Dar & Company

Why Poland is the Most Compelling
Shale Gas Opportunity Right Now 
(First published on www.SeekingAlpha.com on July 13, 2010)

A new, multinational sub-industry is developing: The production of natural gas from tight sands, shale and coal bed methane (CBM) in significant quantities. What started as a niche play in Texas has spread across North America and from there to Australia (CBM, tight sands). China is the next large emerging play in all three forms of natural gas production with India following.

Interest in Europe and even Turkey is increasing by the month, with Eastern Europe ahead of Western Europe in its trajectory of shale and tight sands development. Poland is the first to attract significant technology, operating experience and risk capital from North American exploration and production (E&P) companies in developing its potentially large shale resources.

Ukraine, Hungary, Crotia an Romania are alo currently evincing surveying, analysis and exploration interest in shale and tight sands.  The Ukrainian government ha stated thatit plans to finalize E&P cintracts with U.S. companies fror shale and coal bed methane development with initial production anticipaed in four years.  The government believes Ukraine's shale resources ae amongst the st attractive in Europe.  Of voute, no one can currenlty erify this in the absence of drilling.  Hungary's tight sands prospects in the Mako Trough continue to interest from Falcoln OIl and Gas (headquartered in Denver, incorporated in British Columbia) eem after its initial wells did not produce conclusive results.  

In Croatia, the Drava Depression is suspected to have notable tight sands and deep shale resources at depths between 11,000 and 14,000 feet. Croatia's INA Naftaplin is currently analyzing these resources.

In Romania, a start up Canadian E&P company focused on unconventional natural gas, called Avere Energy Inc, was awarded 4 exploration blocks where there is thought to be large shale and tight sands resources as well as conventional gas. The blocks are within the Pannonian Basin, a proven oil and gas producing area.

In Turkey, a U.S. based E&P company, TransAtlantic Petroleum Ltd., is concentrating on the Thrace basin (where it holds 1 million net acres) for its tight sands potential. The company plans to have 5 rigs drilling in tight sands formations by mid 2011 and expects significant commercial production. TransAtlantic asserts that it has considerable exposure to shale gas in southern Romania along the Bulgarian border and expects to drill a well within a year to test the quality of the shale resource.

In Western Europe, governments and companies are actively studying shale resources (with several test wells planned over the next 2 years) in Germany, Denmark, France, Sweden and the U.K. However, commercial production seems to be a decade away, if at all.

It is Poland that clearly has the lead. Its shale resources have attracted the interest, technology and money of both the largest integrated majors (ExxonMobil (XOM) and Chevron (CVX)) and mini majors, (ConocoPhillips (COP) and Marathon Oil Corp (MRO)) as well as small independents (Realm Energy International, San Leon Energy, Aurealian Oil and Gas, for example). Poland's gas monopoly PGNiG is also interested. Poland has issued 58 licenses (as of July 2010) to search for shale natural gas in the past 2 years, mainly in the Lublin, Mazowsze, Pomeranian and Lower Silesian regions. This represents about 12% of Poland's geography. PGNiG has 7 of these licenses. The good physical conditions, hospitable terrain, access to attractive markets and suspected scale (40 to 90 Trillion cubic feet) and quality of the resource base, make Poland the most compelling shale gas opportunity in Europe in the near term.

ExxonMobil is looking at Poland and Germany for its initial test drilling for shale gas in Europe. Chevron was recently granted 5 year exploration rights for 4 shale concessions: Zwierzyniec, Kransnik, Fampol and Grabowiec. A joint venture of ConocoPhillips and Canada-domiciled Lane Energy has started drilling in the Baltic Basin in Northern Poland. The venture plans to drill two wells to explore the Silurian and Ordovician shale resources. The complete exploration program could take 4 years.

Marathon has seven concessions in Northern, Central and Southeastern Poland, totaling 1.4 million acres. Its exploration objective is Lower Paleozoic shale gas at depths of 8,000 to 13,000 feet, similar to successful shale production in the U.S. Marathon studied several European and Asian shale basins before making Poland its priority.

Vancouver-based Realm Energy has 3 concessions that target the Silurian, Ordovician and Cambrian shales. These are the Gniew, Ilawa and Wegrow concessions. The latter 2 concessions are owned jointly with Source Energy Partners of Denver. Adjoining the Ilawa concession are prospects held by a joint venture of San Leon Energy and Talisman Energy, a joint venture of ConocoPhillips and Lane Energy and by Marathon.

Adjoining the Wegrow concession are prospects held by ExxonMobil, EurEnergy Resources Corp and Cuarilla Resources Holding Company.

Currently Poland depends almost entirely on Russian natural gas imports. Should Poland succeed, as it hopes, in developing its shale resources, it could be net self reliant in 15 to 20 years. Producing shale gas in Poland is likely to be significantly more expensive than in the U.S. However, the jobs, income and national security benefits may justify the investment, effort and price.

Both European nations and Russia are keenly following the activity in Poland, for opposite reasons- obviously. For the former, Polish success may be the harbinger of a continent wide opportunity; for the latter, a major strategic threat. Fifteen to twenty years seem remote to the retail investor but they are merely mid term in the investment and strategic horizons of the majors, mini majors and Russia's Gazprom (OGZPY.PK).