Poland is at the top of the list for shale potential

Houston companies planning to explore for natural gas

Dec. 9 (Bloomberg) -- Two Houston-based companies, ConocoPhillips and Marathon Oil, are betting that Poland, which gets half of its natural gas from Russia, can yield a development boom in shale formations like those that drove a jump in U.S. output of the heating fuel.

The third- and fourth-biggest U.S. oil companies obtained exploration licenses this year covering hundreds of thousands of acres in Poland. The country, which imports 72 percent of its gas, could become an exporter of the fuel, said Maciej Wozniak, chief adviser on energy security to Prime Minister Donald Tusk.

“Everything leads to a conclusion that in four or five years, and this is how much time we have to prepare for this, Poland will become a place with quite a lot of gas,” Wozniak said in a telephone interview.

Shale developments, where rock formations are fractured and injected with water and sand to release trapped fuel, account for about 15 percent of U.S. gas output, according to Oklahoma City-based Chesapeake Energy Corp. After successes in the U.S., producers such as Houston-based Marathon seek to exploit similar geological formations around the world.

“We looked at a number of countries in Europe and through Asia,” Marathon Executive Vice President David Roberts told investors in a Nov. 19 presentation after the company obtained its license. “Poland bubbled up to the top of our list.”

Russia Reliance

Shale projects contributed to a drop in U.S. gas prices from a 2008 high of $13.69 per million British thermal units to a 2009 average of about $4.06.

Successful drilling wouldn’t end Poland’s reliance on Moscow-based OAO Gazprom, which disrupted gas supplies to 20 European nations in January on a price dispute with Ukraine. Poland’s gas-distribution monopoly, Polskie Gornictwo Naftowe i Gazownictwo SA, agreed Nov. 3 to contract with Gazprom for almost three-fourths of its gas until 2037. The deal is pending approval by governments of both countries.

“It would have no choice but to pay the price agreed to in the contract even if the price on the cash market falls due to additional supplies from the shale formations,” said Vince Kaminski, an adjunct professor at Rice University in Houston and former risk-management director at Enron Corp.

Gas discoveries could enhance energy security for Poland and neighboring countries such as the Czech Republic and Slovakia. Polskie Gornictwo, based in Warsaw, cut sales to the nation’s largest refiner, PKN Orlen SA, and the biggest fertilizer maker, Zaklady Azotowe Pulawy SA, after the Russian- Ukrainian conflict left Poland with limited supplies.

Energy Security

“Increasing natural-gas production in Poland, especially in such a sustainable way, is very important for us,” Wozniak said. “Given our situation and the problems we had over the last years with securing stable supply on the gas market in the country, this initiative is particularly valuable.”

Polish shale gas is “a long way off” from having a “serious” impact, Gazprom said in a statement. Long-term contracts are needed for gas users to secure supplies and for producers to finance infrastructure projects, the company said.

Polskie Gornictwo, which produces about 4.1 billion cubic meters of gas a year in Poland, plans to drill in shale formations with Marathon and Chevron Corp., said Piotr Gliniak, the company’s exploration director. It may turn out that Polish shale formations have too much water to tap using techniques currently employed in the U.S., he said.

“It seems to me that at the moment, the foreign companies are a bit too optimistic about what may be found in Poland,” Gliniak said.

Silurian Shale

Representatives of Marathon and ConocoPhillips of Houston declined to comment for this article.

If the 430 million-year-old Silurian shale that stretches through Poland proves to be “an economic resource,” 48 trillion cubic feet (1.4 trillion cubic meters) of gas could be recovered over decades, according to Rhodri Thomas, a project adviser at Wood Mackenzie Ltd. in Edinburgh. That much gas would sell for more than $240 billion at current futures prices.

ConocoPhillips has an option to develop as many as 1 million acres in the Silurian shale under an exploration agreement with Warsaw-based Lane Energy, the U.S. company said in a Sept. 9 presentation to investors. The companies plan to drill the first well near the northern Polish town of Lebork, said Kamlesh Parmar, country manager at Lane Energy.

Parmar said the concession area has all the geological attributes, including a thick and organically rich rock formation, to become a successful shale-gas development.