* Marathon, Talisman say quitting Polish operations
* Polish government backs shale to replace Russian imports
* Critics say reality falls short of shale gas hype
* Estimates of reserves were drastically downgraded
* Energy executives complain about red tape
By Agnieszka Barteczko
WARSAW, May 8 Canada's Talisman Energy and U.S. oil firm Marathon said they were quitting Polish shale gas operations, raising questions over the business sense of developing the deposits, once seen as a potential energy bonanza.
Poland's government, determined to find a new source of energy to replace the imported Russian gas on which it depends, has trumpeted its rock formations as the biggest potential source of shale gas in Europe.
The initial optimism among investors has been tempered by an unsettled regulatory landscape, and a downgrade of estimates for the size of potential reserves.
U.S. oil major Exxon pulled out last year, citing disappointing drilling results, but the announcements from Marathon and Talisman on Wednesday added up to the most dramatic exodus from the sector to date.
Marathon said it had decided to end operations in Poland: "after an evaluation of the company's exploration activities in Poland and unsuccessful attempts to find commercial levels of hydrocarbons."
Talisman announced it was selling its Polish operations to Irish headquartered gas exploration group San Leon Energy.
A Talisman executive in Poland told Reuters the main reason for the sale was to allow the company to focus on its operations in the Americas and the Asia-Pacific region. But he said the picture inside Poland was also a factor.
"Of course what Talisman also took into consideration was the situation in Poland's shale gas, including geological uncertainty and unclear legal framework," said Tomasz Gryzewski, Corporate Affairs Lead at Talisman Energy Polska.
The departure of the North American firms is likely to further dent investor appetite to develop Polish shale gas, which is seen as a political imperative by a government wary of former occupier Russia, but has yet to produce any shale energy in commercial quantities.
"Poland's shale gas exists only in the media, because in reality nothing happens," said Grzegorz Pytel, energy expert at Sobieski Institute, a Polish think tank.
"What is needed is a long term-strategy for the sector, predictability and equal treatment of local state-controlled firms and foreign investors."
Poland has issued more than 100 shale gas exploration licences, and about 40 test wells are in operation, though none is expected to start producing gas before 2015.
Foreign permit-holders still active in Poland include Chevron Corp of the United States and Italy's ENI , as well as a handful of smaller independents.
The new owner of Talisman's Polish shale gas operations was bullish about the prospects.
"There is still significant and continued industry interest in the Baltic Basin shale gas play, and we expect the results of our fracking programme to attract further interest from potential farm-in partners," said Oisin Fanning, executive chairman at London listed San Leon Energy PLC.
HOW MUCH GAS?
Enthusiasm for Polish shale gas reached its peak in 2011, when the U.S. Energy Information Administration estimated its reserves at 5.3 trillion cubic metres, enough to cover domestic demand for some 300 years.
But estimated reserves were slashed to about a tenth of that in a government report published last year -- still enough to supply Poland for decades but far short of the initial promise.
At the same time, the legal framework for shale gas investors in Poland, while still more open than in most European countries, turned out to be less straightforward than some foreign firms had anticipated.
Company executives complain about the tangle of overlapping environmental regulations which force them to seek permissions from multiple agencies before they can drill. They say the fact there is, as yet, no law adopted on taxing shale gas makes it difficult for them to make business projections.
Opposition to drilling from green groups and local residents has so far been muted, but international environmental lobby groups are building up their presence in Poland and starting to scrutinize Polish shale gas projects.
In part because of the question marks about whether shale gas in Poland is commercially viable, investments so far have been led by the state.
Firms controlled by the state, led by energy company PGNIG , are the biggest holders of shale gas concessions.
Even state-controlled companies not traditionally involved in energy exploration, including copper miner KGHM and refiner PKN Orlen have committed to big investments in shale gas, prompting concerns from some minority shareholders that politics was being put before business.