Sunday, 24 May 2015

Tight gas in Poland - is there potential for an exploration?

The news media circulated recently that Poland has large deposits of so-called “tight gas” which is easier in the extraction in comparison to shale gas. Bearing in mind the initial enthusiasm and later disappointment about exploration of shale gas, we shall take a closer look at Polish gas market before judging its potential profitability, considering not only the reserves of tight gas but also market environment.

Before discussing the subject in detail, we should take a closer look at the gas extraction in Poland. What might be surprising to those who are not having particular interest in the power market of the region, Poland has significant resource of gas on its territory (resource a total amount of the raw material; reserve is the amount of resource that is accessible). In the same time, despite its resources, gas extraction in Poland has not changed for past 10 years. There was potential for increased gas exploration, even if it was limited to conventional deposits of this raw material. Confirmed deposits of ordinary natural gas (called conventional, which Poland extracts for decades) in Poland are equal to 134 billion cubic meters. Its production in 2013, however, stood at just 4.4 billion cubic meters and in 2014 it was probably at a similar level (there is no official data yet).

The main producer of gas in Poland is PGNiG (Polish Oil and Gas Group), who accounts for 95 percent of total gas production. At the same time, company in its strategy for the years 2014-2022 does not plan to increase domestic production of this raw material after 2022.

Apart from conventional gas resources, Poland still has very large resources of unconventional gas, equal approx. to 150-200 billion m3 of recoverable tight gas and about 350 to 770 billion m3 of gas shale (according to estimates by the Polish Geological Institute). In addition, Poland has substantial deposits of yet another unconventional gas: 168 billion m3 of methane, hidden in seams of coal. The extraction of methane has been discussed for about twenty years, but for now, similarly as the discussion over shale gas, there have not been action plan drafted.

What is tight gas exactly ? Tight gas refers to natural gas reservoirs locked in extraordinarily impermeable, hard rock, making the underground formation extremely "tight." Tight gas can also be trapped in sandstone or limestone formations that are atypically impermeable or nonporous, also known as tight sand. While a conventional gas formation can be relatively easily drilled and extracted from the ground unassisted, tight gas requires more effort to pull it from the ground because of the extremely tight formation in which it is located. In other words, the pores in the rock formation in which the gas is trapped are either irregularly distributed or badly connected with overly narrow capillaries, lessening permeability -- or the ability of the gas to travel through the rock. Without secondary production methods, gas from a tight formation would flow at very slow rates, making production uneconomical. One of the most important aspects of drilling for any petroleum is predetermining the success rate of the operation. ( Rigzone, 2015) According to the scientific publications, tight gas from coal proves to be easier to extract than shale gas. To clearly illustrate the difference between shale and tight gas, we shall refer to the publication of Shell : “While shale gas is trapped in rock, tight gas describes natural gas that is dispersed within low-porosity silt or sand areas that create a tight-fitting environment for the gas” ( Shell, 2015 ).

Poland could take other countries as an example and learn from their experience. To compare, Americans were able to extract up to 56 billion m3 of gas (annually) from coal seams; China, Canada and Australia - of 5-6 billion m3. To compare: the annual gas consumption in Poland is 16 billion m3, out of which 9 billion is imported from Russia (2013.).

The data gains significant importance if one considers Polish energy security. Around 75 % of the gas consumed in Poland is imported - mostly from Russia. In 2013, Russian gas accounted for 77 percent of Polish imports.

Oil and Gas fields in Poland: click on the image to see it in bigger size

And again, one could look at other countries in finding solutions to the existing situation. If we take a look at Ukraine and Romania, one can notice that gas demand (imports from Gazprom) has significantly decreased in these countries. In Ukraine, the national gas production is growing - not including lost deposits in the Crimea - and already exceeds 20 billion m3 per year (what is more than four times higher than in Poland), what corresponds to 40 percent of Ukrainian consumption of gas. Last year (2014), Ukraine has bought 50 % less gas from Gazprom, in comparison to 2013. Another example is Romania, who has gradually reduced purchases of gas from Gazprom. Coming April (April 2016), the country will cease purchasing Russian gas – they will be able to supply "blue fuel" from their own national reserves. It happened mainly due to the reduction of gas consumption in the country. It is now about 1/3 less than ten years ago. Ukraine is doing the same thing - reduces gas consumption what contributes to fewer purchases from Russia.

Gas pipeline network in Poland; the thick pink line is Jamal pipeline, another significant pipeline enters Poland in Przemysl ( from the side of the border with Ukraine)

The fact that Poland never seriously considered exploration of its natural gas can be explained by multiple reasons, but it is necessary to date back to political changes that took place in Poland in 1989. The history shows that successive governments, which were assembled after 1989, did not seem to be interested in an increase in domestic gas production. They did not create good conditions for investment in the industry: they did not shorten nor simplified the administrative procedures in this respect. More important, however, was another factor that successfully discouraged companies to be interested in gas market in Poland - more than 90 percent of gas market - its extraction and delivery to customers - should be controlled by the state company PGNiG (Polish Oil and Gas Group). On the 236 licenses issued so far on gas and oil production in Poland, 228 falls into PGNiG’s.

Having in mind the, so-called, “gas crisis” from the beginning of 2009 – when Gazprom stopped delivery of gas due to price conflict for gas delivery with Ukraine that affected Poland significantly, it would be wise to plan alternative ways of providing gas supply. Diversifying supplier range can be an option, but the solution meets limitation from the infrastructure perspective. Exploration of the national resources seems to be the most dependable option.

To conclude, Poland should see the potential that exploration of gas brings, either it is shale gas or tight gas. Apart from gaining energy independence, it might bring a lot of capital to the country and secure its prosperity in decades to come, what the best examples are countries like Norway or the Netherlands. At the beginning, the government should put significant effort in the research of potentiality of exploration of existing resources and then simplify the law to invite more experienced, (mainly) foreign companies to the initial exploration face. What will happen – the time will show.