By Matthew Czekaj
Those eagerly calculating the strategic gains in energy security that shale gas promises to bring Central and Eastern Europe (CEE) may need to run the numbers again. According to a US Energy Information Agency (EIA) study from April 2011, Poland’s natural gas reserves locked up in shale rock were estimated at 5.3 trillion cubic meters – the largest such reserves in Europe and enough to last Poland for two or three centuries. However, the newest survey [PDF], carried out by the Polish Geological Institute (PGI) and made public on Wednesday, March 21, reveals that those original assessments were seven to 13 times too large, and that Poland’s reserves are more likely between 346 and 768 billion cubic meters. This is even smaller than the pessimistic predictions in the Financial Timesthis week that Polish reserves would turn out to be around one trillion cubic meters.
Though by far the largest CEE economy, Poland consumes only 14 billion cubic meters of natural gas annually. If the country’s gas consumption holds steady, its recoverable shale gas reserves will last for 35 to 65 years. But, Poland’s energy resource mix has for decades been overwhelmingly skewed toward highly polluting coal and lignite. More than 90 percent of its electricity is generated by burning domestically mined coal. This is problematic due to Poland’s obligations to meeting ever more stringent EU air quality and carbon dioxide emissions standards. Increased domestic production of natural gas would have allowed the country to move away from coal and toward a higher proportion of the significantly cleaner “blue” fuel source in its energy mix. Warsaw’s frequent effortsto slow and hold back EU “green energy” initiatives clearly reveal the government’s anxiety about being able to quickly switch to cleaner and less carbon-heavy sources of energy, and the PGI’s reserve estimate downgrade will only exacerbate these concerns.
Furthermore, the smaller shale gas estimate will likely have a negative effect on Warsaw’s future budget calculations. Two thirds of the country’s natural gas is imported from Russia, and Poland pays Gazprom a premium price of over $550 [link in Polish] per 1,000 cubic meters – at the extreme high end among EU customers. According to Minister of the Economy Waldemar Pawlak, domestically recovered shale gas would cost[link in Polish] Poland only around $200 per 1,000 cubic meters. Thus, if it substituted all imports from Russia, shale gas would have brought the government annual savings of $3 billion. But, the lower reserves will likely put pressure on the government to tamper down the rate of shale gas recovery so as to maintain its national resource for as long as possible. In addition, the smaller estimate may radically scale back Poland’s plans to export its natural gas to its neighbors. Poland’s largest gas company, PGNiG, was recently considering converting the liquefied natural gas (LNG) terminal being built at Świnoujście from a strictly importing facility to one that can also handle Polish gas exports. Such plans are unlikely to go ahead now (Financial Times, March 19). Having little shale gas to export after meeting domestic demand will not just harm Poland’s trade balance but also potential regional importers, many of which are significantly more dependenton Russian gas than Poland. On the other hand, the PGI’s announcement will substantially improve the financial argument in favor of the Polish government’s plans to build two nuclear power stations in the country (Financial Times, March 19).
Poland’s recent obstacles to taking advantage of its shale gas have not just been limited to a smaller shale gas stock, however. In an interview with the Financial Timeson March 18, Chevron’s head of oil and gas production, George Kirkland, cautiously noted that it is still too soon to tell whether Poland’s geology will be as amenable to large-scale profitable shale gas production as in the United States. Moreover, he suggested that starting up shale gas production outside America may not happen until the next decade. The Polish government had expected that commercial extraction of 0.5 to 1 billion cubic meters of shale gas annually could begin by 2014-2015. While Chevron and PGNiG have had some early successes in drilling test wells, worryingly, Exxon Mobil’s first two wells were both deemed unproductive (though it is still far too early in the process to make any real judgments) (Financial Times, March 19).
Poland may not have any control over its geology, but legal and political issues have crept into the picture as well. In its rush to capitalize on the country’s shale gas findings, the Polish government has already given out over 100 concessions for drilling to domestic and foreign gas companies. However, Prime Minister Donald Tusk has admitted[link in Polish] that the process of handing out concessions was not well thought through. In addition, cases of bribery and corruption are coming to the fore. In January, the Polish Internal Security Agency arrested seven individuals accused of bribe taking or giving, including government functionaries in the Environment Ministry, three employees of firms seeking gas concessions as well as a person working at the PGI. Finally, environmental concerns [link in Polish] related to hydraulic fracturing (“fracking”) used to extract shale gas compelled parliamentarians from the “Greens 2004” Party to demand that the Polish Senate’s Supreme Audit Office (SAO) thoroughly study the safety of fracking techniques being employed in the country. The SAO will likely begin its study this year. Though largely driven by Russian lobbying, environmental concerns about fracking pushed the Bulgarian Parliament in January 2012 to extend a moratoriumon all shale gas projects in the country.
Despite all these setbacks, opposition Law and Justice Party leader Jarosław Kaczyński [link in Polish] is still optimistic. Earlier this week, Kaczyński called shale gas a national treasure and appealed to the Polish state to be more fully involved with its exploitation for the collective good of the nation. Indeed, it will now be difficult to entirely slow or reverse the shale gas momentum started in Poland and the wider CEE region, even with negative forecasts and trends appearing. Illustratively, the Ukrainian government hopes to emulate Poland’s shale gas drive and plans to release tenders [link in Polish] to exploit shale gas to foreign companies and investors in short order. Finally, as the Financial Times was quick to point out following the PGI’s March 21 announcement, the latest Polish estimate of shale gas reserves may eventually be revised upward since it was based on “data collected more than 20 years ago from 39 test wells. More wells have been sunk more recently and when the results of those tests are analyzed, the outlook may well look rosier.”
Although shale gas extraction will likely still move ahead in Poland despite the recent obstacles, production may very well occur at significantly lower levels than predicted and later than forecast. Consequently, the prospects for providing a plentiful, cheaper alternative to Russian conventional natural gas in Central and Eastern Europe may need to be revised. With downgraded Polish shale gas reserves, the importance of LNG terminals, nuclear power plants, “clean coal,” carbon dioxide sequestration projects, regional pipeline inter-connectors, and Caspian basin gas shipments across the “Southern Corridor” will certainly grow. Examples of all of these shale gas alternatives are, to varying degrees, currently being pursued in the region. Thus, as shale gas euphoria cools, CEE countries will likely need to double their efforts unilaterally, in joint projects and with the EU’s help to assure sufficient diversification in their gas and energy markets. As energy expertsand even the President of the United States have often said, there will be no silver bullet for achieving energy security. Poland’s more sobering shale gas forecasts are just the latest regional case in point.