Maplecroft: Poland Plans for Gazprom Contract Expiration
State oil and gas company sets deadline for shale estimates ahead of Gazprom contract expiration
The Polish Geological Institute, on 11 May, said it is to publish an updated version of its latest shale reserves in late 2013 and suggested future estimates would be higher than the most recent figures released. Latest shale reserve estimates from the Polish Geological Institute, in March 2012, were revised downwards significantly – from 5.3tr cubic metres (tcm) in April 2011 to 346-768bn cubic meters (bcm) - necessitating a revision of prospects for providing cheaper alternatives to Russian conventional gas. Poland's state-controlled oil and natural gas company, PGNiG, on 24 April said that it will be crucial for Poland to be clear on its shale gas potential by 2019 in order for it to gauge terms of negotiation for Russian gas imports. Within such a timeframe, Poland will have three years before the expiration of its current deal with Russian gas major Gazprom in 2022, to decide on an appropriate energy mix consisting of domestically produced unconventional gas and conventional gas imports.
However, a definitive assessment that would enable the government to strategise about its energy security over the next two decades has yet to be made. Such estimates will underpin PGNiG's operations in the country and, in turn, dictate foreign involvement in the sector. For instance, investment decisions are being delayed in anticipation of regulatory and tax changes currently being drafted for the sector and due to be passed during 2012.
Significance
PGNiG's proclamations signal that the government continues to broadly support development of shale gas. It also confirms that Poland's long-term energy strategy to become self-sufficient remains at the forefront of the government's concerns. That the actual size of Polish deposits has yet to be confirmed is a critical issue for the governing Civic Platform (PO) as it endeavours to push forward and commence production in 2014.
Depending on the level of shale reserves in Poland, the government will wish to minimise costly Russian imports in the composition of its energy balance. Poland is currently signed to an agreement which stipulates that Gazprom will supply PGNiG 11bcm through the Yamal pipeline from 2012 (increasing from 9.7bcm in 2010 and 2011) until 2022 for domestic use and until 2019 for transit on to other European customers. Given the costly nature of importing Russian gas, in addition to the fact that Poland will remain in Russia's strategic influence, a deadline of 2019 would enable Warsaw to at least attempt to negotiate future energy deals with Moscow which exhibit more beneficial terms.
Poland's high dependence on Russian supplies has left it vulnerable to Moscow's influence of late. A disagreement in early 2012 over the terms of supply has amplified calls for Warsaw to diversify its energy supply away from Russia. In November 2011, PGNiG sought an arbitration ruling in a Stockholm court, which aimed to reduce the price paid for gas under its arrangement with Gazprom. PGNiG sought at least a 10% discount on the price it was paying, to be retroactively applied to April 2011 – and would follow similar discounts to the Italian energy supplier ENI and France's GDF Suez. In February 2012, PGNiG denied reports that it had received a proposal on price deductions in exchange for increased purchase volumes being agreed.
If Poland is successful in reducing its dependence on Russia, which currently accounts for approximately two-thirds of its annual 14bcm gas consumption, and can make the conversion from a mix heavily weighted in favour of coal (in which it is also increasingly dependent on Russian imports), the country has the potential to become self-sufficient in terms of energy. It may even eventually become a net exporter, as some have suggested.
Uncertain role for unconventional domestic production
As the government envisages a future energy strategy centred on shale production, politicians are divided over what role foreign entities should play in the country's shale gas sector. The Treasury Ministry's backing of state-owned companies to take a lead role in production has instigated concerns over a possible trend towards resource nationalism and disadvantageous conditions for small investors. Although there is consensus that fiscal burden on companies should increase, a moderate rise would be preferable to retain foreign investment, and its benefits, in the country.
Continued dominance of PGNiG at the expense of foreign operators, meanwhile, could impede Poland's campaign towards shale production. At present, PGNiG lacks the resources to fund the intensive exploration required, or the technological know-how held by foreign companies. PGNiG has sought out various options to increase licensing possibilities, and negotiations are underway to create a new joint shale gas company, or special purpose vehicle, between PGNiG and power groups PGE, Tauron and Enea, and copper and silver mining giant KGHM. This could open up new financing possibilities.
Nevertheless, foreign operators have yet to be deterred by the lack of regulatory clarity or concrete estimates. Drilling is expected to double in 2012 from 2011 levels, with activity executed by foreign companies including Chevron, ENI and ExxonMobil. Such optimism could be down to the fact that, although exploration costs are high, gas prices are up to seven times higher in Poland than in the US.
Forecast
The next milestone looks set to be at the end of 2013, when the Polish Geological Institute releases more definitive estimates for future shale reserves. Such certainty will not only provide PGNiG and foreign investors a more complete picture of potential shale gas production, but will allow the government to shore up the regulatory framework. A new tax for hydrocarbons is due to be formalised in the second quarter of 2012, and will impact upon shale extracts. It comes in response to concerns that the lack of certainty on the percentage of royalties that the government will seek on shale extractions could result in an earnings shortfall for the government. Additional regulatory changes are likely to be made once a more definitive estimate is ascertained.
Poland may also be sending a message to Russia that it is committed to overhauling the composition of its energy supplies and reduce its relationship of dependence. However, claims that shale gas production could start by 2014 are unrealistic when the required technological expertise from foreign companies are considered. While Russia may be aware of the dynamic rise of unconventional natural gas extraction, it has little cause to suppose that Poland will shed its dependency on Gazprom imports in the near future, particularly considering the political divisions emerging around the subject.
Jamie Scudder is an analyst at Maplecroft, a leading source of global risks intelligence. Maplecroft has recently produced a Country Risk Report on Poland covering the economy, the regulatory environment, governance issues and environmental concerns affecting companies looking to invest in shale gas extraction. For more information, please contact jason.mcgeown@maplecroft.com