Shale Focus: Alexander Fraser, 3Legs Resources

US President Barack Obama recently offered to help Poland, sharing best practices to pave the way to shale gas exploration and production in the Eastern European country. Natural Gas Europe had the pleasure to speak about this and other topics with Alexander Fraser, CFO of 3Legs Resources, the company established in 2007 to focus on the exploration and development of unconventional oil and gas resources in Poland. We also spoke about 3Legs’ strategy for the coming years.  

During a recent conference, you mentioned you are planning to increase the lateral length, the number of stages and the amount of sand of your fracks. Does it translate into increased financial stress? Does it change your previous assessments of your Polish licences?

I would say, if you look at the way the industry has developed generally in North America, the trend is to see longer lateral length, to see more stages. We will continue to invest more and more in horizontal wells and completions. Where we are heading is really a reflection of what you are seeing in the United States. Yes, it costs more to drill longer lateral wells, but at the same time it is a good investment. 

3Legs Resources recently sold its assets in Germany to focus its attention on Poland. Is this decision anyhow related to the increased financial needs, is it anyhow correlated to the change in cost structure you just mentioned?

The reason we disposed of our German licences is that we are focusing on Poland. As we said to our shareholders, we look to monetise our non-core assets. In the case of Germany, it did not make sense for us to engage in these blocks. So we found investors that would come in for cash consideration plus royalty. It seemed like a reasonable idea itself and is also consistent with the commitment we gave to our shareholders. 

Are these decisions anyhow related to your assessment of shale gas' potential in Germany?

In Germany we have less information. So, to that extent, they are high risk. There are fewer wells drilled, we struggled to get access to the available data. It is not easy in Germany because the data is not widely available, so we had a fairly limited data set, we considered that the risk was higher. Potentially, it could be a very good market, but it did not really fit our risk appetite at that point. 

We are witnessing an increasing market consolidation in the United Kingdom, but also to some extent in Norway. We remember a similar trend a few years ago in Poland, do you see this continuing in the near future? If so, to what extent?

Yes, we have seen some consolidation in Poland in the past. So there is always a possibility that smaller independent firms would combine and consolidate. You can never say never, it depends a lot on future results in the region that would change the fortunes of companies operating. Right now I suspect we are not going to see consolidation at this moment in time.

Speaking with people from the Polish Ministry of Energy, they told me that they don't feel the pressure because whenever a big operator leaves the country, there are others in line waiting to take those interests in Poland. Do you think this is the case? 

You have seen a number of companies leave and you haven't seen many of those replaced by new companies coming in. Some of the licences that have been surrendered by foreign companies have been taken up by Polish companies. I haven't seen many foreigners coming in the last couple of years. There are two main factors that are driving people's interest in Poland. One is the geology and the other is the regulatory and licensing fiscal regime. People are looking for positive outlook on both those scores. If for example the fiscal and regulatory regime looks like it is going to get worse, then that would discourage foreign companies from staying in Poland. They have other choices. They are always comparing Poland to other countries around the world. 

Recently, US President Barack Obama committed to an increased cooperation with Poland, saying that the United States will share shale gas practices with Warsaw. Do you think that it could help the country with its shale gas projects? 

Absolutely, absolutely. I think Poland and other parts of Europe have benefited hugely from US technology and leadership in shale exploration. It is happening all the time, even without governments having encouraged it. It happens spontaneously. I think that if the US government wants to give that additional encouragement, then so much the better. But we have seen so much already. Poland has got a lot of companies applying foreign technologies. We, along with our partner ConocoPhillips, are doing exactly the same. We are applying the best practices and the best ideas from the US. We welcome foreign companies and foreign service companies in Poland to understand the shales. So it is happening all the time. We also welcome any additional support from the US government. 

What kind of support are you hinting at? In other words, how would this political message translate into practical measures? Would it be an economic support as well? Would it be just sharing best practices? Would it imply a discount on technology?

I would have thought the easiest way would not been involving hard commercial discounts or things like that. I think the easiest way would be a know-how transfer, through assistance in creating the right licensing regime or looking at the fiscal regimes, for example. The assistance in transferring drilling know-how or helping to encourage US companies to move into Poland, whether exploration and service companies, would be of great help as well. I think of those soft benefits. 

During a recent conference, you said that 3Legs is stepping up efforts to prove commerciality of the Baltic Basin. What's your timing? When do you expect to come up with some more evidences? 

Well, we drilled eight wells since 2010 with ConocoPhillips. Of those eight wells, three are lateral wells. We have tested two of those lateral wells already. That was back in 2011. We fracked other two vertical wells. 

So in total you fracked four wells, right?

Yes, two lateral and two vertical wells.  

What is your timing now?

We have now just drilled our 8th well, which is our third lateral. It is longer than the previous ones. We have learnt about the rock properties and suitable completion design, since we last fracked a lateral well in 2011. So we and ConocoPhillips are putting a lot of effort in designing the right completion programme that takes into account all these learnings. This will be reflected in the choice of fluid, the amount of sand, the number of stages and other parameters related to the frack design. We are looking for a material improvement in the flow rate compared to what we achieved when we last tested this horizon with a horizontal well in 2011. We feel he have done everything we can to achieve an improvement. In terms of timing, we are due to frack, and stimulate and test in the third quarter of this year.

You mentioned that Polish population is quite in favour of shale gas, more than French and British population. What is the reason for the different viewpoint in France, but also in the United Kingdom? Do you see any cultural differences or is it more related to a different way of handling the situation? Did the Polish government  take any particular measure that reassured the population? Can the British government learn from Poland?

I would say that the Polish people are very supportive. I think they are very focused on what is good for Poland. They have gone through very challenging 20 years, since the Wall came down. They are completing the transition to a market economy, their economy performed really well since then, but they have still to catch up with Western European economies. So I think they are focused on developing their own domestic natural resources. That can be really useful if they can make it work. They already have quite a strong oil and gas industry, a lot of traditional producers of oil and gas date back to over 150 years ago. They produce around 30% of their own gas, so they are familiar with the idea of being suppliers of their own gas. So I think for them it is an easier bridge to cross than it is for countries like the UK, which has a relatively small onshore industry. British people associate their natural resources less closely with their national success and prosperity than countries like Poland. 

In conclusion, what about 3Legs' strategy? Do you see any close cooperation with other companies? Do you expect to buy new licences, new shares? 

No plans at the moment to buy new licences or acquire interests in other companies. We committed last year to our shareholders to concentrate on our main asset, which is the Baltic Basin. So we are focused on that. Following this well test, we will have a better sense of where we stand in terms of what are our commercial priorities. If we get a good result, then I expect we would be looking to plan for a bigger drilling campaign in the following one or two years. I think that, right now, we are a small company, potentially sitting on a very large asset. The best thing is to focus on that. At the same time, yes, we have a dialogue with other companies obviously, but it is not a strategy we are actively pursuing. 

Are you basically saying that one, two or three wells will define 3Legs' future?

I am saying this coming well is a key test for our future. If that well is successful, we would then follow out with a sort of pilot development programme over the couple of years after that. And that is likely to be somewhere between four and ten wells. 

 Sergio Matalucci

Editor's Note:  Last Thursday, PKN Orlen commented that shale gas extraction in Poland may turn out to be lower than expected.  The country’s largest oil company cited the “geological characteristics of the Polish shale rock as well as the results of the exploration works and tests conducted on the deposits so far indicate clearly that the average estimated gas extraction from the shale formations analyzed so far in Poland may be on a relatively low level.”