Challenges to the Development of Polish Shale Gas

The future of Polish shale gas: What potential challenges are facing the development of a Polish shale gas industry?

Polish state energy company PGNiG plans to start test drilling of shale gas formations in the northern region of Pomerania later this month. Polish media, along with their Russian, American, and European counterparts are already buzzing about the possibilities of Poland becoming the next energy Kuwait. It’s easy to see why the Central Europeans are so enamored with the idea of natural shale gas. The Russians have a death grip on nearly all natural gas supplies to the entire region and very few of the Central Europeans have large natural resources, energy or otherwise. Poland is actually in a double bind, for later this year the Nord Stream pipeline comes online, which will ship natural gas direct from Russia to Germany, bypassing all the current transit states. This denies Poland not only transit revenues, but the ability to use natural gas as a leverage against either Berlin or Moscow.

Shale gas is a relatively new development in the United States. The US is now in a natural gas glut. There are, for all practical purposes, no natural gas imports from the United States any longer. Poles are thinking if they can replicate the American experience then all of a sudden, their energy problems could be completely solved. It’s a nice dream and it may even become a reality, but not anytime soon. For a truly revolutionary impact in shale gas you need to have five things in place.

First, you have to have the natural gas in a high enough concentration that it can be economically extracted. Yes, advances in hydraulic fracturing and horizontal drilling have lowered the price point, but at present Poland is only at the very beginning of this process. We should know some of the initial results from the test drills later this year.

Secondly, you need considerable amount of fresh water. It takes several million barrels of water treated with various chemical substances in order to achieve the hydraulic fracturing results. In this respect Poland is fine. It has as plenty of fresh water and more than many of the natural gas sites in the United States, such as the Eagle Ford Shale in southern Texas.

Third, you need a lot of money. Shale gas developments are expensive. The technologies are relatively new, there aren’t a lot of people who know how to do them, and it requires a lot more capital investment into each individual well, which sometimes can run miles laterally under the surface of the earth.

Fourth, you need a lot of small companies. It really is an issue of size here, it’s not that the small companies are better at the technology than larger ones, but small companies will try to extract every molecule of natural gas they can from a specific chunk of land. When a big company comes in, it lays claim to a very large tract and tries only to develop the most productive or cheapest part. You simply won’t get the massive outflow of natural gas that you do if you divided the same plot of land up among dozens or even hundreds of smaller companies. Poland lacks this tradition of small energy companies that exists in the United States. Remember that Poland only gained complete control of its own affairs with the end of the Soviet period in 1989. Since then, PGNiG has really been the only party in town and as a state major it actually has invested interest in keeping competition to a minimum in order to maximize its own bottom line.

Finally, and most importantly, in the case of Poland, a successful shale gas operation requires a pre-existing infrastructure both to gather and then to distribute the natural gas, and this is something Poland just doesn’t have. Poland may be in Europe but it’s not one of continent's richer states, so it is going to be heavily dependent on outside investments despite the fact that this is a national security issue. There are just not that many financial resources that can be applied to this project at any given time. Unlike the United States, which is one of the most intensive users of natural gas in the world, Poland ranks near the bottom in terms of the amount of natural gas use per capita. In fact in 2010 Poland only used natural gas to fuel about two percent of their electricity generation. Over 90 percent of it actually comes from coal. So even if Poland were to discover vast tracts of natural gas under Pomerania, it will still cost them tens of billions of euros to build the gathering infrastructure, the transport pipelines, the electricity generation facilities and the chemical plants necessary to take advantage of it.

That is something that is going to be measured in years, maybe even decades, not months.

Peter Zeihan, vice president of analysis, STRATFOR

The future of Polish shale gas is republished courtesy of STRATFOR.  STRATFOR’s global team of intelligence professionals provides an audience of decision-makers and sophisticated news consumers with unique insights into political, economic, and military developments.