Polish Shale Gas Production Will Not Impact Prices Prior to 2020
Fitch Ratings believes that shale gas production in Poland could improve the country's security of gas supplies but is unlikely to lead to large declines in gas prices before 2020.
Shale gas production in Poland, which has one of the highest shale development potentials in Europe, would lower the country's dependence on gas imports from Russia (currently covering about 70% of gas demand).
However, the agency believes that even substantial shale gas production by 2020, is unlikely to result in large declines in domestic gas prices. In the most likely scenario, shale gas production, which may start around 2015, will not lead to a gas oversupply in the first few years of production, especially as domestic gas demand may increase by 2020 as several gas-fired power plants are planned to be built. If there is a surplus of gas because shale gas production reaches a significant level by 2020, this surplus is likely to be exported.
Gas supplies to Poland will continue to include imported volumes based on the long-term contract with Gazprom Export (take-or-pay volume of 8.7bcm per year by 2022) and the long-term take-or-pay contract for LNG supplies with Qatargas (1 million tonnes of LNG annually (about 1.5bcm) starting from 2014). The contract with Gazprom is currently partly indexed to oil prices, while the formula in the LNG supply contract is based on oil prices. Production of shale gas in the first few years is unlikely to substantially lower domestic gas prices due to high breakeven costs until economies of scale are achieved.
If the planned liberalisation of the Polish gas market takes place in the next few years, European spot gas prices may have a larger impact on gas prices in Poland than the potential shale gas output. Polish gas prices for industrial customers are currently regulated, but this may change if the new gas law (the draft of which was published by the Ministry of Economy in October 2012) is enacted. The draft stipulates gas suppliers, including the dominant supplier, Polish oil and gas company PGNiG SA, will sell at least 70% of their gas in the local commodities exchange. This will open up the Polish gas market to competition.
The low risk of a substantial gas oversupply leading to a large fall in gas prices is positive for potential shale gas producers. The shale gas boom in the US led to about a 70% decrease in domestic gas prices between 2008 and 2012, which reduced cash flows and worsened credit ratios for some gas producers. Such a scenario in Poland is rather unlikely.
Fitch believes that gas prices in Poland following market liberalisation in the next few years will be driven mostly by external rather than domestic factors. These include European spot gas prices, a gas supply-demand balance in Europe (which is unlikely to be significantly affected by Polish shale gas before 2020), a further growth of US shale gas production, potential gas exports from the US to Europe or potential further re-negotiations of prices under the long-term supply contracts between European utilities and OAO Gazprom ('BBB'/Stable).
From a credit perspective, Fitch views shale gas exploration as high risk and capital intensive. The current degree of exploration for shale gas in Poland is neutral for the ratings of leading domestic energy companies, given the modest amounts of planned capex relative to their total capex. However, a substantial increase in investment in shale gas exploration would add to high core capex requirements, particularly for electric utilities, reducing free cash flow and potentially pressuring ratings. Therefore, partnerships among domestic companies to share exploration risks and costs are positive.