Eastern Europe Commits to Natural Gas Development From Shale and Tight Sands With Poland Providing The Model

Jul 12, 2010 5:45 PM

Vinod Dar

A newmultinational sub-industry is developing: the production of natural gas from tight sands, shale and coal bed methane(CBM) in significant quantities. What started as a niche play in Texas has spread across North America and from there to Australia( CBM, tight sands) . China is the next large emerging play in all three forms of natural gas production with India following.

Interest is Europe and even Turkey is increasing by the month, with Eastern Europe ahead of Western Europe in its trajectory of shale and tight sands development. Poland isthe first to attract significant technology, operating experience and risk capital from North American E&P companies in developing its potentially large shale resources.

Ukraine, Hungary, Croatia and Romania are also currently evincing surveying, analysis and exploration interest in shale and tight sands. The Ukrainian government has stated that it plans to finalize E&Pcontracts with US companies for shale and coal bed methane development with initial production anticipated in four years. The government believes Ukraine's shale resources are amongst the most attractive in Europe but, of course, no one can currently verify this in the absence of drilling. Hungary's tight sands prospects in the MakoTrough continue to interest from Falcon Oil and Gas ( headquartered in Denver, incorporated in British Columbia) even after its initial wells did not produce conclusive results. In Croatia , the Drava Depression is suspected to have notable tight sands and deep shale resources at depths between 11,000 and 14,000 feet. Croatia's INA Naftaplinis currently analyzing these resources. In Romania a start up CanadianE&P company focused on unconventional natural gas, called Avere Energy Inc, was awarded 4 exploration blocks where they are thought to be large shale and tight sands resources as well as conventional gas. They are within the Pannonian Basin, a proven oil and gas producing area.

In Turkey, a US based E&P company, TransAtlantic Petroleum Ltd is concentrating on the Thrace basin ( where it holds 1 million net acres) for its tight sands potential. The company plans to have 5 rigs drilling in tight sands formations by mid 2011 and expects significant commercial production. TransAtlantic asserts that it has considerable exposure to shale gas in southern Romania along the Bulgarian border and expects to drill a well within a year to test the quality of the shale resource.

In Western Europe,governments and companies are activelystudying shale resources( with severaltest wells planned over the next 2 years)in Germany, Denmark, France, Sweden and the UKbut commercial production seems to be a decade away, if at all.

It is Poland that clearly has the lead. Its shale resourceshaveattracted the interest, technologyand moneyof both the largest integrated majors( ExxonMobil andChevron) andmini majors, (ConocoPhillips and Marathon Oil Corp) as well assmall independents( Realm Energy International, San Leon Energy, Aurealian Oil and Gas, for example) and alsoPoland's gas monopoly PGNiG.Poland has issued 58 licenses( as of July 2010) to explore for shale natural gas in the past 2 years ,mainly in the Lublin, Mazowsze , Pomeranian and Lower Silesian regions, representing about 12% of Poland's geography. PGNiG has 7 of these licenses. The good fiscal conditions, hospitable terrain, access to attractive markets andsuspected scale( 40 to 90 Trillion cubic feet) and quality of the resource base make Poland the most compelling shale gas opportunity in Europe in the near term.

ExxonMobil is looking at Poland and Germany for its initial test drilling for shale gas in Europe. Chevron was recently granted 5 yearexploration rights for 4 shale concessions : Zwierzyniec, Kransnik ,Fampol and Grabowiec. A joint venture of ConocoPhillips and Canada- domiciled Lane Energy has started drilling in the Baltic Basin in Northern Poland. The venture plans to drill two wells to explore the Silurian and Ordovician shale resources. The complete exploration program could take 4 years. Marathon has seven concessions in Northern, Central and Southeastern Poland, totaling 1.4 million acres. Its exploration objective is Lower Paleozoic shale gas at depths of 8,000 to 13,000 feet, similar to successful shale production in the US. Marathon studied several European and Asian shale basins before making Poland its priority.

Vancouver based Realm Energy has 3 concessions that target the Silurian, Ordovician and Cambrian shales. These are the Gniew, Ilawa and Wegrow concessions. The latter 2 concessions are owned jointly with Source Energy Partners of Denver.Adjoining the Ilawa concession are prospects held by a joint venture ofSan Leon Energy andTalisman Energy,a joint venture of ConocoPhillips and Lane Energy and by Marathon.

Adjoining the Wegrow concession are prospects held by ExxonMobil, EurEnergy Resources Corp and Cuarilla Resources Holding Company.

Currently Poland depends almost entirely on Russian natural gas imports. Should Poland succeed, as it hopes, in developing its shale resources, it could be net self reliant in 15 to 20 years. Producing shale gas in Poland is likely to be significantly more expensive than in the US but the jobs, income and national security benefits may justify the investment, effort and price. Both European nations and Russia are keenly following the activity in Poland, for opposite reasons, obviously. For the former, Polish success may be the harbinger of a continent wide opportunity;for the latter, a major strategic threat. Fifteen totwenty years seem remote to the retail investor but they are merely mid term in the investment and strategic horizons of the majors, mini majors and Russia's Gazprom.