TEXT-Fitch: shale gas in Poland could still be a game changer
March 21 - Shale gas in Poland could still be a game changer for the country's energy sector despite the disappointing shale gas reserve estimate published today by the Polish Geological Institute (PGI), says Fitch Ratings. PGI assessed most likely recoverable shale gas reserves to be between 0.35 and 0.77 trillion cubic meters (tcm), which is about one -tenth the 5.3 tcm estimated by the US Energy Information Administration in April 2011. PGI estimates maximum recoverable shale gas reserves at 1.92 tcm. It is still too early to make any meaningful assumptions about the future of shale gas in Poland, believed to have one of the highest development potentials in Europe. Less than 20 exploration wells have been drilled by domestic and foreign companies, in many cases with disappointing results. From a credit perspective, we view shale gas exploration as high risk and capital intensive. Partnerships among domestic companies to share exploration risks and costs, or more participation by foreigners would be positive. The current degree of exploration for shale gas in Poland is neutral for the credit ratings of leading domestic energy companies, given 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, reducing free cash flow and potentially pressuring ratings. The Polish government strongly supports shale gas exploration activity. It has urged large state-owned or state-controlled energy companies to invest in the sector. Exploration by Poland's energy companies at an early stage gives them a chance to become major players should the commercial availability of gas be proven over the next several years. This was not the case in the US, where the shale gas industry was developed by a number of smaller, independent players. Large US oil and gas companies have only recently started to be active in the sector, mostly through acquisitions. We do not expect that the success in the US, which led to about a 50% decrease in US gas prices between 2008 and 2011, will be easily replicated in Poland. Commercial production in the first five to 10 years is unlikely to substantially lower gas prices given high breakeven costs. Also, Poland and the US differ both in terms of shale formations and the gas market structure. The PGI shale gas reserve estimate, made in conjunction with the US Geological Survey, is still substantial. The shale gas reserves would be sufficient to cover Poland's gas consumption for 25-55 years, in addition to 10 years coverage by conventional gas reserves. Substantial shale gas production could lower Poland's dependence on gas imports (currently covering about 70% of gas demand), most of which comes from Russia. It would also shape Poland's future power generation mix as the country aims to diversify from the dominance of coal in power generation by investing in renewables, nuclear energy and gas-fired power plants. A number of foreign companies already have exploration concessions for shale gas in Poland, including ExxonMobil, Chevron, ConocoPhillips (through a service agreement with Lane Energy), Marathon Oil and Eni. Local players that have been granted exploration concessions include PGNiG, PKN Orlen, Grupa Lotos and Petrolinvest. Another three large domestic companies - PGE, Tauron, and KGHM - also plan to enter shale gas exploration. In January 2012, they signed three separate letters of intent with PGNiG regarding cooperation in shale gas projects. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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