already helped delay Russia’s first foray into the Arctic: the massive Shtokman project, which is estimated to hold 3.8tcm of gas. As late as 2009, Gazprom was predicting Shtokman would help it boost its share of the US market to 10%. However, with LNG terminals on the US coast mothballed, a final investment decision on the first phase has been postponed, with shareholders fretting over rising costs and depressed markets. “The project is a bit expensive for our taste,” said Andre Goffart of French energy group Total in February. At the same time, huge volumes of cheap LNG from the Gulf and North Africa have been diverted to European markets. According to IHS Global Insight, a rush to secure supplies in the boom years ahead of the downturn saw the EU over-contracted for gas to the tune of 110bcm in 2010, with that the figure still set around 70bcm in 2012. In the face of falling prices, Gazprom has, very reluctantly, introduced elements of the spot price for some customers, and analysts are increasingly asking will sustained lower spot prices for gas eventually force a reconfiguration of long-term gas contracts indexed to oil? Little wonder then that Moscow leapt to talk up its role as a reliable energy supplier as turmoil spread across North Africa and the Middle East this year. It also offered to raise piped exports to Europe by 70bcm to allow LNG shipments to head to Japan in the wake of the nuclear crisis at Fukushima. Support for the arguments against major shale gas production in Europe – cost, space, environmental - is more of the same, and understandable as Gazprom battles to defend its contracts.

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Dream to

reality

Just how important a future membership in the European Union may be for a state is not visible in Poland, but in neighboring Ukraine. There, a struggle is underway .

BY WOJCIECH KOSC THE CLASH IS between the EU and Russia to convince local politicians of the way they should go. Ukraine has the choice to enter the status of an associated country with the EU or the customs union with Russia. Should any of the Kiev politicians want to listen to their Polish counterparts, they would hear just one thing. There can only be one way for an underdeveloped and poor country that Ukraine now is and that Poland ceases to be. Join the EU. In June 2003, when Poles were to ultimately decide whether they want Poland to be an EU member or not, the 86 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

PHOTOGRAPHY BY KASIA SNYDER perceived change that the membership would bring, according to the EU enthusiasts, was nothing short of a civilizational turning point. “Ten centuries watching us,” ran a headline in one of the dailies just before the referendum. It referred to a 1,000 years of Polish history of a country that had mostly been a European underdog, now with an unseen opportunity at its hands. Poles put their trust in the EU, 77 percent voting in favor of the membership, with a turnover at the polling station almost 60 percent. Poland officially became a member in May

2004, together with seven other former communist states as well as Malta and Cyprus. Seven years on, the EU membership has penetrated virtually every single aspect of life in Poland. From traveling abroad to environmental protection, from road building to education. Today, Poland is the EU’s sixth largest state in terms of population and size. Economically, it doesn’t fare that well, even though one of the most palpable effects of the membership has been a constant march upwards in terms of GDP and GDP per capita, owing to Poles’ entrepreneurial spirit but also


to €65-67 (estimates vary) billion worth of EU funds that are scheduled to boost the Polish economy between 2007 and2013. So the Polish economy is now eighth in the EU in terms of overall GDP but at a mediocre 23rd position in terms of GDP per capita (data for 2009). The latter indicator shows a strong upward tendency, however, because – measured in purchasing power parity – it reached the level of 61 percent of the EU average in 2009, a growth from 56 percent in 2008. According to the Polish ministry of regional development, which is one of the key institutions responsible for the management of the EU funds in Poland, Polish GDP received an extra boost of 0.6-0.9 percent GDP growth an-

nually only thanks to the EU funds. On top of that, in 2011, if Poland plays its EU cards well this year, it has a rare chance to keep the EU support at an at least unchanged level in 20142020, the next “financial perspective” as the EU budgets are called. Despite the global financial crisis that had several EU states bail out their banks or other member states like Greece, it’s now or never for Poland to make sure that the EU funding keeps propping up Poland’s growth. Poland’s position in the bloc is strong as ever thanks to a few people at key financial and political posts (including Jerzy Buzek the head of the European Parliament and Janusz Lewandowski the EU budget commissioner) and the upcoming Polish EU presidency.

VIEW FROM THE PALACE OF CULTURE IN WARSAW, LONG THE DOMINANT SYMBOL OF RUSSIA’S INFLUENCE

POLITICS

“There can only be one way for an underdeveloped and poor country that Ukraine now is and that Poland ceases to be. Join the EU.”

Poland will take over the EU presidency from Hungary as of July 1, 2011 and it’s going to be the country’s biggest test in the EU to date. In short, the EU presidency – more correctly the presidency of the European Council – will have Poland as the bloc’s agendasetting leader. Poland will be the host country to several important EU events, coordinate EU-wide policies, including work towards the EU position for the South African climate change summit in December, as well as tackle whatever crisis situations there will come or already exist, like the refugee crisis following unrest in the Arab countries of North Africa. According to the government, Poland will focus on strengthening of economic growth through the development of the EU’s internal market and taking advantage of the EU budget towards “building competitive Europe”, the latter focus area definitely entailing making sure that Poland gets the best possible share of the EU funds. Other focus areas are security, including energy security, and a better cooperation with EU neighboring states like Belarus or Russia. Poland will also attempt to broker compromise between the European Commission, the European Parliament Parliament and the European Council so as to foster legislative procedure, coordinate national policies and bring about compromise between member states’ own interests. In just a few years, then, what was once seen as giant leap forward is now simply everyday reality of Poland and Poles. More practical attitudes prevail as well. The EU is less subject to heated proand contra- debates, but a useful working ground on which a better future is being shaped.

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PRIME MINISTER DONALD TUSK’S PARTY IS UP FOR RE-ELECTION; SHALE GAS WILL BE A FOCAL POINT

It’s an election

YEAR

As it happens, 2011 may be remembered as the year when shale gas broke through to the awareness of the general public. It’s also an election year, and could be remembered as the year when shale gas was on the lips of just about every politician, for and against.

BY WOJCIECH KOSC THE INCUMBENT IN this year’s election is a coalition formed by the liberals from Citizens’ Platform (Platforma Obywatelska, PO) and the Polish Peasants Party (Polskie Stronnictwo Ludowe, PSL). The government is led by the prime minister Donald Tusk (PO) and his deputy and minister of economy Waldemar Pawlak (PSL). These two parties will battle jointly to become Poland’s first post-1989 government to win a second term in the office. It’s of course nothing unusual that economic issues would be present in this year’s political discourse, irrespective of the coming election. But in Po88 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

PHOTOGRAPH COURTESY OF KPRM land energy issues are that one part of the economy that’s driven by politics to a much greater extent. It’s enough to say that the state is the sole proprietor of all natural resources in Poland to understand why. So what will the elections mean for shale gas producers? Suppose that there’s a change in power after the elections this year and the opposition takes over. The biggest opposition party is Law and Justice (Prawo i Sprawiedliwosc, PiS). A year ago, the party lost its leader, then-president Lech Kaczynski, in a terrible aviation accident in Russia. Since, then, the single leitmotif for PiS has been to “uncover

the truth” about the accident, even if in all probability the truth is that the crash was the tragic outcome of ignoring the rules of aviation. POLITICS OF MEMORY Exploiting the death of Lech Kaczynski for the purposes of the upcoming elections, PiS stops just short of denying the current government and incumbent president Bronisław Komorowski (PO) the legitimacy to manage Poland’s affairs. The closer we move to elections, the more often there will be particular accusations, coming from what may be called a nationalistic viewpoint. Some


of these accusations might involve shale gas and selling off Poland’s national resources. The media generally sympathetic to PiS went down that route shortly after the first concessions were granted. The government was accused of “selling out” to international interests by paving a way for it to make billions in return for the petty income that comes from concession rights. It escaped the accusers attention (or it was deliberately omitted) that the concessions are exploratory concessions only to prove if there’s enough shale gas to start production. If production happens, different concessions will be issued under different rules. The ministry of environment made an effort to

clarify, but the drama of the message that Poland was selling its national treasures, are likely to return as election campaign heat up. POLITICS OF SHALE The current government will of course counteract by trying to show what the concessions system is about, and what it will take for shale gas production to take off, and what’s in it for the Polish economy if it does. That, in turn, will cause a counter reaction that the entire approach to the issue of shale gas has been a disaster. The discourse may carry on ad nauseam. There also is every probability that the coalition politicians will show up at a well flaring if any producer man-

POLITICS

“Lane Energy and ConocoPhilips might be keeping a low profile, but there’s little doubt if state-owned Orlen Upstream or PGNiG flare their wells, the government will take advantage of it in the campaign.” ages to time it during the campaign. The likes of Lane Energy and ConocoPhilips might be keeping low profile about their findings, but there’s little doubt that if state-owned Orlen Upstream or PGNiG flare their wells, the government will take advantage of it in the campaign. The bottom line is that in 2011 shale gas will cease to be a business and technological issue that it has largely been so far. It will move right into the center of the purely political rhetoric with all the consequences of being either a propup for the government to increase its chances in the polls or a cheap way of accusing the government of not handling the sensitive issues in a way beneficial for Poland.

IS THE MAN ON THE STREET UNDECIDED ABOUT SHALE GAS? PERCENTAGES AT TOP ARE THE AVERAGE OF ALL THE POLLS

PHOTO BY KASIA SNYDER

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AURELIAN OIL BNK PETROLEUM CHEVRON CUADRILLA DART DPV SERVICE ENI EXXONMOBIL LANE ENERGY LNG ENERGY LOTOS MARATHON PKN ORLEN PGNIG REALM ENERGY SAN LEON TALISMAN

Pioneers of the

OLD WORLD WHO’S WHO IN CONCESSIONS

90 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011


BOARD MEMBERS

AnnaSrokowska-Okonska, CountryManager AurelianOil&GasPolandSp.zo.o., 17SniadeckichStreet, 00-654Warsaw,Poland Tel:+48226299037 Fax:+48226282071 KRS0000252004 RegisteredFebruary8,2006

MichaelDenysSeymour, RoyHartley, MarcReid,ChristopherBrown, RowenHeathBainbridge

concession block (approx.)

PLANS FOR 2011

Rowen Bainbridge, CEO: “Here’s our strategy: explore for conventional gas in the south and tight gas in the center. In 2010, we raised money in the capital markets, this year we will drill four wells, two conventional and two unconventional (tight gas)” PLANS FOR NEXT 3 YEARS (2011-2013)

RB: “We are preparing a treatment plant in Siekierki to take nitrogen out and make it high pressure, high methane. Once we have production results, we’ll be looking for strategic partners.”

WHO’S WHO

AURELIAN OIL & GAS (AIM:AUL)

HOLDING COMPANIES

EnergiaZachodHoldingsSp.zo.o. EnergiaBieszczadySp.zo.o. EnergiaCybinkaSp.zo.o. EnergiaTorzymSp.zo.o. EnergiaKaliszSp.zo.o. EnergiaKarpatyZachodnieSp.zo.o.

But there aren’t enough wirelines, cement, field services. Services here are 10 years behind North America. The big issue is learning curve. There’s no cluster like there is other places.” LOOKING FOR A PARTNER OR WANT TO DO A JV?

RB: “We need to convert our wells into producing wells, then we begin a conversation about bringing on a partner.” GOOD TO KNOW:

RB: “Poland is an extremely good place to do business, and I’ve worked all over the world.”

NEEDS FOR SERVICES

RB: “Nafta Piła is up there with the best.

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Cybinka

700

202, 222

Torzym

600

203, 223

Kalisz

965

249

Poznan E & N

1200

206, 207, 208

Bestwina

1000

410, 411

Cleszyn

775

410, 430

Bielsko-Biała

965

411, 431

Budzow

450

412

Jordanow

450

432

Mszana Dolna

300

433

BNK PETROLEUM (TSX:BKX)

HOLDING COMPANIES

Barbara Fox, Executive Assistant: 760 Paseo Camarillo, Suite 350, Camarillo, CA 93010 Telephone: 805-484-3613 Fax: 805-484-9649 Registered December 12, 2006

INDIANA INVESTMENTS Sp. z o.o. SAPONIS INVESTMENT Sp. z o.o. KRS NUMBERS

0000269493 0000309438

BOARD MEMBERS

Wolf Regener, James Hill concession block (approx.)

PLANS FOR 1 2011

NEEDS FOR SERVICES

Barbara Fox, Executive Assistant: The company will “drill three wells” in unspecified locations; Drilled a well in late 2010 and early 2011; will drill another in 2011.

BF: “We will need services for drilling and completing wells.”

PLANS FOR NEXT 3 YEARS (2011-2013)

BF: “BNK will drill “between three and six wells” in 2011-2013. No specific locations for drilling given. Required to complete spudding of well within 18 months of award date of March 2010; a second well on each concession by March 2013.”

LOOKING FOR A PARTNER OR WANT TO DO A JV?

BF: “Rohöl-Aufsuchungs Aktiengesellschaft (RAG), Sorgenia E&P SpA (to farm out interest); LNG Energy has interest in Saponis concession;”

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Mszana Dolna

300

433

Starograd

900

70, 90

Slupsk

1050

47, 48

Slawno

950

26, 46

Darlowo

1200

45, 65, 66

Tytow

1200

48, 67, 68

Trzebielino

1200

47, 66, 67

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KRS 0000255169 Established on Apr 13, 2006 CHEVRON POLSKA ENERGY RESOURCES Sp. z o.o. KRS 0000275118 Established on Feb 27, 2007

CHEVRON (NYSE: CVX)

John Claussen, Country Manager Ul.WIERTNICZA 135 A, 02-952 Warsaw tel: +48 22 816 75 97 www.chevron.com

BOARD MEMBERS

HOLDING COMPANIES

SEWERSKI, Marian JONES, David John LOCKHART, Brent CLAUSSEN, John Preston

CHEVRON POLSKA EXPLORATION AND PRODUCTION Sp. z o.o.

concession block (approx.)

PLANS FOR 2011

PRESS CONTACT:

John Claussen: “During 2010 and 2011, we’re carrying out seismic.”

Muriel Roberts muriel.roberts@chevron.com

PLANS FOR NEXT 3 YEARS (2011-2013)

MARKETING CONTACT:

Piotr Kedzierski piotr.kedzierski@chevron.com

JC: “In 2012, we’ll carry out exploration drilling; 2013-2014 we’ll do a pilot well and hopefully move to production; we also have 2 million acres in Romania.”

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Zwierzyniec

1000

338, 339, 358,

359, 379

Kransnik

900

336, 337, 357

Frampol

800

337, 338, 357, 358

BOARD CONTACT:

Marian Sewerski marian.sewerski@chevron.com

NEEDS FOR SERVICES

JC: “We are using Geofizika Torun for 2D late seismic; in Q4 we’ll be using Nafta Piła for drilling. Once we start producing wells, then we begin a conversation about bringing on a partner.”

COUNTRY MANAGER:

John Claussen John.Claussen@chevron.com

CUADRILLA RESOURCES (UK)

BOARD MEMBERS

CUADRILLA POLAND Sp. z o.o. Ul. SYROKOMLI 5C 03-335 Warsaw tel: +48 22 818 97 95 http://www.cuadrillaresources.com KRS KRS 0000322844 Established Feb 3, 2009

MILLER, Mark Andrew TURNER, Peter MADEJA, Marek Jan

concession block (approx.)

PLANS FOR 1 2011

NEEDS FOR SERVICES

Marek Madeja, Country Manager: We will carry out seismic research on 2 concessions (a process that may go into early 2013). If 3rd concession’s granted, seismic research on that one will begin in 2013

MM: “The company is going to require services in seismic, drilling (including site preparation), legal, fracking, cementing, disposal of flow back water, disposal of drill cuttings..”

PLANS FOR NEXT 3 YEARS (2011-2013)

MM: “We will drill a minimum of 1 well per concession (so 2 in total). Horizontal drilling unlikely to start in 2013.”

LOOKING FOR A PARTNER OR WANT TO DO A JV?

MM: “No.” GOOD TO KNOW:

Marek Madeja, marek@cuadrilla.pl

92 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Miedzyrzec-

1000

238, 258

Podlaski


BOARD MEMBERS:

COMPOSITE ENERGY Sp. z o.o. AL. JEROZOLIMSKIE 56C Warsaw, 00-803 +44 (0) 333 800 2000 http://www.composite-energy.co.uk/ KRS 0000268708 Established Nov 30, 2006

LOUGH, Keith Geddes FRASER, Stanley Thomson BOUSFIELD, Colin David

WHO’S WHO

DART ENERGY LTD (AUSTRALIA)

concession block (approx.)

PLANS FOR 2011

Zbigniew Zuk: “The company has four concessions, mainly for coalbed methane, but there’s a concession, obtained four months ago, that has some potential for shale gas but the company’s not focusing on it right now. There’s been no geologicial or seismic research done on that concession yet.”

LOOKING FOR A PARTNER OR WANT TO DO A JV?

ZZ: [No answer] GOOD TO KNOW:

There’s no press or marketing contact for Poland

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Milejow

372

318, 319

Chelm

760

319, 300, 320

USCB

323

430, 440, 441

LOCAL CONTACT: PLANS FOR NEXT 3 YEARS (2011-2013)

ZZ: “The company’s focus isn’t on shale gas yet..”

Zbigniew Zuk zbigniew.zuk@composite-energy.co.uk

NEEDS FOR SERVICES

ZZ: “It’s too early to talk.”

concession block

PLANS FOR 1 2011

No drilling planned for 2011 yet, still at the stage of seismic and geological research and analysis. PLANS FOR NEXT 3 YEARS .) (2011-2013)

Five wells planned by end of 2013, details subject to results of geological and seismic research.. NEEDS FOR SERVICES

Consulting services for well location, seismic research and analysis, drilling and fracturing.

DPV SERVICE

BOARD MEMBERS:

DPV SERVICE Sp. z o.o. Emfesh, Hugarian company Owned by Group DF, The holding company of Ukrainian businessman Dmitry Firtash AL. UJAZDOWSKIE 41 Warsaw, 00-540 KRS 0000068710 http://www.dpvservice.com.pl/ wersja_angielska/ tel: +48 22 319 57 20

GÓCZI Istvan KARDAPOLTSEV, Dimitry KOŁODZIEJEK, Michał

LOOKING FOR A PARTNER OR WANT TO DO A JV?

Yes, due to the overall number of concessions that we hold (21), it’s necessary to divide risks by finding a partner with expertise in the field. LOCAL CONTACT:

Michał Kołodziejek Country Manager mkm@emfeszng.pl office +48 22 319 57 20

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Białobrzegi-Rusinow

724

294, 274

Korczmin

629

318, 338, 339

Lipsko

1192

315, 316

Radom

895

295, 296, 275

Opole Lubelskie

338

316, 296

Block 233

963

233

Block 253

958

253

WWW.CLEANTECHPOLAND.COM

| 93


Al. JEROZOLIMSKIE 30/7 00-024, Warsaw +48 22 827 75 10 Established June 26, 2009 KRS 0000332255

ENI SPA / EUR ENERGY RESOURCES

Italy-based Contacts: Erika Mandraffino erika.mandraffino@eni.com +39 06.59822737 Filippo Cotalini filippo.cotalini@eni.com, +39 06 598 22 030

BOARD MEMBERS

HOLDING COMPANY concession block (approx.)

MINSK ENERGY RESOURCES Sp. z o.o./ Eni Spa / Eur Energy Resources

GIAMMATEO, Andrea CINGOLANI, Enrico MARINELLI, Marzio

PLANS FOR 2011

BUSINESS DEVELOPMENT:

Lucio Bertoldi, Eni Engineer: “We have to drill within the next year. We’re bound by this obligation.”

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Marzio Marinelli marzio.marinelli@eni.com

NE Baltic (1)

300

51, 52, 72

NE Baltic (2)

1600

90, 91 92

PLANS FOR NEXT 3 YEARS (2011-2013)

LB: “We will likely drill in more than one concession.” NEEDS FOR SERVICES

LB: “Drilling, wireline, cement, pumping, fracking services.”

EXXON MOBIL (NYSE:XOM)

BOARD MEMBERS

Ul. CHMIELNA 85/87 00-805, Warsaw http://www.exxonmobil.com

BENAVIDES, Armando Alonso JOHNSTON, James Allen BIDDLE, Kevin Thomas

HOLDING COMPANY

EXXONMOBIL EXPLORATION AND PRODUCTION POLAND Sp. z o.o. KRS 0000332109 Established July 1, 2009 concession block (approx.)

PLANS FOR 1 2011

Farm out a 49% stake in the 4 concessions: Legionowo, Wodynie-Łuków, Minsk Mazowiecki and Wołomin; has carried out 75 sq km 3D seismic and plans to spud its first exploration well in Minsk PLANS FOR NEXT 3 YEARS (2011-2013)

Farm out a 49% stake in the concessions they hold

94 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Wolomin

3000

215, 216, 235, 236, 256


Ul. CHMIELNA 13A 00-021, Warsaw +48 22 505 91 77 info@laneenergy.eu http://www.3legsresources.com

BOARD MEMBERS

JEFFCOCK, William PARMAR, Kamlesh NEEDHAM, Clive Ronald

HOLDING COMPANIES

LANE ENERGY POLAND Sp. z o.o. KRS 0000279288 Established Apr 24, 2007 concession block (approx.)

PLANS FOR 2011

Drilled and flared their first well in late 2010/early 2011 at Lebien LE1; ready to drill a second well in 2011. PLANS FOR NEXT 3 YEARS (2011-2013)

Evaluating potential for unconventional on three concessions; license requires exploratory work and 3D seismic in first two years.

LOOKING FOR A PARTNER OR WANT TO DO A JV?

ConocoPhilips GOOD TO KNOW:

Kamlesh Parmar, Country Manager Kelly Scott, Operations

NEEDS FOR SERVICES

3D seismic.

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Damnica

965

7, 27

Lebork

1000

8, 28

Karwia

350

8, 9

Cedry Wielskie

800

50, 70

Stegna

600

51, 71

Paslek

750

72, 92

Glinica-Psary

1100

350, 351

Bytom-Gliwice

400

370

Dabie-Laski

800

371, 372, 391 392

LOTOS

BOARD MEMBER

LOTOS PETROBALTIC S.A. LOTOS GDANSK STARY DWÓR 9, 80-958 +48 58 301 30 61 petrobaltic@petrobaltic.com.pl http://www.lotos.pl/ KRS 0000171101 Sep 8, 2003

SIEMEK, Paweł

concession block

[DID NOT RESPOND TO REQUEST] PLANS FOR 1 2011 PLANS FOR NEXT 3 YEARS (2011-2013) .)

NEEDS FOR SERVICES LOOKING FOR A PARTNER OR WANT TO DO A JV?

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Gotlandia

700

E9, E10

Gazpolnoc

975

E28, E48

Rozewie

1100

E30, E50

Łeba

1100

E49

Gazpoludnie

965

E68

SambiaW

965

E69, 9

SambiaE

965

10, 11

Wolin

700

61, 62

WWW.CLEANTECHPOLAND.COM

| 95

WHO’S WHO

LANE RESOURCES POLAND Sp. z o.o. EstablishedJun 4, 2008 KRS 0000306767

LANE ENERGY (3 LEGS RESOURCES)


MARATHON OIL POLAND AREA D MARATHON OIL POLAND AREA E MARATHON OIL POLAND AREA F MARATHON OIL POLAND AREA G MARATHON OIL POLAND AREA H MARATHON OIL POLAND AREA I MARATHON OIL POLAND AREA J

MARATHON OIL

MARATHON OIL POLAND KRS 0000309186 Jun 27, 2008 Marathon Oil UL. ZŁOTA 59 00-120, Warsaw +48 22 379 94 40

BOARD MEMBERS

WATKINS, Gretchen BAY, Annell HUBACHER, Jr., Carl LANDRY, Stephen

HOLDING COMPANIES:

concession block (approx.)

PLANS FOR 2011

John Porretto, Communications: “In 2011 we plan to acquire 2D seismic over all concessions by the end of the third quarter and plan to initiate drilling in the fourth quarter..” PLANS FOR NEXT 3 YEARS (2011-2013)

“To drill 7-8 wells in 2012 (stated at Howard Weil Energy Conference, New Orleans, March 28, 2011).” LOOKING FOR A PARTNER OR WANT TO DO A JV?

JP: “We have recently been successful in farming-out a portion of our interest in our play. Our partner will earn a 40 percent working interest in 10 licenses, as well

MARATHON OIL POLAND AREA A MARATHON OIL POLAND AREA B MARATHON OIL POLAND AREA C

as pay a promote on certain future seismic and well costs. This transaction is subject to the approval of the Polish Ministry of the Environment. We will remain operator of the 10 licenses included in the agreement. Please note: Marathon has not stated publicly the name of our partner.” Editor’s note: Nexen is Marathon’s partner.

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Kwidzyn

1200

110, 111

Brodnice

1200

131, 132

Orzechow

1200

179, 280, 299, 300

Plonsk S

360

213, 214

Plonsk SE

247

194, 214

Rypin

672

151, 152

Ciechanow

1186

174, 194, 195

GOOD TO KNOW

From Marathon 2010 Fact Book: “Poland’s Lower Paleozoic shale play may be the largest and most significant opportunity for unconventional gas in central Europe and is evolving rapidly in the wake of successful shale plays in North America. ORLEN UPSTREAM

BOARD MEMBERS

KRS 0000256011 Established Apr 26, 2006 ORLEN UPSTREAM Sp. z o.o. PKN Orlen S.A. Ul. PRZYOKOPOWA 31 01-208, Warsaw +48 22 778 02 00 upstream@orlen.pl

PRUGAR, Wiesław MARTYNEK, Paweł

concession block (approx.)

PLANS FOR 2011

Wieslaw Prugar, CEO: “At the moment we’re finishing seismic research that will help us fine tune where to start drilling so that we know where the Silurian and Ordovician formations are. We should finish that by mid-2011. We think that the first two wells will be drilled towards October or November 2011, by early 2011 latest. The drilling will also tell us about the quality of shale rock in terms of gas. We’re going to drill in the Garwolin, Wierzbica and Lubartów concessions..” PLANS FOR NEXT 3 YEARS (2011-2013)

WP: “We’re planning to drill six wells by 2013, two wells per each of the concessions.”

96 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

LOOKING FOR A PARTNER OR WANT TO DO A JV?

WP: “We’re in conversations with several companies to partner. We’re also looking for financial partners. These are not going to be financial institutions but rather wellcapitalized oil and gas companies, mainly from US and Canada. It has to come from them because they understand the risks involved.” WHAT SERVICES DO YOU NEED?

Drilling services, drilling equipment, hydraulic fracturing equipment, Almost all the equipment that we’re going to need is American and it will have to be shipped here.

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Garwolin

900

256, 276

Lubartow

1100

278, 297, 296

Betzce

1100

297, 317, 337

Lublin

1000

298, 318, 338

Wierzbica

900

298, 299, 319


BOARD MEMBERS

concession block (approx.)

PLANS FOR 2011

Marek Karabuła, Vice President: “The Lubocino-1 well on the Wejherowa concession yielded “promising” gas shows in Silurian shales, but it’s still too early to assess the potential. More generally, the company will carry out 2D and 3D on concessions.” PLANS FOR NEXT 3 YEARS (2011-2013)

MK: “Find a partner to work with to increase expertise.” WHAT SERVICES DO YOU NEED?

MK: “Equipment is the biggest challenge. This year we are buying two new rigs through our subsidiaries in Poland.” ARE YOU LOOKING FOR A PARTNER?

According to Marek Karabuła, PGNiG is

SZUBSKI, Michał Antoni DUDZINSKI, Radosław HINC, Sławomir SZKAŁUBA, Mirosław KARABUŁA, Marek KRS 0000059492 Established Nov 14, 2001

CONCESSIONS NAME

CONCESSIONS AREA (KM2)

BLOCK NUMBERS

Wejherowo

850

29

Kartuzy-Szemud

700

49, 69

Trzebiatow

400

63

550

64

Bardy Kalen

looking for operators for farm-in to their concessions to share cooperation and expertise; in turn, looking for access to foreign concessions. From the press office: “We’re not looking for financial partners, but for partners who can provide us with know-how.” GOOD TO KNOW:

The following are all PGNiG subsidaries, or partly owned: Geofizyka Kraków, Geofizyka Torun, Nafta Piła, Kraków (ogec.krakow.pl), ZRG Krosno (fracking). Press office: It will take drilling of about 40 wells countrywide in order to attempt an estimate of how much shale gas there is. It will be known in 2-3 years time.

WHO’S WHO

POLSKIE GÓRNICTWO NAFTOWE I GAZOWNICTWO S.A. Ul. KASPRZAKA 25 01-224, Warsaw +48 22 691 79 30 joanna.zakrzewska@pgnig.pl

800

82, 83

KarnienPomorski

1000

82

Nowogard

1700

103, 104

Tychowo

900

65, 85

Biały Bor

900

85, 86

Szamotuly

1300

166, 186

M.Goslina-Klecko

800

187

Gniezno

1050

187, 188

Slesin

1100

189, 209

Kornik-Sroda

900

207, 227, 206, 226

Pyzdry

900

228

Block 172

960

172

Block 173

960

173

Block 192

945

192

REALM ENERGY

3 HOLDING COMPANIES

Investor Relations: Keir Reynolds, Contact Financial, T: 604-689-7422, keir@contactfinancial.com Corporate Enquiries: Kevin Rathbun, CFO T: 604.637.4974 ext. 33 info@realmenergy.ca

HELLAND INVESTMENTS Sp. z o.o JOYCE INVESTMENTS Sp. z o.o. MARYANI INVESTMENTS Sp. z o.o.

concession block (approx.)

[DID NOT RESPOND TO REQUEST] HELLAND INVESTMENTS Sp. z o.o. KRS 0000296485 Jan 9, 2008 Al. JEROZOLIMSKIE 56C, 00-803, Warsaw +48 22 379 94 40 BOARD MEMBERS

ELSTON, James RATHBUN, Kevin STEINKE, Craig

JOYCE INVESTMENTS Sp. z o.o. Realm Energy International Co. KRS 0000290038 Established Oct 5, 2007

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Gniew

1191

70,89,90,109,110

Ilawa

652

91, 92, 112

Wegrow

729

195, 196, 216, 217

MARYANI INVESTMENTS Sp. z o.o. Realm Energy International Co. KRS 0000296814 Established Jan 10, 2008 BOARD MEMBERS:

STEINKE, Craig SOMMER, Jerry

WWW.CLEANTECHPOLAND.COM

| 97


SAN LEON ENERGY PLC.

Gora Energy, Sp. z o.o. Al. WYZWOLENIA 8/1 00-570, Warsaw +48 22 594 24 40 KRS 0000335652 Established Aug 26, 2009 info@sanleonenergy.com BOARD MEMBERS

SULLIVAN, Paul James BUGGENHAGEN, John Edmund

Established Feb 11, 2008 OCULIS ENERGY Sp. z o.o. KRS 0000309197 Established Jun 30, 2008 MAZOVIA ENERGY RESOURCES Sp. z o.o. KRS 0000290156 PODNIESIŃSKI, Bogusław Piotr Established Oct 16, 2007 VABUSH ENERGY Sp. z o.o. KRS 0000323716 EstablishedFeb 17, 2009

HOLDING COMPANIES

LIESA ENERGY Sp. z o.o. KRS 0000298625

concession block (approx.)

Lars Hubert, Geologist: “We plan on drilling this year.”

LH: “We’re a small company. We are looking for an operator for a farm-in in the southwest”

PLANS FOR NEXT 3 YEARS (2011-2013)

EDITOR’S NOTE:

LH: We’ll be looking to conduct further 2D seismic, improve imagery of the carboniferous structure, looking for drilling operator in the southwest.”

Talisman has signed a 60% interest in Gdansk W and Braniewo S concessions.

PLANS FOR 2011

NEEDS FOR SERVICES

LH: Drilling, 3D seismic. LOOKING FOR A PARTNER OR WANT TO DO A JV?

GOOD TO KNOW:

Five holding companies: GORA ENERGY Sp z o.o. LIESA ENERGY Sp. z o.o. OCULIS ENERGY Sp. z o.o. MAZOVIA ENERGY RESOURCES Sp. z o.o. VABUSH ENERGY Sp. z o.o.

TALISMAN ENERGY

Tomasz Maj General Manager tmaj@talisman-energy.com WFC, ul. Emilii Plater 53 00-113, Waraw (+48) 22 37 06 070

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Nowa Sol

1167

244,245

Sufechow

300

224

Wschowa

1078

245,264,265,266

Sczecinek

920

106

Nida

1167

353,354,373,374,393

Gdansk West

780

48,49

Braniewo S

1043

52,72,73,92,93

Szczawno

603

151,152

LOOKING FOR A PARTNER OR WANT TO DO A JV?

TM: We became partners to the original concession holder, San Leon Energy, which has the concessions via its subsidiary Oculis Investment.

concession block

PLANS FOR 1 2011

Thomasz Maj, General Manager: “We want to finish the seismic research and carry out 2-3 vertical drills. Where we’re going to be at the end of 2011 we don’t know exactly, but likely we’ll be doing the third drill. Once we have .) finished them, we will start fracking, but that’s scheduled for early 2012. If we’re successful, we will then carry out horizontal drilling and fracking.” NEEDS FOR SERVICES

TM: “Apart from fracking services that only a few companies in the world, like Schlumberger or Halliburton, can offer,

we’re going to need drilling services, seismic research services, firms that will treat fracking solutions, gas networks or firms offering gas tanks. Then come firms that liquify gas, providers of micro-power plant solutions that you can install directly on a well plus all the “soft” services: security, catering, transport, accommodation, etc. Finally come legal services, for example working out access to land.” GOOD TO KNOW:

According to James Elston, former CEO of Realm, Talisman is regarded in the industry as the “black belt” of cost cutting.

98 | SHALE GAS INVESTMENT GUIDE | SUMMER 2011

CONCESSIONS NAME

CONCESSIONS AREA (KM 2)

BLOCK NUMBERS

Szczawno

603

151, 152

GdanskWest

780

48, 49

BraniewoS

1043

52, 72, 73, 92, 93


WHO’S WHO

EVENTS CALENDAR Take your pick of industry events. Most are held in the business capital Warsaw, though a number are choosing Krakow, because of the added attraction of a beautiful old town and modern events faciliites. Just get a stack of business cards and come to Poland.

May 31

Sept 7

SHALE GAS RESULTS in Europe 2011, the second annual Warsaw unconventional gas summit put on by American Business Conferences. Richard Sherer of LNG Energy, John Buggenhagen of San Legon Energy and Paweł Chałupka of Aurelian Oil will be there to share their experience.

THE 3RD EDITION of the Global Shale Gas Forum in Krakow in September. The speakers on the agenda include Lars Hubert of San Leon, Patrycja Kujawa of LNG Energy and Mikhail Slobodin of TNK-BP. Produced by Marcus Evans, an international event organizer.

MAY 31 - June 1st, 2011 at the Sofitel Warsaw Victoria Hotel, just a block away from the President’s palace.

THE EVENT WILL take place from Sept 7th to 9th at an event to be determined.

Oct 20

THE EUROPEAN UNCONVENTIONAL Gas Summit 2011 to be held in Krakow, with a focus on shale gas results, and overcoming environmental concerns with respect to water. There will be case studies on the latest techniques in hydraulic fracturing.

UNCONVENTIONAL GAS OPPORTUNITIES in Poland wiill take place on October 20th, 2011. A good mix of local operators and international experts. The conference is on commercial opportunities for suppliers and service providers out of North America. A panel discussion dedicated to entering the Polish market.

SEPTEMBER 27TH TO the 29th, 2011, it will be put on by the Energy Exchange in Krakow at a venue still to be determined.

OCTOBER 20TH, AT the Hyatt Regency Hotel in downtown Warsaw, it is priced to be affordable to Polish companies. Speed networking, so you’ll make new contacts.

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Sept 27

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EVENTS CALENDAR

UNCONVENTIONAL GAS OPPORTUNITIESIN

POLAND

2ND EDITION

Business opportunities in Poland: • Legal, financial and tax challenges • Strategies for partnership, risk reduction • Prospects, resources, infrastructure and surface access • Geological and geochemical tools • Equipment and innovative technologies • Water management strategies • Regulatory environment • Latest drilling & test results Discussion panel 1: Perspective for foreign companies to implement their know how and develop their business in Poland. Discussion panel 2: What Polish companies can learn from North American operators.

www.powermeetings.eu/shale organizers:

in cooperation with:

OCTOBER 20TH, 2011 HOTEL HYATT REGENCY WARSAW

media partner:

powermeengs.pl

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UNCONVENTIONAL GAS OPPORTUNITIESIN

POLAND

2ND EDITION

Business opportunities in Poland: • Legal, financial and tax challenges • Strategies for partnership, risk reduction • Prospects, resources, infrastructure and surface access • Geological and geochemical tools • Equipment and innovative technologies • Water management strategies • Regulatory environment • Latest drilling & test results Discussion panel 1: Perspective for foreign companies to implement their know how and develop their business in Poland.

VIP

SIGN UP

NOW!

Discussion panel 2: What Polish companies can learn from North American operators.

www.powermeetings.eu/shale organizers:

in cooperation with:

media partner:

powermeengs.pl

OCTOBER 20TH, 2011 HOTEL HYATT REGENCY WARSAW

FARMING IN TO CONCESSIONS Strategies for a partnership or joint venture

MORNING PANEL:

WATER MANAGEMENT New ways to recycle produced water

DISCUSSION ON OPERATORS’ ISSUES • WHAT IS A TYPICAL DRILLING STRATEGY FOR POLAND? • IN A JOINT VENTURE, HOW DO YOU PROTECT DATA? • SHOULD WELL RESULTS DATA BE PUBLICLY DISCLOSED?

PUBLIC RELATIONS Managing “not in my backyard!” protests ECONOMICS OF SHALE GAS Drilling costs, demand and price of gas

AFTERNOON PANEL:

INFRASTRUCTURE DISCUSSION Transportation & logistics of gas

DISCUSSION ON REGULATIONS IN POLAND, EUROPE & USA: • WHAT LESSONS FROM TEXAS TRANSFERABLE? • HOW DO YOU REGULATE PRODUCED WATER DISPOSAL? • SHOULD THE GAS MARKET BE LIBERALIZED?

MARKETING & SALES The structure of the Polish market

Shale Gas Investment Guide Vol. 1  

Regulatory info about shale gas, concessions info, the who's who of Polish uconventional gas acreage, ExxonMobil, Chevron, ENI, Nexen, Cuadr...

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