POLAND'S POTENTIAL SHALE GAS INVESTMENTS

UNCLAS SECTION 01 OF 02 WARSAW 001037 SENSITIVE SIPDIS STATE EEB/ESC FOR DOUG HENGEL AND S/CEE FOR REBECCA NEFF, COMMERCE FOR HILLEARY SMITH E.O. 12958: N/A TAGS: ECON ENRG EINV PL SUBJECT: POLAND'S POTENTIAL SHALE GAS INVESTMENTS WARSAW 00001037 001.2 OF 002 ¶1. (SBU) Summary: The success of companies in the U.S. at extracting gas from shale and other unconventional sources has generated some excitement in Poland. Several majors and mid-majors have applied for exploration licenses over the past year and performed broader market and investment climate studies. While these companies are cautiously optimistic, the government and local energy concerns remain unconvinced, arguing that "tighter rocks" make Polish shale gas uneconomical. Based on the conflicting views, it appears that either Polish officials underestimate recent advances in technology (exacerbated by the companies' attempts to downplay potential),or global energy companies are overly optimistic. Major finds would change how Poland views climate/energy security and their related priorities in Brussels. Facilitating exploitation investments might also inspire the GoP to address long-standing impediments to infrastructure development. End Summary. Changing the Gas Mix -------------- ¶2. (SBU) Poland currently generates about five billion cubic meters (bcm) or one third of their total annual gas consumption from conventional domestic sources, importing the remainder from Russia. Government officials have not yet factored nonconventional gas into Poland's energy security strategy. State-owned monopoly importer PGNiG is still focused exclusively on conventional domestic and international exploration, and will not substantially invest in nonconventional sources. However, if global energy companies are right, this shale gas will clearly change the game. ¶3. (SBU) Global industry representatives are tight-lipped about specifics, but they tells us they see huge potential for expansion into unconventional sources - with some suggesting they could easily surpass total domestic consumption (about 15 bcm/yr) making Poland a net exporter in years to come. Marathon representatives thought they could be producing gas within the next two years. Ministry of Environment geologists and experts at the Oil and Gas institute (a commercial research institute under the supervision of the Ministry of Economy) claim that Poland has a large formation similar to US geological formations which have proven so productive. But they add that the "rocks are tighter," suggesting higher extraction costs and lower potential. Energy companies are betting on a large swath of land cutting diagonally across the country from just off the northwest coast to the country's southeastern borders. Global Players Quietly Get in the Game -------------- ¶4. (SBU) Chevron, Conoco Phillips, Exxon, FX energy, and Marathon are all actively developing or seeking new exploration rights in Poland. While they are quiet in their preliminary operations and subdued in their public expectations, it is clear that all are in a hurry to move into this potential market. Marathon and Exxon have already appointed country directors and are working to establish local offices. FX has a history in Poland and has already partnered with PGNiG on smaller extraction projects. While the companies do not advertise their presence, the Ministry of Environment is transparent in its licensing of exploration, providing a CD and map of current and potential investors to anyone interested. Their flat fee structure for exploration of quadrants suggests they aren't yet looking to manage expectations as a negotiating tool. Potential Hurdles to Investment -------------- ¶5. (SBU) Companies considering investments have noted concerns which reveal not only their high expectations, but also potential pitfalls to development: - Domestic Market Access: Poland's state-owned monopoly importer (PGNiG) and distribution system (Gaz System) will need to support any eventual exploitation and delivery of product to market. These state-owned monopolies are a concern, as they can influence gas prices and construction of supporting infrastructure (particularly pipelines). On the plus side, domestic demand is expected to increase rapidly as Poland searches for alternatives to coal. - Exports: Poland is working hard to lock-in long term global gas supply commitments (most notably from Qatar and Russia). Any significant finds will require accessing broader regional markets. There is a great deal of uncertainty surrounding Poland's verbal commitments to gas interconnectors. WARSAW 00001037 002.2 OF 002 - Land Use: Poland has a history of difficult negotiations over land use spoiling large investments, notoriously highway development. Imminent domain legislation is still new and untested. Access to exploration sites and rights of way for eventual pipelines can be impeded by any number of local authorities or small private landowners. - Exploration/Exploitation Rights: To date, the process has been very straightforward. However, state-owned mining companies and PGNiG control much of the country's mineral rights. Should initial exploration raise expectations, dealing with cash-strapped state-owned companies may prove difficult. Comment: Changing Climate/Energy Security Calculations -------------- -------------- ¶6. (SBU) Shale gas development would dramatically impact Poland's energy security calculations as well as their willingness to participate in global climate change initiatives. At the highest levels, the government would welcome and encourage local exploitation as an alternative to buying more Russian gas or increasing reliance on coal. The investment climate concerns while real, are surmountable. Today, the best information on unconventional gas potential probably lies with experts in the major global energy firms. If and when they are ready to substantially invest in exploitation, we expect the GoP will work to facilitate that investment, including ordering the state-owned energy companies to support development. The process of facilitating this investment may in fact open the door to the USG working more closely with Poland on addressing the last of its long-standing structural impediments to development. TULLEY