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.