Portfolio: The Future of Polish Shale Gas
Vice President of Analysis Peter Zeihan examines the potential challenges facing the Polish shale gas industry.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
Polish state energy company PGNiG plans to start test drillings of shale gas formations in the northern region of Pomerania later this month. Already, Polish media, along with Russian, American, and European media is 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 shale natural 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 United States is now in a natural gas glut. There are, for all practical purposes, no natural gas imports from the United States any longer. The Poles are thinking if they can replicate the American experience then all of a sudden, their energy problems are 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 have to have five things in place. First, you have to have the natural gas in 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 the Poles are only at the very beginning of this process. We should know some of the initial results from the test drills later this year.
Second, you need a lot of fresh water. It takes several million barrels of fresh water treated with various chemical substances in order to achieve the hydraulic fracturing results. Now, in this, 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 the large 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 to only develop the most productive or cheapest part. You simply won't get the massive outflow of natural gas that you will 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 became in charge 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.
Fifth, 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 the richer states of Europe, so it's 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 amount of natural gas use per capita. In fact in 2010 Poland only used natural gas to fuel about 2 percent of their electricity generation. Over 90 percent of it actually comes from coal. So even if the Poles 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.