Eastern European Shale Exploration on Ice as Boom Turns to Bust

American oilers who promised the coveted 'independence' from Russian hydrocarbons are now leaving

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Originally appeared at Financial Times


Chevron, which led the charge into eastern European shale exploration, has pulled out of Lithuania, Ukraine, Romania and Poland

Whatever happened to the much-heralded eastern European shale gas boom? The answer is that, for now at least, it has quietly become a bust.

Even more than in the rest of Europe, unconventional gas seemed a few years ago to hold out great promise in the centre and east of the continent. With Moscow flexing its geopolitical muscles, shale gas offered the prospect of reducing energy costs and reliance on Russian imports, which in some former Soviet bloc countries is 100 per cent.

Western oil majors, especially from the US, began to flock late in the past decade into countries such as Poland, Hungary, Romania and later Ukraine, hoping to replicate the North American shale boom.

But alarm bells began to sound in 2012 when ExxonMobil pulled out of Poland — seen as one of the continent’s best prospects — after disappointing test well results. The Polish Geological Institute also estimated recoverable reserves of shale gas in the country that year at 346bn-768bn cubic metres, only about one-tenth of previous estimates by a US agency.

Since then, other majors have made for the exits. In the space of eight months from summer 2014 to early this year Chevron, which had led the charge into eastern European shale exploration, pulled out of Lithuania, Ukraine, Romania and Poland. This summer, ConocoPhillips, the last US major in Poland, withdrew, following on the heels not just of Chevron and ExxonMobil, but Marathon Oil of the US, Talisman of Canada, Total of France and Eni of Italy.

 

Tim Wallace, Conoco’s manager in Poland, said after drilling seven wells in three exploration blocks, and investing about $220m since 2009, “unfortunately, commercial volumes of natural gas were not encountered”.

Just a few years ago, Poland’s government had hoped commercial shale gas production would be under way by now. Instead, after more than 70 test wells were drilled on 45 blocks, with investment totalling $2bn, no industrial-scale production has begun.

The reasons for the bust across the region are varied: sometimes unfavourable regulatory and tax regimes, as well as bans or temporary moratoria on hydraulic fracturing such as in Bulgaria, Romania and the Czech Republic, often following environmental protests. Some senior western officials, including Anders Fogh Rasmussen last year when he was Nato secretary-general, have accused Russia of secretly stirring up such protests, which Moscow denies.

Lower oil prices have also changed the financial equation, in a region where drilling costs are high and which lacks the infrastructure whose development has driven costs down in the US.

On top of all that, in the words of one executive from a US oil major, “the rocks aren’t there”.

Geological formations that appeared promising in countries such as Poland have turned out to be more difficult to fracture with existing technology than reserves in North America. Some industry insiders say the geology has been the biggest single factor holding back development of central European shale.

But while Poland no longer looks like becoming a new North Dakota, its domestic energy companies PGNiG and PKN Orlen have been charged with continuing to try to develop its shale reserves.

Polish officials remain optimistic that some commercial shale production will begin — reducing the country’s reliance on Russia for about 60 per cent of its gas needs.

Once oil prices rise again, drilling will become more affordable. The experience and data amassed by energy companies so far can then be put to use in attempting to adapt technology to local geological needs.

Ukraine, too, which has seen Shell and Chevron withdraw from unconventional gas exploration, is hopeful that if it can resolve its eastern conflict and stabilise the economy, shale production will be developed.

It may ultimately be domestic companies and smaller independents, not the international majors, that will harness the unconventional resources of eastern Europe.

With development of unconventional gas stalling, moreover, a pointer to the future may be this month’s EU-backed deal to build a 534km gas pipeline from Poland to the Baltic states. All three Baltic republics were until recently entirely dependent on supplies from Russia.

Also this month, outgoing Polish prime minister Ewa Kopacz officially opened a long-delayed liquefied natural gas terminal on Poland’s Baltic coast at Swinoujscie. The first LNG tanker is expected to dock in late November.

For the time being, diversifying eastern Europe’s sources of supply is likely to rely on these efforts to develop LNG capacity and establish more “interconnector” pipelines to enable gas to flow more freely. The promise of shale gas will have to wait.

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