Cablegate: Poland's Potential Shale Gas Investments

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PP RUEHIK
DE RUEHWR #1037/01 2801404
ZNR UUUUU ZZH
P 071404Z OCT 09
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC PRIORITY 9014
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 WARSAW 001037

SENSITIVE
SIPDIS

STATE EEB/ESC FOR DOUG HENGEL AND S/CEE FOR REBECCA NEFF,
COMMERCE FOR HILLEARY SMITH

E.O. 12958: N/A
TAGS: ECON ENRG EINV PL
SUBJECT: POLAND'S POTENTIAL SHALE GAS INVESTMENTS

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1. (SBU) Summary: The success of companies in the U.S. at
extracting gas from shale and other unconventional sources
has generated some excitement in Poland. Several majors and
mid-majors have applied for exploration licenses over the
past year and performed broader market and investment climate
studies. While these companies are cautiously optimistic,
the government and local energy concerns remain unconvinced,
arguing that "tighter rocks" make Polish shale gas
uneconomical. Based on the conflicting views, it appears
that either Polish officials underestimate recent advances in
technology (exacerbated by the companies' attempts to
downplay potential), or global energy companies are overly
optimistic. Major finds would change how Poland views
climate/energy security and their related priorities in
Brussels. Facilitating exploitation investments might also
inspire the GoP to address long-standing impediments to
infrastructure development. End Summary.

Changing the Gas Mix
--------------------
2. (SBU) Poland currently generates about five billion cubic
meters (bcm) or one third of their total annual gas
consumption from conventional domestic sources, importing the
remainder from Russia. Government officials have not yet
factored nonconventional gas into Poland's energy security
strategy. State-owned monopoly importer PGNiG is still
focused exclusively on conventional domestic and
international exploration, and will not substantially invest
in nonconventional sources. However, if global energy
companies are right, this shale gas will clearly change the
game.

3. (SBU) Global industry representatives are tight-lipped
about specifics, but they tells us they see huge potential
for expansion into unconventional sources - with some
suggesting they could easily surpass total domestic
consumption (about 15 bcm/yr) making Poland a net exporter in
years to come. Marathon representatives thought they could
be producing gas within the next two years. Ministry of
Environment geologists and experts at the Oil and Gas
institute (a commercial research institute under the
supervision of the Ministry of Economy) claim that Poland has
a large formation similar to US geological formations which
have proven so productive. But they add that the "rocks are
tighter," suggesting higher extraction costs and lower
potential. Energy companies are betting on a large swath of
land cutting diagonally across the country from just off the
northwest coast to the country's southeastern borders.

Global Players Quietly Get in the Game
--------------------------------------
4. (SBU) Chevron, Conoco Phillips, Exxon, FX energy, and
Marathon are all actively developing or seeking new
exploration rights in Poland. While they are quiet in their
preliminary operations and subdued in their public
expectations, it is clear that all are in a hurry to move
into this potential market. Marathon and Exxon have already
appointed country directors and are working to establish
local offices. FX has a history in Poland and has already
partnered with PGNiG on smaller extraction projects. While
the companies do not advertise their presence, the Ministry
of Environment is transparent in its licensing of
exploration, providing a CD and map of current and potential
investors to anyone interested. Their flat fee structure for
exploration of quadrants suggests they aren't yet looking to
manage expectations as a negotiating tool.

Potential Hurdles to Investment
------------------------------
5. (SBU) Companies considering investments have noted
concerns which reveal not only their high expectations, but
also potential pitfalls to development:

- Domestic Market Access: Poland's state-owned monopoly
importer (PGNiG) and distribution system (Gaz System) will
need to support any eventual exploitation and delivery of
product to market. These state-owned monopolies are a
concern, as they can influence gas prices and construction of
supporting infrastructure (particularly pipelines). On the
plus side, domestic demand is expected to increase rapidly as
Poland searches for alternatives to coal.
- Exports: Poland is working hard to lock-in long term
global gas supply commitments (most notably from Qatar and
Russia). Any significant finds will require accessing
broader regional markets. There is a great deal of
uncertainty surrounding Poland's verbal commitments to gas
interconnectors.

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- Land Use: Poland has a history of difficult negotiations
over land use spoiling large investments, notoriously highway
development. Imminent domain legislation is still new and
untested. Access to exploration sites and rights of way for
eventual pipelines can be impeded by any number of local
authorities or small private landowners.
- Exploration/Exploitation Rights: To date, the process has
been very straightforward. However, state-owned mining
companies and PGNiG control much of the country's mineral
rights. Should initial exploration raise expectations,
dealing with cash-strapped state-owned companies may prove
difficult.

Comment: Changing Climate/Energy Security Calculations
--------------------------------------------- ---------
6. (SBU) Shale gas development would dramatically impact
Poland's energy security calculations as well as their
willingness to participate in global climate change
initiatives. At the highest levels, the government would
welcome and encourage local exploitation as an alternative to
buying more Russian gas or increasing reliance on coal. The
investment climate concerns while real, are surmountable.
Today, the best information on unconventional gas potential
probably lies with experts in the major global energy firms.
If and when they are ready to substantially invest in
exploitation, we expect the GoP will work to facilitate that
investment, including ordering the state-owned energy
companies to support development. The process of
facilitating this investment may in fact open the door to the
USG working more closely with Poland on addressing the last
of its long-standing structural impediments to development.
TULLEY

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