Shale Gas Investment Guide vol. 3 by Cleantech Poland LLC

SHALE GAS

invest/POLAND ment

GUIDE SERVICES

COMPANY DIRECTORY

BNK

WELL SITE VISIT

WINTER 2012

WOZNIAK

THE CHIEF GEOLOGIST

make way the (GOVERNMENT)

CONTENTS

p/7

LEADER:

2013 a turnaround year

p/11

INDICATORS

p/16

Market update

p/22 TRENDING p/2 6 Profile:

Kris White, UOS p/32 SITE VISIT BNK Polska p/38 STATE OWNED COMPANIES p/4 2 Interview: PIOTR WOZNIAK Chief Geologist

p/4 6

New market entrants

p/50

Concessions trading

p/52

LOGISTICS, IN AND OUT OF A PAD PIOTR WOZNIAK, CHIEF GEOLOGIST

p/56

PIOTR S PA C Z Y N S K I , a l aw y e r ’s p r o f i l e

4 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

CONTENTS

p / 7 6 *

I P G r o u p Iza Kawczynski

p / 7 8

New royalty regime

p/80 GLOBAL UPDATE China USA Russia Australia S. Africa Argentina UK EU Bulgaria Brazil Mexico Ukraine Turkey Lithuania Germany France

BALTIC VALUE CHAIN IN PICTURES

82 86 92 96 98 100 102 104 106 106 107 108 109 109 110 110

p / 1 1 3

WHO’S WHO Operators

p/129 Services Directory p/13 3*

HALLIBURTON Solving challenges

. PGNIG’S NEW PRESIDENT, GRAZYNA PIOTROWSKA-OLIWA

p/6 1

Baltic value chain in pictures

p/138

p/72

p/141 PICTORIAL Shale Gas World Europe p/14 4*

Viking Geophysical Services

Environmental groups against shale gas

P a c k e r s P l u s Open Hole Multi Stage Completions

*Advertorial

WWW.CLEANTECHPOLAND.COM

OPINION

BY WOJCIECH KOSC

Fundamentals are

shaping up

One flared well and a regulatory blueprint. The gas isn’t flowing at commercial rates yet. But there are signs forecasting a breakthrough in 2013. LET’S BE CLEAR: the Polish shale gas market is feeble by anyone’s standards. There have been 30 wells drilled to date and just a few horizontals. Hydraulic stimulation has been carried out on about a third of the wells. Let’s also be clear about something else: the market has been turning corners in a way that provides evidence for a reasonable premise that 2013 could be a breakthrough year. Late 2012 already brought about a taste of what’s to come. First, there was a sustained flare on a CP/3Legs Resources well called Łebień LE-2H for over two weeks (ongoing as the Shale Gas Investment Guide went to press). Methane was being brought to the surface at between 560 and 780 mscf per day. One flare on one well is nowhere close to gas from shales flowing at two billion cubic meters annually, which is what the ministry of environment would consider production at an “industrial scale”. Still, it’s one of those encouraging signs for the ministry that there are operators who are serious about shale gas. In the eyes of the Polish government, Poland’s shale gas push is, first of all, about the best possible use of natural resources. “We call it maximization of resources,”

If you miss out on the opportunity, there are plenty of others waiting in line to operate your relinquished concessions

6 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

deputy minister of environment and the country’s chief geologist Piotr Woźniak told SGIG in an interview on page 42. Secondly, the officials at the ministry finally got around to releasing an early draft proposal for a regime to regulate oil and gas production. As soon as the blueprint came out, a chorus of boos resounded from executives and lawyers. The bottom line of criticism is that the overall 40 percent tax rate doesn’t quite add up. Take income tax of 19 percent, a cash flow tax of 25 percent, and several other taxes and it’s clear that there’s “different” math at work at the ministry, they say. In Europe, energy has long been tied to the state and there’s not much to indicate that anything will change anytime soon. Poland’s proposed regulations take after Norway’s (also after Denmark and the Netherlands), where such solutions worked but were built up over time. The new Polish regulations simply couldn’t be a surprise to operators. There’s an argument circulating that the Polish government should take less from investors so they stick around. But where would the investors go to? A cheap source of labor and a playertake all set of rules isn’t all what it takes to be successful. If it was, manufacturing wouldn’t be relocating from China back to the US, as in recent trends. In other words: adapt. If you miss out on the opportunity, there are plenty of others waiting in line to operate your relinquished concessions.

EDITORIAL

kick the

SHALE GAS

investment /POLAND

GUIDE

tires and

EDITOR IN CHIEF WOJCIECH KOS´C´

light

PUBLISHER PARKER SNYDER

ART DIRECTOR PASCAL GUITER

the fires

GRAPHIC DESIGNER OLA FORYS´

PRINCIPAL ANALYST TOBIASZ ADAMCZEWSKI

KEY ACCOUNTS KEITH LUKE

WRITERS

HUNTER DIAMOND, PAUL GARRETT ANDREW HOBBS, STANISŁAW KOCZOT, JAKUB KOCZOT, KEITH LUKE, NIKOLAY MARCHENKO, NICHOLAS NEWMAN, GREG PENFOLD, SONJA VAN RENSSEN, . SWIRE, CLAUDIA PEREZ RIVAS, DOMINIC ALICE TRUDELLE, JUDE WEBBER

PHOTOGRAPHY

FORUM, FOTALIA, ISTOCKPHOTO.COM, PIOTR KNAP, DAVID MARIUZ, KRZYSZTOF M RATSCHKA, REUTERS, SHUTTERSTOCK, SZYMON SZCZES´NIAK

PUBLISHED BY

CLEANTECH POLAND LLC UL. PUSTELNICKA 48/22 04-138 WARSAW, POLAND

EDITORIAL CONTACT WOJCIECH@CLEANTECHPOLAND.COM (+48) 602 458 099

ADVERTISING CONTACT

KEITH@CLEANTECHPOLAND.COM

(+48) 694 478 075

GENERAL REQUESTS INFO@CLEANTECHPOLAND.COM

Dear Colleague, In June this past summer, my editor and I took a trip to a BNK well site. There in north Poland, we met the farmer who had leased out his land. We met the owner of a hotel where the drilling team was staying. We met the HSE manager, from Texas, who had come half a world away to a remote village of strange tongues to prove up a shale play. In the Cashubian region west of Gdańsk, we asked a few of our questions: Where is the waste headed? How does the farmer benefit? Who is the local opposition? BNK Polska is an operator open to visitors, and thanks to a bit of transparency about their operations, we got to kick the tires on Poland’s shale boom. What did we find? Read Wojciech Kość’s site report beginning on page 32. The government has finally spoken about the shape of the royalty regime. Warsaw will tax 25 percent on cash flow, 19 percent on company profits and 5 percent on the value of the gas. What’s it add up to? 40 percent according to the ministry of environment. According to at least one lawyer, the ministry’s math is circus math, a bit of numbers “acrobatics.” Read Piotr Spaczyński’s profile on the risks to investors who would roll the dice in Poland’s upstream markets. As for news from the oilfield? 3Legs Resources in JV with ConocoPhillips flared their Łebien LE-2H well. The best result yet in Poland.

PRINTER

DRUKARNIA BELTRANI

WWW.CLEANTECHPOLAND.COM

Partners

To become a partner for the magazine, please contact the publisher The American Chamber of Commerce (AmCham) is a business organization that serves and promotes its member companies. AmCham fosters positive relationships with the government and promotes the free market spirit for the benefit of business. Ul. Emilii Plater 53, 00-113 Warsaw www.amcham.com.pl Cleantech Poland is media and consultancy for sustainable business. Cleantech Poland provides services to the upstream oil and gas sectors. The Shale Gas Investment Guide/Poland is part of a portfolio that includes the magazine Cleantech. Ul. Pustelnicka 48/22 04-138 Warsaw info@cleantechpoland.com PwC PwC provides oil and gas companies with services in assurance, advisory and tax & legal. A global services company, PwC has been in Poland for 20 years and counts many of the largest oil and gas companies as clients. Al. Armii Ludowej 14, 00-638 Warsaw www.pwc.pl SSW SSW provides comprehensive tax and legal advisory services. SSW, whose main practice areas are energy and natural resources, advises investors on the business implications of the government’s royalty proposal. Rondo ONZ 1, 00-124 Warsaw www.ssw.pl

COMPANY INDEX O 3Legs Resources (p13, 11, 50) n A ARI (p12) n ANP (p106) Apache (p91, 103) Apex (p46, 53) B Baker Hughes (p11, 90) Baker Oil Tools n (p27) Baltic Ceramics (p54) BofA (p40) Bankers Pet. (p36) Bentec (p46, 25) Bloomberg (p95, 84) BNK (p11, 13, 19, 25, 30, 110, 32) BP (p89, 91) British Geo. Surv. (p102) Bundu (p98) Buru (p100) n C CASE (p40) CDM Smith (p46, 53, 142) Cheniere (p111) Chesapeake (p90, 91, 84) Chevron (p11, 46, 102) CNOC (p84, 91) China United CBM (p84) Coldstream (p46) ConocoPhillips (p11, 18, 50, 91, 100) Consus (p13) Crown Point (p103) Cuadrilla (p103) n D Dart (p13, 103) DBM Services (p46, 54) Deloitte (p53) Devon (p84) Diament (PGNiG) (p25, 11) DPV (p42) n E EIA (p22) Ely & Assoc (p28) ENDS Europe (p110) Enea (p11, 39, 23) ENI (p11) Ensign (p11, 46, 25) Enterprise Inv (p46) EOG Resources (p91,

Want to see if your company was mentioned? Here's our index to help you out.*

103) EPI-V (p90) ExxonMobil (p11, 50, 91, 107, 110, 93, 56, 30, 22) n F Falcon (p98) Financial Times (p110, 95) Friends of the Earth (p73, 106) FX Energy (p18, 46) G Gazprom (p25, 39, 92, 94, 106, 110, 111) n Global (p142) Greenpeace (p73) n H Halliburton (p11, 46, 54, 107) Hart (p103) Hess (p91) Hutton (p23) n I IEA (p106) ION (p46, 140) IP Group (p46, 142) n J Jefferies (p89) n K KCA Deutag (p11, 46, 25) KGHM (p11, 23) Korea NOC (p91) KPMG (p106) n L Lane Energy (p75) Liberty PP (p28) LNG Energy (p13, 11) Lotos Petrobaltic (p19) n M Madalena (p103) Marathon (p11, 48, 91, 25) McKee Inv (p28) MinijosNafta (p111) Mitsubishi (p100) Mitsui (p91) MND Drilling (p25, 11, 32) Moldovagaz (p110) n N Nafta Piła (p11, 46, 25) National GWA (p74) NOV (p25) Nexen (p84) NoHotAir (p103) NOKE (p18, 24, 78) n O Orlen Up. (p25,

P Patersons Sec. (p100) Pemex 11, 40) n (p107) Petroceltic (p106) PetroChina (p84) PetroFrontier (p100) Petrohawk (p90) PGE (p11,23) PGNiG (p18, 11, 20, 28, 39, 23, 94) PGNiG Norway (p41) PGNiG Posz. (p40) PGNiG Tech. (p40) PKN Orlen (p28, 40) PKO (p40) Planet Earth (p103) PGI (p18, 75) PWC (p40, 98) n R Railroad Commission of Tex. (p90) Renaissance Cap. (p95) Rosneft (p22) Royal Dutch Shell (p111) n S San Leon (p18, 11, 13, 51, 23) Saponis (p18) Schlumberger (p11, 103) SKM (p11, 46, 25) Shell (p91, 98, 84) Sinopec (p84) SSW (p56) Statoil (p91, 100) n T Talisman (p11, 91, 13, 78) Tauron (p11, 39, 23) Tenaris (p54) Total (p22) n U UOS (p11, 25, 27, 19, 46) URE (p18) US Steel (p54) V Viking (p46, 53, 140) n W Wall Street n Journal (p25) WAG (p46) WWF (p98) n Y YPF (p93, 102) n Z Zetas Drug Cartel (p107)

* Please see the Who’s Who of Concessions (p 113) and the Services Directory (p 131) for a complete list of companies operating in Poland

8 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

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SHALE GAS

investment

GUIDE/POLAND

I ND I CA T O R S

A N A LY S T ' S V I E W

BEGINNING JAN 2011 IN POLAND

Company

Manufacturer Name

Sample specs

Diament

Service King SK 175 Manufacturing and SK 575

175: 8,900 feet (9/16"); 7 * 575: 14,400 feet (9/16")

Ensign KCA Deutag MND Drilling

N/A

Bentec

EURO RIG T-207 1500 HP

1 **

Bentec

EURO RIG 350 AC

Hook load capacity at 10 lines: 350 mt

1 **

Nafta Piła

Bentec

EURO RIG 450 T

Hook load capacity: 450 mt

12 *

Kraków

Drillmec (PGNIG)

AC WALKING RIG

2000 HP, 24,500 ft @ 5" DP

14 ***

United Oilfield National Services Oilwell Varco

NOV CE - ATEX

2000 HP, 20,000 ft @ 5" DP

1 **

(PGNiG)

RC(1)

1 **

TOBIASZ ADAMCZEWSKI P R I N C I P A L A N A LY S T

We start off indicators with a

market report: new rigs, pressure pumping and wells-to-date. Progress remains slow, although wells are being drilled. We expect this trend to continue through 2013. The Polish government is betting strongly on shale gas development and we can see this through increased investment of state owned entities. Up to PLN 1.72 billion will be spent on one of PGNiG’s northern concessions (Wejherowo) through an agreement with Enea, KGHM, PGE and Tauron. Whether foreign investors will follow suit remains to be seen. The introduction of a hydrocarbon tax regime will be a factor. But other elements need to be taken into account, such as the currently strong dollar and European climate policy, which is generally unfavorable to coal. Poland’s energy mix needs to shift towards cleaner alternatives. Renewables won’t be enough; this is why the government is counting on gas.

SOURCE: CLEANTECH POLAND RESEARCH

NEW RIGS TO MARKET

(1) Brings company's Poland rig count to * Medium sized workover ** Deep well ***Deep well, medium sized and small

TOTAL KIT

P R E S S U R E P U M P I N G C A PAC I T Y Storage (1)

Completion

HHP(2)

Baker Hughes Halliburton Schlumberger United Oilfield Services Weatherford TOTAL KIT (estimate)

Warsaw, Poland

N/A

20,000

Teresin, Poland

Operational

36,000

Wołomin, Poland

Operational

44,000

Łowicz, Poland

Q4 2012

60,000

Central Poland

Q2 2012 (est.)

20,000 180,000

SOURCE: CLEANTECH POLAND RESEARCH

IN POLAND

Company

(1) And maintenance facility (2) Hydraulic horse power in Poland, as of 2012

SHALE GAS ONLY

No. HS* Well Names

Well Locations

Chevron Eni ExxonMobil San Leon BNK CP/3Legs Res. 3Legs Resources Marathon Oil

Frampol-1, Grabowiec-6, Zwierzyniec-1

Bągard-1, Stare Miasto-1, Kamionka-1

Siennica-1, Krupe-1

Siciny-2, Belvedere-1, Chopin-1, Lelechów SL-1

Gapawo B-1, Miszewo T-1

5 -

SIE-Domanice-01, RYP-Lutocin-01, ORZ-Cychów-01, KWI-Prabuty-1, BRO-NM Lubawskie-01

Orlen Upstream PGNiG

Berejów-OU1, Syczyn-OU1, Goździk-OU1, Syczyn-OU2K

5 3

Markowola-1, Lubycza Królewska-1, Lubocino-1, Lubocino-2H, Opalino-2

Talisman En. BNK/LNG/RG/SR

Rogity-1, Lewino-1, Szymkowo-1

Wytowno S-1, Lębork S-1, Starograd S-1

LITHUANIA

Olsztyn

Warblino LE-1, Łebień LE-1, Łebień LE-2H, Strzeszewo LE-1

Łęgowo LE-1

RUSSIA

Gdańsk

*Hydraulically stimulated, wells in red are ongoing

SOURCE: MINISTRY OF ENVIRONMENT AS OF OCTOBER 15, 2012, CLEANTECH POLAND RESEARCH

Company

INCLUDES HYDRAULIC STIMULATION

Szczecin Bydgoszcz

BELARUS

Poznań

GERMANY

W E L L S T O D AT E

-1-

WARSZAWA Łódź Lublin Wrocław

CZECH REPUBLIC

Katowice Kraków

Rzeszów

SLOVAKIA

MŚ : 31 wells have been drilled on 111 shale-gas concessions, 8 more are on the way. 10 have been hydraulically fractured: 2 were horizontal. By 2020 approximately 270 additional wells should be drilled. (1)

(1) ministry of environment, October 10, 2012

WWW.CLEANTECHPOLAND.COM | 11

SHALE GAS

investment

GUIDE/POLAND

I ND I CA T O R S

-2-

DISBURSEMENT OF REVENUE

N E W TA X R E G I M E B Y N U M B E R S

Local (Gminy): 60% District (Powiat): 15%

EXPLOITATION

Regional (Województwo): 15%

High methane gas: PLN 24 per 1,000 m3 Nitrogen-rich gas: PLN 20 per 1,000 m

The National Environment Protection Fund (NFOŚiGW): 10%

Oil: PLN 50 per tonne CASH FLOW TAX

ROYALTY

On October 17th, the ministry of environment made public the planned hydrocarbon tax regime. By 2027, the full government take, including CIT and property tax, once upstream activities have commenced and profits started flowing, will be approximately 40% of gross income. Implementation year: 2015.

Gas: 5%

On earnings: 25%

Oil: 10%

Start year: 2027

Minus loss in CIT tax

Based on: 54 bcm

PRICE OF ELECTRICITY (WEEKLY WEIGHTED AVERAGE RATE, PLN PER MWH)

C O U N T R Y S TAT S

Gas import

200

11,174.48

SOURCE: MINISTRY OF ECONOMY

Gas production 4,447.89

185.55

71.53% 28.47%

100

March 2012

June 2012

Sept 2012

The price of electricity reflects the ongoing slope in the value of coal. This is because the Polish energy market is 90% dependant on this resource.

POWER GENERATION BY SOURCE

SHALE GAS POTENTIAL (BCM)

2.67% 1.55% 1.74% 5.52%

6,000 5 29 5, 0 92 1, 8 76 634 SOURCE: PSE OPERATOR

32.87%

4,000

55.66%

The Polish Geological Institute's maximum assessment of shale gas potential in Poland is less than half of what Advanced Resources International (ARI) calculated for the US Energy Information Agency (EIA) back in 2011.

12 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Lignite Renewable

Hydro Industrial

NATURAL GAS CONSUMPTION FORECASTS (BCM PER YEAR) 21

20.2

20 19 18 17 16 15 14

SOURCE: MINISTRY OF ECONOMY

SOURCE: EIA, PGI

PGI, March 2012-high probability PGI, March 2012-max EIA, April 2011

According to EU legislation, by 2020 the share of consumed energy from renewables in Poland should be at least 15% of the total energy mix. By that time, gas should also start replacing coal and start playing a larger role in CO2 reductions.

Anthracite Gas

2,000

SOURCE: POLISH POWER EXCHANGE

300 GAS CONSUMPTION IN 2011 (BCM)

17.1

14.5

2006

2010

2015

2020

2025

2030

The Polish government estimates that natural gas consumption will grow 70 percent by 2030. By that time, energy production from natural gas is planned to triple. Increased domestic production and efficiency in power generation will be key elements in implementing this plan.

SHALE GAS

investment

GUIDE/POLAND

I ND I CA T O R S S T O C K P R I C E O F S H A L E G A S E X P LO R AT I O N C O M PA N I E S ( 2 0 1 2 )

AURELIAN OIL & GAS (AUL)

16.63

11.00

7.25 03 Jan

06 Jun

BNK PETROLEUM (BKX) 2.60

7.25

0.58

03 Jan

06 Jun

DART ENERGY (DTE) 0.55

0.59

0.14

0.15 06 Jun

03 Jan

01 Nov

06 Jun

£GBP 13.00

9.59

10.54 7.32

7.32

03 Jan

01 Nov

06 Jun

TALISMAN ENERGY (TLM)

$CAN

15.00

14.57

12.25 9.50

01 Nov

In the second week of November, PGNiG came out with good news about price negotiations with Poland’s major gas supplier, Gazprom. Within days their stock price jumped 10%. PGNiG was losing money due to previously high prices of purchased gas and capped tariffs for end users by the Energy Regulation Office (URE). Whether the re-negotiated price will bring down the tariff remains to be seen, but the health of Poland’s major investor in shale gas exploration will most definitely be improved.

0.04

0.02

13.75

$AUD

0.35

0.17

SAN LEON ENERGY (SLE)

01 Nov

0.46

03 Jan

0.00

$CAN

2.16

$CAN

0.10

01 Nov

1.60

0.40

SOURCE: LONDON STOCK EXCHANGE

0.20

22.50

SOURCE: TORONTO STOCK EXCHANGE

26.00

LNG ENERGY (LNG )

£GBP

SOURCE: TORONTO STOCK EXCHANGE

01 Nov

06 Jun

SOURCE: AUSTRALIAN SECURITIES EXCHANGE

03 Jan

SOURCE: LONDON STOCK EXCHANGE

34.00

11.18 9.97

03 Jan

01 Nov

06 Jun

PGNiG (PGN)

SOURCE: TORONTO STOCK EXCHANGE

43.12

SOURCE: LONDON STOCK EXCHANGE

85.00

42.50

IN POLAND

The last two quarters have not been easy for the exploration sector in Poland. Exxon’s two dry wells and loud exit shook the market in mid June. The already undervalued share prices of independent operators hit their all-time lows. Since then exploration activities have been quietly progressing or put on hold. However, the recent 3Legs Resources and ConocoPhillips flare on their Łebień LE-2H well should bring optimism before the year's end. Good news about preliminary flow rates is music to the ears of other independents, BNK, LNG and Talisman, who have interest in neighbouring acreage.

£GBP

46.25

INDEPENDENTS

PLN

4.60 4.29

4.25

4.10

3.60

03 Jan

3.61

SOURCE: GPW

3LEGS RESOURCES (3LEG)

-3-

06 Jun

01 Nov

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| 13

SHALE GAS

investment

GUIDE/POLAND

I ND I CA T O R S HIGH METHANE GAS 3

PRICE OF GAS

SGIG asked Maciej Wiśniewski, one of the leading market experts in emissions trading, about the correlation between a potential shale gas boom in Poland and the health of the carbon market.

PLN / 1,000 m

US: Henry Hub Natural Gas Spot Price

1,800

Poland: E tariff

Germany: Natural Gas Index

1,164

SOURCE: EIA, NYMEX, EEX, PGNiG, PWC

EXPERT GUEST

-41,294

1,016

1,230

900

435 233

140.00

08 Feb

2008

2009

2011

2010

2012

Gazprom’s long term contracts are tied to the price of oil. The falling prices of crude led to renegotiation of terms with Italy’s Eni SpA, Germany’s E.ON and Poland’s PGNiG. The result: 10 to 15% price cut in PGNiG’s contract.

PRICE OF COAL 150

STEAM COAL FUTURES $ USD / TONNE

Rotterdam Coal

Central Appalachain Coal

133 95

100 70

Nov 2011

Mar 2012

Jul 2012

SOURCE: NYMEX, ICE, GUS

115

Nov 2012

As demand for cheap gas in energy production rises, down goes the price of coal. This is good news for Poland, where ninety percent of power is coal based and last year’s retail price averaged a record high of USD 237.00 per tonne.

C U R R E N C Y R AT E S CERs

08 Nov

POLISH ZŁOTY (PLN)

€ EUR

5.00 4.41

3.75

$ USD 4.16 3.26 SOURCE: NBP

3.82

14 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

SOURCE: NYMEX

53.00

€ / TONNE OF CO2

09 July

107

0.92

0.00

Light Sweet Crude Oil (WTI) Futures Brent Crude Oil Last Day Financial Futures

95.00

8.28 6.34

2012

117

EUAs

5.00

$ USD / BARREL

137

FUTURES

10.00

2011

2010

MONTHLY AVERAGE

PRICE OF OIL

SOURCE: CONSUS BROKERAGE HOUSE

CARBON PRICE

2009

EU is pushing the liberalization process of the Polish gas market. Soon, high methane gas will be sold via the Polish Power Exchange (TGE). PwC stresses that besides having a trading platform, Poland will need investments in infrastructure, efficient procedures and the ability to re-sell gas for the process to be finalized.

MACIEJ WISNIEWSKI, PRESIDENT OF CONSUS BROKERAGE HOUSE

THE BASIC DETERMINANT IN THE PRICE OF CO2 ALLOWANCES is balance between the supply and demand curve. According to calculations done by Consus Brokerage House, for the years 2013-2020 more allowances have been allocated to the European market than needed. This is why we expect the average price in that period not to exceed 12 € per EUA. The market is currently waiting for a decision by the European Parliament allowing the European Commission to take action towards lowering the supply of allowances. This may cause a considerable price increase. In this context, an increase of gas-based energy will lower the demand for allowances, since CO2 produced from 1MWh of gas-based energy is almost halved when compared to hard coal. However, it is important to note that investment time in the energy sector is approximately five years, therefore the effect of lowered demand in this case would only be seen after 2020. In the long term, this is good a development rout for the energy sector.

2008

3.15

2.50

08 Feb

01 Jun

08 Nov

3.60

June 20, 2012 US-Poland business summit shale panel (from left): Kelly Brezger of BNK, John Claussen of Chevron, Wiesław Prugar of Orlen, Grażyna Piotrowska-Oliwa of PGNiG, Parker Snyder of Cleantech Poland, Richard Walawender of Miller Canfield, Beata Stelmach of MFA, Rafał Miland of MOE and Michał Kiełsznia of GD of Environmental Protection

MARKET OVERVIEW

All’s fair in love 16 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

MARKET FEATURE

not oil

On October 30th, after a separation that lasted a hundred million years, a bright orange ball of fire leaped skyward and kissed the milk white face of the moon, disappearing into the heavens wherefrom it originated. BY PARKER SNYDER PHOTOS BY JACEK DOMINSKI

WWW.CLEANTECHPOLAND.COM

| 17

CONOCOPHILLIPS/3LEGS’

Łebień LE-2H began to flow hydrocarbons after being “de-watered,” a process in which excess fracturing liquids get pumped to the surface. As this magazine went to press, the flare was still burning. Poland is years, not months, away from commercial production, and despite the enthusiasm for shale, Poland’s operators had never before been treated to images of a gas well burning so bright for so long. Cleantech Poland broke the news on November 6, 2012 after a site visit confirmed reports of a Baltic flare burning hot and steady. The flare earned admiration from operators, and brought a touch of optimism to a basin in short supply. DEAL THE CARDS To date, there have been about 30 unconventional gas wells drilled in Poland, more than the rest of Europe combined. At least ten wells – by our reckoning – have been hydraulically stimulated. (See indicators, p. 11) These wells include 4 from 3LegsResources/ConocoPhillips, 2 by ExxonMobil, 2 by PGNiG and at least 1 by Saponis (BNK as operator). The results to date have been less than glamorous, and the listed independents were all trading well off their peak share prices when the fall SGIG went to press. 18 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

According to Paweł Poprawa, a consultant and geologist formerly with Polish Geological Institute, PGNiG in particular had a disappointing quarter. “During the operation of its first horizontal well, Lubocino – 1, casing got stuck and the stimulation program was canceled,” Mr. Poprawa said. PGNiG’s failure to frack a multi-stage horizontal comes on the heels of an announcement that their recent target well in the Kutno formation in joint venture with FX Energy, a conventional project in central Poland, had been very expensive, very deep and very dry. ExxonMobil plans to relinquish at least three concessions - Legionowo, Mińsk Mazowiecki, and Werbkowice - after failing to flow gas in commercial quantities on their first two exploratory wells. The Irving, Texas based IOC shut down their Polish operations; Jim Johnson, the general manager, relocated to Ukraine. BNK has fared no better. After screening out on a horizontal well some time ago, the California-based operator was temporarily stalled by the ministry of environment after a request to drill 500 meters deeper than they had planned. The extension was finally granted, and BNK was spared a laborious and timeconsuming environmental impact assessment. But the delays and disappointments have begun to add up.

PICTURE: SGIG

US Poland Business Summit June 20, 2012 (from left) Rebecca Blank acting US secretary of commerce, Joseph Wancer chairman of AmCham board, Waldemar Pawlak minister of economy, and Eric Stewart of US Poland Business Council.

MARKET FEATURE

The only glimmer of hope for the investors who have placed big bets on Polish shale came when ConocoPhillips/3Legs flared their well These less than optimistic signs have taken their toll on the market. The only glimmer of hope for the investors who have placed big bets on Polish shale came when ConocoPhillips/3Legs flared their well, and whose stock was trading up on the news. Other than that, most of the flare-ups have been internal.

Nov 6, 2012, ConocoPhillips/3Legs Resources’ Łebień LE-2H well in north Poland burns off methane after using a jet pump to bring production to a rate of about 800 mmcf.

DISCARDS, ANYONE? Shale, everywhere, has gone rocky. In the U.S., when the love affair ended, the floor of the bar was littered with broken glass, and the Chinese were left to pick up the tab for North America’s taste for easy credit. Sinopec, CNOOC, and China Investment Corp were happy to overpay. Devon, Nexen and Talisman were happy to oblige them. Leadership changes were inevitable, given the plummet in the value of North American based operators (see USA in the global update). This was a disappointing quarter marked by writedowns and dismal interest from equity in financing Polish operations. Independents and NOCs replaced some of their top staff. Lotos Petrobaltic appointed a new President and management board director, Mr. Zbigniew Paszkowicz, who was brought in to lead the organziation after a lengthy executive search. Mr. Paszkowicz has a formal training in engine mechanics and takes the top spot at Lotos Petrobaltic, as well as remaining VP of Lotos Group, the mother company. Grażyna Piotrowska-Oliwa was brought in to head PGNiG after a short stint on the Orlen board and a few years as the CEO of Orange, France Telecom’s brand in Poland. Ms. Piotrowska-Oliwa, who is not from the oilfield, was brought in to lead the company through a difficult period of restructuring in preparation for the liberalization of the gas market and 

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When the love affair ended, the floor of the bar was littered with broken glass, and the Chinese were left to pick up the tab for North America’s taste for easy credit

 the flotation of PGNiG owned com-

PICTURE: PRESS OFFICE

panies. PGNiG has been forward about their plans to “drill, baby drill” according to former vice president of the board Marek Karabuła, during a Warsaw conference at the Sofitel. But the company faces structural challenges to growth. In terse comments after the company posted a third quarter loss, Ms. Piotrowska-Oliwa hinted at the difficulty of having the treasury as shareholder. “URE is controlled by the government, which is also PGNiG’s largest shareholder, so suing the regulator would also mean suing our controlling shareholder, ‘which hasn’t ever happened in Polish history,’ Ms. Piotrowska-Oliwa said,” the Wall Street Journal Europe reported in August 2012.

PICTURE: PRESS OFFICE

Grażyna Piotrowska-Oliwa, CEO and president of the management board of PGNiG.

Zbigniew Paszkowicz, president and director of the management board of Lotos Petrobaltic.

20 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Ms. Piotrowska-Oliwa sat for the shale panel at the U.S. Polish Business Summit in her public debut to North American operators. A classical pianist by training, Piotrowska-Oliwa spoke knowledgeably and fluently about her company’s plans, noting that among other challenges, PGNiG will have to work out the details of the treasury supported joint venture with KGHM, PGE, Tauron, and ENEA. The independents also rolled the dice in a game of craps at the table with the rich and pretty. Chesapeake Energy ousted its chairman Aubrey McClendon, after dubious investment schemes with company funds. John Manzoni, CEO of Talisman Energy was forced out. Peter Clutterbuck, CEO of 3Legs Resources resigned; so did David Afseth, CEO of LNG Energy. Taking the helm were Kamlesh Parmar of 3Legs Resources and David Nelson of LNG Energy, both of whom took on the role of CEO. KING TRUMPS The Polish government has finally spoken about the shape of a forthcoming royalty regime for unconventional oil and gas. The proposed royalty regime was greeted with moderate disappointment and a bit of confusion. Warsaw has proposed a 25 percent tax on accumulated cash flow, meaning on income after expenses. In addition, they’ll cull 5 percent of the value of gas and 10 percent of the value of oil. Toss in associated property taxes and a CIT of 19 percent, and it’s not really clear if

the government’s take adds up to the 40 percent cited in an October 2012 presentation by the ministry of environment. Still, if 40 percent is the government’s take, the Polish royalty regime can be regarded one of the most favorable in Europe (see indicators). Should the effective royalty climb to the level of copper in Poland, operators could see the value of their usufruct rights diminish (see profile Piotr Spaczyński p. 56). Much will depend on how the royalties will be calculated in practice. NOKE – a new government entity known by its Polish acronym - may function both as an operator and a regulator, although neither role is clearly spelled out. PAIR OF ACES Here’s a bright spot: a tip of the hat to San Leon Energy, who in addition to increasing their acreage position as the largest rights holder in Europe after farming into Hutton Energy’s acreage, managed to save a church bell. A 16th century church tower came crashing down unexpectedly, leaving the parish in need of heavy equipment to save what was left of the tower. Vice president Ron Crow, and public relations manager Karolina Romanek, acting on a charitable impulse, made two cranes available to the local priest. In short order, the crumbling tower was taken down to avoid uncontrolled collapse. The church bell was saved. It will toll again soon in a new tower.

MARKET FEATURE PICTURE: TYGODNIK KURIER

August 2012, when a church tower collapsed in the gmina of OtyĹ&#x201E; in south Poland San Leon put two cranes to the disposal of the local church to prevent uncontrolled collapse

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T R E ND I NG EXXONMOBIL EXITS POLAND, LOOKS TO MOSCOW THREE YEARS AFTER LEAVING HUNGARY’S un-

PICTURE: EXXON PRESS RELEASE

conventional gas sector in something of a hurry, Exxon Mobil in the summer of 2012 abandoned its shale gas ambitions in Poland. The move followed after two of Exxon’s exploratory wells in Poland were deemed “not commercially viable.” According to an ExxonMobil spokesman, in comments that were echoed on a quarterly earnings call,

ExxonMobil seems to have a preference for the far north

“There have been no demonstrated sustained commercial hydrocarbon flow rates in two test wells in eastern Poland,” he said. The speculation surfaced, however, that Moscow may have played some role in the move, tempting Exxon to move closer to its Russian investments, in particular Rosneft’s arctic shale oil deposits, allegedly equal in size to the Bakken shale deposit in North Dakota. Poland has since 1989 sought to move away from a dependence on Russian energy. Tapping its shale deposits could help. The US Energy Information Administration estimate of 5.3 trillion cubic meters of shale gas - enough to satisfy demand for 300 years – were diminished by a Polish review in March that found reserve estimates at 346-768 billion cubic meters. Exxon said it has not yet decided what it will do with its exploration licences. The company controls four and jointly holds two with France’s Total SA.

More on changes in concessions, page 50.

SGIG FEED 3/5

@wiadomości naftowe i gazownicze Weatherford and Diament sign an agreement to work together

6/1

@wnp.pl Nafta Piła has the Euro Rig TM 450t AC Bentec rig delivered to Polish market

6/6

@wnp.pl PGNiG to spin off 5 exploration firms: Piła, Kraków, Jasło, Krosno and Diament

6/11 @bloomberg.com Silurian Hallwood subsidiary changed name to Wisent Oil and Gas @cleantechpoland.com 6/28 Lithuania annouced an international tender for shale gas E&P 7/4

@ministry of treasury Shale gas consortium agreement signed: PGNiG, PGE, Tauron, Enea, KGHM

22 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

TRENDING

SAN LEON FARMS INTO HUTTON'S ACREAGE unconventional acreage in Poland by close to half a million acres (just over 2,000 square kilometers) after buying a 75 percent stake in three of Hutton Energy's unconventional gas concessions. The acreage concerned includes the Prabuty Poludniowe concession in the Baltic Basin and the Wieluń and Oleśnica concessions in the Carboniferous Basin. The deal cost San Leon Energy $15 million, paid with its London-listed shares to Hutton Energy, which are being held in escrow for a year. The two firms will jointly develop the assets with San Leon as the operator. Hutton Energy retains a 25 percent working interest in each of the concessions (reduced by five percent per concession if the company does not participate in the first exploration well). “The interests will complement our current operations in Poland," said Chairman of San Leon Energy Oisin Fanning. "Our focus on the huge upside potential of the Baltic and Carboniferous Basins follows the company's strategy of building a portfolio of high potential assets. We

PICTURE: SAN LEON WEBSITE

SAN LEON ENERGY HAS INCREASED its interest in

San Leon farmed into Hutton, announced buyout of Aurelian

see this agreement with Hutton as a real positive for San Leon Energy as the addition of this acreage gives us an unprecedented acreage position in Poland," Mr. Fanning added.

POLAND SHALE GAS PUSH GATHERS MOMENTUM POLAND’S TREASURY MINISTER Mikołaj Budza-

PICTURE: PAP

nowski, expects state-owned companies, Polish Oil and Gas Company (PGNiG) in particular, to explore for shale gas more quickly. The minister has said that gas from shales should flow as early as 2015. PGNiG with 15 concessions, the most in Poland, is the key figure in the state’s plans. The company already had a development program underway when, in a move

orchestrated by Mr. Budzanowski, PGNiG entered into talks to form a shale gas consortium with four other state-owned companies. The agreement was signed in July 2012 between PGNiG and KGHM, a listed copper and silver company, and three power utilities, Polska Grupa Energetyczna (PGE), Tauron and Enea. The companies agreed to co-finance development of PGNiG’s exploration program, starting with three wells - Kochanowo, Częstkowo and Tępcz - in the Wejherowo concession, in northern Poland. The treasury has done its bit too to make sure that the Polish shale gas effort doesn't become too much of a financial strain for PGNiG and others. The treasury decided not to collect a dividend for 2011 from a majority of companies involved in shale gas. Mr. Budzanowski, however, ruled out financing exploration through the increase of gas tariffs or issuing shale bonds guaranteed by the treasury.

Shale could help his career too

Read more on page 38.

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T R E ND I NG NEW ROYALTY REGIME IN SIGHT THE END IS FINALLY IN SIGHT of the legal limbo that

PICTURE: SZYMON SZCZEŚNIAK

have made it impossible to draw business plans for shale gas extraction in Poland. In October, Polish minister of environment Marcin Korolec presented the key assumptions of an upcoming oil and gas law. According to the proposal, there will be a tax on the extraction of hydrocarbons imposed on revenue (a royalty) that will amount to 5 percent of the value of extracted gas and 10 percent of oil. A 25 percent tax

Piotr Woźniak, Poland’s chief geologist, gave the powerpoint

will be imposed on positive accumulated cash flow, or upon an excess of revenues from hydrocarbon operations over expenditures. According to the government, the total tax burden, including CIT and property tax, should amount to about 40 percent of the gross profits of the industry. Current operational fees for gas will increase roughly four times to PLN 24 per 1,000 m3 of extracted highmethane gas (from 5.89 PLN) and to PLN 20 per 1,000 m3 of extracted nitrogen-rich gas (from 4.90 PLN). The operational fee per ton of extracted crude oil will increase to 50 PLN (from 34.89 PLN). The Polish government will set up a state owned operator, known by its Polish acronym as NOKE, that will be responsible for oil and gas activities. NOKE will also have the right of first refusal in secondary concession offerings. Piotr Woźniak, Poland’s chief geologist, described the taxation model proposed in the outline as the “most favorable” in Europe, a view doubted by some analysts.

Read about the new royalty regime: pages 42&78.

SGIG FEED 7/11

@NCBiR press release State agencies NCBiR and ARP pledge 240 million for shale gas R&D

9/18 @cleantechpoland.com LOTOS and PGNiG team up for oil and gas E&P in Poland @bloomberg.com 9/20 Exxon will return two Polish shale gas permits to government 10/12 @bloomberg.com Total to push ahead with shale gas drilling in Poland @ministry of environment 10/16 Ministry of environment announces the proposed royalty regime in Poland 11/6 @cleantechpoland.com ConocoPhillips/3Legs Resources flare Łebień LE-2H at 560-780 mscf per day

24 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

TRENDING

OVER SUPPLY OF RIGS IN POLAND Although still few in number, the rig-count in Poland - about seven capable of deep wells - could be in a state of oversupply. Over the last eighteen months, MND Drilling Services had a rig, moving from site to site while working for BNK Petroleum and Orlen Upstream. MND, a Czech based drilling services provider, is finishing up a well for ConocoPhillips in the baltic basin. KCA Deutag, an Aberdeen based global drilling services provider, entered the Polish market to provide drilling services to Marathon Oil. This year, Bentec, a unit of KCA Deutag, delivered a new rig capable of drilling deep wells to PN Nafta, a PGNiG subsidiary, the Euro Rig 450 T, which was put into operation in the summer of 2012. Ensign, a Calgary based drilling services provider, moved their $20 million rig into Poland, and despite the best effort of Ensign’s general director, the rig is still sitting idle in a Gdynia warehouse. United Oilfield Services, an equity backed startup, has imported a National Oilwell Varco CE-ATEX 2,000 HP rig, perhaps the most sophisticated yet brought to

PICTURE: UOS

TWO YEARS AGO, THE WORRY WAS not enough.

The view from the cabin is crowded

the Polish market. PNiG Kraków, a PGNiG subsidiary, had earlier brought a Drillmec 2000 HP rig to the market in March of 2012, also capable of deep well drilling. Other rigs that have come to the market in 2012: Diament (PGNiG) acquired two new rigs: the Service King Manufacturing Inc. model SK 175, a truck mounted, double drum, draworks rig, and the SK 575, which can service a well to 5,000 meters and workover to 3,000 meters.

TROUBLED GAZPROM DOES U-TURN ON SHALE GAS SINCE THE FIRST SHALE GAS concessions were

PICTURE: GAZPROM

awarded in Poland in 2010, Warsaw has made it quite clear that the estimated 346-768 billion cubic meters of shale gas will be a perfect opportunity to end, or at least reduce, Poland’s dependency on imports from Russia. At the same time, any time a skeptical voice emerged to discuss risks, some were invariably discredited as

being financed by Gazprom. The rise of shale gas in North America has dented Gazprom’s results, which has forced the company acknowledge the obvious - it can produce gas from its own shales. According to the Russian ministry of economic development, Gazprom will sell 193 billion cubic meter of natural gas in 2012, a decrease of nine percent of what seemed achievable in May 2012. This is an indirect effect of the massive shale gas production in North America. Middle East and African gas producers have reoriented their exports from the US and Canada to Europe, offering gas at $320 per 1,000 cubic meters, undercutting Gazprom’s pricing of around $400 per 1,000 cubic meters. “Politicians, experts and businessmen are talking about shale revolution. We must take into account the current developments and have a clear view how the situation will develop," Russian president Vladimir Putin told the Wall Street Journal in September 2012.

Any way you write it, it still spells Kremlin

Read about Gazprom on page 94.

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Kris White thinks he can make a difference unlocking Polandâ&#x20AC;&#x2122;s shale gas potential

26 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

PROFILE

PEOPLE

The

Challenger Kris White and his partners at United Oilfield Services are betting it all on Poland. BY ALICE TRUDELLE

PHOTOGRAPHY BY SZYMON SZCZESNIAK

THE FIRST HALF OF 2012 was a

difficult one for the industry, “a black eye” even, says Mr. White. After glittering international headlines announcing a Polish shale gas rush in 2011, this year started with a corruption scandal, followed by the first official Polish estimates of national shale reserves, which came in much lower than expected. In June, the pullout of one of the industry’s biggest names, Exxon Mobil, also caused some disquiet. A few years have passed since it emerged that Poland might be sitting on enormous reserves of shale gas. And yet, “so far no one has done the right thing to try to unlock that potential,” believes Kris White, vice president of oil and gas services provider United Oilfield Services (UOS). “Most operators have trivialized what it means to successfully develop shale gas. They tried to move too quickly,” he said. But the wind is about to change, according to Mr. White, who thinks 20132014 are set to be pivotal years for the industry. When that happens, he and

his partners at UOS intend to acquire seismic data, and provide drilling and well completion services to the various operators prospecting in Poland. THE REAL DEAL FROM TEXAS Denis McKee, CEO of UOS and a serial enterpreneur, smelled the potential Polish shale bonanza as early as 2009. He met Kris White a decade ago, when Mr. White worked his first horizontal wells as a field engineer for Weatherford International in the Barnett shale. Those were exciting times for enterprising US engineers and a formative period for Mr. White. He describes being thrown into the Barnett field after working on conventional sandstones formations as an eye-opening experience. “We got there when they were still drilling vertical wells, and saw things evolve to huge horizontal wells,” Mr. White said. In the following years, as the US shale boom gained pace, Mr. White went on to work as a completions engineer for Baker Oil Tools in China, the Gulf of 

“Most operators have trivialized what it means to successfully develop shale gas. They tried to move too quickly” Kris White, United Oilfield Services

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“We got calls from PGNiG and BNK Petroleum: all these operators have been very disappointed by the service they have received” Kris White, United Oilfield Services

 Mexico and West Africa. He joined

Ely and Associates as a consultant in fracturing stimulation in 2007, and was made partner in 2009. His work at Ely and Associates took him to Texas, Louisiana, Oklahoma, the North Sea, and again to West Africa and the Gulf of Mexico. For his part, during that time Mr. McKee created several oil and gas startups, including Liberty Pressure Pumping in 2003, which provided fracturing services for the Anadarko, Barnett, Fayetteville and Haynesville shales, and in 2008, McKee Investments, with which he created and invested in three oil and gas start-up companies. By 2010, the US shale-gas industry was growing by 45 percent a year, and shale gas had come to account for a quarter of America's overall gas production (up from a mere four percent in 2005). With competition seriously heating up, Mr. McKee turned his

sights to emerging shale gas destinations. His list included Romania and Turkey, as well as Southeast Asian countries, but he chose Poland as the most promising. “We saw the flood coming, we had to see where the next big move was. Denis came to Poland, saw the lack of services, and decided he could make a difference here,” said Mr. White. Mr. McKee proceeded to recruit local knowledge to join his project. His partners now include CFO Tomasz Wardak, who has worked in the top management of Polish gas monopoly PGNiG and recently-privatized mobile operator Polkomtel, and Cezary Filipowicz, UOS country manager for business development, a former deputy head at Poland’s top refiner PKN Orlen and a former advisor to some of Poland’s highest elected officials. But when it came to the technical and operational side of things, Mr. McKee

went for American experience and know-how. He reached out to Kris White. By then, Mr. White had just been made partner at the consulting firm Ely and Associates, where he was responsible for well fracture stimulation design and implementation. Although Mr. White says it was difficult to walk away while the US market was at its peak, ultimately the appeal of a new challenge won him over, and he came to Poland in October 2011. NOTES FROM THE FIELD While nearly all other foreign players devote only a small percentage of their resources to tapping into Polish shale gas, Kris White and his partners are focused solely on developing the oil and gas industry in Poland. UOS put together an all-Polish team of young engineers and experienced supervisors, mechanics and managers, and offered them the opportunity to 

“Shale gas relies heavily on operational efficiency. Here, the industry is still in its infancy and I often see operators that don’t have enough experience to know what they need,” said Kris White of UOS.

28 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

PROFILE

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 train in the US. “Around 20 guys are

doing three, four fracks every day in the US. No one in Europe has that kind of experience,” said Mr. White. UOS has also invested $150 million in new seismic and fracking equipment, scheduled to be on the ground in November 2012. The hardware will be stored in Łowicz, around 80 km west of Warsaw, where UOS has established its $11 million (PLN 35 million) logistics and storage base, its construction now underway from Kajima. With equipment adapted to Polish winter conditions, the firm will be ready to start operations by January 2013, says Mr. White. But he adds that operators, put off by negative experiences with service providers, aren't likely to operate before March-April. UOS is also betting on the fact that their hands-on, out-in-the-field approach, coupled with their exclusive focus on Poland, might tempt operators to switch from other service providers. “I witnessed the US shale gas transition and start-ups were able to adapt quicker. Big companies could not adapt to this developing technology fast enough. Many of these big guys found it hard (and still do) to adapt their business model to shale, this has caused them to lose market share to the smaller companies in the US,” said Mr. White. “Shale gas relies heavily on operational efficiency. Here, the industry is still in its infancy and I see operators that don’t have enough experience to know what they need. Without the right methodology, companies are searching blindly. We have to do some real engineering,” he added. The Texan is also dismayed by the lack of professionalism that he says has so far prevailed among service providers in Poland. “We got calls from PGNiG and BNK Petroleum: all these operators have been very disappointed by the service they 30 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

“There is a huge potential for shale gas in Poland, and it is not only geological: people want this to happen” Kris White, United Oilfield Services

have received. Service firms active in Poland are picking guys from Spain, Germany, who have never worked together and only worked on a few conventional wells here and there. Customers were also disappointed with the equipment, which is old,” Mr. White said. HUGE POTENTIAL But Kris White seems confident that with the right commitment and the right approach most of the issues that have been universally labeled as obstacles for the industry’s development can be overcome. For instance, he says he doesn’t believe “for a second” that the density of Poland's population, which is much higher than in the US, will be a problem. “I have literally fracked in people's backyards. Although operators will have to deal with many landowners because of the small size of land plots, someone needs to incentivize people properly for this to work,” said Mr.

White. The overwhelming bureaucracy is weighing more heavily on UOS revenues than Mr. White expected. Meanwhile the numerous permit requirements and logistics restrictions are also slowing down business at every level. “In Poland there are only a few wells now, compared with thousands in the US. The way things are being run now, there is not enough paper in the world to monitor a similar boom in Poland,” said Mr. White. Still, according to Mr. White, the biggest risk for the industry is political. “There is a huge potential for shale gas in Poland, and it’s not only geological: people want this to happen. But politicians could drive a stake in this whole thing, because they don’t know how to make this happen,” Mr. White said. A major like ExxonMobil giving up on exploration might prove to be just the thing to get Polish politicians moving in the right direction a bit quicker.

Landman Services Contractors who need permitting and compensation for 2D and 3D seismic lines, as well as permits for well pads, water lines and roadways, can contact us to schedule a meeting or get an estimate. Our experienced and knowledgeable land representatives will quickly and accurately meet your project goals with the highest standard of ethics, efficiency and excellence.

Staffing Solutions Companies in the energy sector, including oil & gas operators and renewable energy producers, can contact us to handle their human resource needs. IP Group solutions include recruitment services for permanent and temporary positions, employee leasing and payroll management.

www.interpermit.pl

Iza Kawczynski +48 604 601 050

Zygmunt PawĹ&#x201A;owski, a Polish farmer, leased his land to BNK Polska for drilling an exploratory well in the Baltic basin in northern Poland

32 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

JOB

SITE VISIT

Where

the boom may begin Kelly Brezger, general manager of BNK Polska, invited the Shale Gas Investment Guide to tour the Gapowo B-1 well pad while an exploratory well by MND Drilling Services was underway. Hereâ&#x20AC;&#x2122;s what we saw. BY WOJCIECH KOSC PHOTOGRAPHY BY SGIG

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“I find it exciting to be in the front of shale gas exploration in Poland. It’s the best place to work in the world now” Hamish McNaughton, BNK Polska VIGILANCE RUNS IN THE BLOOD of farmers. Day in and day out, they are on a constant lookout for the wellbeing of their livestock and crops. Zygmunt Pawłowski is no different. He has just gotten off his backhoe - of all vehicles, a backhoe - as he arrives to a well site on a wide swathe of land that he owns. It’s a warm, overcast June afternoon in the picturesque region of Kaszuby, an hour drive south west of Gdańsk, in northern Poland - the highly prospective Baltic basin.

OUTSIDE THE GATE The land, measuring roughly one and a half hectares, is fenced off, but this is not to round up livestock. In fact, while still the owner, Mr. Pawłowski can only watch what’s going on, as he’s leased out his land to an oil and gas operator. A piece of land that he owns, on which cattle might normally graze, has been

Steel pipe for use on the drill string

34 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

turned into a well pad on concession acreage operated by BNK Polska, a California-based and Canadian-registered oil and gas operator, one of several foreign-owned companies exploring for shale gas in northern Poland. Mr. Pawłowski is one of those farmers who has already gotten to know the benefits of exploratory works for shale gas. Following seismic work in 2011, BNK singled out Mr. Pawłowski’s farm as suitable for an exploratory well, owing to its convenient roadside location and its geological subsurface features. The well pad is called Gapowo-1 and is located in the gmina (local community) of Stężycka Huta in the Gdańsk region. “I’ve got educated daughters. They helped me deal with [BNK],” Mr. Pawłowski said. He can’t give the exact value of the annual lease he had signed, saying he is barred from doing so by

the company. Unofficially, the Shale Gas Investment Guide learned that this type of leaseholds might net Polish farmers an extra income in the vicinity of PLN 2,000 ($650) on average per month. “I’d be better off if not for the local taxes,” said Mr. Pawłowski, as he stood outside the gate to the well pad. Part of what’s paid, he adds, goes to the local community, reasoning that he might get more if not for this fact. ON THE WELL PAD There’s a number of posted signs on the gate warning visitors of ongoing mining operations. Anyone past the gate must sign into an entry book: first name, last name, purpose for the visit. Visitors are directed up the stairs into a large container with a window that has been raised to view operations. Inside, Robert Neuwirth takes charge. He’s a Texan, and the Gapowo B-1 well

MND Drilling Services preparing pipe on the well pad

JOB

The blow-out preventer for safety

pad health and safety (HSE) manager, who has been in Poland for just over a year. “Helmets, gloves, goggles, protective boots and overalls must be worn at all times beyond this line,” Mr. Neuwirth says, pointing to a line separating the “safe zone” from the rest of the well pad. The containers are a place for the crew to gather, and also something of a temporary home for Mr. Neuwirth and Hamish McNaughton. These two have to be on call 24 hours a day. The rest of the crew works 12-hour shifts and is lodged in a nearby hotel. Mr. McNaughton, a Scotsman, is BNK Polska’s site supervisor, and the head of all activity taking place on the Gapowo B-1 well pad. The center of action is in the cabin of a 55-meter high drilling rig, operated by the Czechbased MND Drilling. Assembled in the middle of the pad, the rig gives off an incessant, low-decibel hum. Drilling works are ongoing. “I find it exciting to be in the front of shale gas exploration in Poland. It’s the best place to work in the world now,” Mr. McNaughton says.

From left: Hamish McNaughton, site supervisor, and Robert Neuwirth, health, safety and environment (HSE) manager

SPEAK OF THE OPERATOR Unlike investors that took up shale concessions without any proper knowledge nor the intention to operate them, BNK Polska is the subsidiary of BNK Petroleum, an independent oil and gas company that learned the ropes of unconventional gas exploration and production in the US. A spin-off of Bankers 

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Shutoff instructions in Polish and English

 Petroleum, BNK Petroleum com-

pleted its first horizontal well in the US in Oklahoma in 2006. BNK was also one of the first US companies to come to an apparently not so obvious conclusion that shale rock with gas trapped inside cannot be just a US phenomenon. The company thus went on to look for prospective shale plays in Europe, which has resulted in 17 concessions covering close to five million acres (over 20,000 square kilometers) in Germany, Spain, and Poland. The latter, as the European leader in shale gas exploration, has become BNK’s European testing ground. BACK ON THE WELL PAD “No photographs can be taken here,” Mr. Neuwirth warns, before he climbs a steep ladder leading to the rig’s floor. Although there hasn’t been an accident on the site so far, no risks at all can be taken in this line of business. Mr. Neuwirth has it his way. The center of the rig’s floor is an operator’s cabin from which MND Drilling Services oversees and controls the downward movement of a series of pipes called the drill string. So far, on the Gapowo B-1 well, 30 drill pipes have made their way through younger, shallower geological formations. It will take a few hundred more before all three target shale formations will be drilled through: Silurian, Ordovician and Cambrian Alum. At the moment, some pipes are neatly stacked to the operator’s right hand side, waiting for 36 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

(At back) Radovan Jedlička, MND Drilling Services, stands with members of his team

their turn. Still more wait on the ground beside the drilling rig. ABOUT THE OPERATOR BNK Polska operates six concessions in Poland via two subsidiaries Indiana Investment and Saponis Investments. The concessions are Starogard, Słupsk, Sławno, Darłowo, Bytów, and Trzebielino. Austrian oil and gas company RAG is holding 26.3 percent stake in Saponis Investments (operating on the Starogard, Słupsk, and Sławno concessions) along with BNK Polska’s subsidiary BKX International Holdings, Italian company Sorgenia and Canada’s LNG Energy. The concessions are all located in northern Poland in the Gdańsk region, which is considered the most promising part of the country. To date, BNK Polska has drilled one well on each

MI-SWACO is handling the waste on site

JOB

MND Drilling Services rig with pipe stand in a field in northern Poland on a well that will go to nearly 4,300 meters in depth

concession except for Darłowo. The company attaches great importance to the Gapowo B-1 well, where Mr. Neuwirth and Mr. McNaughton work. After testing core samples, the company released a report in September 2012 that “verifies [BNK’s] belief that the Gapowo B-1 well was drilled in a portion of the basin that is highly prospective for shale gas. The core data is showing that the lower Silurian has higher porosities, permeability and Total Organic Carbon than in the comparable intervals in all other Baltic Basin BNK Polska operated wells.” It hasn’t only been a smooth ride for BNK Polska. In addition to some minor local opposition in 2011, the company had a horizontal well screen out and works on a well temporarily put on hold before the ministry of environment managed to greenlight plans to drill deeper than BNK had planned. The bureacrats, however, spared BNK Polska an environmental impact assessment and the company eventually drilled the well to depth.

BACK OUTSIDE THE GATE Mr. Pawłowski’s friends arrive in a car to take a look at the rig. They speak a local dialect in this part of Poland, which is hard to understand. The men switch to standard Polish immediately when asked about shale gas in Poland. These two gentlemen are not biased against drilling, an atittude often ascribed to locals. They’re not going to take anything for granted, either. “Let them find this gas first and then we’ll see what good will come out of it,” one man said, who didn’t wish to be identified. With a leasehold agreement in hand, Mr. Pawłowski is apparently less concerned about the gas as long as the lease continues. “I’ve got enough to do on my land elsewhere,” he said, pointing to a place over the hill where presumably he has a house and crops to attend to. A short time later, Mr. Pawłowski climbs back on his backhoe to head home. He will be back at the well pad tomorrow.

“The Gapowo B-1 well was drilled in a portion of the basin that is highly prospective for shale gas” BNK Polska’s operational update, September 2012

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“First exploration results have been more than promising. The gas has flowed. Research and preparation works are in progress to enable industrial operation” . Grazyna Piotrowska-Oliwa, PGNiG.

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STATE CO’S

The

money S TAT E OW N E D O P E R AT O R S

game

Polish state owned shale gas operators have tons of cash to finance the early stages of exploration. Later on, they’re hoping that the flowing gas will make it easy to attract debt financing. BY S TA N I S Ł AW KO C Z O T A N D J A K U B KO C Z O T

PICTURE: MINISTRY OF TREASURY

DESPITE UNCERTAINTY about

the amount of shale gas, state owned companies are pushing to develop Polish shale plays. Some of these firms are going to bear extra responsibility apart from yielding good results. They must live up to the political goal of shale gas development, which is to push the country forward toward greater energy self-sufficiency. Imports from Russia currently cover about 80 percent of Poland’s total domestic gas consumption among Europe’s highest prices. Poland pays $420 per 1,000 cubic meters of natural gas supplied by Gazprom in a contract that’s binding until 2022. Germany, which buys gas based on spot price contracting, pays $379 per 1,000 cubic meters. Before the Gazprom contract expires, the government in Warsaw wants to know in advance whether shale gas is going to reduce Poland’s energy dependence on Russia.

How much gas flows from Polish wells is a vital element of the government’s overall energy strategy. Exact data on shale gas will also determine the rate and scale of nuclear power development as well as define the demand for LNG. DO AS YOU’RE TOLD Poland’s treasury minister Mikołaj Budzanowski, expects state-owned Polish companies that are involved in shale gas, Polish Oil and Gas Company (PGNiG) in particular, to move quickly in their exploration programs. The minister has said gas from shales should flow as early as 2015. PGNiG with its 15 concessions, the most in Poland, is the key figure in the state’s plans. The company already had a development program underway when, in a move seemingly orchestrated by Mr. Budzanowski, PGNiG entered into talks to form a shale gas consortium with four other stateowned companies.

The agreement was signed in July 2012 between PGNiG and KGHM, a listed copper and silver company, and three power utilities, Polska Grupa Energetyczna (PGE), Tauron, and Enea. The companies agreed to co-finance development of PGNiG’s exploration program, starting with three wells - Kochanowo, Częstkowo and Tępcz - in the Wejherowo concession in northern Poland. Political pressure aside, there are business reasons as well for these companies to bear the costs of the $538 million exploration program in Wejherowo. The three power utilities are planning to develop gas-fired power capacity so as to reduce reliance on coal, while KGHM is looking to get involved in the energy business as a means of income diversification. Another deal followed in September. Lotos Group, an oil E&P and retail company, teamed up with PGNiG to develop PGNiG’s five unconven- 

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Treasury minister Mikołaj Budzanowski rules out financing exploration through the increase of gas tariffs or issuing shale bonds guaranteed by the Treasury.  tional and two conventional gas con-

cessions. Orlen Upstream, a subsidiary of the crude oil refiner PKN Orlen, is also stepping up its shale gas exploration, looking to double the number of concessions it holds from the current number of eight. CASH IS KING Shale gas exploration is not cheap: according to Jefferies, an investment bank, an initial horizontal, multi stage fracked well costs $17 million in Poland, twice as much as in the US. The Polish Center for Social and Economic Research (CASE), a think tank, predicts that with an increase in drilling activity, economies of scale will kick in. According to CASE, the cost of drilling will go down to $14 million between 2012-2030 and to $12 million from 2031. Last year, Jefferies estimated the cost to fall even more quickly, to $11 million in four years. “Companies’ budgets are not unlimited. They can cope with individual drilling jobs, but the trouble with financing exploration comes when the number of wells extends to dozens,” said Jacek Ciborski, deputy director for oil and gas at PwC, a consultancy. PGNiG can handle a lot of drilling, at least for the time being. The company’s strategy is to earmark a total of about $1.3 billion for shale gas exploration by 2015. The actual outlays will depend on the pace of exploration and on success in finding large quantities of shale gas. “First exploration results are more than promising. The gas has flowed. Research and preparation works are in progress to enable industrial operation,” said Grażyna Piotrowska-Oliwa, CEO of PGNiG. 40 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Even with the current high price tag for exploratory drilling, however, the Polish leaders of the shale gas industry seem poised to handle the costs. For starters, companies like PGNiG or PKN Orlen can finance operations from their balance sheets. Secondly, their position on the market is strong enough to facilitate leverage, even for risky exploration programs. PGNiG, for example, can issue bonds and list numerous subsidiaries on the Warsaw Stock Exchange. Next year will very likely see PGNiG Technologie, a company that builds gas pipelines and designs parts of oil rigs and shale gas drilling platforms, go public, as will PGNiG Poszukiwania (PGNiG Exploration). KGHM should not find it difficult to finance their involvement in the Wejherowo shale gas project given that KGHM’s current financial position is strong as long as the copper price exceeds $8,000 per ton, says Artur Iwański, head analyst at Dom Maklerski PKO BP, a brokerage. Should the copper price fall, then the company might cut its dividend or seek loans to finance exploration. GAS SHOWS, MONEY FLOWS Still, companies won’t spend cash to develop shale gas forever. “The financing model evolves with sector development, and financing by debt capital is employed at later stages,” said James Sleeman, an analyst at Bank of America Merrill Lynch, during the European Financial Congress held in Sopot this year. Debt financing will only be available once the gas flows. Even then, there are going to be caveats that financing in-

“T conte predic uncon decisi econo

STATE CO’S

The Wejherowo concession development program concerns three well pads: Kochanowo, Częstkowo and Tępcz, located in the south western part of the concession. In 2010/2011, PGNiG fracked a well in Lubocino, in the north of the concession area and recorded promising gas shows. The development program includes following work on each pad: l One exploratory drilling l 3D seismic l 12 horizontal wells, 10 stages each Estimated cost of the development program: $538 million.

Treasury minister Mikołaj Budzanowski (right) has pushed state companies to the shale gas sector. There’s a stellar future ahead of him if shale gas is found

PICTURE: MINISTRY OF TREASURY

The recent evolution of the European ext suggests a growing need for a clear, ctable and coherent approach to nventional fossil fuels to allow optimal ions to be made in an area where omics, finances, environment and in

B AT T L E G R O U N D O F P O L I S H S H A L E G A S

stitutions will apply. PGNiG may apply the model that’s already in place in Norwegian Skarv gas play where PGNiG Norway holds 11.9 percent share. $400 million financing is provided through Reserved Based Loan formula, where oil and gas are used as security for creditors. A similar formula could be used in Poland. According to Mr. Budzanowski, three financing sources are sufficient at the current early stage of exploration and evaluation of shale gas resources. The companies can use equity, raise financing on the capital markets via share issues, bond placing or IPOs or they can execute investment agreements between sectoral investors. The Treasury has done its bit too in order to make sure that the Polish shale gas effort doesn’t become too taxing for PGNiG and others. The Treasury decided not to collect a dividend for 2011 from a majority of companies involved in shale gas. Mr. Budzanowski, however, ruled out financing through the increase of gas tariffs or issuing shale bonds guaranteed by the Treasury. Should exploration prove successful, financing won’t have to come from domestic sources only. This explains considerable activity of the Polish shale gas lobby at the EU level. If there’s gas, institutions like the European Investment Bank could provide financing, boosting the credibility of shale gas projects for other investors, attracting more funds and reducing the cost of debt.

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GOVERNMENT

Shale gas

in 2016

The deputy environment minister Piotr Wozniak says that the commercial flow of shale gas is to be expected in late 2016. The new regulatory regime that will put a tighter control upon what’s going on in the concession will help.

BY WOJCIECH KOSC PHOTOGRAPHY BY SZYMON SZCZESNIAK

Are you happy with what’s going on in the concessions? There have only been 31 wells drilled to date. As of today we have 33 shale gas wells drilled in Poland. We certainly look forward to seeing a lot more more activity. At the moment, with the current regulatory system, there is in fact no legal basis for managing hydrocarbons. What’s happening is that companies come, they are granted concessions, and we can only keep our fingers crossed for them to succeed. It has to be the other way round! Shale gas is the state’s asset and we want it to be managed well. Maximization of resources’ value should be fundamental and common goal of the state and the companies. Given what shale gas operators have done thus far in Poland, has their activity moved us anywhere in the direction of a competitive gas market? 42 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Yes, it has, but not at the rate that we would like it to happen. A real market gives you a choice of suppliers. This market will only happen once there is a significant amount of gas available to the market. What’s the realistic date of shale gas flowing on a commercial scale? Companies generally tend to avoid declarations on the amount of gas and the expected starting date of production. Commercial production of gas means 2 billion cubic meters of unconventional gas annually. My assessment is rather conservative, however late 2016 still looks realistic. There are companies currently operating on shale gas concessions that were first granted the concession and only started obtaining financing later on. Under the new system they’d stand no chance. How will you pre-screen companies to make sure that operators 

INTERVIEW Chief geologist Piotr Woźniak: shale gas will flow in late 2016

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 aren’t unfairly rejected?

The idea behind the pre-qualification of companies is that the already existing requirements cannot be executed. The pre-qualification process is not designed to reject anybody, its main objective is to screen the companies and make sure that all operators are in compliance with industry and national standards. I could tell you to wear a red hat for two hours as of tomorrow - but would it actually make any sense to ask you to do so? No, we are not going to ask companies to wear a red hat. The companies will have to convince us, and make it verifiable, that they will be able to finance subsequent phases of operation and to explore and produce hydrocarbons in full compliance with the environmental requirements How about companies that have concessions but sit idly on them, like DPV? Shouldn’t the government have taken back their concessions? We should not name any particular company. But yes, the lack of knowhow, financing and industrial record of some of the companies can be prohibitive when granting concessions. I agree that there are at least dozen concessions in Poland that were taken by companies set up ad hoc. These companies, without any experience in oil & gas business whatsoever, are postponing their site operations and looking for options for farming out instead. There is very little the state can do to accelerate the process of exploration in these cases. That is the fault of the current system that such entities could not be refused concessions. Now since they 44 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

are not fulfilling their obligations, their concessions will very likely be relinquished. However, from the point of view of the administration, interest of the state is being compromised. Why would a company applying for a production permit want to invite NOKE (the state owned operator/ regulator) to work together? NOKE is an absolutely key idea in the new regulatory regime: it will institute the state’s involvement in the upstream field. Such a model has been extremely successful in several European countries for years. It may raise questions, but only for those who take things at face value and never get into the substance of the issue. This is a special kind of industry, and what we are doing has long been done successfully by Norway, Denmark and the Netherlands. From the point of view of the investor, the state’s obligatory involvement has a positive outcome too. The investor gains credibility in the financial markets and across local communities. Of course, as regards the financial markets, the majors will be credible without state involvement, but even they can have trouble with credibility as we had seen in the Bay of Mexico. For small and medium companies, however, the state participation will improve their credibility a great deal. With shale gas, it’s much easier to find it than produce it. The production costs are high and we can expect even the biggest players to ask NOKE to join. That said, NOKE will come in to play only once there are concessions available again, or when companies already exploring for gas in Poland will invite

NOKE to participate. Some companies will do so, some others may not. In Alberta, operators submit a few pages. In Poland, the geological works plans are long and difficult to change. What concrete steps are you taking to make this process easier, more streamlined? We are working to simplify the procedures, but not to erase regulations. For example, operators no longer will be obliged to carry out an environmental impact assessment for the entire concession area - typically about 1,200 square kilometers - but only for a designated drilling site. While you cannot skip the

INTERVIEW Piotr Woźniak says that NOKE is an “absolutely key” idea; getting operators to believe this is another story

EIA procedure, you can make it smaller in scope and thus more practical. In Texas, a single failure can cost an operator their license. How will you encourage operators to take responsibility? First of all, there hasn’t been a single incident in oil & gas mining for the last 24 years in Poland. The regulations are simply enough to prevent serious environmental incidents. A company’s track record will become part of the screening system under the new regulations. A record of environmental incidents is going to count against them. Prevention is better than cure.

At the moment, with the current regulatory system, there is in fact no legal basis for managing hydrocarbons. What’s happening is that companies come, they are granted concessions, and we can only keep our fingers crossed for them to succeed

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New kids MARKET ENTRANTS

on the Block

The Polish services sector is quickly becoming a competetive playground for the ambitious and quick to market. The field for drilling, well pad, and permitting serivces is getting crowded BY HUNTER DIAMOND

arrival of United Oilfield Services, a startup founded by oilfield veteran Dennis McKee and his completions manager Kris White, who raised over $128 million in equity through several private placement rounds, including backing from Poland based Enterprise Investors. After burning cash for some months, UOS acquired its first contract: seismic services for FX Energy. “Dennis came to Poland, saw the lack of services, and decided he could make a difference here,” completions manager Kris White said. SHAKE THINGS In the last nine months, the market for permitting and compensation for seismic services was transformed. A year ago, a startup named Coldstream had the lion’s share of an infant market, but the company’s position has dwindled since the company was fired by Viking Geophysical. Two new market entrants quickly filled the vacuum. The first was IP Group, who entered the market to provide permitting and compensation services for several 2D seismic lines on ION’s Poland SPAN project, ex46 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

ecuted by Viking Geophysical. According to Peter Turo, co-founder, “IP Group is an American-owned company working in Poland. Customer service and transparency, that’s our competitive advantage.” IP Group also provides temporary staffing and specialized labor for Viking Geophysical and aims to expand their services to other power segments.

The second was Apex Contracting, founded by Norbert Szczepański and Eric Bollard, who entered to provide permitting and uphole services on Viking’s 2D seismic line. “Eric wanted to develop a shale business in Europe. I have a logistics background. We decided to work together to combine our knowledge,” Mr. Szczepański said. Apex Contracting

OPEN FOR BUSINESS

SOURCE: CLEANTECH POLAND RESEARCH

THE BIG STORY of the year is the

Company

Entered to provide

Apex Contracting Bentec CDM Smith Construction DBM Services Ensign IP Group Service King Manufacturing United Oilfield Services World Acoustic Group

Permitting, logistics, HSE Drilling rigs (deep well) Well pads Facility management Drilling rigs (deep well) Permitting, compensation Drilling rigs (workover) Seismic services Well pads

NEW ENTRANTS

Dorota Flint, managing partner with newly entered DBM Services, providing Halliburton facilities management services

At least three startups: Apex, IP Group and DBM Services have entered the space in 2012. CDM Smith opened a construction services subsidiary. Service King Manufacturing and Bentec entered as equipment manufacturers. World Acoustic Group (sound barriers) entered to build well pads. United Oilfield Services, the largest of them all, is an equity backed startup who entered the market in 2011 to compete against the big four. According to Cleantech Poland research, the segments that are ripe for new entrants are water, sand, proppant, gravel and emergency services.

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 picked up the HSE work for CDM

CONSTRUCTION JUNCTION Few companies were building large, spill-safe well pads before the onset of unconventional gas. To meet the needs of operators such as Marathon and Chevron, several new companies have entered the market. World Acoustic Group, a Polish company with a strong business in sound walls along highways, won the contract for Marathon and has received positive reviews. CDM Smith, an environmental consultancy, started a subsidiary to provide construction services as well. LOGISTICS IS HOT DBM Services is a startup founded by Dorota Flint, Bill Flint and Marek Cibor. This year, DBM Services picked up a facilities management contract with Halliburton. The partners, who have worked for ExxonMobil in other markets, entered Poland because of the opportunities in unconventional gas. Ms. Flint, the managing partner remarked: “If you apply a process oriented approach, have an uncompromising approach to safety, and use industry best practices, you will for sure find clients in Poland.” Logistics is a growing market, for both seismic and drilling, both of which are equipment intensive and cost operators time and money when supply chains fail. These two facts mean customers will pay a premium if a company can move equipment quickly to 48 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Peter Turo, of IP Group, entered the market to provide permitting and compensation. He now runs a company with about 200 employees

“Customer service and transparency. That’s our competitive advantage” Peter Turo, IP Group and from the field. Apex Contracting is providing logistics services, helping to transport Viking’s equipment. TOO MANY RIGS Back when the market was feverish, Ensign shipped a fully-winterized, modern rig into Poland. The market dynamics weren’t sustained and the rig’s been sitting in a port in Gdańsk for nearly a year. Dean Hills, the general manager for Ensign, remains optimistic about putting the rig to work. Bentec, a unit of KCA Deutag, who entered the market to drill for Marathon, believes Europe could be a good market for new rigs. Bentec CEO Dirk Schulze in an article for Drilling Contractor online magazine said: “We could supply as many as 30 to 40 rigs over the next 3 years. However, we do not see demand exceeding this level in

the short run.” Bentec has sold at least one rig to the market this year, a Euro Rig TM 450t AC to Nafta Piła. OPPORTUNITIES? Poland is in its exploration phase, and there are relatively few wells drilled to date [see indicators, page 11]. Only a handful of these have been hydraulically stimulated. Soon, however, the need for sand, proppant and water will be on the rise, as operators move to production. As yet, no company has emerged as the market leader in water supply or waste treatment, in, for example, the way CDM Smith has cornered the market on environmental services. To sum up, in the first three quarters of 2012: a few hot startups and at least one less than graceful exit.

PICTURE: IP GROUP

Smith who works for Marathon, and aims at expanding into the water supply business.

CONCESSIONS

Giving back

the papers Although 3Legs Resources and ExxonMobil are relinquishing at least some of their concessions, interest in Polish shale remains strong. BY TOBIASZ ADAMCZEWSKI PHOTOGRAPHY BY SZYMON SZCZESNIAK

MINERAL AND ENERGY resourc-

es in Poland are state owned. That’s why operators - in contrast to basins in North America - have to submit lengthy, detailed plans to the central government before they can enjoy the legal right to explore. The ministry of environment, which grants the concessions, typically imposes an obligatory exploration seismic research and exploratory drilling program for each concession. As deadlines for obligatory exploration activities are coming up, some concession holders are considering options like seeking farm-in partners. Others are relinquishing their concessions, or returning them to the pool of concessions that the ministry of environment can grant to future applicants. AVAILABLE AGAIN At the moment, three of ExxonMobil’s concessions and one from 3Legs Resources are being put back on the market. “ExxonMobil has submitted applications to the Ministry of Environment regarding the relinquishment of two exploration concessions in the Podlasie Basin (Legionowo and Mińsk Mazow50 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

iecki) and one, together with its partner (French operator Total E&P Poland), in the Lublin Basin (Werbkowice). It is too early to comment on the future of our remaining three concessions in Poland,” Adam Kopyść, ExxonMobil Exploration and Production spokesman, wrote in reply to SGIG. The relinquishment of at least some of these concessions had to do with ExxonMobil’s failing to find gas in commercial quantities. Exxon’s strategy for Poland isn’t quite clear because the company has not immediately decided to give up the Chełm concession, where an exploratory well also yielded “noncommercial” results. Another operator, 3Legs Resources, is recalibrating its effort, following a

decision from the company’s joint venture partner, ConocoPhilips, not to pursue operatorship of 3Legs’ three eastern Baltic basin concessions. “ConocoPhillips’ [decision] is consistent with our own strategy of highgrading our acreage and focusing our activity on those areas which we believe offer most potential,” said Peter Clutterbuck, former CEO of 3Legs Resources, in an October 2012 corporate update. The potential is with the Baltic Basin’s western concessions, he added. There, ConocoPhillips has just taken over operatorship and intends to scale up exploration. 3Legs Resources has also previously stated in an August 2012 update that: “the Company has decided to relin-

“The current big concession blocks will transform into smaller extraction concessions as exploration and reconnaissance works progress” Polish ministry of environment

UP FOR GRABS

quish the Dąbie-Laski concession; it is continuing to consider options for its Bytom-Gliwice and Glinica-Psary concessions.” A GROWING TREND According to the ministry of environment, concessions’ changing hands or being given up is going to be a trend that will grow over the next couple of years. “We are certain that the current big exploration concession blocks will transform into smaller extraction concessions as exploration and reconnaissance works progress. The relinquished concession areas will return to the Ministry of Environment, which will later put them up for tenders,” said Monika Kita from the press office in the ministry of environment. Ms. Kita also said that some investors, due to organizational or financial reasons, will not be able to complete

their exploration plans and will relinquish their concessions. Despite these developments, backed by evidence of poor exploration results and a lack of economic potential, interest in Polish shale remains strong. According to Sylvie Duflot, press officer at Total, despite ExxonMobil’s exit (Total’s farm-in partner on the Chełm and Werbkowice concessions), the company doesn’t intend to leave Poland and is discussing a way forward both with Exxon and the Polish administration. CHANGES ON THE MAP There are more companies looking for concessions than those giving up acreage. San Leon Energy has been one of the most active in the Polish shale market. With a stake in seventeen shale gas concessions they have just gained an additional 700 km2 through their sub-

sidiary Oculis in the Czersk concession in northern Poland. According to the ministry of environment, newcomers Canadian International Oil Corp. (CIOC) has filed for three concessions in south-central Poland, Pro Energis for two and Mazovia Energy Resources for nine. Petrolinvest and PGNiG, relative old hands in the shale gas sector in Poland, are also looking for more acreage. It’s yet unclear what will happen to the concessions that Exxon and 3Legs are going to give up. There were speculations that Poland’s state owned Lotos Group was in talks with ExxonMobil, but no word of a deal has surfaced. The unofficial word from market observers is, however, that there is a queue for these supposedly “dry” acres. So rather than a blank spot in the concession map of Poland, we can expect to see a change of color.

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Given the demands of unconventional gas, in which multiple wells are producing in a resource intense environment, logistics services have moved to the main stage

52 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

LOGISTICS

In and out SERVICES MARKET

of a well pad

Logistics companies have been waiting anxiously for the shale gas market to unfold at a faster rate. It’s finally happening. BY HUNTER DIAMOND

PICTURE: SHUTTERSTOCK.COM

IN POLAND OVER THE LAST TWENTY YEARS, the upstream

services market has largely remained the domain of state owned companies. But a competitive market for services is slowly unfolding, and logistics companies stand to benefit the most from the resource intense production cycle of shale gas. Traditionally, oil and gas operators pushed responsibilities for logistics on their service providers. But today, given the demands of unconventional gas, in which multiple wells are producing in a resource intense environment, logistics services have moved to the main stage. According to a Deloitte study in 2012, over the last ten years operators have better learned how to optimize the performance of their wells through improved scheduling and rigorous bargaining for all the raw materials used in production - sand, gravel, water, chemicals, pipes. In the past, a foreman on a job site might call up someone familiar and local to get sand or water. Today, due to the enormous volumes required, procurement might be handled by software that optimizes the best price and avail-

ability quotes from multiple vendors across a wide region. Similarly, an operator would own just a few trucks. Today, optimizing shale gas production could mean having an entire fleet of trucks at one’s disposal. Yet in Poland, much of the responsibility for logistics is still being outsourced to third parties. FIRST OUT OF THE GATE To fill the logistics service gaps, several companies have entered the market. Apex Contracting, a startup founded by Norbert Szczepański and Eric Bollard, got their first logistics contract handling heavy equipment for Viking. Although Mr. Bollard started the company with a focus on delivering water, he and his partner moved on quickly to provide other services. “In college, Eric wanted to develop a shale business in Europe. We decided to run the company together because I have a logistics background and he has shale knowledge,” said Mr. Szczepański. Mr. Bollard began working for CDM Smith, doing HSE on Marathon’s first well sites; Apex Contracting was soon providing permitting and up-hole 

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Deloitte concludes that sand and proppant don’t make up large portions of logistics costs. These materials are expensive, but they are used in less quantity than gravel and water. Gravel (graded limestone) is used for constructing the well pad, as it provides a firm base for the movement of heavy equipment and helps keep dust and dirt from clinging to the wheels of transport tires. Water for fracking is needed in large volumes (2-4 million gallons or 7.5 - 15.1 million liters) for deep unconventional wells with horizontal laterals. Water is used to create rock fractures, kept open by sand and proppant. This chart assumes 4 wells drilled on a single pad.

COINSTRUCTION

Temporary water piping › Line pipe › Gravel › Facility and construction supply › Vacuum trucks, drilling ›

DRILLING

Rig moves, skid + location › Fresh water, drilling › Drilling site equipment and materials › Cutting and removals › Absorbent disposal/sawdust › Vacuum trucks, completion › Sand required for hydraulic fracturing › COMPLETION

Produced waste water transported › Hydraulic fracturing water › Hydraulic fracturing service equipment › Hydraulic fracturing chemicals › Flowback water transportation › Completion site equipment and materials ›

100

 services for Viking’s 2D seismic pro-

gram. Another company, DBM Services, founded by Marek Cibor, Bill Flint and Dorota Flint, has also entered the market. They’ll be providing facilities management services to Halliburton, who has just built a warehouse and maintenance facility in Teresin, Poland about 40 km west of Warsaw. DBM Services also manage the flow of raw materials for production, such as concrete. DBM Services partners have years of experience doing logistics for IOCs elsewhere. Now they’re in Poland to apply their expertise. “This is the right time to be in this place; we feel there’s a need for planning and streamlining activities to create a seamless working environment and allow the client to focus on its core business,” said managing partner Dorota Flint. NEVER FAR FROM SOURCE Logistics in oil and gas means moving and using raw materials for production - pipe, water, sand, fuel, gravel and even human resources. To meet local supply gaps, companies are announcing ambitious plans to build new facilities. 54 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

200

300

400

Baltic Ceramics is fundraising to build a new proppant production facility near Poland’s western border. Other suppliers needing to bring product to the Polish market, such as US Steel and Tenaris, deliver their products from neighboring countries. US Steel operates out of a facility in Slovakia. Tenaris, manufacturers and services equipment out of Romania. The challenge for these steel companies wasn’t in getting the steel delivered, it was getting it tested. Reportedly, there were few, if any, trained pipe testing specialists in Poland. They had to be brought from Germany and Romania to do the work. LESSONS FROM HOUSTON According to a 2012 Deloitte study which analyzed the cost patterns for logistics services in U.S. and Canadian shale gas plays, the most cost-intensive components of the logistics service market are gravel, water, and rig moves. Large quantities of gravel are required in the construction of the well pad to support the traffic of heavy equipment. Sand, used to prop open

500

costs: $ 1,000

SOURCE: DELOITTE’S PROPRIETARY WELLSITE LOGISTICS MODEL. ASSUME FOUR WELLS DRILLED ON ONE PAD 2012

F R O M G R AV E L T O P I P I N G : C O S T S O F W E L L LO G I S T I C S

fractures during hydraulic stimulation, is required in large volumes. Water, which can be required in volumes close to 2-4 million gallons (7-15 million liters) per well for a typical 10 stage lengthy horizontal lateral, is the second largest expense in shale logistics. The high cost of bulk material supply and rig hauling have prompted operators to design multiple wells per pad, and make use of flow back water recycling programs and consecutive well stimulation programs. Truck trips to the well site can be reduced this way, and so can the damage to road surfaces and disturbances to local communities. To process the extraordinary logistics requirements for shale gas production, operators have turned to software to optimize purchasing and scheduling. The study done by the Deloitte team out of Houston, Texas, to advise upstream operators on their logistics decisions has shown cost savings of 10 to 15 percent through optimizing procurement and scheduling processes. High up on the costs curve, it’s no small reduction.

Tower talk L AWY E R P RO F I L E

As former in-house legal counsel for ExxonMobil in Poland, Piotr Spaczynski has spent some time looking at the business case for oil and gas. As the head of the energy and natural resources practice at SSW, a firm he co-founded, the UK-trained lawyer has gotten his chance to put what he’s learned into practice.

BY HUNTER DIAMOND PHOTOGRAPHY BY SZYMON SZCZESNIAK

AS A YOUNG MAN RAISED in c o m m u n i s t Po l a n d , P i o t r Spaczyński went abroad to the UK to trade the dictums of Marx for John D. Rockefeller’s adage: If you want to succeed you should strike out on new paths. Mr. Spaczyński studied law at Clifton College in the UK and was even accepted for a program in economics at St. John’s College at Cambridge, but returned to Poland and completed a degree in law as well as management and marketing in Poznań. “I was in love with my then fiancé [current wife]. I even have a stack of used British Telecom calling cards at home to prove it,” Mr. Spaczyński reminisced on one fall afternoon in the Rondo 1 office building in Warsaw. Mr. Spaczyński heads the energy and natural resources practice of SSW, a law firm he co-founded. As the former head of legal at ExxonMobil, Mr. Spaczyński is familiar with the structure and function of large corporations. He also understands that international oil companies (IOCs) tie their strategic decisions to the long-term profitability of the country where they operate. The 56 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

profitability - and thus the business case - in large part depend upon the degree of state taxation. Mr. Spaczyński’s blend of legal acumen, oil and gas experience, and formal business training is perhaps unique among Warsaw lawyers. At Exxon, he was responsible for the divestment of a large number of downstream assets which were sold to a state-owned Polish energy company in a pattern Mr. Spaczyński says was replicated by other foreign companies. TALKING TAXES Recently, Mr. Spaczyński sat down to talk to the Shale Gas Investment Guide about an early proposal put forward by the government in October 2012 to describe the shape of the shape of a future royalty regime. “All of the companies who came to

Poland after 2007 did an analysis. They asked the questions: what’s the legal environment? What are the general levels of taxation? What are the royalties in mining? They also asked the question, is Poland a transparent country to do business? Their idea was that yes, Poland is a very attractive place to do business. The 19% percent corporate income tax rate was good and there was decent infrastructure in place. Compared to other countries, they made a decision that Poland is a country where they wanted to be,” Mr. Spaczyński said. “It seems to me that the new proposal would be less attractive for foreign investors. The historical attractiveness of Poland seems to be gone once the new regulation will be introduced,” he added. Mr. Spaczyński cautions that the proposal is in its early stages, and most of

“NOKE is not going to be welcomed warmly. Nobody wants to have a partner who is not really freely chosen”

INTERVIEW Mr. Spaczyński’s blend of legal acument, oil and gas experience, and formal business training is perhaps unique among Warsaw lawyers

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“It might be the case that with the new level of taxation Polish shale gas is being nationalized”  the regulations that would dictate

just exactly how the royalty regime would function have yet to be written, much less put into practice. Take for instance the 25 percent tax on “cash flow”. The government has not yet made it clear how cash flow would be calculated, and whether a government regulator would have the authority, or the interest, to audit the books of a company at work in a shale play. GOVERNMENT JV As for NOKE [Narodowy Operator Kopalin Energetycznych], the national operator who would function in some respects as a regulator and in others as a joint venture, it’s not yet clear what dominant role the entity would take on. “Certainly, NOKE is not going to be welcomed warmly. Nobody wants to have a partner who is not really freely chosen. Still, we don’t know any details. We know that [NOKE] would be owned 100 percent by the treasury and is supposed to protect the interest of the state. But it also plans to be involved as a shareholder in various consortia. Will it be a JV in the form of a partnership or LLC? What corporate rights will the entity have? What stake will be taken by NOKE?” Mr. Spaczyński said. As regards the ministry of environment’s suggestion that their proposed total tax burden amounts to a de-facto 40 percent of gross proceeds, Mr. 58 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Spaczyński calls this math “acrobatics.” In his view, it would be hard to add up all the numbers and come up with 40 percent. “Consider CIT: 19 percent. This new royalty of 5 percent [tax on natural gas]. Then a 25 percent tax on cash flow. Then real estate taxes. Then increased concession and mining usufruct fees. It is really difficult to come up with an effective tax rate at 40 percent,” Mr. Spaczyński said “ “Look at the example of other new taxes, for instance, the tax on copper. The effective tax rate on copper went up from 38 percent to 89 percent. Here, the assumption is that 5 percent is also to be value based. This increase [on copper] was also a royalty that was value based,” he added.

mon than one would expect,” he added. He’s also able to draw lessons from the wind sector. Several foreign energy concerns who have invested considerably in the Polish wind market, are considering acting upon existing treaties between Poland and other European countries. Given the proposed support scheme for wind energy, where one of the major changes is reducing the subsidy for onshore wind by 10 percent, these companies have considered taking action against the state. Mr. Spaczyński cautions that the Polish government’s role in regulating the oil and gas business could indicate behavior that borders on nationalization. “It’s a pretty complex story. The question is whether foreign investors are going to consider to protect their rights based on treaties for the protection of foreign investment. This is due to the fact that it might be the case that with the new level of taxation Polish shale gas is being nationalized,” Mr. Spaczyński said.

OUTSIDE OF OIL Mr. Spaczyński is on the board of the Polish Wind Energy Association. When asked about his involvement with renewables, he doesn’t find it odd that a lawyer can maintain expertise and credibility in both energy segments. “Some say that these businesses are pretty contradictory. Oil and gas and wind energy. I don’t agree with such an approach. In Poland, they seem to need one another,” Mr. Spaczyński said. “Due to the fact that wind is not a stable source of energy, it needs an alternative that is flexible, as are gas turbines. So these could have more in com-

NARY A DAY AWAY Give him time off, and you’ll find Mr. Spaczyński on the pitch playing soccer with friends. Last year, he twisted an ankle and spent a few weeks in a support cast, but that hasn’t diminished his winter-time enthusiasm for snowboarding and iceskating. As for the challenge of running his own law practice, one might say that finding a balancing between work life and family life is a bit like going to a public school in the UK coming from a former communist state. From one to the other, a man has to adjust a bit to the change in rhythm.

INTERVIEW Piotr Spaczyński: the government’s 40 percent total tax rate on shale gas is “acrobatics”

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Tracking the

v a l u e

c h a i n

ScienceNews

IP Group | Piotr Knap

Baker Hughes

in the Baltic Basin

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Viking | Piotr Knap

Fotalia

Viking | Piotr Knap

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Baker Hughes

Viking | Piotr Knap

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Cleantech Poland

3Legs Resources

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Cleantech Poland

Fotalia

Istockphoto

Cleantech Poland

Nomac drillnig

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Cleantech Poland

Halliburton

Weatherford

Baker Hughes

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Cleantech Poland

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Cleantech Poland

Geological evaluation

Permitting seismic

v ca hl ua ei n

Planning seismic

Geophone placement

Running vibroseis trucks

Reservoir modeling

Well pad construction

Site supervision

Drilling preparation

Drilling services

Hauling cuttings

Sand for fracking

Pipe testing

Logistics

Proppant delivery

Pressure pumping

Fluid storage

Waste handling

Health and safety

Measuring flow rates

in the Baltic Basin

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Source: Cleantech Poland, Weatherford, Baker Hughes, Halliburton, Istockphoto, Piotr Knap, Fotalia, Metro Focus, ScienceNews, Chesapeake Energy and Nomad Drilling; Thanks to BNK Polska and MND Drilling Services for coordinating a site visit.

Tracking the

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GREEN GROUPS

E N V I R O N M E N TA L I M PA C T

Working for the

frackdown Environmental groups in Europe are bringing attention to the risks of shale gas exploration, which tend to be obscured by the positive spin in countries like Poland. BY WOJCIECH KOSC

PICTURE: BOGDAN CRISTEL/REUTERS/FORUM

NO COUNTRY IN EUROPE has

gone to greater lengths than Poland in pushing the exploration for shale gas. In the eyes of the Polish authorities, the EU should follow Poland and embrace shale gas as a remedy to economic and, yes, environmental woes. "The economy of the European Union needs shale gas in order get back on its feet, help create new jobs and break the link between economic growth and the growth of CO2 emissions," Polish minister of environment Marcin Korolec said in September 2011. Environmental campaigners, however, took a critical view of Mr. Korolec’s position. According to environmentalist organizations like Friends of the Earth Europe and Greenpeace, the Polish minister turned the shale gas issue completely on its head. Shale gas isn’t going

A protester holds placard against hydraulic stimulation during a protest in Bucharest, Romania

to solve any of the environmental problems because it’s one such problem itself, they claim. Indeed, the environmental risks that shale gas exploration might have created in North America are at the center of the debate about shale gas exploration and production (E&P). Hydraulic stimulation (fracking) has been targeted in particular as the riskiest element in the process. In late September, several environmental and citizens’ organizations staged protests and rallies worldwide in an action called "Global Frackdown”. Even without organized protests, some countries have pre-empted any, even perceived, risks related to fracking by introducing moratoriums on the technology until further research has been done. Fracking is now banned, at least temporarily, in countries like the Czech Republic, Bulgaria and France, even though the latter two countries could

soon launch reviews of their legislation and reconsider whether the bans should remain in force (see Global Update, pages 80-110). NO BRIDGING SOLUTION A September 2012 report from Friends of the Earth Europe (FoEE), an environmental group, is the most comprehensive attempt to date aimed at raising public awareness of the environmental risks related to shale gas. The report was issued before a recent debate in the European Parliament that might pave the way to placing restrictions on unconventional oil and gas production in the EU. The fundamental misgiving about shale gas is, according to FoEE, that shale gas can’t be "a bridging solution" between CO2-intensive power generation based on coal and energy from renewable sources. Considering it a way to shut critics’ mouths, shale gas stakeholders have 

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“The shale gas industry’s rhetoric downplays risks inherent in shale gas operations. It confuses people with the real impact that shale gas activities can have on climate” Antoine Simon, Friends of the Earth Europe  been quick to adopt the “We’re re-

ducing CO2!” strategy, Antoine Simon, FoEE’s extractive industries campaigner, told Shale Gas Investment Guide. "[The industry] talks about shale gas to promote it as 'transition fuel,' meaning that it is a perfect temporary way to reduce countries' carbon footprint and at the same time to slowly develop member states' renewables sector," Mr. Simon said. WHAT’S SO WRONG? "[The industry’s] rhetoric confuses people with the real impact that shale gas activities can have on climate. It also promotes its complementarity with renewables and energy savings while many experts agree that shale gas diverts investment away from the renewable sector," Mr. Simon added.

According to the greens, relying on shale gas could be as harmful to the climate as reliance on coal. This is due to the levels of methane released during the extraction process, says FoEE. Other risk areas that environmental campaigners have been looking into include dangers to water supplies due to large amounts of produced water that result from large scale production. Fracking, some say, poses a risk of water contamination because of the chemicals used, a risk particularly hard to manage because the composition of the fluid is often trademarked and not made public. "The risk exists that these chemicals could leak into the ground water during the fracking operations as a result of spills of drilling mud, flow back, leakage from storage ponds or from transportation trucks. Leaks could also owe

to unprofessional handling, old equipment or inadequate cementing of the wells," the FoEE report concluded. Finally, as substantial amounts of fracking fluids remain underground, the greens are warning of the fluid being able to migrate towards natural drinking water supplies, like aquifers or springs. The US-based National Ground Water Association was first to publicize this particular risk, but the association’s study was criticized for adopting many mistaken assumptions about rock formations, groundwater movement and fracture-lengths. WIND, NOT SHALE Poland is very much willing to take on whatever risks exist in shale gas E&P. Earlier in 2012, the Polish Geological Institute analyzed the first full-

T H E A E A R E P O R T : W H AT ’ S AT S TA K E ?

ENVIRONMENTAL RISK Groundwater contamination Surface water contamination Water resources Release to air Noise impacts Traffic

Well design drilling, casing, cementing

Fracturing

Well completion

Low

Moderate-High

High

Production

Well abandonment and postabandonment

Moderate-High Not classifiable

Moderate

Moderate-High

High

Low

Not applicable

Moderate

Not applicable

Moderate

Not applicable

Moderate

Low

Moderate

Not classifiable

Low

Not applicable

Low

Moderate

Low

Not applicable

SOURCE: AEA

Not applicable: impact not relevant to this stage of development Not classifiable: insufficient information available for the significance of this impact to the assessment

“The recent evolution of the European context suggests a growing need for a clear, predictable and coherent approach to unconventional fossil fuels to allow optimal decisions to be made in an area where economics, finances, environment and in particular public trust are essential,” reads the AEA report compiled at a request of the European Commission. The AEA report is one of three shale gas reports that the Commission requested to substantiate the decision whether to regulate shale gas industry in the EU.

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GREEN GROUPS

scale fracking job carried out in Poland by Lane Energy, on location in Łebień. The study found no negative consequences that could be linked to fracking, but, environmentalists say, this represents far too little data to ascertain that the problems are unlikely enough to surface. Green organizations argue that letting the shale gas industry take off in the EU will contradict the bloc’s environmental policies that aim to switch the EU economy onto renewable and energy efficiency tracks before long. "We believe that no further shale gas activities should proceed. This is because of the risk posed by the competition to investment in renewables and energy efficiency, the obvious inadequacy of the current European environmental and other relevant legislation and the inevitable impacts on environment, health and climate," Mr. Simon said. "We call on all European member states to suspend all ongoing activities, to revoke existing permits, and to place a ban on any new shale gas projects, whether exploration or exploitation," he added. There is no legal possibility for the EU to limit the member states’ powers in determining their energy mixes. Still,

Mr. Simon says that, "if member states refuse to listen to the many studies flagging the high probability that these risks will happen, we consider it’s essential that through the legislative work at the EU level, citizens can be protected from the damages generated by the shale gas industry." Indeed, a recent study from AEA, a UK consultancy, ordered by the Euro-

“We call on European member states to suspend ongoing activities, to revoke existing permits, and to place a ban on any new shale gas projects, exploration or exploitation” Antoine Simon, FoEE

pean Commission, did flag major risks attached to shale gas E&P (see table). According to Mr. Simon, Poland is likely in for a major disillusionment if the push to shale gas boils down to nothing.. “There’s nothing to suggest that the Polish shale gas reserves are commercially viable and capable of diminishing Poland’s dependence on imports from Russia,” he said. "It’s very risky to engage in very expensive investments to adapt the national infrastructure to the shale gas specificities: construction of kilometers of pipelines and roads, and construction of numerous gas power plants," he said. Mr. Simon adds that if the effort to develop the shale gas sector is made nonetheless, not only will Poland be in for a lot of misguided investment expenditure, but it will seriously undermine its plans for renewables and energy efficiency. "Poland has considerable wind energy potential, which can cover more than half of its electricity needs and create long-term, local and sustainable jobs. However it will require investments that Poland won’t be able to afford if it prefers developing shale gas first," Mr. Simon said.

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PICTURE: TSVETELINA BELUTOVA/REUTERS/FORUM

Environmentalists demand a blanket ban on fracking, but the EU tends to think shale gas is an important source of energy for the near future

Iza Kawczynski

Meet your landman Chicago-native Izabela Kawczynski moved to Poland seven years ago. An American, raised with typical mid-western values, Izabela worked for a large, international staffing company in Poland before leaving to join IP Group. “I’m American with strong Polish roots. I grew up immersed in corporate America and started my career there, but at the same time was raised in a very Polish home, so I know both cultures perfectly. Also working in Poland for the last seven years has given me in-depth knowledge of the Polish market. I guess that makes me a pretty good ‘middleman’ for foreign investment in Poland.” IP Group provides landman services (permitting and compensation) as well as comprehensive staffing solutions for the energy sectors, including oil & gas and renewables. “Our clients are companies that need a service provider who understands both sides; their corporate culture and goals, as well as the Polish way of doing business: the legal system, business and cultural etiquette, labor laws and the labor market.” Viking Geophysical Services, one of IP Group’s clients, is currently working on a comprehensive 2D seismic program. IPG handles Viking’s staffing needs, providing Viking with over 180 employees, from basic labor positions to highly skilled specialists.

LANDMAN SERVICES | STAFFING SOLUTIONS

INTERPERMIT.COM (+48) 22 213 22 00 76 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

ADVERTORIAL

Iza Kawczynski, a partner with IP Group.

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The government has spoken. But the final shape of the regulatory environment for shale gas is still hardly in sight

Pay to play H Y D RO C A R B O N L AW

The Polish government has finally spoken about the shape of the hydrocarbons’ E&P regime. Shale gas operators can now base their business plans on something more solid than gossip. BY S TA N I S Ł AW KO C Z O T AND JAKUB KOCZOT

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THE END IS FINALLY in sight of

the legal limbo that has made it impossible to draw business plans for shale gas extraction in Poland. In mid-October, Polish minister of environment Marcin Korolec presented the cornerstone assumptions of an upcoming oil and gas law. The government proposal is only an outline of what will eventually be signed into law, and a lot can still happen before the parliament convenes to work on the proposition towards the end of 2012. In theory, what’s going to emerge from the parliament as a complete law on hydrocarbons (including both conventional and unconventionals) should induce companies to push forward with their plans. Piotr Woźniak, Poland’s chief geologist, described the taxation model proposed in the outline as the “most favor-

able” in Europe. How this new regime is going to work in real life, however, will only be verified once and if the gas does flow from the Polish shales. “We’re only going to see if the overall tax burden of 40 percent is favorable compared with Norway or Denmark once production starts and there’s more knowledge about profitability,” said Marek Krukowski, an analyst at Deutsche Bank. WHAT’S IN IT FOR THE OPS? There will be tax on the extraction of hydrocarbons imposed on revenue (a royalty) that will amount to 5 percent of the value of extracted gas and 10 percent of oil. A 25 percent tax will be imposed on positive accumulated cash flow, or on excess of revenues from hydrocarbon operations over expenditures.

ROYALTY UPDATE

“[The government proposition is] early, but it’s nonetheless an interesting and pro-investment outline of the future legal environment for shale gas”

PICTURE: SZYMON SZCZEŚNIAK

Tomasz Gryzewski, Talisman Energy

Current operational fees for gas will increase roughly four times to PLN 24 ($7.5) per 1,000 m3 of extracted highmethane gas (from $1.9) and to PLN 20 per ($6.3) 1,000 m3 of extracted nitrogen-rich gas (from $1.5). WHERE DA BLING? The fees for the use of mining usufruct will not change. According to the government, the total tax burden, including CIT and property tax, should amount to about 40 percent of the gross

profits of the industry. The revenue from the taxes will go to the state budget and to a so-called Hydrocarbons’ Fund, which will support Poland’s long term investment projects. The increased operational fees will be distributed in 60 percent to gminas (local communities impacted by exploration). The remaining 40 percent will be distributed between other administrative units in Poland (powiaty or districts, and wojewodztwa or provinces) as well as the National Fund for Environmental Protection and Water Management. The new regulations are supposed to come into force on 1 January 2015, but not before commercial production of shale gas gets underway and the gas market is liberalized. The cash flow tax is supposed to be effectively levied on companies in 10-15 years. NOKE IS WATCHING The Polish government will set up a dedicated state owned operator, known as NOKE, that will be responsible for oil and gas activities. NOKE will also

NEW RULES OF THE GAME Tax on the value of extracted gas 5% Tax on positive accumulated cash flow 25% Overall tax burden, incl. CIT and property tax approx. 40% Operational fee, high-methane gas* PLN 24 ($7.6, up from $1.9) Operational fee, nitrogen-rich gas* PLN 20 ($6.3, up from $1.5) * price for 1,000m3 The government has long said that the current taxation and royalty regime isn’t taking care of the state interests well enough. The plans for a new regime have now been announced. Are new, higher, taxes and royalty fees going to halt the sector before it takes off? Operators are still waiting for some key details to be worked out.

have the right of first refusal in secondary concession offerings. NOKE’s profits will be transferred to state budget and to the Hydrocarbons’ Fund. NOKE will form joint ventures with the companies involved in prospecting and extraction of hydrocarbons. However, the companies that have already obtained licenses will have three years to declare whether they want to enter into a joint venture with NOKE. The entities that will receive concessions after the new regulatory regimes has entered into force will have no such choice. Companies already operating on exploration concessions will have priority in obtaining extraction rights. For new concessions, Poland will adopt a system similar to Norway’s where applying companies will go through screening that will examine companies’ finances and technical capabilities. The government hopes that the national operator boosts credit standings of shale gas operations with the banks. The initial capitalization of NOKE will be secured by the Polish treasury. “[The government proposition is] early, but it’s nonetheless an interesting and pro-investment outline of the future legal environment for shale gas,” said Tomasz Gryżewski, corporate affairs manager at Talisman Energy. “How certain elements of the new law will be worked out in detail is going to be key for investors. For example, how are the companies going to account for operational losses during the exploratory stage?” Mr. Gryżewski said. “We hope that the new regulation will precisely define the mechanisms of issuing new concessions, or how NOKE will participate in operators’ E&P companies and what the legal and financial consequences of NOKE’s involvement will be,” he added.

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The Premier of South Australia, Jay Weatherill, turning the valve on Australiaâ&#x20AC;&#x2122;s first shale gas producing well, Moomba-191

80 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

GLOBAL UPDATE

SHALE

GOING INCREDIBLY

GLOBAL The United States and Canada are the only countries where shale gas has proceeded in production volumes. The effects are: cheap sources of natural gas, a shakeup in the global LNG markets, and an intensifying attempt by several countries to follow down the pioneers’ path. No one outside North America is there yet, but it seems pretty certain that IEA’s “golden era of gas” is in the making.

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AT A GLANCE China has welcomed the presence of foreign firms that can develop its shale gas resources Chinese companies are scouring the world for oil and gas deals to gain shale gas know-how The geology of the potential shale plays is poorly understood

82 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

GLOBAL UPDATE

CHINA

WAKING THE

GIANT

PICTURE: ISTOCKPHOTO.COM

CHINA BOASTS AN EIA estimat-

ed 36 trillion cubic meters (tcm) of shale gas deposits. This represents a potential resource base 50 percent larger than the United States, though comparisons with the Chinese and American shale markets end there. Lacking extensive seismic data and exploratory drilling in many of the regions, the exact nature and scope of the Chinese shale gas is rather opaque. “You see the numbers all over the place: from 28 to 37 tcm. But if we talk about proven reserves, zero is very close to reality,” said Wu Kang, an expert on energy in China at the East-West Center, a think tank. Shale gas, however, has been noted an avenue in which CO2 reductions could be found in China, the world’s biggest polluter. “We simply cannot operate on a policy that says, because coal is somehow abundant and because we worry about uncertainties in global supply, we should just stick to coal. Coal is simply not an option,” said Professor Zha Daojiong, a member of China’s State Energy Expert Commission. GOING ONCE, GOING TWICE In late October, China carried out the second auction of shale gas concession areas (the first auction took place

In these early stages of exploration, nothing is certain in China. Aware of the potential, however, Beijing can expect foreign companies to come tickle the toes of a 36 tcm giant. BY KEITH LUKE AND DOMINIC SWIRE IN SHANGHAI

in 2011). The blocks offered were located in eight different provinces, mostly in southern China. There were five blocks in Guizhou and Hunan, three in Chongqing, two in Hubei and Henan and one each in Anhui, Jiangxi and Zhejiang. Unlike the previous auction in June 2011, Beijing allowed foreign firms to participate this time, provided they form a joint venture (JV) of less than 50 percent with a Chinese partner. Allowing JV’s is a promising move by the Chinese government as previous partnerships only existed through production sharing agreements that required foreign participants to accept risk and debt in an unleveraged position. The October 25th deadline for submission of bids was met with a resounding response. 83 companies produced a total of 152 bids for the 20 various concession available. The bidding seemed to be stacked in favor of certain areas over others. One block 

China has set a production goal of 6.5 billion cubic feet by 2015; this represents five percent of the country’s consumption in 2011

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 received a total of 13 bids while a

block located in the Anhui province took only two, failing to meet the minimum 3 bid requirement for auction. Following an analysis of the bids to evaluate factors such as budget and plans for development by a ministry panel, winners will be announced sometime in November. The first round of auctions saw invitation-only tenders submitted by six Chinese companies: Sinopec, Shaanxi Yanchang Petroleum Group, China United Coal Bed Methane Company, Henan Provincial Coal Seam Gas Development and Utilization Company, PetroChina, and CNOOC. Sinopec is said to have successfully bidded for the most promising plays in the first auction, which are now being co-developed with Shell. China has set a production goal of 6.5 billion cubic meters (bcm) by 2015 (five percent of the country’s consumption in 2011). Progress will be anything but rapid, however. “I think the targets for shale gas are definitely too ambitious, especially the target for 2015,” said Charlie Cao, a Beijing-based analyst at Bloomberg New Energy Finance. Mr. Cao says that the Chinese government’s enthusiasm has not spread to the big state-run energy companies. These companies bid for shale gas con-

China’s moves to gain foreign shale gas assets aren’t without controversy. These investments carry the perceived risk of Chinese appropriation of hydraulic fracturing technology cessions across the country, but remain unconvinced because there are so many obstacles left in the way of progress. THE GLOBAL GRAB Following the first round of auctions, the Chinese government realized that only allowing domestic companies to bid was ill advised. This is because the only companies with proven technical expertise in extracting shale gas were foreign and thus absent from the bidding process. Attracting foreign companies is, however, just one aspect of China’s move into shale gas. China is also on a global quest to acquire the know-how, technology, and personnel that will be necessary to produce gas from shales. The CNOOC purchase of Canadabased Nexen for $15.1 billion has recently received approval from shareholders and has moved on to approval by the Canadian government. Nexen has ongoing shale gas operations in British Columbia and Poland. Other large investments by CNOOC include buying into US-based Chesapeake Energy for $2.2 billion during 2010 and

100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000

2009

2010

2015

2020

18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0

Shale gas output (Mcm/day) CBM output (Mcm/day) Share in domestic gas production (%)

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China is a major polluter because of its heavy reliance on coal. The global effort to curb CO2 emisisons is having an effect on Beijing, however. China is developing less CO2-intensive energy sources like shale gas and coal bed methane (CBM). Of these unconventional energy sources, CBM is already being produced in China, and Beijing plans to cover five percent of its domestic gas demand with shale gas as early as 2015.

SOURCE: NATIONAL BUREAU OF ASIAN RESEARCH

SHALE, CBM SET TO GROW IN CHINA

2011. Another Chinese major, Sinopec, has signed an agreement with Devon Energy Corp. totalling $2.2 billion for a 33 percent stake in five US-based shale gas plays. China’s moves to gain foreign shale gas assets aren’t without controversy. These investments carry the perceived risk of Chinese appropriation of hydraulic fracturing technology. For this reason, CNOOC’s purchase of Chesapeake Energy’s shale assets was specifically limited in the access of CNOOC workers had to Chesapeake’s know-how and equipment. THE LONG MARCH TO SHALE “Getting to 6.5 bcm will require a lot of effort, and at the moment, China is not there,” said Andreas Goldthau, Associate Professor at the Center for Environment and Security in Budapest. There are some specific challenges that China must overcome. The regulatory regime lacks transparency concerning the process of licensing. Exactly how a Chinese company with foreign JV funding will function has not yet been defined, either. A legal structure that could allow for rapid drilling and clarity in local ownership rights is also sorely needed. Furthermore, there’s scarce geological data available. Once and if this data becomes accessible, the need will emerge for a system that encourages the dissemination of new data about shale gas regions. “Be not afraid of going slowly; be only afraid of standing still,” might be a popular proverb in China, but in this case, going slowly is simply not a option. China must pick up the pace if it hopes to bring in the expertise that can unlock the massive reserves it has locked in shale deposits.

AT A GLANCE Shale gas exploration led to a 63 percent rise in proven reserves between 2011 and 2011 Thereâ&#x20AC;&#x2122;s a $100 to $350 disconnect between current gas price and the breakeven gas price US majors may make up for write downs on global markets

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GLOBAL UPDATE

U N I T E D STAT E S

THE REVOLUTION WILL EAT ITS

CHILDREN Countries looking to follow the US as a role model in the development of shale gas should know it hasn’t been all roses in the Marcellus or in the Barnett. At least not for investors. BY NICHOLAS NEWMAN IN LONDON

PICTURE: SHUTTERSTOCK.COM

A WINNING COMBINATION of

large shale gas formations, rising natural gas prices and easy credit laid the foundations of the North American shale gas revolution. In particular, it was the arrival of viable technological innovations in horizontal drilling and hydraulic fracturing (fracking) and a record high in Henry Hub natural gas prices of about $491 per thousand cubic meters (Mcm) during 2005 that permitted the take off in exploration, drilling and production of shale gas in the United States. Extraction of shale gas from the rich shale deposits of Texas, Louisiana, and Pennsylvania has been dominated mainly by wildcat entrepreneurs as well as small independent companies, all seeking a slice of the action. They financed their activities mainly on borrowed money during a period of financial exuberance. This has resulted in a frenzy of drilling with some 36,000 wells drilled in 2006 alone, reports the Energy Information Agency (EIA). Six years on, shale gas has changed the world’s energy balance for good.

But, the impact of the enormous supplies on shale gas companies’ balance sheets is questionable. “Over the longer term, the companies and investors that have done best are those with early mover advantage in the Marcellus due to its low cost and the Eagle Ford and Bakken due to its liquids content as well as those that sold at the right time,” said Laura Loppacher, oil and gas E&P analyst at Jefferies, an investment bank. SO MUCH GAS The rise in exploration led to new discoveries of gas with proved reserves rising from 5.2 tcm at the end of 2001 to 8.5 tcm in 2011 according to the June 2012 Statistical Review from British Petroleum. Shale gas production rose from 36.6 billion cubic meters (bcm) in 2007 to an estimated 179 bcm in 2012, according to the EIA. Since 2005, millions of acres of shale gas and oil leases awarding development rights to the subsurface minerals have been purchased across the continental United States.

In one of the top deals, Japanese Marubeni Corporation paid $25,000 an acre for a Texas shale play in 2011. In Ohio, Pennsylvania and elsewhere, millions of acres of land were leased. Where a lease was available the cost ranged from $1,500 to some $5,000 an acre. Obtaining the mineral rights is still petty cash compared to the expenditure involved in drilling and well completion. According to the EIA, the total cost of well drilling, completion and construction per well range from $7 million to $8 million in many of the established shale fields. TOO MUCH GAS Investments made on this scale require massive amounts of easy credit and are only sustainable whilst the price of gas exceeds the cost of its production. This simple arithmetic was flipped upside down as the worldwide financial crisis and the associated global economic decline hit in 2009. A contraction of exploration and development led to a plunge in rig activity and declining demand for hydraulic fracturing and an overall reduction in capital spending. However, supplies of shale gas continued their upward trend. Over the past decade, shale gas production expanded 12 fold to reach some 25 percent of US total gas output in 2011. But demand for energy fell, which in turn exacerbated the price decline. In 2011 natural gas prices averaged $162 per Mcm. In April 2012 natural gas prices hit rock bottom at some $85 per Mcm. This is a spectacular price crunch for any commodity espe- 

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Even before the gas price crash shale gas producers were spending two to five times their operating cash flow to fund land purchase or leases, drilling and completion programs

 cially when in the year to end of

September 2012, natural gas prices had averaged $100 per Mcm, compared with a 10 year moving average of $214 per Mcm, reports the EIA. Extraction of shale gas at these price levels is uneconomic. The breakeven point, with land lease costs and debt servicing costs included, is around a price of $350 per Mcm. Even before the gas price crash, shale gas producers were spending two to five times their operating cash flow to fund land purchase or leases, drilling and completion programs, according to the Financial Times in May 2012. The response to low price levels has been marked. There was a decline in drilling activity that mirrored the downward shift in national gas prices. For example, at the beginning of 2010 Chesapeake Energy had around 100 rigs operating in Marcellus, Haynesville, Bossier Shale and Barnett plays. Only nine rigs remained in early November 2012. The total rig count fell from a peak of 1,879 in 2008 to 889 in 2011, to 518 in July 2012, and falling further to 422 in October 2012 - a 21st century low according to data from Baker Hughes, an oilfield services firm. Rig support services are now in oversupply. Prices

charged for fracking services are expected to drop by 14 percent in 2012 and another 8 percent in 2013. FROM BOOM TO BUST Write downs by the companies that entered late into this market are another less publicized aspect of what is dubbed “shale gas revolution” elsewhere in the world. Chesapeake Energy has written down $2 billion of natural gas reserves and is endeavoring to sell some $19 billion in assets by the end of 2013 in order to plug a funding shortfall. Australia’s BHP announced recently that it had made losses on its US shale gas estate worth $2.8 billion in write downs. “The very large write downs by companies involved in shale gas are all related to the very low gas prices. Many of these were also related to high priced acquisitions made with materially higher assumed recovery in gas prices several years out, which has not only not materialized but also deteriorated,” said Jefferies’ Ms. Loppacher. “The position on the cost curve is

GAS GLUT ( in bcf/d) Fayetteville (AR) Eagle Ford (TX) Marcellus (PA and WV) Haynesville (LA and TX) Woodword (OK) Rest of US Barnett (TX)

20 15 10 5 Jan. 2010

Jan. 2011

Jan. 2012

Sep. 2012

It’s been a positive story for US gas consumers, but the breakthrough in shale gas extraction technology has mostly been giving headaches for producers. The gas glut that resulted from tens of thousands of wells from US’ shale plays has been too much for the domestic market. Scaling back activity is the answer for now.

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SOURCE: ENERGY INFORMATION ADMINISTRATION

crucial when the macro environment takes an unexpected turn to the worse,” Ms. Loppacher added. Financial pressure is continuing due to the need to keep drilling new wells in order to maintain output and revenues. Shale gas wells have a high decline rate which necessitates continued expenditure even at a time of falling prices, high debt servicing costs and lower or negative profitability. “The US mineral rights leasing system is such that properties have to be relinquished relatively quickly if not drilled. Mid to later entrants paid premiums for the acreage and were reluctant to relinquish this and thus drilling was the lesser of the two evils,” said Glynn Williams, an analyst with Epi-V, an oil and gas technology investment firm. Following the US presidential election, there’s also a possibility that the federal government might end the tax break offered to independent oil and gas producers which allowed them to set the cost of drilling against the payment of taxes which in effect allows them to fund investment in new wells. This tax break was started at a time when drilling was a hit or miss affair but, with scientific techniques, drill failures today are very low at less than one percent. That said, shale gas players in the US may still be willing to stomach write downs for one other reason. They’re hoping to take their expertise overseas to the growing number of markets that are only getting ready to embrace shale gas. “Although the cash strapped independents may have shut up shop, the major global players have been anxious to purchase a piece of the action so that they can become informed users on a global scale,” said Mr. Williams.

U N I T E D STAT E S

THE

HOTTEST PLACE The Eagle Ford play in Texas is transforming shale gas E&P from a high-risk venture to something much more like old fashioned manufacturing operation: repeatable and reliable all the time.

BY C L AU D I A P E R E Z R I VA S I N T E X A S

OVER THE LAST FEW YEARS,

the Eagle Ford Shale in South Texas has become a booming play much like the Bakken in the northern United States. Based on the rig counts, service companies and infrastructure investments, the Eagle Ford is currently the second most active unconventional oil and gas play in the country. The area, 50 miles wide by 400 miles long, contains vast reserves of oil, gas, and condensate which are being unlocked with horizontal drilling and hydraulic fracturing technologies. There are 4,970 wells in the play that stretches from the Mexican border to East Texas. The Eagle Ford’s rise to the position of Texas’ hottest economic development began in 2009 and 2010 when the play began attracting lots of attention from drilling companies. Businesses recognized the Eagle Ford Shale’s capacity to produce both oil and gas, but what makes the play really different from past oil and gas booms is the fact that there is a high probability that a well will be productive anywhere in the leasehold unit. In fact, drilling wells in the Eagle Ford Shale has be90 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

come more like a manufacturing operation than the typical high risk venture. GROWTH IS THE ONLY WAY Today, the Eagle Ford Shale is possibly the largest single economic development in the history of Texas. The play had a more than $25 billion dollar impact on the local South Texas economy in 2011. A 2011 study from the University of Texas San Antonio suggests that 5,000 new wells that are slated to go online by 2020 will add 68,000 fulltime jobs in Texas. The economic output could be as big as $21.5 billion, according to the study. The Eagle Ford Shale isn’t uniform. It has different porosity and quality of oil and gas, depending on where the acreage lies, but nonetheless it’s mostly continuous throughout much of the play. The play is composed of three zones that produce natural gas, natural gas and condensate, and crude oil. The natural gas and condensate as well as oil windows in Frio, LaSalle, McMullen, Live Oak, and Atascosa are currently the focus of intense drilling activity. Still, the surface of the Eagle Ford Shale has only been scratched and companies

plan to drill thousands more wells over the coming years. The exploration and production governing entity in Texas, the Railroad Commission of Texas, says that there were 550 producing shale gas wells in 2011, up from a mere 67 in 2009. The numbers of shale oil wells were up from 40 to 368. But the most stunning are production figures. Gas production in 2008 was 8 MMcf (226,000 cubic meters) per day, climbing to 880 MMcf per day (almost 25 million cubic meters) by August 2012, a 100-fold growth. OIL & GAS HUB The Eagle Ford Shale’s development kicked off in 2008, when Petrohawk drilled a well with a horizontal leg and hydraulic fracturing that flowed at an initial rate of 7.6 million cubic feet

PICTURE: CUSTOM AERIAL/IMAGES BY ERICK RICHTER

GLOBAL UPDATE

What makes the Eagle Ford really different from past oil and gas booms is the fact that there is a high probability that a well will be productive anywhere in the leasehold unit

(215,000 cubic meters) per day. This well in La Salle County, Texas, demonstrated that the play could yield significant amounts of natural gas if developed properly. The Eagle Ford Shale is in an ideal location for large gas fields because there are not many big cities in counties such as McMullen, LaSalle, Frio and Atascosa, where most of the drilling is now taking place now. In addition, the Eagle Ford Shale is beneath many large ranches, which simplifies and reduces problems with acquiring acreage. The result is that there are over 200 active operators in the play, including Statoil, Apache Corporation, BP, Chesapeake Energy, ConocoPhillips, China National Offshore Oil Corporation, EOG Resources, Exxon-XTO, Gas Authority of India,

Hess Corporation, KNOC (Korea National Oil Corporation), Marathon Oil, Mitsui, Shell, and Talisman Energy. The Eagle Ford may be booming at the moment but the discussion is already on about how long it’s going to take before the play will decline. At a recent meeting of South Texas business leaders, it was conceded that the play will have a productive lifespan of 16 years, as reported by the eagleford.com website. Such a window of opportunity has provided good grounds for substantial commitments to the Eagle Ford. For example, Marathon Oil has committed $4.5 billion to the area. A complementary trend has been to shed acreage that companies consider non-pivotal to their plans for the Eagle Ford, so-called “high-grading” of acreage.

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RUSSIA

LEVERAGE LOST Two decades of Gazprom dictating the rules of gas trade in Europe might just be coming to an end because of shale gas. Gazprom itself is recognizing shale potential now. BY KEITH LUKE

IN A MAY 2010 shale conference

at Sofitel Hotel in Warsaw, a Gazprom economist dismissed North American shale as a runaway train on a dead-end track. Operators, he said, were drilling wells that cost them more than the revenue from gas sales. Some eighteen months later, his point has turned out to be true: over production of shale in North America

AT A GLANCE

Gazprom has been urged to reassess its strategy relative to shale gas Russia is making first steps to get involved in shale gas globally Exxon to develop an unconventional play in Siberia

92 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

has decimated the market for natural gas. What an irony then that Gazprom has turned a corner, and is starting to see opportunity in shale where it used to see foolhardy. Gazprom and by extension, Russia, was set to dominate the European energy market for decades. Emerging from the chaos of the Soviet Union’s breakup, Russia was endowed with a vast pipeline infrastructure that connects gas fields in Siberia to end users in Europe. This transport infrastructure, combined with the world’s largest natural gas reserves, gave Russia a position with an extremely high degree of leverage. Through revenue streams generated by transit fees, nations situated along this huge network of pipelines had very little incentive to develop diversified energy sources. Discounted Soviet era prices coupled with dividends from transit duties only

further suppressed the need of these markets to source other energy inputs. DOMINANT POSITION For most of central and eastern Europe, there seemed little in the way of bargaining power to reject higher prices from the Russian giant - a flurry of cases brought before arbitration courts in Europe is showing a shift in the wind. Poland’s PGNiG and Gazprom recently settled out of court for an estiamted 10 to 15 percent reduction in the latter’s prices. Driving down the price of natural gas in the United States, freeing up LNG resources that would be going to the US, and providing a supply of energy outside of conventional sources are all part of the cascading effect that the development of shale gas has had on global energy markets. A recently announced European

PICTURE: GAZPROM.COM

GLOBAL UPDATE

Commission investigation into Gazprom’s pricing policies in Central and Eastern Europe has the potential to further complicate the already tumultuous relationship between Gazprom and its customers. The Russian reaction was one of skepticism and dismissal. But the Commission’s investigation is further evidence of European nations seeking parity in what has previously been a rather onesided relationship. ABOUT FACE Gazprom itself is, however, looking at ways to react to the looming possibility of losing foothold in at least some European markets by getting involved in shale gas in Russia and elsewhere. This action runs counter to the company’s earlier suggestions that fracking of shale and tight hydrocarbons could be damaging to the environment. Early September saw a strategic accord signed between Gazprom and Argentine energy company YPF. “Gazprom is the most important gas company in the world and we’ve found points in common to rapidly explore a shared collaboration,” YPF President Miguel Galuccio said about the agreement. Shale gas is one of the fundamental elements of YPF’s strategy until 2017 (see Global Update, page 102). Internally, Russia does not seem

Gazprom has turned a corner and is starting to see opportunity in shale where it used to find it foolhardy averse, either, to using horizontal drilling and multistage fracking to tap tight oil and gas assets. A partnership with Exxon looks to do just that. The 2.3 million square kilometer Bazhenov play in western Siberia is an unconventional shale resource rich in tight gas and oil that Exxon seems poised to develop. There were even speculations that Exxon’s giving up on shale exploration in Poland was due to the company’s renewed interest in Russia. More interesting, however, is the quick about face that Russia has made in so actively dismissing the potential that fracking can have in unlocking untapped energy resources. This about face is now quickly changing into a full tilt in the opposite direction. President Vladimir Putin has recently urged Gazprom to reassess its energy policy relative to the effects that shale gas is having on global resource

flows. The enormous potential that Russia has locked in shale plays leave one wondering why it has taken this long and necessitates the direct involvement of Mr. Putin to effect a change. PREDATOR NO MORE Memories of the cold winter of 2009 that saw natural gas supply disruptions in Europe caused by disputes between Russia and Ukraine are still fresh. Tensions returned in 2011 over allegations by Russia of Ukraine illegally appropriating gas supplies. There should be little surprise in Moscow over the desire in Europe to diversify the resource base. The reduction of demand for imports in the US and the availability of global shipments of LNG has created a different climate than the one in which many of the contracts with Gazprom were inked. Hard nosed policies like take-orpay or the seemingly predatory pricing that differed widely among European markets are now haunting Gazprom. The upcoming ruling from the European Commission will further complicate an already difficult climate in the European energy market. This, combined with nations like Poland and Ukraine pushing to create their own shale gas industries, will further reduce the relative bargaining power that Russia still holds.

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RUSSIA

THE BIGGER

THEY COME... Gazprom, one of the largest companies in the world, widely seen as a proxy for the Kremlin’s energy policy, is an easy target for attack. BY KEITH LUKE

COMING OUT OF THE HEYDAY

of Russia’s privatizations in the 1990s, Gazprom inherited a vast empire of resources including oil and natural gas assets, pipeline infrastructure, and a growing demand for its hydrocarbon products. This made Gazprom the proverbial jewel in the crown of the Russian state through the hard currency the company generated. This flush financial status was not without downsides. Corruption, kickbacks, and inefficiency became rampant as both businessmen and politicians accessed the profits of the energy giant. It seems though, that times are changing, and Gazprom’s regional power is beginning to wane. CONFRONTED, DEFEATED? A highly publicized European Commission’s investigation into Gazprom’s allegedly illegal pricing schemes has been joined by numerous cases from national energy companies. This includes the recent dispute between Polish Oil and Gas Company (PGNiG) and 94 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Gazprom, with PGNiG seeking arbitration in Stockholm over disputed prices. Gazprom has not been able to escape these confrontations unscathed. In early November, PGNiG and Gazprom settled their dispute for a retroactive settlement and a reported 10 percent reduction in prices. While the specifics of this settlement are not public knowledge, the effects cover prices from 2011-2012 and will add between $780 million and $936.6 million to PGNiG’s 2012 earnings and reduce the price of gas on par with Gazprom’s other clients in Europe. “It is a clear sign that competitiveness of PGNiG’s long-term gas contracts relative to European markets is being recovered,” PGNiG’s CEO Grażyna PiotrowskaOliwa said in a statement. This, along with other retroactive discounts to European energy suppliers such as Germany’s E.ON and France’s GDF Suez, totaling $4.25 billion, led to a 50 percent drop in net profits so far for the year as reported by Gazprom in November. Revenue also dropped overall with a 2.4 percent drop to $32 billion. Gazprom’s troubles, however, do not end in European arbitration courts. The titanic resources that were so instrumental in Gazprom’s - and by extension Russia’s - building a dominant position on the gas market - are now in decline. Accounting for about 80 percent of Russian gas production, the fields in the Nadym Pur Taz region

are producing less and less, falling at a rate of 20–25 billion cubic meters (bcm) per year. An International Energy Agency estimate from 2011 showed that 640 bcm of production will need to be replaced by 2035. Gazprom is actively investing in new fields to combat declining returns, but even these massive fields will still require billions more in investment to become active. IS THE PARTY OVER? The shale gas revolution in North America has sent shockwaves throughout world energy markets by driving the market price of natural gas to record lows. This has also has freed up LNG and coal supplies and made them available for consumption by other buyers - Europe in particular. At the same time, the development of the Shtokman Field, a vast arctic reserve of oil and gas supplies that was to guarantee Gazprom’s future for decades to come, has been canceled for financial reasons. Furthermore, the South Stream pipeline, which is designed to compliment the already completed North Stream, seems to be getting dressed for a party that might not exist when it arrives, due to much of the demand in southern Europe shifting to other sources. The market share that Gazprom holds in Europe also seems to be slipping. What was a 50 percent share has

Titanic resources that were so instrumental in Gazprom’s building dominant position on the gas market are now in decline

now slid to 33 percent and could fall further as coal and LNG supplies become more available. This is unsettling when one considers that Europe represent Gazprom’s biggest customer and almost 40 percent of its revenues, according to Bloomberg Businessweek. NOT A WRITE OFF YET While a claim that Gazprom is failing would be far fetched, the company seems to be weakening across several fronts both domestically and internationally. A decisive shift in Gazprom’s way of doing business could be on the cards. “The pressure will be building on them to reform and restructure and

I think the [Russian] government realizes that. They rely just on Europe and Europe is getting crowded,” Ildar Davletshin, an analyst at Renaissance Capital in Moscow said, according to the Financial Times. Whatever the outcome of these various scenarios affecting Gazprom, business will not continue as usual. Whether this is for better or worse depends in large part to the ability of Gazprom to adapt. But, the ability of such a gargantuan company to change its ways could be called into question. This means that the future for Russia’s golden-egg-laying behemoth is none too certain.

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PICTURE: SHUTTERSTOCK.COM

GLOBAL UPDATE Gazprom’s headquarters in Moscow

AUSTRALIA

GLOBAL

AMBITIONS AUSTRALIAN SHALE PROJECTS

are having their moment in the sun, but a failure to move quickly could leave some companies burned as buyers find cheaper gas alternatives elsewhere. The nation’s shale industry got a boost in August when the first gas production from an Australian shale well, Moomba 191, was tied into a gas plant run at the company town of the same name, operated by Santos. The well is in the Cooper basin, in the state of South Australia, an area already home to a series of conventional gas projects. These, along with the highly productive North West Shelf region off the state of Western Australia, are said to position the nation to become the world’s biggest LNG exporter by 2016, according to International Energy Agency estimates. FARM-IN QUICK AND CHEAP A number of exploration and production companies have taken an interest in Australian shale projects over the past 12 months, with a series of farm-in

AT A GLANCE

Australia wants to become the world’s biggest LNG exporter by 2016 Santos is operating the country’s first producing shale gas well Australia’s up against China for Asia Pacific market

96 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

Australian ambition is to become the world’s biggest LNG exporter by 2016. As shale gas production started this summer, the country down under may not be far from the top. BY ANDREW HOBBS* IN PERTH

deals being signed. The largest of these deals was Statoil’s decision to pay Canadian company PetroFrontier $210 million in June to farm-in to the company’s acreage over the Georgina basin, north of Alice Springs in Australia’s Northern Territory. Statoil senior vice president for new ventures, Atle Rettedal, said at the time that the company had acted in line with a strategy to acquire plays at low cost and at an early stage of development. This was a strategy embraced by a number of oil and gas majors which paid a premium to enter the US unconventional plays after they had been derisked by smaller players, Patersons Securities oil and gas analyst Alexis Clark said. ConocoPhillips farmed-in to projects run by Australia’s New Standard Energy, while Mitsubishi did a similar thing with local firm Buru Energy. Both of these companies were developing projects targeting the Canning basin, located onshore in the Kimberley region of northwest Western Australia. Both are seeking placements this year in a broadly supportive stock market. INTERIOR CHALLENGES While buying early could save money, the costs and challenges of developing Australian shale assets remain high.

This is due in many cases to isolation and lack of infrastructure, but also an abnormally strong Australian dollar. Despite being located in deserts roughly 770 kilometres northeast of Adelaide, the location of Moomba 191 in a developed field and close to existing facilities made the well more commercially viable. But the South Georgina and Canning basins are less developed – with drill rigs, pipelines, fracking crews and gas processing plants all in limited supply. Water is also scarce, with many in the industry saying that management of the nation’s valued groundwater reserves would be key to the future of the industry. The cost of drilling, fracking and completing a well in the Southern Georgina basin is between $8.3 million and $11.4 million, Patersons said. In addition, the cost of connecting the Canning basin to existing Western Australian pipeline infrastructure is estimated at between $621.7 million and $829 million. Connection to pipelines would give the projects access to the state’s domestic market – into which 15 per cent of all produced gas must be sold. Gas prices in that market hover between $7.2 and $9.3 per thousand cubic feet, well over the $4.1 price for gas on Aus-

*Andrew Hobbs is a journalist with Oil and Gas Australia.

GLOBAL UPDATE

The nation’s shale industry got a boost in August when the first gas production from an Australian shale well, Moomba 191, was tied into a gas plant. Pictured are Santos production operator Brendon Ireland and team leader Central Fields Khalee Field

PICTURE: DAVID MARIUZ

tralia’s more densely-populated eastern coast – served in part by the Cooper basin. Finance is not the only barrier to development in Australia’s eastern states. The state of Victoria has banned fracking across the state, while neighbouring New South Wales lifted a fiveyear moratorium last month to replace it with a new industry code of practice. Among those conditions is a requirement for the disclosure of chemicals used in fracking, a condition also enforced in Western Australia. KEEP THE WINDOW OPEN While the sun’s shining on the shale industry, Australian companies will have to expend a lot of effort to keep the window of opportunity open. With Australia’s six State and two Territory governments each producing its own shale regulations, companies looking to develop projects face an obstacle course of different requirements. The regulatory burden has long been a source of complaint for the Australian Petroleum Production and Exploration Association – the nation’s top industry body. The Association’s chief executive, David Byers, said in October that this and higher development costs were putting Australia in danger of losing its competitive edge for exports in the Asia Pacific region. Increasing efforts by China to develop its shale markets as well as the prospect of new gas supplies from east Africa are both applying pressure to companies working to develop Australian shale assets. “The window Australia has in which to become a major global gas supplier is already in danger of closing, and the industry has a huge amount to do to maintain momentum,” Mr. Byers said.

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PICTURE: SHUTTERSTOCK.COM

South Africa: one of the world’s richest shale basins, so far untapped

SOUTH AFRICA

GAS

IN THE KAROO A new study into the impacts of fracking is underway that could decide if the technology will be used in one of the world’s richest shale basins. BY GREG PENFOLD IN CAPE TOWN

THE SOUTH AFRICAN GOVERNMENT in September 2012 decided

to lift a moratorium on the use of hydraulic fracturing (fracking) to explore for shale gas in the country’s Karoo region. A government-appointed task team will now undertake a feasibility study as well as environmental and job creation impact assessments. Happiest with the announcement were Shell South Africa, Bundu Gas & Oil and Falcon Gas & Oil. These oil companies have all applied for exploration licences, although Shell SA has been the most prominent advocate of fracking. As Shell SA upstream general manager Jan Eggink

AT A GLANCE

The South African moratorium on fracking lasted 14 months The government ordered a feasibility study into fracking environmental impact WWF: gas companies underestimate mistrust

98 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

said at the time,“We are very pleased the government has taken this step.” He cited job creation, increased government tax revenue and South African energy security as the primary causes for their optimism. SHELL VS WWF Published in February 2012 and commissioned by Shell SA, the special report on the economics of South African shale gas cautiously states that there was “some quantitative support” for large gas finds having a “transformational” or even “game-changing” outcome for the South African economy. “Desktop estimates predict that the shale gas of the Southern Karoo area could be a reserve of 450 trillion cubic feet (12.74 trillion cubic meters), which would make it the fifth largest shale gas field in the world,” the report stated. The report was soon met with skepticism. “The study is speculative and designed to play-up the contribution of shale-gas with questionable assumptions of the size of the resource and its economic spin-offs - and without consideration for the social and environmental costs,” South African World Wildlife

Fund’s Living Planet Unit head Saliem Fakir said. The memo criticizes the study on a couple important grounds. First, the methodology used to arrive at a wellhead price (price paid at the mouth of a well for gas as it flows from the ground without any processing or transportation provided) doesn’t explicitly unpack environmental mitigation and other cost factors. The study also fails to account for “market, infrastructure development costs and surcharges for distribution”, costs that consumers or government would then have to defray. Finally, WWF cautions that “in the event that large reserves are confirmed, dollars will flow, strengthening the rand and potentially destroying local exports and jobs”. According to WWF’s Mr. Fakir, Shell is generally “failing to understand that public mistrust is high.” It may well be that South Africa’s economy could be totally transformed by shale gas. “Potentially 90 to 100 percent of the local gas could be shale and if the shale gas estimates are correct, we will probably be in a position to export gas,” said Chris Bredenhann of PWC. If fracking is ultimately banned, however, then shale gas is not going to economic to produce, he adds. A ban on fracking tops the agenda of activists such as the Treasure Karoo Action Group leader Jonathan Deal and his Nigerian ally Barry Wuganaale. They still have time to plan their campaigns because a monitoring committee to supervise fracking operations has yet to be set up.

SHALE GAS

investment

GUIDE/POLAND

Open me up WORLD MAP

SHALE

GOING INCREDIBLY

GLOBAL At the turn of the millenium, a Texas wildcatter discovered he could move gas through solid rock by applying pressure, sand and water. In the annals of history, 2012 will be remembered as the year his far sighted idea went global. From the UK to Australia to Argentina and back to China, his technology is about to lift previously inaccessible gas to the surface of the earth.

The Shale Gas Investment Guide is a bi-annual publication covering the world’s shale basins. Published out of Warsaw, Poland, the magazine covers shale from an investment analyst’s perspective. In contrast to traditional oil and gas publications, the editorial board takes a neutral position, drawing inspiration from Europe’s push to a low-carbon economy, while at the same time asking the question: can natural gas do the dirty work of coal?

Polish Shale Resource Base and Pipeline Network Q4/2012

NEW RULES OF THE GAME* P R O P O S E D R O YA LT Y R AT E S

R E S O U R C E B A S E E S T I M AT E S

TA X 5% (GAS) 25% (CASH FLOW)

S I Z E E S T I M AT E

T O TA L

40% (APPROXIMATE)

5 . 3 T C M A R I / E I A

FEE1

$7.60 (HIGH METHANE)

1 . 9 T C M P G I ( M A X )

FEE2

$6.30 (LOW METHANE)

Ministry of Environment Proposal

*CURRENT AS OF NOVEMBER 2012

364-768 BCM

PGI (PROB.)

Advanced Resources International (ARI) for the Energy Information Administration (EIA) Polish Geological Institute (PGI)

Global Shale Resources

SOURCE: POLISH GEOLOGICAL INSTITUTE, GAZ SYSTEM, MINISTRY OF ENVIRONMENT, ENERGY INFORMATION ADMINISTRATION, INTERNATIONAL ENERGY AGENCY, CIA WORLD FACTBOOK, HOPKINS-SCHLUM

s and Gas Trade

MBERGER, BRITISH GEOLOGICAL SURVEY, CLEANTECH POLAND RESEARCH

SHALE GAS

Q4/2012

investment

GUIDE/POLAND

* 2011 ** PGI MAX NUMBERS ROUNDED UP; NO EIA DATA FOR RUSSIA

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Pro-government supporters cheer during a debate in the Argentine Congress over the nationalization of Argentina’s biggest oil company YPF, May 2012.

ARGENTINA

FICKLE Capital is needed in Argentina to unlock one of world’s largest shale gas reserves. The South American nation has a hard time attracting it. BY JUDE WEBBER IN BUENOS AIRES

AT A GLANCE Argentina’s shale gas reserves are the third-largest in the world, after China and the US Expropriation of YPF from Spain’s Repsol makes it difficult for YPF to attract capital Americas Petrogas and Apache are developing the Vaca Muerta play

100 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

ARGENTINA HAS THE MAKINGS OF a stellar shale industry, but the

obstacles to turning the dream into reality are not getting any smaller. First and foremost among them is capital: in recent weeks, YPF, the recently nationalized oil company, signed a memorandum of understanding with US major Chevron to work together on shale gas. YPF’s CEO Miguel Galuccio has also discussed “the possibility of accelerating the development of unconventional resources in Argentina” with ExxonMobil. It’s safe to assume, however, that on YPF’s recent “non-deal” roadshow in Europe and the US, which the company billed as a “getting-to-know-you” affair since it does not expect to issue bonds internationally until probably next year, investors have been asking difficult questions. How much leverage Mr. Galuccio has to guarantee incentives for investors will prove key to turning investment pledges into reality. Some investors believe that given the bitter expropriation of YPF from

Spain’s Repsol in May, which triggered a flurry of lawsuits from the Spanish company, any bond issue is going to prove a hard sell. Industry players say the expropriation of YPF badly dented Argentina’s credentials as an attractive investment destination, even for oil companies used to doing business in difficult environments. New rules including a requirement for oil companies to file investment and production plans with the government only made things worse. STAGGERING OUTLAYS Repsol, which is suing Argentina to try to secure more than $10 bn in compensation, has also filed a suit against YPF in Madrid alleging unfair competition because YPF is actively seeking partners to develop the shale resources Repsol discovered. Repsol has warned oil majors that it will sue if they seek to invest in or exploit YPF’s unconventional oil and gas assets. Bernard Weinstein, associate director of the Maguire Energy Institute at the Southern Methodist University’s Cox School of Business in Dallas suggested in a recent paper that reducing taxes – either lowering the tax rate, or tackling export tariffs – could be one way to go. “Outside partners simply won’t drill

PICTURE: REUTERS/ENRIQUE MARCARIAN

difficulties investors face in repatriating earnings, restrictions on dollar purchases and a wider sense that the rules of the game are unpredictable and fickle in Argentina. “Argentina isn’t North America and it doesn’t have economies of scale, skilled labour and efficiency,” Mr. Economides added. SOMETHING’S GOING ON? Still, some companies, including Apache and Americas Petrogas, are active. Apache is drilling the first of three horizontal wells in the Vaca Muerta to see whether the play is economic. Argentina also has promising shale plays on the D-129 formation in Patagonia and the Los Monos play in the north. According to EIA, Los Monos could hold 59 tcm of gas in place with

GLOBAL UPDATE

in Argentina if they can do so elsewhere at a lower cost,” Mr. Weinstein said. That is a chilling reminder that although Argentina’s shale reserves are ranked as the third-biggest in the world - 77 trillion cubic meters (tcm) of gas in place of which 22 tcm is considered technically recoverable - investment will not come if the political environment is hostile. Michael Economides, a professor at the University of Houston’s Cullen College of Engineering who worked for oil services firm Schlumberger in Argentina, says the country will need $250 billion to develop the Vaca Muerta shale play in the western province of Neuquen over the next 15-20 years. That is, Mr. Economides says,“a figure impossible to envision” today, given the

Argentina will need a “staggering” $250 billlion to develop the Vaca Muerta shale play in the western province of Neuquen over the next 15-20 years 14.8 tcm technically recoverable, a potentially gigantic resource. Other companies engaged in exploring the Vaca Muerta include EOG, Chevron, Crown Point Ventures and Madalena. Hart Energy, a Texas-based consultancy, had envisaged the number of shale wells in Argentina to triple to some 9,000 around 2020, but the consultancy is now more cautious, expecting many players to remain in a waitand-see mode given the new regulations. Argentina’s inflation, running at an annual rate of 24 percent, further complicates the investment picture. YPF sold some $322 million of pesodenominated bonds in the local market in September, but at steep interest rates of up to nearly 18 percent. It’s expected to issue dollar-linked bonds domestically later this year, though the target market is small retail investors and the total raised is likely to be only $175 million. Argentina has its work cut out before it can woo deep-pocketed partners or institutional investors. Until then, the shale revolution is likely to remain on hold.

YPF’S SHALE GAS PUSH CAPEX

DRILLING

35,687 MM3

USD 6.5 bn

1,160 WELLS

32%

41%

27%

18%

21%

33%

42%

39%

35%

Facing multi-billion lawsuits, YPF is wasting no time in trying to convince investors that it can pull off an ambitious shale gas development program. The production, capex, and drilling figures on the left come from the company’s 2012 gas exploitation strategy that YPF wants to execute between 2013 and 2017. Shale Development

SOURCE: YPF

PRODUCTION

Tight Other

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Where is Britain going to turn to change its energy mix? David Cameron has some thinking to do

UNITED KINGDOM

SLOWED, STALLED? With traditional energy sources set to go into decline, shale gas is moving to the center of the debate about UK’s future energy mix. BY PAUL G ARRETT IN LONDON

AT A GLANCE Britain’s North Sea oil and gas resources, coal and nuclear capacity are in decline Cuadrilla Resources is probing the Bowland play that could hold 5.66 tcm of shale gas The UK’s Environment Secretary is pro-gas and renewables skeptic

102 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

BRITAIN HAS SHALE GAS and

needs low-carbon, affordable and indigenous fuel sources to help fill a looming energy gap. For decades now Britain has had the benefit of plentiful natural gas supplies. Like the Netherlands and Norway the UK has been able to exploit large reserves in the North Sea basin, but while Norway’s reserves are set to last for decades more, the UK’s continental shelf gas reserves are now in sharp decline. The decommissioning of 20 GW of old coal and nuclear power by 2020 will necessitate building new generation capacity. Given the European Union 2020 targets for carbon reduction and renewables generation, much hope has been placed in wind power, particularly offshore. But power generation from shale gas could represent a new and welcome element of Britain’s energy mix. EXECS SPEAK UP The UK’s Institute of Directors (IoD), an organization representing senior executives, published a report in September titled Britain’s Shale Gas Poten-

tial, which argues that shale gas could and should play a role, either as a “bridging fuel” between old coal and future renewables, or as a complement to offshore wind. “The IoD believes that the UK has a major opportunity to develop a cheap and reliable domestic source of energy, create jobs, reduce the need for gas imports, and improve the environment by replacing coal in electricity generation,” the report says. The authors Dan Lewis and Corin Taylor add that cheap gas-fired turbines powered by UK shale gas could also prove to be the perfect complement to renewable generation, “providing power when the wind isn’t blowing and the sun isn’t shining”. MEN AT WORK In 2010 the British Geological Survey estimated the UK’s onshore shale reserves at 5.3 trillion cubic feet or tcf (150 billion cubic meters or bcm). The Survey expects to revise this estimate upwards later this year, possibly to as high as 200 tcf (5.7 trillion cubic meters or tcm). Offshore reserves could be higher still, perhaps as high as 1000 tcf (28 tcm).

GLOBAL UPDATE

A L O T T O P L AY W I T H

We could be seeing the start of a shift in government policy away from offshore wind towards a new “dash for gas” UK operators are far more bullish. The UK developer Cuadrilla Resources says one shale field in the Bowland play outside Blackpool could yield 200 tcf (5.7 tcm), equal to national estimates from the Survey. Test wells have been drilled in the Bowland area, and the wells have been pressure tested. Flow testing has confirmed the presence of shale gas, perhaps in commercial quantities. PRESS ONWARD Shale resources also have been identified by Cuadrilla Resources in Dorset and Sussex in southern England, by Dart Energy in Scotland, by I-Gas in North Wales, by the Eden-UK Methane-Coastal consortium in south west England, South Wales and Kent, and by the Egdon-eCorp-Greenpark consortium in the East Midlands.

Depth*

Barnett Haynesville Woodford Bowland

Net thickness*

Approx average resource**

6,000-8,500

100-600

240

10,500-13,000

200-300

113

6,000-11,000

120-200

5,200-10,700

3967

1391

* meters ** bcm/sq.km

Britain could have the perfect conditions to emulate the US shale gas story. The Bowland play is five to ten times thicker than best known American plays of Barnett or Haynesville. The amount of shale gas, as calculated per square kilometer, might be six to a staggering 16 times bigger than in the US. Population density, environmental concerns and mineral ownership rights of the state could get in the way, however.

The British government is of two minds about shale gas. The appointment in September of Owen Paterson as Environment Secretary in the British government could be the start of a shift in government policy away from offshore wind and towards another “dash for gas.” But Energy Secretary Ed Davey recently told the Confederation of British Industry that it was a “myth” that shale gas a “better, cheaper and easier way” of getting energy than nuclear or wind. The geological conditions in Britain are different to those in the US, and this, along with greater population density, could make the gas more difficult to extract. In the UK, planning laws are also more stringent than in the US and because mineral ownership rights in Britain belong to the Crown Estate, not private landowners as in the US, there may be less of an incentive for landowners to permit shale drilling. Another potential obstacle is environmental concerns. In Britain an active anti-fracking environmental movement maintains that fracking can cause small earthquakes and contaminate the water table. Tremors that occurred in the Blackpool area last year during test drilling caused activity there to be temporarily halted. Cuadrilla, the operator on the location, thus became one of the first

SOURCE: INSTITUTE OF DIRECTORS

PICTURE: ISTOCKPHOTO.COM

Play

European shale gas companies to face up to a problem that the public has long been concerned about. “We believed that we weren’t responsible. But then we had another [tremor], and we realized it was us. So we had to stand up in front of the public and acknowledge that,” Cuadrilla’s CEO Mark Miller told an industry conference in London in September. Mike Stephenson, head of energy science at the British Geological Survey, suggests that monitoring of UK fracking operations might go some way to addressing public concerns , but he thinks it’s extremely unlikely that fracking itself could pollute aquifers with methane. “The distances are just too great. The aquifers that provide groundwater are only a few hundred feet (around 200 meters) deep. The Cuadrilla fracking has been about five kilometers beneath Blackpool - so there’s a huge amount of hard, dense rock in between. I can’t imagine how the gas could make it through this and into aquifers,” Mr. Stephenson told Planet Earth magazine. A shale gas breakthrough in the UK is inevitable, suggests a veteran advocate, Nick Grealy of NoHotAir.co.uk. “The shale denial in government, NGOs and the green business lobby is sounding increasingly separated from policy and reality,” he said.

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EUROPEAN UNION

SET TO REGULATE A CONSENSUS IS EMERGING in

Brussels that the EU has a role to play providing a coherent regulatory framework for shale gas that recognizes its potential environmental impacts and importance as a new energy source. “I think it’s pretty clear we will have a policy on shale gas,” said Joe Hennon, spokesman for EU environment commissioner Janez Potočnik. “It’s quite likely that in 2013 you’ll see some kind of proposal coming from the Commission. It may be a standalone piece of legislation or it could be amendments to existing legislation,” Mr. Hennon said. Confirmation of an EU action on shale gas and who will lead it should come in late October, when the Commission is due to decide its work plan for 2013. Mr. Potočnik is reportedly keen to take the reins, on the basis that the work ahead will consist primarily of amending environmental legislation. EU sources say he has considerable support. Mr. Potočnik, EU energy commissioner Günther Oettinger, and EU climate commissioner Connie Hedegaard had the first high-level meeting on shale gas early in October. A public consulta-

AT A GLANCE The EU is on course to put shale gas E&P under control; the effort will be led by environment commissioner Shale gas production can prevent EU gas imports from growing to 80 percent of overall consumption EU green lobbies want a ban on shale gas production

104 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

SHALE GAS

Shale gas is a welcome addition to the EU’s energy mix, provided all potential environmental risks are put under control. BY S O N J A VA N R E N S S E N I N B R U S S E LS

tion on potential EU action will probably follow in November, says Mr. Hennon. The Commission also has two shale gas studies in the pipeline. NO, WE’RE NOT AGAINST There is no question among EU policymakers that shale gas could be an important new energy source for Europe. Gas plays a central role in all of the Commission’s 2050 energy scenarios. In one of a trio of shale gas reports released by the Commission in September, the authors concluded it could help Europe retain its energy imports at the current level of around 60 percent of overall consumption (vs. 80 percent by 2030 as per International Energy Agency predictions). Shale gas could also support further liberalization of the EU gas market, pointed out Marie Donnelly, a director at the Commission’s Directorate General Energy during the European Gas Policy Forum in Brussels in early October. This would happen by bringing online new suppliers and enhancing competition. Finally, shale gas could help the EU cut its greenhouse gas emissions and meet its climate targets by replacing coal. While responsible for more emissions than conventional gas, shale gas could provide a slight advantage over

pipeline imports, according to the second of the Commission’s September trio of shale gas reports. All these potential advantages however, must be set against a long list of environmental risks. The third of the Commission’s reports identifies a “high” risk of water contamination in particular. The authors identify gaps in the EU’s environment policy framework that need to be closed. As the Commission lays the groundwork for action next spring, the European Parliament is also in the process of establishing its position on shale gas. It will vote on two reports – one prepared by its energy and industry committee (Itre) and one by its environment committee (Envi) – in November. WIN THE PEOPLE “The impacts of shale gas on the economy of Europe are huge – they’re much bigger than the impacts on the environment,” said MEP Niki Tzavela, the Itre report’s Greek rapporteur. “We must stop looking at shale gas as a threat but as an opportunity,” she also said. Ms. Tzavela’s report recognises the environmental and health risks shale gas could pose – and she does not oppose “realistic” rules to manage these – but the emphasis must be on its potential, she says: “The EU can be the

main vehicle for developing clean shale gas.” Tzavela urges Europe to learn from the US. In the environment committee, rapporteur MEP Bogusław Sonik, a centreright Pole, believes that the EU should revisit relevant existing laws but it does not need a “special law” on shale gas. “There is no special law for extracting coal,” he said. Mr. Sonik advocates drawing up best available technology reference documents and clear definition of liability in case of an accident. The parliament’s petitions committee meanwhile is examining complaints filed against shale gas exploration in various member states. In early October, Ms. Donnelly said that the Commission’s best estimate of technically recoverable European shale gas reserves, based on a literature review, is 15 trillion cubic meters. The economically recoverable potential re-

There is no question among EU policymakers that shale gas could be an important new energy source for Europe. Gas plays a central role in all of the Commission’s 2050 energy scenarios.

PICTURE: SZYMON SZCZEŚNIAK

GLOBAL UPDATE

Bogusław Sonik MEP: revisit regulations, reference BAT, define liability

mains “unclear” however, she added. All stakeholders in Brussels agree that the debate on shale gas is still in its infancy in Europe and a consensus is still some time way. Poland is in the lead and reports a clear environmental record so far. Companies such as Exxon Mobil say the environmental risks are manageable and they agree with mandatory disclosure of fracking fluids, for example. NGOs like Friends of the Earth continue to demand a blanket ban (see p. 75-79). Public acceptance may prove decisive for shale gas in Europe, say Commission, the EP and industry stakeholders alike. The EU will not decide whether or not Europe pursues shale gas -member states are masters of their own energy mix after all - but decisions on a framework to manage it could help decide all-critical public support.

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| 105

BULGARIA

THE STREET POLITICS

OF OIL AND GAS

If the street doesn’t like shale, PM Boyko Borisov (right) won’t like it, either

PICTURE: PARLIAMENT OF BULGARIA

Bulgaria’s ruling party banned fracking upon seeing street protests against the technology. With elections looming next year, the ban looks set to remain and shale gas development stalled. Shale gas development continues to suffer setbacks due to the populism of Citizens for European Development of Bulgaria (GERB), the ruling party led by the prime minister Boyko Borisov. It’s unlikely that the GERB-enforced ban on hydraulic fracturing (fracking) will be reviewed, let alone lifted, before the summer of 2013, when the next parliamentary elections take place. The popular support for GRB is hovering at 20-22 percent, but the opposition’s has been rising in the polls recently. Bulgaria is only able to cover 15 percent of its overall domestic gas consumption of 2.5-3 billion cubic meters (bcm) annually thanks to the exploration and production (E&P) efforts from British company Melrose Resources (now merged with Petroceltic). The remaining 85 percent of Bulgaria’s gas demand is covered by Russia’s Gazprom. “I think that Bulgaria is just going to waste a lot of time [because of the fracking ban]. We eventually will have to explore the potential shale gas plays to determine whether the gas

is there and whether the production is possible in the future,” said Valentin Stojanow, a consultant and a former advisor to the energy policy committee in the Bulgarian parliament. He adds that prospecting bears little risk whereas the risks of production keep getting less significant as technology advances. Critics of Mr. Borisov charge the prime minister with making strategic energy decisions under the pressure of street protests. This year’s rallies against shale gas E&P in Bulgaria gave grounds for Mr. Borisov - ever sensitive to the vox populi - to go ahead with the ban on fracking that in turn led to US oil and gas major Chevron to give up on shale gas in Bulgaria. Political will is lacking in Bulgaria and the country’s oil and gas sector isn’t keen to embrace shale gas, either. Bulgaria’s national gas company Bulgargaz could lead the effort to develop shale gas but is heavily in debt - to no other creditor than the monopolist supplier Gazprom. Nikolay Marchenko in Sofia

BRAZIL

AMAZONIAN

After discovery of huge oil reserves offshore, Brazil is now looking at shale gas as a means to complement the country’s ambitions to become a regional oil and gas power. Brazil’s giant pre-salt oil and gas reserves have long overshadowed its promising shale reserves but Royal Dutch/Shell announced plans last month to drill the country’s first shale gas well. The plans were announced by Andre Araujo, Shell’s president in Brazil. The company will target the Sao Francisco basin in the state of Minas Gerais in the south east. “We’ve done our seismic work and we’ll drill our first well next year,” Mr. Araujo told reporters at an oil and gas conference in Rio de Janeiro. KPMG, a consultancy, reckons that Brazil has the potential to be the second biggest shale producer in Latin America and the US Energy Information Administration ranks Brazil as one of the world’s most promising regions, with shale gas reserves estimated at some 6.4 trillion cubic meters of shale gas. That is less than a third of the reserves in neighbouring Argen-

106 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

PICTURE: PRESIDENTIAL OFFICE OF BRAZIL

APPETITE President Dilma Rousseff , the driving force of Brazil’s oil and gas push tina, and well behind the US and China, but still more than Poland, one of the leaders in shale gas prospecting outside of the US. Brazil’s National Oil, Gas and Biofuels Agency (ANP) has highlighted shale gas deposits in three onshore sedimentary basins – Parnaiba, Parecis and Reconocavo – but Sao Francisco is considered the new frontier in a country where the industry first flirted with shale more than half a century ago. Brazil also has large shale oil resources. Shell says it is too early yet to estimate potential production, but the exploration comes in at a moment when the company’s gas production is on the way to overtake its oil output.

Brazil is also starting to lay the foundations for a future ramp-up in shale gas: politicians have acknowledged the country must improve the regulatory framework, and have been studying the US approach in the hope of learning lessons. ANP is, too, conducting an in-depth survey of the country’s shale gas potential. “Brazil is committed to developing its shale gas resources, but production will likely be slow to come,” Marco Antonio Almeida, secretary of oil, natural gas and biofuels at Brazil’s mines and energy ministry, said after talks with visiting officials from the International Energy Agency. Jude Webber in Buenos Aires

MEXICO

PICTURE: FRONTPAGE/SHUTTERSTOCK.COM

GLOBAL UPDATE

It’s not about rigs. It’s about protecting your workers

NO WORK AFTER DARK

Mexico’s violent conditions are preventing the country from replicating the shale gas success story north of the border.

Mexico has shale gas reserves estimated at up to 19.2 trillion cubic meters (tcm), making the resource base estimate fourth largest in the world behind China, the U.S. and Argentina. With demand rising and supplies bottlenecked because of inefficient infrastructure, shale gas could alleviate Mexico’s energy woes. Though, an extra difficult condition to overcome: reining in drug cartels. The bulk of Mexico’s shale resources are an extension of the Eagle Ford play in Texas. These oil and gas deposits are located in the northern states of Chihuahua, Coahuila, Nuevo Leon and Tamaulipas. Part of the Eagle Ford formation, Mexico’s Burgos basin, is the richest of Mexico’s shale gas plays with an estimated resource between 765 and 2,463 billion cubic meters (bcm). Production of shale in Mexico so far has been limited to just one well, Emergente-1, completed in February of 2011 by state owned petroleum firm Pemex. The Emergente-1 well has proven to be viable, producing 82,000 cubic meters of gas per day. Pemex has scheduled four more wells (Montanes-1, Nomada-1, Navajo-1, and Takama-1) for completion by the end of the year in the same Eagle Ford play. The company plans to spend $200 million (€154 million) on exploration in the short term, which will translate into drilling 170 wells in the next four years. Still, Mexico must rectify several impedi-

ments to exploration if the country hopes to take advantage of shale gas. Like many nations with shale gas potential and problematic bureaucracy, Mexico is a long way from the production levels seen north of its border. Aside from political issues, the country’s hydrological resource base is a challenge. In the arid conditions of northern states, the majority of water available in the region is already taken up by the agricultural sector. Mexico must solve these issues of water scarcity and excessive bureaucratic abundance if production is to reach industrial levels. Beyond these problems, Mexico will need to overcome a unique challenge to the commercial production of shale gas. One of the most violent drug cartels in the world, the Zetas, operates in a territory covering a large portion of the Mexican part of the Eagle Ford shale play. Inability to protect equipment and personnel from attacks by the cartel has been evident. In what is believed to be the work of the Zetas, eight Pemex

employees vanished in 2010, as did two Halliburton contract workers in March 2012. "Many companies that were active in the danger areas have stopped operations until Pemex or the government can provide security," said an employee of one Tamaulipas-based company, according to the Houston Chronicle in September 2012. "In places where there have been incidents we don't operate anymore. When darkness falls, we stop wherever we are,” he added. With fracking crews and equipment valued at a premium, the Mexican government will have a hard time enticing companies to develop its shale resources even if the other issues of bureaucracy and water are solved. Optimism might be high simply due to the size of the shale gas estimates. But until the violence on the ground gets resolved, the dream of cheap, clean energy in Mexico will remain simply that, a dream. Keith Luke

One of the most violent drug cartels in the world, the Zetas, operates in a territory covering a large portion of the Mexican part of the Eagle Ford shale play

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UKRAINE

PREPARING FOR

DIVORCE Forget Poland. It’s Ukraine that has Europe’s biggest shale gas potential, at least according to Ukrainian officials. Representatives of the Ukrainian government say that the country has the richest shale gas deposits in Europe, estimated at about 1.2 trillion cubic meters (tcm). Kiev is waking up to the potential that the Ukrainian shale gas play may offer and has now started to identify best locations where production could launch. As in the case of other Central and Eastern European states, like Poland or Lithuania, the Ukrainian shale gas push is fuelled in the first place by the necessity of replacing the dominant supplier Gazprom with cheaper domestic gas. The difference in price could be striking. If Ukraine’s current gas contracts, signed in 2009, remain in force, Kiev will be paying $400 per 1,000 cubic meters of gas from Russia. Domestically produced gas from shales could cost about half of the Russian price, a definitely favorable condition even if still more than twice the price of US gas. There’s a long way before shale gas production reduces the gas bill. But willing as it is to go ahead with shale gas development, Kiev doesn’t really know how much of the resource there is underground. Current estimates range wildly from one to 20 trillion cubic meters (tcm). Even if the minimum of one tcm is recoverable, Ukraine could secure 25 years of gas supply without without having to import expensive gas from Russia. But that’s only assuming that shale gas production kicks off in earnest. A more realistic

Ukrainian president Victor Yanukovych and his Polish counterpart Bronisław Komorowski: Europe’s shale gas leaders?

scenario is that in the short to mid term, shale gas production will cover 25 percent of Ukraine’s demand, still enough to put pressure on Gazprom’s pricing. Ukraine could start domestic production of shale gas from reportedly promising plays located near the border with Moldova. Kiev is looking forward to cooperate with Moldova where the national gas company Moldovagaz is controlled in 66 percent by Gazprom - in joint prospecting of shale gas in the areas in question. Shale gas is only one, albeit rather important, element of Ukraine’s strategy to disen-

A realistic scenario is that in the short to mid term, shale gas production will cover 25 percent of Ukraine’s demand, enough to put pressure on Gazprom’s pricing. 108 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

gage from costly political and financial relationships with Gazprom. Valentin Zemlyansky, independent expert and former speaker of Ukraine’s national gas company Naftogaz says that Ukraine should be closely watching Polish shale gas developments, not least because of similar geological conditions in both countries. Because it’s still early in the game in Ukraine, however, Kiev cannot neglect development in other areas, he adds. “I think that Ukraine has to pay more attention to the development of conventional gas plays in the Azov Sea and the Black Sea, for example,” he said. In line with Kiev’s long term energy strategy, Ukraine needs to advance the development of conventional gas in the Black Sea and the Sea of Azov, build an LNG terminal, prepare to receive gas supplies from neighboring EU countries (Hungary, Slovakia, Poland, Romania), as well as incentivize consumers to switch to alternative energy sources, all while lowering gas and coal consumption. A tall order indeed. Nikolay Marchenko

PICTURE: REUTERS/ALIK KEPLICZ/POOL

Ukraine is another eastern European country hoping that huge shale gas reserves will end Gazprom’s domination as a supplier or at least pressure the Russian giant to lower prices.

TURKEY

SPILLOVER Shale gas estimates for Turkey are promising enough for majors like Shell to have started drilling. Lack of infrastructure and an unstable political situation could impede shale gas development. Turkey has more than a pittance of shale gas located within its borders. The country may count 425 billion cubic meters (bcm) of estimated recoverable reserves. There are other unconventional resources as well, such as 3,000 bcm of coalbed methane. If these estimates are confirmed, this wealth of resource could place Turkey on the list of hopefuls - along with China, Argentina and Poland - looking to replicate North American production of unconventional oil and gas. Right now, this Europe-Asia transit country is a net importer of natural gas, as its production potential is minimal and anyway declining. Conventional development of hydrocarbons is concentrated around the Hakkari Basin in the south-east. Production is increasingly coming from ageing wells that are providing decreasing yields. There is also development

in the Black Sea region but this is currently not at any significant levels. Overall, this dearth of supply, a mere 55,110 oil barrels (bbl) per day up against a demand of 646,300 of bbl/day, is met by costly imports. With its own shale gas, Turkey could alleviate a crippling debt caused by oil and gas imports from Russia, Iran and Azerbaijan and LNG imports from Algeria and Nigeria. In mid-2011, this debt stood at $86.6 billion (€66.5 billion) and increases on average $4 billion (€3 billion) for every $10 (€7.5) increase in the price of oil. Royal Dutch/Shell is already active in Turkey, drilling in the Saribugday-1 field in the south east. Shell only began exploration in Septem-

ber 2012, however, and has yet to release any information about the potential for commercial production. Others, like Exxon Mobil, have also made statements of interest in exploring for shale gas in Turkey. There are caveats. Currently, the fundamental stability of Turkey’s south eastern regions where shale gas plays are mostly located - is at stake due to developing cross-border conflicts with Syria. The Turkish government may be optimistic about the prospects of shale, but to help advance production, its leaders will need to face up to the results of several decades of relying on imports. Keith Luke

LITHUANIA

IN YOUR FACE,

GAZPROM

Lithuania’s chief port Klaipeda: taking in US shale gas soon?

PICTURE: ISTOCKPHOTO.COM

Unlike the more diplomatic Poland, Lithuania is making it clear that the onset of shale gas exploration has the ultimate goal to get rid of Gazprom. There’s quite a lot going on between Lithuania and the country’s gas supplier, the Russian energy giant Gazprom. Lithuania is looking ahead to disentangle itself from the monopolist, hoping that their yet unproven shale gas reserves will eliminate whatever demand there’s going to be for Gazprom’s gas in the next 30 to 40 years. An international tender to explore potential shale gas plays is currently underway. The tender concerns two areas: Šilutė Tauragė (1800 km2) in western Lithuania and Kudirka-Kybartai (281 km2) in the southwest, near the border with Russia and Poland. “The winner will receive the right to explore in the areas in question, but also assume the entire risk,” said Lithuanian prime minister Andrius Kubilius in a government release. According to the Lithuanian energy ministry, the areas in question offer opportunities for oil shale and conventional hydrocarbon exploration and production. Tender bids must be submitted within four months from the date of the tender announcement. Results are expected to be announced

in the first quarter of 2013. Interest in the Lithuania shale gas has been expressed so far by such companies like the Polish-Danish company MinijosNafta, owned by Poland’s Lotos local subsidiary Lotos Geonafta and the US major Chevron. Lithuania’s State Geological Service estimates that the country could hold up to 585 billion cubic meters (bcm) of gas, though technically it is possible to extract 10 to 15 percent of these reserves (60-90 bcm). “Lithuania uses about 3.4 bcm of gas annually. If we have as much shale gas as anticipated, we’re going to be able to part ways with Gazprom for three decades,” said Mr. Kubilius. Not waiting around for any domestic shale gas production to take place, Lithuania is already developing gas supply alternatives. They have to do with shale gas too: an LNG terminal is underway in the country’s chief port Klaipeda to take in gas from Cheniere Energy. Cheniere Energy is a US company that plans on changing around its business model from gas imports to exports following the rise of shale gas. Nikolay Marchenko

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PICTURE: ISTOCKPHOTO.COM

SHALE IN A REGIONAL

GLOBAL UPDATE

Turkey: political unrest is no help to shale gas development

GERMANY

PROCEED WITH CARE

PICTURE: ISTOCKPHOTO.COM

Unlike neighboring France, Germany’s environmental concerns about fracking seem to be leading Berlin away from an outright ban and toward tight controls on the use of the technology. According to the 2012 study from the German Federal Institute for Geosciences and Natural Resources (BGR), Germany could have up to 2.3 trillion cubic meters of shale gas available for production. According to BGR, the total amount of shale gas deposits could be even 10 times higher. The largest shale gas potential is in the North German and the Upper Rhine Graben basins. BGR’s findings dwarfed the 2011 estimate from the US Energy Information Agency, which put the German shale gas production potential at mere 10 percent of the BGR’s current estimate. According to the BGR study, production of shale gas could make up for the depletion of currently exploited natural gas resources in Germany and help preserve natural gas’ place as an important component in the German energy mix. There’s a long road ahead for Germany, however, before any gas will flow from shales. A study conducted by the German ministry of environment in 2012 proposes a ban on hydraulic fracturing (fracking) near drinking wa-

ter reservoirs and mineral springs. Operators would also be required to conduct environmental impact studies of fracking activity. “The study’s results and recommendations are a major step forward in the discussion about fracking. All concerns must be alleviated before fracking is used,” Germany’s minister of environment Peter Altmaier told Bloomberg in September 2012. Shale gas exploration concession holders like BNK Petroleum and ExxonMobil, welcomed the study. According to Bloomberg, exploration in proximity to water reservoirs or mineral springs was never in their plans, as the industry has always feared that Germany will follow the French example of a total ban on the use of fracking. The French might be concerned, but fracking has been used for decades to tap into conventional gas in Germany. Shale gas exploration could address some concerns in Berlin about relying on gas imports from Russia, which covers 40 percent of German gas deWojciech Kość mand.

THE BAN

Reduce nuclear, keep ban on shale gas - where is France’s energy strategy headed?

THAT WON’T GO AWAY

Sarkozy or Hollande, left or right, there’s no place for shale in France’s energy policy. In France, shale gas exploration and production are predominantly environmental issues. The best proof of that came in September when the French authorities held the first annual conference on environmental policy. Energy, biodiversity, health, financing issues were the top priorities discussed during the event. The government’s position on shale gas came very early on. At the opening ceremony, French president François Hollande confirmed that a ban on shale gas exploration would remain in place. The French government imposed a moratorium on hydraulic fracturing (fracking) due to concerns about environmental pollution in February 2011. In July 2011, a new law was passed banning fracking and cancelling shale gas exploration permits. The French government was convinced that fracking was not a technology that required

110 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

detailed research to determine whether it’s harmful to the environment or not. “This was a preventative measure, not a precautionary one, since the risks posed by fracking are well known,” said French MP Philippe Tourtelier, as reported by ENDS Europe environmental news service in September 2012. Mr. Hollande also reaffirmed his election commitment to lower France’s reliance on nuclear power from 75 percent of electricity generation to 50 percent by 2025. The supporters of shale gas in France quickly chimed in after Mr. Hollande’s statement about reducing the role of nuclear power and apparent lack of strategy to substitute for the

diminished nuclear capacity. Laurence Parisot, head of Medef, the employers’ federation, said that leaving no shale gas option for France “would be very dangerous for the economy and for the country,” the Financial Times reported. Shale gas could potentially reduce France’s reliance on imports from Algeria, Russia, and Norway. According to an estimate from the US Energy Information Administration, there might be five trillion cubic meters of gas in the French shales. But an EIA’s estimate for Poland, based on the same methodology, was revised considerably by the Polish geological survey. Wojciech Kość

PICTURE:© PRÉSIDENCE DE LA RÉPUBLIQUE - PASCAL SEGRETTE

FRANCE

112 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

SHALE GAS

investment /POLAND

WHO’S WHO

GUIDE

WHO’S

WHO

IN CONCESSIONS OPERATORS 3Legs Resources l Aurelian l BNK Petroleum l Chevron l ConocoPhillips l Cuadrilla Resources l Dart Energy l Emfesz l Eni Spa l ExxonMobil l Hutton Energy l LNG Energy l LOTOS l Mac Oil l

p.114 p.114 p.115 p.115 p.116 p.116 p.117 p.117 p.118 p.118 p.119 p.119 p.120 p.120

Marathon Oil l Mitsui l Nexen l Petrolinvest l PGNiG l PKN Orlen l RAG l San Leon Energy l Sorgenia l Stena l Talisman l Total l Wisent Oil & Gas l INVESTORS l

p.121 p.121 p.122 p.122 p.123 p.123 p.124 p.124 p.125 p.125 p.126 p.126 p.127 p.127

The Who’s Who section is dedicated to shale gas exploration companies and their shale gas concessions exclusively. According to Polish law only one entity may be a concession holder. This is why especially in cases of JVs, dedicated holding companies are formed. We list companies as having stake in those dedicated holding companies rather than concessions themselves. Holding companies in Poland are typically limited liability companies (Sp. z o.o.)

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CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Kamlesh Parmar, CEO

Lane Energy Exploration Lane Resources Poland

Kamlesh Parmar Clive Needham Christine Holt Paul Quirk

ul. Chmielna 13A 00-021 Warsaw (+48) 22 505 91 77 www.3legsresources.com

CONCESSIONS HELD Name Acreage Wells (km2)

S TA K E I N Concession Interest Concession Name (%) Holder

Cedry Wielkie Stegna Godkowo Glinica-Psary Bytom-Gliwice Dąbie-Laski*

904

Damnica Lębork Karwia

1,038

584

895

809

625

ConocoPhillips

CONCESSION AREA

UKRAINE

COMMENT: “The 2013 exploration programme is expected to cost £13.7 million net to 3Legs for the period up to the end of

2013, including an extensive testing programme for the Strzeszewo LE-1 well and for a minimum of two wells planned for 2013.” - October 18, 2012 Press Release

* Concessions in red are being relinquished

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Anna SrokowskaOkońska, Country Manager

Aurelian Oil & Gas

Rowen Bainbridge Paweł Chałupka John Smallwood Robin Storey

ul. Śniadeckich 17 00-654 Warsaw (+48) 22 629 90 37 www.aurelianoil.com

CONCESSIONS HELD Name Acreage Wells (km2) Prusice Kotlarka

758

213

“The proposed merger between Aurelian and San Leon creates a leading upstream position in Poland”

CONCESSION AREA

Rowen Bainbridge, Chief Executive of Aurelian

UKRAINE

COMMENT: “The Boards of San Leon and Aurelian are pleased to announce that they have reached agreement on the terms of a recommended merger pursuant to which San Leon will acquire the entire issued and to be issued share capital of Aurelian.” - November 12, 2012 Press release

114 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

HOLDING COMPANIES

BOARD MEMBERS

Kelly Brezger, General Manager

Indiana Investments Saponis Investments

Ford Nicholson Wolf E. Regener Bob Cross General Wesley K. Clark Eric Brown Victor Redekop

ul. Wiktorska 63 02-587 Warsaw (+48) 22 540 17 30 www.bnkpetroleum.com

CONCESSIONS HELD Name Acreage Wells (km2) Starogard Słupsk Sławno Darłowo Bytów Trzebielino

878

919

1,154

1,152

1,169

1,167

WHO’S WHO

CONTACT INFO

CONCESSION AREA

“First and most important: BNK is here for the long term” Kelly Brezger U.S. Poland Business Summit, July 2012 UKRAINE

COMMENT: “The Company has scheduled to re-enter and complete the Gapowo B-1 well after full concession modification approval has been received, allowing the drilling of horizontal wells.” - Corporate website, 2nd Quarter 2012 results

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

John Claussen, Country Manager

Chevron Polska Energy Resources

David Jones Marian Sewerski John Claussen George Psefteas Derek Magness

Aleja Wyścigowa 6 02-681 Warsaw (+48) 22 460 10 00 www.chevron.com

CONCESSIONS HELD Name Acreage Wells (km2) Zwierzyniec Kraśnik Frampol Grabowiec

824

1,194

1,178

1,195

CONCESSION AREA

“Chevron is committed to our exploration program, so our plans haven’t changed” John Claussen U.S. Poland Business Summit, July 2012

UKRAINE

COMMENT: Fierce objections of local communities to Chevron’s exploration plans have been highlighted by the media in Q4 of 2011 and Q1 of 2012. More protests slowed down spudding of the Zwierzyniec well by a month. - Cleantech Poland

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CONTACT INFO

HOLDING COMPANIES

Laurie St Aubin, Country Manager

ConocoPhillips E&P Poland ConocoPhillips Poland BV Lane Energy Poland

Rondo ONZ 1 00-124 Warsaw (+48) 22 209 04 00 www.conocophillips.com

CONCESSIONS HELD Name Acreage Wells (km2) Damnica Lębork Karwia

784

1,062

209

BOARD MEMBERS

CONCESSION AREA

“An active exploration programme is being planned for 2013” Laurie St Aubin UKRAINE

COMMENT: “In September 2012 ConocoPhillips exercised its option to acquire a 70% interest in Lane Energy Poland and take over operatorship of the three Western Baltic Basin concessions.” - Laurie St Aubin

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Marek Madeja, Country Manager

Cuadrilla Poland

Mark Miller Marek Madeja

ul. Syrokomli 5C 03-335, Warsaw (+48) 22 818 97 www.cuadrillaresources.com

CONCESSIONS HELD Name Acreage Wells (km2) Międzyrzec P. Łuków Pionki

1,174

628

827

CONCESSION AREA

“Today, [Nov 12] Cuadrilla has been awarded ‘Pionki’ concession in the Lublin trough” Marek Madeja UKRAINE

COMMENT: “What’s worked well for us is an “open house meeting” and not a “public town hall” type meeting. We’ll open a room up to the public for four to five hours. Those people who would be quiet at town hall meetings find their voice, and can ask us questions.” - Mark Miller, CEO, London, Unconventional Gas Conference, Sept 25 2012

116 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

HOLDING COMPANIES

BOARD MEMBERS

Zbigniew Żuk, Country Manager

Dart Energy (Poland)

Eytan Uliel Douglas Bain John McGoldrick Mark Lappin

Aleje Jerozolimskie 56C 00-803 Warsaw (+48) 22 630 22 90 www.dartenergy.com.au

CONCESSIONS HELD Name Acreage Wells (km2) Milejów

372

WHO’S WHO

CONTACT INFO

CONCESSION AREA

“Chosing a location for a well site on our Milejów concession next year is under discussion” . Zbigniew Zuk

UKRAINE

COMMENT: “Dart has only one shale concession, Milejów, which is also for CBM exploration. All exploration plans for next year are under discussion.” - Zbigniew Żuk

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Michał Kołodziejek, Country Manager

DPV Service

Kirill Kasatkin

Aleje Ujazdowskie 41 00-540 Warsaw (+48) 22 319 57 20 www.dpvservice.pl

CONCESSIONS HELD Name Acreage Wells (km2) Białobrzegi-R. Korczmin Lipsko Radom Opole Lub.

774

629

1,192

895

388

“Recently, DPV Service has started acquiring 2D 3C seismic data in the area of 400 km on shale gas prospecting and exploration concessions”

CONCESSION AREA

DPV Website

UKRAINE

COMMENT: Based on information provided in their concessions, DPV should have two wells drilled by March 2013, one on Białobrzeg Rusinów and one on their Opole Lubelskie concessions. - Cleantech Poland

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CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Gianni Di Giovanni, VP External Com.

Eni Polska

Enrico Cingolani Roberto Castriota Aldo Napolitano

Aleje Jerozolimskie 30/7 00-024 Warsaw (+39) 06 598 220 30 www.eni.com

CONCESSIONS HELD Name Acreage Wells (km2) Malbork Elbląg Młynary

999

574

395

CONCESSION AREA

“In Poland, we have completed the drilling and the coring of three wells” Luca Bertelli, Senior VP Upstream Seminar London, UK UKRAINE

COMMENT: “Cores have been extensively analyzed in our labs to understand the mineralogical composition and textural setting of the shales. We have drilled our first horizontal drain and started fracking.” - Luca Bertelli, Upstream Seminar, London, UK

EXXONMOBIL

CONCESSIONS HELD Name Acreage Wells (km2) Wołomin Legionowo* Mińsk Maz.* Wodynie-Ł. Chełm Werbkowice*

1,180

978

1,085

978

1,162

995

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Adam Kopyść, Public & Govt Affairs Advisor

ExxonMobil Exploration and Production Poland ExxonMobil Exploration and Production Poland Energia Chełm ExxonMobil Exploration and Production Poland Energia Zamość

Armando Benavides James Johnston Kevin Biddle

Ul. Chmielna 85/87 00-805 Warsaw (+48) 22 586 18 00 www.exxonmobil.com

“There have been no demonstrated sustained commercial hydrocarbon flow rates in our two wells in the Lublin and Podlasie basins” Adam Kopysc

CONCESSION AREA

UKRAINE

COMMENT: “ExxonMobil has submitted applications to the Min. of Environment regarding the relinquishment of two exploration concessions in the Podlasie Basin (Legionowo and Mińsk Mazowiecki) and one, together with its partner (Total E&P Poland B.V.), in the Lublin Basin (Werkowice). It is too early to comment on the future of our remaining three concessions.” - Adam Kopyść

* Concessions in red are being relinquished

118 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

HOLDING COMPANIES

BOARD MEMBERS

Pawel Żuk, Country Manager

Strzelecki Energia

David Messina Charles Morgan

WHO’S WHO

CONTACT INFO

Aleje Jerozolimskie 81 02-001 Warsaw (+48) 22 695 02 70 www.huttonenergy.com

CONCESSIONS HELD Name Acreage Wells (km2) Prabuty Poł. Koło Poddębice Łódź Zachód Oleśnica Wieluń

481

1,172

645

809

1,161

888

“The combination of our assets [San Leon and Hutton] has created a continuous area in two geological basins, maximizing our potential for success”

CONCESSION AREA

Anna Maio, Corporate Communications Manager

UKRAINE

COMMENT: “In the next year we plan to drill our first well with San Leon on the South Prabuty concession (Baltic Basin), as well

as implement a work programme of seismic acquisition and interpretation on the Carboniferous concessions, Oleśnica and Wieluń. We will also continue to develop our wholly owned Jurassic licenses with the objective of seeking partners during 2013.” - A. Maio

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

David Nelson CEO

LNG Energy Limited

Paul Larkin Richard Green David Cohen

ul. Bagno 2/225 00-112 Warsaw (+1) 778 373 0103 www.lngenergyltd.com

S TA K E I N Concession Interest Concession Name (%) Holder Starogard Słupsk Sławno Węgrów Iława

BNK

San Leon

CONCESSION AREA

“Today LNG has substantial prospects in three major areas: Papa New Guinea, Poland and Bulgaria” David Cohen, Chairman of LNG

UKRAINE

COMMENT: Based on a study completed by RPS Energy Consultants, the total prospective resources for the Sławno, Słupsk and Starogard concessions were identified as 910 bscf (billion standard cubic feet) in the low scenario, 1,622 bscf in the “best” scenario, and, 2,660 bscf in the high scenario. - Cleantech Poland

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CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Maciej Powroźnik, Deputy Director

LOTOS Petrobaltic

Zbigniew Paszkowicz Dariusz Wojdyński Krzysztof Sułecki

Stary Dwór 9 80-958 Gdańsk (+48) 58 301 30 61 www.lotos.pl

CONCESSION AREA

CONCESSIONS HELD Name Acreage Wells (km2) Gotlandia Gaz Północ Różewie Łeba Gaz Południe Sambia W Sambia E

881

1,075

1,172

1,154

887

888

1,092

“Our cumulative efforts [with PGNiG] will increase extraction of both oil and gas in Poland” Paweł Olechnowicz President of LOTOS S.A.

COMMENT: In mid September Lotos signed an agreement of cooperation with PGNiG, where the two state-owned companies will be increasing exploration efforts on five shale gas and two conventional PGNiG concessions. - Cleantech Poland

CONTACT INFO

James Fitzsimmons CEO

MAC OIL

253

BOARD MEMBERS

Mac Oil (Poland)

James Fitzsimmons Christian Ceppi

ul. Domaniewska 35A / 40 02-672 Warsaw

CONCESSIONS HELD Name Acreage Wells (km2) Gdynia

HOLDING COMPANIES

CONCESSION AREA

Mac Oil has one shale gas concession in Poland, covering one of the country’s most important agglomerations: the Tri-city Cleantech Poland UKRAINE

COMMENT: According to concession documentation, Mac Oil should have completed reprocessing of available geological data by now. By November of 2014, 100 km of 2D seismic should be shot and analyzed. This is almost half the size of the concession. - Cleantech Poland

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HOLDING COMPANIES

BOARD MEMBERS

John Porretto, External Communications

Marathon Oil (Area A - J)

Carl Hubacher Stephen Landry

WHO’S WHO

CONTACT INFO

ul. Zlota 59 00-120 Warsaw (+48) 22 379 94 40 www.marathonoil.com

CONCESSIONS HELD Name Acreage Wells (km2)

Kwidzyń Brodnica Orzechów Płońsk S Płońsk SE Rypin Lidzbark Ciechanów Sokołów Pod.

Siedlce Parczew

1,197

1,088

1,008

360

245

670

1,046

1,186

834

740

1,003

CONCESSION AREA

UKRAINE

COMMENT: “Marathon Oil holds an interest in 11 concessions in Poland, totaling approximately 1.2 million net acres and spanning the full extent of the country’s Lower Paleozoic shale play. In addition our plans to drill two exploration wells in 2013, Marathon Oil and its partners will be focused on completing previously drilled wells and analyzing the results of those operations.” - John Porretto

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Oishi Yasuhiro, General Manager

Mitsui & Co. Deutschland GMBH

Katsuya Okano

Aleje Jerozolimskie 65/79 00-697 Warsaw (+48) 22 630 60 19 www.mitsui.com

S TA K E I N Concession Interest Concession Name (%) Holder Kwidzyń Brodnica Orzechów Płońsk S Rypin Lidzbark Ciechanów Sokołów Pod. Siedlce

Marathon

CONCESSION AREA

“Exploration activities are progressing according to plan, wells are being drilled one after the other” Anna SoszynskaKalisiewicz, Mitsui UKRAINE

COMMENT:

Mitsui is the first and only Japanese investor in Polish shale exploration activities. They have a track record from participation in the Marcellus play in Pennsylvania. - Cleantech Poland

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CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Jarosław Raczyński, General Manager

Nexen Petroleum Poland

Petra Ftorkova Lewis Harvey Karen Burgess Andrew Quarles Van Ufford

ul. Wiejska 17/5 00-480 Warsaw (+1) 403 470 9184 www.nexeninc.com

S TA K E I N Concession Interest Concession Name (%) Holder Kwidzyń Brodnica Orzechów Płońsk S Rypin Lidzbark Ciechanów Sokołów Pod. Siedlce

Marathon

“CNOOC undertook a thorough analysis which resulted in an offer that provides a significant premium to our shareholders”

CONCESSION AREA

Kevin Reinhart, Interim President

UKRAINE

COMMENT: Pending approval of the Canadian government, Chinese national oil and gas company CNOOC Limited will acquire Nexen Inc. for US$27.50 per share in cash. US$15.1 billion will be paid for Nexen’s common and preferred shares. The Nexen takeover by CNOOC will place additional Chinese-based capital in the Polish shale market. - Cleantech Poland

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Tomasz Tarnowski, Communications

Silurian ECO Energy 2010

Bertrand Le Guern Andrzej Pietraszko Roman Niewiadomski Maciej Wantke Marek Pietruszewski

Aleje Jerozolimskie 65/79 00-697 Warsaw (+48) 22 553 85 14 www.petrolinvest.pl

CONCESSIONS HELD Name Acreage Wells (km2)

S TA K E I N Concession Interest Concession Name (%) Holder

Częstochowa Repki Siemiatycze Grudziądz Maków Maz. Chodel Opole Głubczyce Kędzierzyn K.

Lidzbark War. Węgorzewo Gołdap Kętrzyn

750

882

892

699

189

1,044

1,156

994

31.67

Wisent

31.67

Wisent

31.67

Wisent

31.67

Wisent

CONCESSION AREA

UKRAINE

COMMENT: “According to the Sales Agreement, Petrolinvest bought 18 shares from Tabacchi, with a nominal value of PLN 50 per

share, cumulatively being 8.26% of Silurian shares. Petrolinvest holds 90.83% of Silurian shares.” - Corporate Website “Exploration activities where Petrolinvest has a stake are progressing in accordance with concession agreements.” - Tomasz Tarnowski

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HOLDING COMPANIES

BOARD MEMBERS

Dominika Mackiewicz, PR Specialist

Orlen Upstream

Wiesław Prugar Paweł Martynek

WHO’S WHO

CONTACT INFO

ul. Przyokopowa 31 01-208 Warsaw (+48) 22 778 02 00 www.orlenupstream.pl

CONCESSIONS HELD Name Acreage Wells (km2) Garwolin Lubartów Bełżyce Lublin Wierzbica Hrubieszów Sieradz

884

1,156

1,019

967

702

415

917

“The horizontal well in Syczyn has been drilled in a record 39 days, which was possible thanks to a well coordinated process, experienced staff and properly chosen technology”

CONCESSION AREA

Dominika Mackiewicz

UKRAINE

COMMENT: ”Laboratory test results based on core samples gathered from the Berejów-OU 1 well (on the Lubartów concession) prompted us to decide on drilling a horizontal well in that location. It will be the second directional well done by PKN ORLEN, where we will most probably perform hydraulic fracturing in the first half of 2013.”- Dominika Mackiewicz

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Piotr Gliniak, Head of Exploration

Polskie Górnictwo Naftowe i Gazownictwo

Grażyna Piotrowska-Oliwa Radosław Dudziński Sławomir Hinc Mirosław Szkałuba

ul. Kasprzaka 25 01-224 Warsaw (+48) 22 691 79 67 www.pgnig.pl

CONCESSIONS HELD Name Acreage Wells (km2)

Wejherowo Kartuzy-Sz. Stara Kiszewa “172” “173” “192” “193” Warka-Urs. Ryki-Żyrzyn

Kock-Tarkawica Pionki-Kaz. Wiszniów-Tar. Tomaszów L. Bartoszyce Górowo Ił.

731

783

1,178

937

922

942

734

426

1,028

530

1,106

741

670

1,094

CONCESSION AREA

UKRAINE

COMMENT: “Depending on the speed of receiving administrative approvals such as

land use permits, we plan to spud additional two wells this year. The plans include wells in Stara Kiszewa and Kartuzy-Szemud in the Baltic region. We want to drill vertical and horizontal wells, so that we are able to be precise in determinig the potential of our acreage.” - PGNiG PR team

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CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Elisabeth Kolm, Communications Schwarzenbergplatz 16 A 1015 Vienna (+43) 50724 5448 www.rag-austria.at

CONCESSION AREA

S TA K E I N Concession Interest Concession Name (%) Holder Starogard Słupsk Sławno

26.3

BNK

26.3

BNK

26.3

BNK

“I’m pretty sure Germany has a lot of shale gas potential, but I think it’s easier to develop in Poland” Thomas Teyssen, Head of New Ventures

UKRAINE

COMMENT:“Since October 12th 2009, RAG has held 26.3% of the shares in Saponis Investments Sp. z.o.o., Warsaw, Poland.

Other shareholders are BKX International Holdings Inc., a fully-owned subsidiary of BNK Petroleum (US) Inc. (26.9%), Sorgenia E&P Spa, Milan, Italy, and LNG Energy, Vancouver, Canada, through its subsidiary (20%).” - RAG company website

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

John Buggenhagen, Exploration Director

San Leon (Poland) Gora Energy Resources Helland Investments Joyce Investments Liesa Energy Maryani Investments Oculis Energy Vabush Energy

Oisin Fanning Paul Sullivan John Buggenhagen Ray King Daniel Martin Jeremy Boak

ul. Mokotowska 1 00-640 Warsaw (+48) 22 378 97 00 www.sanleonenergy.com

CONCESSIONS HELD Name Acreage Wells (km2)

S TA K E I N Concession Interest Concession Name (%) Holder

Gniew Iława Węgrów Nowa Sól Wschowa Rawicz Góra Czersk Praszka Nida

Gdańsk W Braniewo S Szczawno Prabuty Poł. Oleśnica Wieluń

1,191

746

711

1,166

1,078

389

706

702

1,199

1,167

Talisman

Hutton

CONCESSION AREA

UKRAINE

COMMENT: “San Leon is the largest foreign net acreage holder in Poland with a

diverse asset base in the Baltic Basin, SW Carboniferous Basin, and Permian Basin with a focus on both conventional and unconventional exploration.” - John Buggenhagen

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HOLDING COMPANIES

Davide Bergamaschi, Investor Relations Director

Sorgenia E&P

BOARD MEMBERS

WHO’S WHO

CONTACT INFO

Via Vincenzo Viviani, 12 Mi 20124 Milan (+39) 026 719 911 www.sorgenia.com

S TA K E I N Concession Interest Concession Name (%) Holder Starogard Słupsk Sławno

BNK

“Sorgenia is not considering any further expansion in Poland with other farm-in deals in addition to its current Saponis investment”

CONCESSION AREA

Salvatore Ricco Communications

UKRAINE

COMMENT: ”In Poland the encouraging results of the first three exploration wells drilled by the company in which Sorgenia has an interest, have confirmed the presence of shales with a natural gas content that is in line with and sometimes higher than that of the shales in production in North America”. - Sorgenia Press Release

CONTACT INFO

Annika Hult Managing Director

HOLDING COMPANIES

BOARD MEMBERS

Stena International SARL

Peter Claesson* Annika Hult*

26b, Boulevard Royal LU-2449 Luxembourg (+352) 26 48 67 00 www.stena.com

S TA K E I N Concession Interest Concession Name (%) Holder Lidzbark War. Węgorzewo Gołdap Kętrzyn

29.7

Wisent

29.7

Wisent

29.7

Wisent

29.7

Wisent

* Wisent Oil and Gas board members

“As a result of the ‘Placement’ Stena now owns 29.7% of the issued share capital and it has warrants to subscribe for additional shares”

CONCESSION AREA

NRS, London Stock Exchange

UKRAINE

COMMENT: “The company is pleased to announce that it closed a further private placement of new equity to Stena Investment S.a r.l. and to parties related to directors of the company. Funds raised under the placement total £7.25 million before costs.” -NRS, London Stock Exchange

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CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Tomasz Gryżewski, Corporate Affairs

Talisman Energy Polska

Rene Kuijper Leonard Van Sandick

ul. Emilii Plater 53 00-113 Warsaw (+48) 22 370 60 70 www.talisman-energy.com

CONCESSIONS HELD Name Acreage Wells (km2) Gdańsk W Braniewo S Szczawno

889

1,043

603

CONCESSION AREA

“We need to be absolutely open, honest and transparent about our operational activities” Tomasz Maj, General Manager

UKRAINE

COMMENT: “In 2013 Talisman Energy plans to continue shale gas exploration in Poland. We are evaluating the results of the wells we have drilled and data obtained by trade from other companies. The locations of future wells are being selected. Talisman Energy will seek to maintain the excellent relations we have built up with the local communities” - Jadwiga Święcicka, Media Relations Advisor

CONTACT INFO

HOLDING COMPANIES

BOARD MEMBERS

Sylvie Duflot, Public Affairs and Adm. Director

Total E&P Poland

Martine Valeix Marcel Mars Bruno Courme

al. Jana Pawla II 80 00-175 Warsaw (+48) 22 481 94 00 www.total.com

S TA K E I N Concession Interest Concession Name (%) Holder Chełm Werbkowice*

Exxon

CONCESSION AREA

“Poland’s potential isn’t written off just because there were two wells that gave disappointing results” Christophe de Margerie, CEO

COMMENT: “On both Chelm and Werbkowice, discussions with our partner and the Polish authorities are not finalized and

UKRAINE

we cannot at this stage communicate [about their future]. Nevertheless, Total is willing to stay in Poland for shale gas exploration.” - Sylvie Duflot

* Concession denoted in red are being relinquished

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HOLDING COMPANIES

Wes J. Skrobowski, CEO Wisent Oil & Gas William Marble, COO

BOARD MEMBERS

WHO’S WHO

CONTACT INFO

Wes J. Skrobowski William Marble

ul. Chocimska 14 A 00-791 Warsaw (+48) 22 856 10 00 wisentoilandgas.com

CONCESSIONS HELD Name Acreage Wells (km2) Lidzbark War. Węgorzewo Gołdap Kętrzyn

895

134

621

683

“We are pleased that Wisent is moving forward to the drilling phase. Our review of seismic data supports the Board’s belief that the concessions have potential in the “oil window” of the Baltic Basin”

CONCESSION AREA

Wes J. Skrobowski

UKRAINE

COMMENT: “Lidzbark Warmiński and Kętrzyn concessions

were converted to allow for drilling. Under the terms for the conversion Wisent has an obligation to drill one vertical well and an option to drill one horizontal well on each concession. Detailed plans have been prepared for a drilling programme of two to three wells to start in the first Quarter 2013.” - Wes J. Skrobowski

I NVE STO R S Editor’s note: this is a non-comprehensive list of investors who have exposure to Polish shale. This list is the SGIG’s first attempt to show the correlation between shale gas operators in Poland and their investor base. Shale gas exploration is a high-risk

endeavour. Especially in Poland, where the resource has not yet been proven and operational costs are much higher than in the US. These risks have been, however, outweighed by hopes for an energy secure Poland and the prospect of high returns. The former precipitated one of the largest investment projects the Polish government had made to date. The latter brought North American companies, experienced through their success in the US and Canada, to this central European country. Polish treasury owned companies have political backing and approved multi-billion PLN investment plans. What the others have is funding from some of the largest investment funds in the world. Here are some examples.

INVESTOR

OPERATOR

AJ Lucas Blackrock BMO Capital Markets Cheviot Asset Management China National Offshore Oil Corporation CIBC Global Asset Management Eton Park Capital Management Goldman Sachs Invesco Trimark Investments J.P. Morgan Chase and Co. Kulczyk Investments Macquarie Norges Bank Investment Management Quantum Partners Source Energy Partners Soros Fund Management State Street Tabacchi Enterprises Templeton Investment Counsel Toscafund Asset Management

Cuadrilla

San Leon, 3Legs, Talisman Talisman 3Legs Cuadrilla Talisman 3Legs Chevron Talisman Chevron Aurelian Hutton Talisman, Chevron San Leon, 3Legs, BNK LNG Energy San Leon, 3Legs, BNK, Talisman Chevron Silurian Talisman Aurelian

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SHALE GAS

investment /POLAND

SERVICES

GUIDE

SERVICES DIRECTORY water, waste, proppant, sand, pipe, gelling agents, biocides logistics, health, safety, environment, seismic, permitting pressure pumping, casing, cementing, coil tubing, drill bits

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Seismic

MA R K E T FO R S E R V ICES COMPLEX SEISMIC SERVICES*

Acoustic Geophysical Services, Geofizyka Kraków, Geofizyka Toruń, Global Geophysical, ION (GX Tech), PBG Geophysical Exploration, United Oilfield Services, Viking

Geology Permitting Seismic Services

GEO-data, Geokrak, Pangea, NuTech Energy Alliance

Subsurface Mapping Compensation

Apex Contracting, AE Com, CDM Smith, IP Group Apex Contracting, Geokrak, Kavo Seismic, Microseismic, NuTech Energy Alliance, Paradigm GeoLog, NuTech Energy Alliance, Paradigm Apex Contracting, CDM Smith, IP Group

Drilling

COMPLEX DRILLING SERVICES*

Diament (PGNiG), Ensign, Jasło (PGNiG), KCA Deutag, MI-SWACO, MND Drilling, Nafta Piła, Schlumberger, United Oilfield Services (UOS), Weatherford

Casing and Cementing

Baker Hughes, Halliburton, Schlumberger, Weatherford, UOS

Directional Drilling

Baker Hughes, Drill-tech, Halliburton, Schlumberger, Weatherford, UOS

Drill Bits, Fluids Systems

Baker Hughes, Halliburton, MI-SWACO, Schlumberger, UOS

Drilling Tools & Services

Baker Hughes, Bentec, Drillmec, Drill-tech, National Oilwell Varco, Pruitt, Siemens

Engineering and Modeling

Core Laboratories (Saybolt), GeoLog, National Oilwell Varco

Hardbanding

Arnco Technology, Hardbanding Solutions

Mud Logging

Baker Hughes, GeoLog, Drill-Lab, Halliburton, Schlumberger, Weatherford, UOS GEO-data, Geokrak

MWD and LWD

Baker Hughes, Halliburton, Schlumberger, Weatherford, UOS

Pipe and Procurement

Alchemia SA group, CB&I, National Oilwell Varco, Tenaris, US Steel

Rig Contracting

Diament, Ensign, Jasło, KCA Deutag, MND Drilling, Nafta Piła, National Oilwell Varco, PNiG (Krakow), UOS

Solids Control & Waste Management

EkoTech Energy, MI-SWACO, WSP

Well Pad Construction

CB&I, CDM Smith, NTS Construction, World Acoustic Group

Services

Completions

COMPLEX COMPLETIONS SERVICES* Baker Hughes, Diament (PGNiG), Halliburton, Schlumberger,

United Oilfield Services (UOS), Weatherford

Casing & Cementation

Baker Hughes, Diament (PGNiG), Halliburton, Schlumberger, United Oilfield Services, Weatherford

Cementing

Baker Hughes, Diament (PGNiG), Halliburton, Schlumberger, United Oilfield Services, Weatherford

Chemicals

Best Drilling Chem (BDC), Brenntag, DOW, Dow Corning, Multi-chem, Siemens

Coil Tubing & Tubing

Sumitomo, NOV, Tenaris, TPS - Technitube Röhrenwerke, US Steel, Vallourec

Equipment Supply

Baker Hughes, Balance Point Control BV, GE Oil & Gas, Halliiburton, Expro, Packers Plus, Siemens, Tech-Pomp, URS, UOS, Weatherford, ZRG Krosno

Pressure Pumping

Baker Hughes, Diament (PGNiG), Halliburton, National Oilwell Varco, Schlumberger, United Oilfield Services, Weatherford

Proppant

Dow Corning, Weir Oil & Gas Division

Water Management

Apex Contracting, Baker Corp, GE Oil & Gas, PPEKO, Veolia Water Systems, WSP

Corporate Services

CEE Consulting Group, Hewitt, PWC, STS Consulting Services, Trinity Corporate

Environmental

CDM Smith, GeoData, GSE Environmental, Prochem S.A

Equity fundraising

Chrystal Capital, Jefferies, Shale Gas Solutions

Market Representation

Shale Gas Solutions

Research

AE Com, INiG (PGNiG), PGI

* CO M P L E X SER VICES MEANS MULTIPLE, INTEGRATED ACTIVITIES IN EACH G I V E N S E R V I C E S S ECTO R

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SERVICES

INTRO D U C I N G T H E D I R ECTO RY

CO M PA N Y I N D E X Acoustic Geophysical p.132 AECom p.132 Alchemia SA group p.132 Apex Contracting p.132 Arnco Technology p.132 Baker Corp p.132 Baker Hughes p.132 Balance Point Control BV p.132 Bentec p.132 Best Drilling Chemicals (BDC) p.132 Brenntag p.132 CB&I p.132 CDM Smith p.132 CEE Consulting Group p.132 Core Laboratories (Saybolt) p.132 p. 132 DBM Services Diament (PGNiG) p. 133 DOW p. 133 Dow Corning p. 133 Drill-Lab p. 133 Drill-tech p. 133 Drillmec p. 133 EkoTech Energy p. 133 Ensign p. 133 Expro p. 133 GE Oil & Gas p. 133 GEO-Data GmbH p. 133 Geofizyka Kraków (PGNiG) p. 133 Geofizyka Toruń (PGNiG) p. 133 Geokrak p. 133 GeoLog p. 133 GSE Environmental p. 134 Halliburton p. 134 Hardbanding Solutions p. 134 Inter Permit Group p. 134 p. 134 ION (GX Technology) p. 134 Jasło (PGNiG) Kavo Seismic p. 134 KCA Deutag p. 134

A N A LY S T ' S V I E W Kraków (PGNiG) p. 134 MI-SWACO p. 134 Microseismic p. 134 MND Drilling p. 134 Multi-chem p. 134 p. 134 Nafta Piła (PGNiG) National Oilwell Varco p. 134 NTS Construction p. 136 NuTech Energy Alliance p. 136 Packers Plus p. 136 Pangea p. 136 Paradigm p. 136 PBG GeophysicalExploration p. 136 Poseidon Concepts p. 136 PPEKO p. 136 Prochem S.A. p. 136 Pruitt Tool & Supply p. 136 PwC p. 136 Schlumberger p. 136 Shale Gas Solutions p. 136 Siemens p. 136 STS Consulting Services p. 136 Sumitomo Europe p. 137 TECH-POMP p. 137 Tenaris p. 137 TPS Technitube Röhrenwerke p. 137 Trinity Corporate Services p. 137 United Oilfield Services p. 137 URS p. 137 US Steel p. 137 Vallourec p. 137 Veolia Water Systems p. 137 Viking p. 137 Weatherford p. 137 Weir Oil & Gas Division p. 137 World Acoustic Group p. 137 WSP p. 137 p. 137 ZRG Krosno (PGNiG)

KEITH LUKE KEY ACCOUNTS OIL & GAS

Our bi-annual services directory is a list of companies involved in shale gas. In the coming years, shale gas production will depend upon a complex network of value-added services that interact to turn potential into product. From seismic services to the chemicals necessary for hydraulic fracturing, the companies that provide these services are part of a complex value chain. We publish this directory to aid competitive pricing. With better prices, comes better value chain optimization, and production cycles that are more profitable for investors. Without a developed services’ market, Polish shale will remain just a paper proposition. We know it’s not complete. We also know that it’s not completely accurate. The value chain is a complex process, and determining who is and who isn’t in the market is a challenge. Some companies will never set foot in Poland, although they’ll sell plenty of services. Next issue, if you want your company in the services directory, you have to be operating in the Polish market. If you were not listed and feel that you should have been included please contact me today to let me know. Keith Luke (+48) 694 478 075 Keith@cleantechpoland.com

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CO M PA N Y NAME

SERVICE SPECIALITY

Acoustic Geophysical Services

Seismic services

AECom

CLIENTS

ADDRESS

C O N TA C T

Marathon, 3Legs, San Leon, Aurelian

Ul. Chłodna 11 lok. 425 00-891 Warsaw

(+48) 667 985 777 infohouston @acousticgeo.com

Global seismic services provider capable of 2D, 3D & complex imaging services Permitting, planning, engineering, project & cost management

Chevron, OMV Petrom, Shell, Public Sector Clients

Ul. Emilii Plater 53 00-113 Warsaw

(+1) 303 588 8352 Don.Shosky@aecom.com

Construction of Ticleni Landfill, Biotreatment Plant and Access Roads for OMV Petrom

Alchemia SA group

Tubing

PGNiG

Arnco Technology Baker Corp

(+48) 22 658 64 52 biuro@alchemiasa.pl

Pipes and steel products used in the petroleum, mining and gas industries Permitting, compensation, water Marathon, Viking transport, HSE, equipment rental

Apex Contracting

Ul. Łucka 7/9 00-842 Warsaw

Ul. Emilii Plater 53 00-113 Warsaw

Eric 48.503.861.695 (US) Norbert 48.601.999.345 (PL) apexcontracting.pl

Permitting, compensation for seismic, logistics. Entered the market to provide transport, equipment rental and health, safetey and environment (HSE). Co-founder Eric Bollard has extensive north American shale experience and co-founder Norbert Szczepanski has a logistics managment background Hardbanding

Aberdeen, UK

(+44) 774 028 0302 ssmith@arncotech.com

Global company in wear resistant, casing-friendly hardbanding alloys Liquids and sludge storage

ConocoPhillips, Cabot, Veolia, BP

North Lincolnshire, DN20 8UN, UK

(+44) 330 333 2611 mhiggins@bakercorp.com

Provides rental tanks, rental pumps, rental filtration, and rental shoring equipment

Baker Hughes

Integrated oilfield services

Talisman, Exxon, PGNiG, Marathon, Aurelian,

Ul. Rondo ONZ 1 00-124 Warszawa

Global provider of integrated oilfield services including pressure pumping

Balance Point Control BV Bentec

Balanced pressure and wireline services

Shell, UGS, Total, Exxon, Apache, Vermilion,

Karel Doormanstraat 4, 7825 VT Emmen, The Netherlands

(+44) 203 320 4900 jens.rodiek@bakerhughes. com (+31) 591 667 687 info@bpc.nl

Aberdeen (UK) and Emmen (NL) based provider of pumping, snubbing, well control Rig and drill manufacturer

Nafta Piła

Deilmannstraße 1, 48455 Bad Bentheim, Germany

(+49) 592 272 80 info@bentec.com

Subsidiary of KCA Deutag manufacturing drilling rigs for Polish market

Best Drilling Chemicals (BDC) Brenntag

Drilling equipment and chemicals

Ul. Biskupińska 3A 30-732 Kraków

(+48) 126 506 642 hrwk@ferrum.com.pl

Distributor, producer of chemicals for drilling: bentonite, polymers, inhibitors Chemical supply, inhibitors, de-emulsifiers, biocides

Ul. Kwasowa 5 95-100 Zgierz, Poland

(+48) 618 936 510 brenntag.pl

Distributor of specialty, industrial chemicals including solvents, acids, lye Technology, engineering, procurement and construction

CB&I

Core Laboratories (Saybolt) DBM Services

Oostudinlaan 75, 2596 JJ The Hague, The Netherlands

(+31) 703 732 010 cbi.com

CB&I engineers and constructs some of the world’s largest energy infrastructure projects. With premier process technology, proven EPC expertise, and unrivaled storage tank experience, CB&I executes projects from concept to completion. Safely. Reliably. Globally. Consulting, engineering, construction, permitting and operations

CDM Smith

BP, ExxonMobil, GASCO, Grupa Lotos, PERU LNG

Marathon, Conoco Phillips, Chevron, BNK, ENI, Exxon

Ul. Stawki 40 01-040 Warsaw

(+48) 225 519 300 warsaw@cdmsmith.com

Integrated engineering services in water, environment, transportation, energy. CDM Smith has 5,000 employees in 125 offices worldwide, including over 80 staff in Warsaw as well as a large amount of experience in the Polish shale gas market Reservoir description, management, production enhancement

Herengracht 424, 1017 BZ Amsterdam, The Netherlands

Reservoir description, production enhancement and reservoir management Facilities, project management, HSE, operations and logistics

Halliburton

02-797 Warsaw, ul. Klimczaka 12B/28, Poland

Entered the market to provide facilities management services to Halliburton

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(+48) 58 627 4641 saybolt.poland@corelab. com (+48) 693 131 693 info@dbmservices.pl

SERVICE SPECIALITY

Diament (PGNiG)

Drilling, completions and related oilfield services

DOW

CLIENTS

ADDRESS

C O N TA C T

PGNiG

Ul. Naftowa 3 65-705 Zielona Góra

(+48) 683 295 555 diament @pn-diament.com.pl

Integrated oilfield services owned by PGNiG working in Poland and abroad Chemicals including lubricants, biocides

Domaniewska 50A 02-672, Warsaw

SERVICES

CO M PA N Y NAME

(+48) 228 332 222 easterneurope.dow.com

Chemicals, materials, services, and technologies for the oil and gas industry

Dow Corning

Chemicals including emulsifiers, proppant, gelling agents

ul. Marynarska 15 02-674, Warsaw

(+48) 228 540 320 fwrpols@dow.com

Oil/water separation, demulsification, hydrocarbon foaming, resin-coated proppants

Drill-Lab (PGNiG) Drill-tech

Mudlogging equipment and services

Diament, PNiG Kraków, PNiG Jasło, ENI

Ul. Krośnienska 7 65-958 Zielona Góra

(+48) 683 238 454 dl@drill-lab.com.pl

Geological consulting and mudlogging services since 1990 Shallow well drilling, importing, health and safety

PGNiG, Diament

ul. Działkowa 19 65-767 Zielona Góra

(+48) 684 777 779 drill-tech.pl

Since 2007, shallow drilling services, retailing clothing, health and safety equipment

Drillmec

Drilling equipment manufacturing and refurbishment

PGNiG Kraków

Drillmec 12, via 1° Maggio 29027, Gariga di Podenzano, Italy

(+39) 052 335 4211 info@drillmec.it

Global manufacture and distribution of drilling and workover rigs for onshore

EkoTech Energy

Waste management, treatement, effluents

Aleje Jerozolimskie 96 00-807, Warsaw

Effluent control, renewable energy, waste management and emission reductions

Ensign

Drilling, well services, production and manufacturing

San Leon

400 – 5th Avenue SW, Calgary, Canada

Drilling and well servies for crude oil and natural gas including directional drilling

Expro

Well testing, wireline intervention, production systems

Energia Zachód

Morton Peto Rd, Great Yarmouth, Norfolk, NR31 0LT UK

(+48) 222 755 625 infopoland @ekotechenergy.com (+1) 403 262 1361 dean.hills @ensignenergy.com (+44) 149 360 0021 exprogroup.com

International oilfield service company that manages wells from expl. to production

GE Oil & Gas

Oilfield equipment, turbines, water treatment technologies

Ul. Emilii Plater 53 00-113, Warsaw

(+48) 225 205 353 piotr.bruzda@ge.com

Technology equipment and services for drilling, production, refining, petrochemicals Wellsite services, environmental consulting

GEO-Data GmbH

Geofizyka Kraków (PGNiG)

Geofizyka Torun (PGNiG)

GeoLog

Carl-Zeiss-Str. 15 30827 Garbsen, Germany

(+49) 513 146 810 nadolny@geo-data.de

Services in mudlogging, wellsite geology, laboratory services, and core analytics partner with GeoKrak SP z o.o. as part of an expanded suite of services (surface logging, wellsite geology, cutting & gas sampling, and isotope analytics) for the Polish market. Seismic services, well logging, data interpretation, processing

Aurelian, RWE, Saponis, BNK, ENI, PGNiG,

Ul. Łukasiewicza 3 31-429 Kraków

(+48) 122 991 200 marketing@gk.com.pl

Since 1956, 2D and 3D seismic acquisition, processing, interpretation, well logging Seismic services, well logging, data interpretation

PGNiG, Shell, Exxon, Eni, Total, Marathon

Ul. Chrobrego 50 87-100 Toruń

(+48) 566 593 101 marketing@geofizyka.pl

Since 1966, integrated geophysical seismic services for oil and gas exploration. a worldwide leader in geophysical services, GT has pioneered 3D seismic technology leading to discovering of major deposits around the world Geological services

Geokrak

BNK, ExxonMobil, Lane Energy, Marathon, Orlen, Talisman, Marathon

Marathon, Talisman, ENI, BNK, Conoco, POGC, Orlen, San Leon, Exxon

ul. Mazowiecka 21 30-019 Kraków

(+48) 126 338 110 geokrak@geokrak.pl

Since 1992, providing geological services associated with deep well exploration. It offers a combined suite of services (surface logging, wellsite geology, cutting & gas sampling, and isotope analytics) with their partner firm GeoData Gmbh for the Polish market. Surface logging

DE II - De Entrée 242 A, 1101 EE, Amst., The Netherlands

(+44) 782 156 9280 geologinternational.com

Oilfield services company offering surface logging services

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CO M PA N Y NAME

SERVICE SPECIALITY

CLIENTS

ADDRESS

C O N TA C T

GSE Environmental

Geosynthetic linings

BHP Billiton, Rio Tinto

Orchideengarten 30 09125 Chemnitz, Germany

(+43) 725 829 201 priegl@gseworld.com

Geosynthetic products including geo-membranes and liners Integrated oilfield services

Halliburton

Hardbanding Solutions

ION (GX Technology) Jasło (PGNiG) Kavo Seismic

53 Ul. Emilii Plater 53, WFC 26th Floor, 00-113, Warsaw

(+48) 224 707 900 jerzy.wozniak @halliburton.com

Integrated oilfield services and products in the upstream oil and gas sectors. The Polish base of operations for Halliburton is located in Tersin, about 40 km from the center of Warsaw. Extensive global experience adds value to services they provide to the Polish market. Hardbanding, hard facing tool joints

Ensign, Exxon, Marathon, Shell, Weatherford

Hardbanding Solutions Europe, Scotland

Wear resistant, non-cracking, casing friendly hardbanding services Seismic permitting, compensation, human resources

Inter Permit Group

Aurelian, Chevron, Eni, Marathon, Saponis, PGNiG

Viking

Ul. Elektryczna 2 00-346, Warsaw

(+44) 774 746 8345 colin.duff@hardbandingsolutions.com (+48) 604 601 050 izabela.kawczynski@ interpermit.com

American-owned company providing landman services: 2D and 3D seismic lines, permits for well pads, water lines and roadways, as well as taffing solutions: human resources, payroll management, including temporary workers or specialist staff Geophysical services, seismic

Institute of Geophysics, PAN, PGI

Al. Jerozolimskie 56C 00-803, Warsaw

(+1) 281 933 3339 info@iongeo.com

Originated as a manufacturer, now provide integrated geophysical services Drilling contractor

PGNiG

Ul. Asnyka 6 38-200 Jasło

(+48) 134 462 061 info@ogecjaslo.pl

Ul. Przy Skarpie 10f / 10 87-100 Torun

(+48) 605 123 524 office@kavoseismic.com

Minto Dr., Altens Ind. Est., Aberdeen AB12 3LW,

Scotland (+44) 122 429 9600 info@uk.kcadeutag.com

Since 1953, PGNiG owned drilling contractor Sesimic

Orlen, PGNiG

Designing, processing and consulting for seismic services

KCA Deutag

Drilling contractor

BNK, Marathon, San Leon Energy

International oil and gas services with headquarters in Aberdeen (UK)

Krakow (PGNiG) MI-SWACO

Geological, drilling, workovers, testing and well operation

PGNiG

ul. Lubicz 25A 31-503, Kraków

Since the mid 1940s, PGNiG owned drilling contractor in Poland and abroad Drilling fluids, completions, waste management

Schlumberger (Owner)

Bruchkampweg 16, 29227, Celle, Germany

Drilling and completions services including fluid systems, tools, waste management

Microseismic

(+48) 126 197 280 ogec@ogec.krakow.pl

Geophysical services, seismic

10777 Westheimer Suite 500 Houston, TX 77042 USA

(+1) 832 628 9187 questions@miswaco.slb. com (+1) 713 781 2323 info@microseismic.com

Microseismic monitoring to listen to low-energy seismic noise during fracturing

MND Drilling

Drilling services

Exxon, Lane Energy Poland, Orlen Upstream

Velkomoravská 900/405, 696 18 Lužice, Czech Republic

(+420) 518 315 555 info-ds@mnd.cz

Czech based drilling contractor providing comprehensive services for oil and gas

Multi-chem

Chemicals, biocides, inhibitors, defoamers, breakers

Halliburton (Owner)

53 Ul. Emilii Plater 53, WFC 26th Floor, 00-113, Warsaw

(+48) 22 47 07 900 jerzy.wozniak @halliburton.com

Pl. St. Staszica 9 64-920 Piła

(+48) 672 151 300 nafta@nafta.net.pl

Technical consulting and sales for oil and gas chemicals

Nafta Piła (PGNiG)

National Oilwell Varco

Drilling services

Aurelian, BNK, Lane Energy, Talisman

International drilling contractor with 55 years experience drilling and producing Drilling, engineering project management, production, well service and completion

BNK, Chevron, Halliburton, Marathon, San Leon, Talisman, Weatherford

Wierzbowa 9/11 00-094, Warsaw

(+48) 224 985 803 nov.com

National Oilwell Varco has the answers to the equipment and service demands of the worldwide oil and gas industry. It is a leader in the design, manufacture, and sale of equipment, oilfield inspection, internal tubular coatings, and drill stem products used in conventional and unconventional drilling.

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CO M PA N Y NAME

SERVICE SPECIALITY

NTS Construction

Well pad construction

NuTech Energy Alliance

Pangea

ADDRESS

C O N TA C T

Rynek 26 37-500 Jarosław

(+48) 166 232 251 k.kolouszek@stabilizacje. net

Well pads, land stabilisation, earthwork, roadwork, preparatory and finishing work Petrophysical, geological, field study, and well services

7702 FM 1960 East, Suite 300, Houston, TX 77346 USA

(+1) 281 812 4030 info@nutechenergy.com

Suite of products for oil field services: NuLook, NuStim, NuView, NuVision, Poro-Labs Completions equipment, open hole, multi-stage, packers

Packers Plus

CLIENTS

Marathon, Petrobakken, Shell, Talisman, Rosneft

Bow Valley Sq. 2, Suite 2200, 205 - 5th Ave. SW, Calgary

(+44) 791 715 4740 Joel.Appleton @packersplus.com

Open-hole, multi-stage horizontal fracturing systems. Based in Calgary, Alberta Packers Plus is expanding into the Polish market by offering innovative high performance equipment options for operators. Open hole systems can perform 30 percent better than cased-hole, plug and perf. Geophysical and geological data processing

Aleksandr Solzhenitsyn Street, 27. Moscow, Russia

(+7) 495 912 6503 info@pangea.ru

Dukes Street, Woking, Surrey GU21 5BH, UK

(+44) 148 375 8000 info@pdgm.com

Geological integrated evaluation for oil and gas industry

Paradigm

Drilling, cleaning, fishing products

Tools applications for geologists, geophysical and engineering subsurface models

PBG Geophysical

Exploration Geophysical services

PGNiG, PKN Orlen

76 Jagiellonska 03-301 Warsaw

(+48) 224 864 100 pbg@pbg.com.pl

Geophysical services for projects related to water and oil and gas

Poseidon Concepts PPEKO

Storage tanks

Supplier of tanks and fluid control systems for oil and gas Waste water treatment

645-7th Avenue SW, Suite (+1) 403 206 4999 1200 Calgary, Alberta T2P 4G8 info@poseidonconcepts. com Ul. Agatowa 12 03-680 Warsaw

(+48) 226 770 456

Wastewater treatment of effluents, anaerobic, membrane systems and technologies

Prochem S.A.

Environmental protection installations

Ul. Powązkowska 44c 01-797 Warsaw

Since 1947, polish provider of chemical projects and solutions

Pruitt Tool & Supply

Rotating control devices

9700 Aire Cir., PO Box 181359, Ft. Smith, AR 72918, USA

(+1) 479 646 1641 pruitttool.com

Al. Armii Ludowej 14 00-638 Warsaw

(+48) 22 523 4000 pwcpoland@pl.pwc.com

Rotating control devices for oil and gas E&P markets Consulting, business advisory, auditing, tax, legal

PwC

(+48) 223 260 100 piotr.strawa@nortonrose. com

Chevron, Gaz-System, KGHM, Lotos, PGE, ENI, PGNiG, Orlen, Tauron

Provides oil & gas companies advisory, tax & legal, and auditing services. PwC, a global services company, has been in Poland for 20 years and there are 46 local partners. Regularly provides up to date information about the regulatory and tax environment for shale operators.

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Schlumberger

Integrated oilfield services

Chevron, Marathon, Lane, San Leon, Talisman

Al. Jana Pawła II 25 00-854 Warsaw

(+44) 203 320 4900 szwolan@slb.com

Integrated oilfield services and products in the upstream oil and gas sectors Equity fundraising, operator meetings, intelligence

Shale Gas Solutions

Siemens

Packers Plus, Silurian Hallwood, San Leon

Ul. Elektryczna 2 00-346, Warsaw

(+48) 606 285 100 shalegassolutions.pl

Equity fundraising, contingency planning, in-country representation. Provides market entry services, including operator introductions and market reports about the current state of the pressure pumping, drilling rigs and seismic services markets. Oil and gas equipment, industrial services

Ul. Zupnicza 11 03-821, Warsaw

(+48) 22 870 90 00 siemens.pl

Consulting and product supply for upstream and downstream, petrochemicals, tools

STS Consulting Services

Project development, project management, construction

PO Box 9005, Longview, TX 75608, USA

Over 100 years of combined experience in management of oil and gas industry

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(+1) 903 247 1787 ststx.com

SERVICE SPECIALITY

Sumitomo Europe

Tubular products

TECH-POMP

CLIENTS

ADDRESS

C O N TA C T

Ul. Stawki 2, 29th floor 00-193, Warsaw

(+48) 223 568 670 sumitomocorpeurope.com

Tubular solutions including carbon steel, Ni based alloy steel, VAM premium Pumps, electric, pneumatic, engine driven

Al. Sztandarów 1/3 04-423, Warsaw

(+48) 226 129 825 techpomp@techpomp.pl

Pumps and equipment for industry provided through rental and installation services Line pipe, coiled tubing, casing, connections

Tenaris

TPS - Technitube Röhrenwerke Trinity Corporate Services United Oilfield Services URS

2200 W. Loop S., Suite 800, Houston, TX 77027, USA

(+1) 713 767 4400 tenaris.com

A full range of quality casing and tubing, drill pipe, premium connections, pipe accessories, sucker rods and coiled tubing for use in all types of oil and gas drilling and well completion activities. Exceptional services based on expertise of material selection and pipe handling. Seamless pipes, welded pipes, bending

Julius-Saxler-Str. 7, 54550 Daun, Germany

(+49) 659 27 120 service@tpsd.de

German based production and stock facilities for API and gas field tubular products Corporate services, temp staffing, recruiting

Marathon

Al. Jerozolimskie 56C 00-803, Warsaw

(+48) 223 799 440 trinity@trinitycs.com

Market entry, shelf companies, accounting, payroll, HR, corporate, dissolution Drilling, completions, pressure pumping

FX Energy, Orlen

Al. Jerozolemskie 123a 02-017, Warsaw

(+48) 221 162 300 cezary.filipowicz@uos.pl

Polish based integrated oilfield services and products in the upstream sector Siting, permitting, geotechnical, construction management

Ul. Rejtana 17 02-516, Warsaw

(+48) 224 273 700 ursglobal.info@urs.com

Fully integrated engineering, construction, and technical services organization Steel pipe supply

US Steel

Vallourec

Marathon

Vstupny areal, 044 54, Kosice, Slovak Republic

(+421) 556 739 536 ekbeever@sk.uss.com

Tubular products for all sectors of oil and gas industry. Extensive experience in the North American shale markets allows US Steel to provide an unparalleled level of service. US Steel manages their supply chain from a factory and back-office in Slovakia. Pipe and tubing

Ave. du Général Leclerc 27, 92100, France

(+33) 149 093 500 contact@vallourec.fr

Through VAM Global Solutions, providing tubular products “from mill to well”

Veolia Water Systems Viking

Water treatment

Ul. Balicka 48 30-149 Kraków

(+48) 124 233 866 info.poland @veoliawater.com

Ul. Emilii Plater 53 00-113, Warsaw

(+48) 225 286 822 info@viking-intl.com

Water and wastewater treatment systems Seismic services: 2D/3D

PAN, ION

Integrated service company providing services to the oil and gas industry

Weatherford

Integrated oilfield services

PGNiG

Ul. Krolewska 16 00-103, Warsaw

(+48) 226 451 330 eu@weatherford.com

Integrated oilfield services and products in the upstream oil and gas sectors

Weir Oil & Gas Division World Acoustic Group WSP

Pumping, proppant, water and flowlines

Alega 3 Maja 9 30-062 Krakow

Manufactures pumps and ancillary equipment for the upstream downstream Well pad construction

Marathon

Ul. Royal 1 59-101 Polkowice

(+48) 768 470 080 k.bartkowiak@wagsa.eu

Noise protection barriers and services for industrial projects Upstream and midstream: engineering design, waste

Ul. Rakowiecka 30 02-528 Warsaw

Consultancy environmental, energy, sustainability, climate change, and business risk

ZRG Krosno (PGNiG)

(+48) 126 328 469 sales.pl@weirminerals.com

Downhole equipment, well stimulation and well logging

PGiG

Ul. Łukasiewicza 93 38-400, Krosno

(+48) 224 808 080 m.zalewski @royaleuropa.com (+48) 134 372 100 zrg@zrg.krosno.pl

Well interventions, workovers of wells, coring, well abandonment, decommissioning

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SERVICES

CO M PA N Y NAME

Spanning Poland SERVICES

Viking International’s geophysical arm is going to map Poland’s geology, shooting 10,000 kilometers of seismic data, Poland’s largest seismic mapping project ever attempted. BY WOJCIECH KOSC PHOTOGRAPHY BY SZYMON SZCZESNIAK

THE STAFF AT ONE of Toyota’s car

dealerships in Warsaw had something to gossip about. One day a client came into the Toyota dealership in Warsaw to pay for 32 Hilux series trucks. 32 trucks is no small order, but Rob Dunn, vice president and director of seismic operations, was paying for them in cash. Mr. Dunn is the head of Viking Geophysical Services (VGS), a company of Viking International, an oilfield services firm. Paying cash for 32 cars was a practical manifestation of the company’s strategy in Poland: get the job done today. “There are companies in our line of business that are leveraged by credit. We aren’t, we buy all our equipment with cash,” Mr. Dunn said. He needed the Toyotas to move his team around quickly, because Viking is on a job whose scope spans the entire length of Poland. 10,000 KILOMETERS In early 2012, the company began works on the so-called PolandSPAN 138 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

project for ION, a geophysical solutions company. PolandSPAN is a large, regional seismic program extending throughout the nation in four phases. According to ION, this will be the largest and most state-of-the-art seismic shoot ever in Poland. Poland may boast that since the 1950s it has researched its geology quite well, but today’s challenges - like the current dash for shale gas - require mapping Polish geology with state-ofthe-art technology. The current ambiguities as to the actual amount of shale gas in place in Poland owe in part to old data sets. Mr. Dunn says his company is up for the challenge. “We want to develop a very detailed subsurface map of Poland and it’s a great opportunity to show our expertise,” he said. “With PolandSPAN we want to establish ourselves on the market and train the national staff by introducing them to the latest technologies. We’re also planning to move to eastern European markets later on,” Mr. Dunn said. The seismic that VGS is shooting 

Viking Geophysical’s core team in Poland (from left): Rob Dunn, VP and director of seismic operations, Andrew Hope, resident representative, and Dan White, operations manager

LOGISTICS

“Geophysical departments at the universities are working on substandard data sets from 1950s or 1960s. We’ll provide them with accurate maps” Rob Dunn, Viking Geophysical

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gas operators are shooting mainly because it’s far broader in scope. “We will provide young scholars and students in geophysical departments at the Polish universities who are working on substandard data sets from 1950s or 1960s with an accurate detailed map of their country. It’s about educating the public,” said Mr. Dunn. Still, PolandSPAN is going to create a knowledge database about Polish geology that future specialists in the shale gas sector are going to find quite useful. It’s likely, and anticipated by ION, that one day operators will pick up the tab by underwriting the cost of the project. Mr. Dunn and his VGS team are currently busy completing phase 1 of the project. Phase one will include 2200 kilometers of high-quality seismic data with improved depth imaging and regional coverage. It’s expected to finish by end of 2012. The entire PolandSPAN project will execute some 10,000 kilometers of seismic data. SHOOTING THE SHALE BELT For Mr. Dunn and his team in Poland this could translate into even ten years of work. Phase 1 of PolandSPAN coincides with the crucial exploration phase in the development of shale gas. Phase one of the project covers a stretch of the Polish shale formations - the Baltic, Podlasie and Lublin basins - that could contain most of Poland’s estimated 346 to 768 billion cubic meters of shale gas. Mr Dunn’s work thus fits in the broader effort of the Polish state to produce shale gas as soon as possible, maybe even from 2015. To do the job, apart from buying the Toyotas, Viking International, in conjunction with its affiliate Viking Oilfield Services, opened a branch office in Warsaw, Poland in October 2011. A small 140 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

PICTURE: PIOTR KNAP

 is quite unlike the seismic that shale

Shooting is on: 10,000 kilometers of seismic data

room in a shared office space may suffice for the core team of three people apart from Mr. Dunn there are Andrew Hope and Dan White, former country manager for Global Geophysical - but out in the field there are more than 200 people at work, says Mr. Dunn. “We’re using 10 Commander series vibrator trucks which have a capability to go very low frequencies to allow us to penetrate salt, for example, 44 shipping containers that are mobile offices we use for data processing. Overall, our environmental footprint is pretty small for this kind of operation,” said Mr. Dunn. VGS contracted IP Group to do permitting and manpower, CDM Smith to do permitting and compensation, and Apex to do permitting and uphole driling. “What we do is coach and mentor those companies about the business to improve their position on the market,” said Mr. Dunn. “Shooting seismic is simple if you follow a certain sequence of tasks. You can replicate it regardless of the theater of operations you’re working,” Mr. Dunn said. He refers to a subcontractor hired during Viking’s early days in Poland that couldn’t quite understand

what it takes to shoot seismic properly. “The sequence is always the same. The government permits come first, the tender comes out, the operator awards the tender, you take a broad view of the area that you’re going to work in, work with your project team to perfect the blueprint of the project, do the permitting, send your survey team on the ground, bring equipment in, and then bring the closing crew to measure the land and crop damages. It will always be in that order,” he added. THE NEXT STEP Concurrent with the opening of the office in Warsaw, Viking registered with Achilles to be a preferred supplier of oilfield related services in Europe. This registration will help facilitate tender invitations and communication with major IOC’s and NOC’s in the area. Viking looks to follow the recent import of seismic equipment with both drilling and completions equipment. The PolandSPAN project is VGS’ only job in Poland but for Mr. Dunn and Viking International it may well be the point from which they’ll jump into the shale gas E&P market in Poland.

PICTURES: KRZYSZTOF RATSCHKA

EVENTS

Terrapinn guests are enjoying a complimentary copy of the SGIG.

From left, Monika Chrostek, Trinity Corporate Services marketing and communications manager, speaks with Tom Ravensdale, CEO of Trinity Group

Shale Gas World Europe

FALL COCKTAIL Paul Gilbertson and Sean Willis take pride in producing the premiere shale event in Europe. Representatives of Terrapinn, a UK based conference organizer, Mr. Gilbertson and Mr. Willis flew into Warsaw to present the results of their shale confidence survey. Shale Gas World Europe (Terrapinn) has proven to be the premiere shale event.

From left, Marek Cibor, managing partner, and Dorota Flint, managing partner, both of DBM Services, speak to Parker Snyder, Director of Cleantech Poland

Guest of the Terrapinn mixer reading the spring 2012 edition of the Shale Gas Investment Guide/Poland.

From left, Sean Willis, Terrapinn managing director speaks with Tom Ravensdale CEO and Sylwia Toczyska, accounting manager of TCS Paul Gilbertson, marketing director of Terrapinn

Wolfgang Mitschker, regional manager for Poland, KCA Deutag Bill Marble, COO of Wisent Oil and Gas, shale veteran from the U.S.

From left, Andrzej Szczesniak, NaftaGaz.pl, in conversation with Malgorzata Chodur, business development director for Veolia Water Systems

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TOP 5 HR FIRMS 86.4

Comment:

is t nt l Cl ie

r ie nc RE e ex in p PL er 3 ie nc e 2

&G in ex PL p e

Co n in tac fo t

biuro.hq@adecco.com +48 22 376 09 00 Al. Jana Pawła II 19 00-854 Warsaw

yes

Enea, Energa, E.ON, EC Kraków, EDF Polska, RWE, EDP Renewables, Everen, Dong Energy, ENI Polska,Vattenfall, Von Roll

Łukasz Radzikowski lra@hrk.eu +48 604 397 403 Pl. Bankowy 2 00-095 Warsaw

yes

WND4

Agnieszka Nowak

a.nowak@wsenergy.com +48 508 000 779 ul. Ruska 51 50-079 Wrocław

yes

Platinum Oil, RWE STOEN, Tauron, Global Geophysical Services, Silurian, Broen Oil&Gas, Boryszew, Huta Batory, Enea, Elektrownia Rybnik, LM Wind Power Services, PGE ENERGIA ODNAWIALNA.

WS energy provides paid internships. Paying young people for their work assigns a value to their labor and helps to create a positve brand.

44.9

Comment:

WND4

Although not many companies chose to calculate their GHG footprint, HRK believes it’s a small investment into sustainable business.

53.2

Comment:

yes

Adecco has bike racks, an incentive to use a form of clean transport and promote healthy living.

62.1

Comment:

maciaszek@hays.pl +48 22 584 56 61 ul. Złota 59 00-120 Warsaw

yes

Gender balance in management means a higher score in Cleantech’s ranking.

75.6

Comment:

Bartosz Maciaszek

Sylwia Rzemieniewska sylwia.rzemieniewska@ targetexecutivesearch.com +48 693 367 711 Bagno 2/6 lok. 205 00-112 Warsaw

yes

WND4

Target subsidizes their employees’ public transportation. They avoid traffic, emit less CO2, and get to work quicker.

1. OUT OF 100. THE CLEANTECH QUOTIENT IS AN IN-HOUSE DEVELOPED ARITHMETIC TOOL, WHICH MEASURES THE COMPETENCIES OF RANKED COMPANIES 2. OIL & GAS EXPERIENCE IN POLAND 3. RENEWABLE ENERGY EXPERIENCE IN POLAND 4. WOULD NOT DISCLOSE

142 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

SOURCE: THIS RANKING IS BASED ON SELF REPORTING AND INTERNAL ANALYSIS, AUGUST 2012

Cl e Q ant uo e tie ch nt 1

Co m Na pa m ny e

Sustainability, Capacity, Experience, Sectorial Coverage

ENERGY CONSULTANTS RANKING 83.8

Comment:

4 AN INDEPENDENT MEMBER FIRM OF BAKER TILLY INTERNATIONAL

is t nt l Cl ie

2 r ie nc RE e e in x p PL er 3 ie nc e

Co n in tac fo t

&G in ex PL p e

AES, Aurelian, BNK Petroleum, BP, Bogdanka, Chevron, ConocoPhillips, Dalkia, Dong Energy, EDF, Enea, Energa, Eni, E.ON, EWE, ExxonMobil, Fortum, Gaz-System, Iberdrola, JSW, KGHM, KHW, Kompania Węglowa, Kulczyk Investments, Lotos

Witold Domek

domekw@cdmsmith.com +48 22 551 93 00 Stawki 40 01-040 Warsaw

yes

Orlen Group, ArcelorMittal, Nordex, Green Bear, Fortum, PPL, Marathon, ConocoPhillips, Exxon Mobil, BNK, ENI, PGE

Ewelina Tyszko

e.tyszko@ekoefekt.pl +48 604 397 403 ul. Modzelewskiego 58A/89 02-679 Warsaw

yes

PGE, KGHM Polska Miedź , EDP Renewables, DONG Energy, MARTIFER Renewables, Global Wind Energy, Wind Prospect, VORTEX Energy, Geo Renewables, Infusion, Akuo Energy, Green Bear Corporation/CONERGA, DELITISSUE , KWB Konin, KWB ADAMÓW, EOLICA Wojciechowo, NFOŚiGW, Elektrownia Wiatrowa KAMIEŃSK, Windprojekt

yes

David James

djames@bakertilly.pl +48 725 000 007 ul. Hrubieszowska 2 01-209 Warsaw

yes

Lane Energy Poland, Lane Resources Poland, Jastrzębska Spółka Węglowa, Lennox Polska, Sagittarius Solutions, Clariter Poland, Ezada, Green Lights, Farma Wiatrowa Słupca, Farma Wiatrowa Kluczbork, Energetyczna w Polsce, Mercuria Energy Trading

BAKER TILLY has showers in their offices for employees who chose to run/bike/skate to work.

36.0

Comment:

yes

EKO-EFEKT is a mid-sized company, which ranked high because their experienced staff knows what to trash and what to recycle.

49.1

Comment:

yes

CDM Smith’s consultancy spans many sectors, including the nascent shale gas market.

53.8

Comment:

maciej.chyz@pl.pwc.com +48 502 184 611 Al. Armii Ludowej 14 00-638 Warsaw

One of the reasons why PwC scored the highest is because they have a proven track record in promoting sustainable business.

56.1

Comment:

Maciej Chyż

Tomasz Snazyk

t.snazyk@bioalians.pl +48 662 229 251 Al. Jerozolimskie 81 02-001 Warsaw

yes

WND4

Bio Alians specializes in biogas and provides lawmakers with advice on the sector’s needs .

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SOURCE: THIS RANKING IS BASED ON SELF REPORTING AND INTERNAL ANALYSIS, AUGUST 2012

Cl e Q ant uo e tie ch nt 1

Co m Na pa m ny e

Sustainability, Capacity, Experience, Sectorial Coverage

Packers Plus Open Hole Multi-Stage Completions Solutions for Shale

Horizontal drilling and multi-stage fracturing technologies have provided the ability to access unconventional reserves, such as those found in shale plays worldwide. This process was made economical by the introduction in 2001 of open hole multistage fracturing systems by Packers Plus Energy Services.

PACKERS PLUS

s depletion of conventional resources occurs at a rapid pace and demand continues to grow, oil and gas producers around the world are searching for ways to economically access massive reserves in tight formations. In particular, the massive reserves held in shale formations have become a major focus for exploration. Horizontal drilling and multi-stage fracturing are the two technologies credited for enabling exploitation of these reserves. A completion solution which has made these processes economical is the Packers Plus StackFRAC® open hole multi-stage fracturing system. The StackFRAC system was originally adopted for the operational efficiencies it provided compared to the conventional cemented liner, “plug and guns” method.(7) By enabling stimulation of the entire horizontal well in a single, continuous pumping operation, the StackFRAC system reduces completion time and lowers costs. Over a decade after its introduction, operators have discovered additional benefits, such as increased production and reduced water usage. OPERATION The StackFRAC system uses hydraulically set, mechanical RockSEAL® II packers to isolate the wellbore into sections and FracPORT™ sleeves to stimulate the entire length of the lateral with144 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

out the need for cement or plugs (Fig. 1). The StackFRAC system is run into the wellbore from a rig by spacing out tools on production liner. Once the system reaches total depth, the RockSEAL packers are set using hydraulic pressure, and the rig can be moved to another location. The FracPORT sleeves create openings between the packers to deliver the programmed stimulation and allow for production flow. The first FracPORT is opened hydraulically at a specific pressure, and the remaining FracPORT sleeves are ball-actuated using sizespecific balls. The balls create internal isolation from stage to stage as the stimulation process moves from toe to

heel in one continuous operation, unlike cemented liners which require multiple coiled tubing interventions to set and unset bridge plugs, perforate and clean-out. BENEFITS The StackFRAC system offers many features that make it reliable and repeatable from an operational perspective. Packers Plus can attribute the achievements of this technology to a set of features and benefits inherent to its design. OPEN HOLE COMPLETION

Open hole completions inherently have the ability to produce more oil and gas from shale formations compared

O P E N H O L E M U LT I - S T A G E S O L U T I O N S FEATURES AND BENEFITS

WHY IT MATTERS

Open hole completion

Access to natural fractures, increased inflow area and lower breakdown pressures

Continuous pumping operation

Improved fracture connectivity, reduced water usage, and reduced completion time and cost

Immediate flowback

Minimized reservoir damage, and reduced time and cost of getting wells on production

More stages

Maximized reservoir contact

RockSEAL II packer FracPORT sleeve

Figure 1. StackFRAC open hole multi-stage system completion.

“Natural fractures are present in nearly all gas productive shales, but are very rarely productive…until opened and connected with a hydraulic fracture treatment. Whether the fractures are simply closed or mineralized and plugged, they offer a plane of weakness in the rock.”(5) These natural fractures increase the reservoir contact and allow production in addition to the fractures introduced by the stimulation treatment. Cemented liner completions do not allow production from natural fractures that transect the lateral wellbore or from the rock matrix itself. This logic was applied to a Barnett Shale study by Fisher et al. (2004) where “for horizontal wells with transverse fractures, open hole completions were outproducing the cemented completions by approximately 20 – 40%.”(3) The conclusion was that because the Barnett Shale has a relatively high brittleness,

the natural fractures present would be produced in the open hole wells, while the cemented wells would plug them off.(1)

“Open hole completions inherently have the ability to produce more oil and gas from shale formations compared to cemented liner methods.” In addition to production benefits, open hole completions enable fractures to initiate where breakdown pressures are lowest along each isolated zone. “By employing a cased and perforated design the lateral is artificially constrained as to where a hydraulic fracture can initiate; whereas, in the open hole design, a hydraulic fracture can initiate at any point of weakness, potentially a natural fracture, between the open hole packer elements from any given fracture port.”(2) “Inefficient fracture initiation is the largest reoccurring problem seen when completing horizontal Barnett shale wells.” “…cemented laterals also yielded a higher rate of inefficient fracture initiation than seen in uncemented laterals”(4) By reducing the stimulation pressure required to

initiate a fracture, open hole completion systems need lower stimulation rates at surface. This translates into fewer pump trucks at surface reducing stimulation costs. CONTINUOUS PUMPING OPERATION

Displacement refers to where the proppant lies in reference to the wellbore wall. Over displacement is when there is no near-wellbore proppant because pressurized fluid has forced it deep into the fracture, or overflushed. Initially, an un-propped fracture may remain open and allow for production, but as the bottom hole pressure drops off, the fracture will close in on itself negating the value of the treatment. Optimal displacement is when proppant remains near wellbore to hold the fracture open and allow hydrocarbons to flow into the wellbore with minimum drawdown pressure at the formation surface. In cemented liner, plug and perf completions, overflush is unavoidable because the wellbore must be cleaned between stages to ensure that the bridge plugs do not get stuck due to the presence of proppant from the previous stage. Typically, an entire wellbore of  CONTINUED NEXT PAGE... Some or all of the systems, methods or products discussed herein may be covered by one or more patents, or patents pending. © 2012 Packers Plus Energy Services Inc. All rights reserved.

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to cemented liner methods. Numerous field studies have demonstrated that open hole outperforms cemented liner completions in shale by between 25 to 80%.(8,9,10) A theoretical study compared the two completion methods using thermal/fluid network analyses software and concluded that “for horizontal wells with transverse fractures, assuming equivalent fracture geometry, it is physically impossible for a cemented completion to out-produce an open hole completion.” The author attributed the increased production to natural fractures within the open hole section.(1)

FracPORT

RockSEAL II

Sleeve

OPERATING IN

Packer

LONGEST LATERAL

ACCOUNTING FOR OVER

COMPLETED OVER

SYSTEMS

14,025

112,000

COUNTRIES

FEET

STAGES

 fluid is displaced before a bridge

plug is pumped down with additional fluid. In contrast, the operation of the StackFRAC system uses a stageto-stage fluid volume (flush) to calculate when the ball should be launched so that it seats and isolates the next stage just as the flush fluid reaches the previous ball seat. This maximizes production via optimized near wellbore conductivity from fully propped fractures and minimizes water usage, a major focus in shale development. (3,9) The continuous pumping operation of the StackFRAC system also helps to reduce rig time by eliminating coiled tubing or wireline intervention necessary in cemented liner completions to set and drill out bridge plugs, run perforating guns, and clean out, all of which require separate trips.(3,7) In a study by Lohoefer et al. (2010) in the Barnett Shale, the StackFRAC system “eliminated approximately two weeks of completion operations.”(6) Other studies have shown similar time and cost savings in major tight gas plays both in Canada and the United States.(8,10) IMMEDIATE FLOWBACK

Because shale reservoirs are clay rich, stimulation fluids used to create fractures, particularly water-based fluids, can cause reservoir damage through clay swelling and fluid retention. Although traditional waterbased fluids can be replaced with less 146 | SHALE GAS INVESTMENT GUIDE | WINTER 2012

damaging media such as N2/CO2 foams or propane, these may not be readily available. Therefore, it is critical that the time between the first fracture stimulation to when the well is flowed for cleanup is minimized. Cemented liner methods require poststimulation mill-out of bridge plugs resulting in prolonged fluid contact with the reservoir; whereas, open hole completions allow for immediate flowback minimizing induced reservoir damage and reducing the time and cost of getting wells on production. The shorter operating time required for StackFRAC systems also makes more efficient use of fracture crews allowing them to move on to other jobs sooner than with the cemented liner plug and perf method. MORE STAGES

Increased reser voir contact achieved through induced hydraulic fractures allows multi-stage fractured wells to produce more hydrocarbons than unfractured wells due to the increase in inflow area. Shale formations have very low matrix permeability, so an efficient network of induced fractures is mandatory to provide permeability for the trapped gas to flow. Direct comparisons of production enhancement and fracture evaluations have shown increased complexity, productivity and recovery with higher number of fracture stages. (5) In a study done in the Bakken Shale, Zan-

9,800

der et al. (2011) “determined that the increase in production was due more to the increase in stages rather than the increase in the lateral length of the well.”(11) Trends in shale and other tight formations have shown increased stage counts in an effort to improve recovery and optimize production by maximizing reservoir contact.(5,8) Packers Plus StackFRAC systems have the capability of performing 40+stages and ongoing research and development in staging technology continues to push the envelope as to how many stages these systems can deliver. REFERENCES

1. Augustine, J. R. 2011. SPE 142279. 2. Decker, N., et al. 2007. SPE 109948. 3. Fisher, M.K., et al. 2004. SPE 90051. 4. Ketter, A.A., et al. 2005. SPE 103232. 5. King, G. 2010. SPE 133456. 6. Lohoefer, D., et al. 2010. SPE 136196. 7. Seale, R., et al. 2006. SPE 104557. 8. Snyder, D. & Seale, R. 2011. SPE 142729. 9. Snyder, D. & Seale, R. 2012. SPE 155095. 10. Wilson, B., et al. 2011. CSUG/SPE 149437. 11. Zander, D., et al. 2010. SPE 135195.

For more information visit www.packersplus.com. Some or all of the systems, methods or products discussed herein may be covered by one or more patents, or patents pending. © 2012 Packers Plus Energy Services Inc. All rights reserved.