Unconventional Gas - A Chance For Poland and Europe

Unconventional Gas aChanceforPoland and Europe?
AnalysisandRecommendations
IzabelaAlbrycht, KeithBoyfield, JarosawM.Jankowski, MaciejKaliski, MaciejKoaczkowski, MarcinKrupa, GuyLewis, ZiwaseNdhlovu, KentF.Perry, PawePoprawa, RomanRewald, AlanRiley, MariuszRuszel, StanisawRychlicki, JakubSiemek, AndrzejSikora, TrevorSmith, PiotrSzlagowski, MarcinTarnawski, AleksanderZawisza
Unconventional Gas aChanceforPoland and Europe? AnalysisandRecommendations

IzabelaAlbrycht, KeithBoyfield, JarosawM.Jankowski, MaciejKaliski, MaciejKoaczkowski, MarcinKrupa, GuyLewis, ZiwaseNdhlovu, KentF.Perry, PawePoprawa, RomanRewald, AlanRiley, MariuszRuszel, StanisawRychlicki, JakubSiemek, AndrzejSikora, TrevorSmith, PiotrSzlagowski, MarcinTarnawski, AleksanderZawisza
If you appreciate the value of the presented Report as well as The Kosciuszko Institutes mission, we kindly encourage you to support our future publishing initiatives by making a financial contribution to the association.
Unconventional Gas a Chance for Poland and Europe? Analysis and Recommendations IzabelaAlbrycht, KeithBoyfield, JarosawM.Jankowski, MaciejKaliski, MaciejKoaczkowski, MarcinKrupa, GuyLewis, ZiwaseNdhlovu, KentF.Perry, PawePoprawa, RomanRewald, AlanRiley, MariuszRuszel, StanisawRychlicki, JakubSiemek, AndrzejSikora, TrevorSmith, PiotrSzlagowski, MarcinTarnawski, AleksanderZawisza Editor: Izabela Albrycht Edition completed: July 2011 The Kosciuszko Institute 2011. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted in the original language without explicit permission provided that the source is acknowledged. Translation: Justyna Kruk (Preface, Chapter 10), Alicja Chojnacka (Chapter15), AleksandraBigda (Chapter 5), Magdalena Ostrowska (Chapter 12, 17), KatarzynaSobiepanek (Chapter 1, 6), Karolina Kocielniak (Chapter 16). Proofreading: George Lisowski Cover design, layout and typesetting: Magorzata Kopecka Cover illustration: PGNiG SA Print: Dante Media The Kosciuszko Institute ul. Karmelicka 9/14 31-133 Krakw e-mail: ik@ik.org.pl +48.12.632.97.24 www.ik.org.pl ISBN: 978-83-931093-5-7
Contents
Introduction Izabela Albrycht ................................................................................................................................................. 7 Main Thesis ....................................................................................................................................................................................11 BASIC INFORMATION TECHNOLOGY, RESOURCES&SAFETY ...................................................................................21 1. 2. 3. Unconventional Gas Characteristics of Deposits andTechnology of Extraction StanisawRychlicki, JakubSiemek .................................................................23 European and Global Resources and the Potential ofUnconventional Gas PawePoprawa ................................................................................................................29 Environmental ImpactofUnconventional Gas Exploration and Production GuyLewis, TrevorSmith, Kent F.Perry, PawePoprawa .......................................................35 Unconventional Gas: TheNorthAmerican Experience GuyLewis, TrevorSmith, Kent F.Perry .......................................................................................................................49 The Influence of the U.S. Gas Revolution on International Gas Markets Economic and Political Implications and the ImportanceofEnergy Security MarcinTarnawski ..........................55 Transfer of American Experiencein the Unconventional Gas Sector to the European Context IzabelaAlbrycht ............................................................................................................63 Exploitation of UnconventionalGas under EU Law: aReview ofRelevant Legislation PiotrSzlagowski ...............................................................................................................71 European Unconventional GasResources as an Alternative toGas Dependency on Russia AlanRiley .......................................................................................................................................................83 Development of the UnconventionalGas Sector inEurope from a UK Perspective KeithBoyfield, ZiwaseNdhlovu ...................................................................................................................................95 The Political Impulse for Unconventional Gas Development in Europe the Role of the Polish Presidency of the EU Council IzabelaAlbrycht, MariuszRuszel ......................................... 101 Resources and Potential ofUnconventional Gas in Poland PawePoprawa ......................................... 111 Gas Market Liberalisation and Increase in Energy Security as a Result of Unconventional Gas Sector Development in Poland MaciejKoaczkowski ...................................... 119 Prospects for Utilising Unconventional Gas in Poland: thePotential of the Power Industry as a Possible Direction of Gas Consumption MaciejKaliski, MarcinKrupa, AndrzejSikora ............... 127 Prospects for Utilising UnconventionalGas inPoland: the Potential oftheNon-EnergySectoras a Possible DirectionofGasConsumption andBasic Barriers toUnconventional Gas Sector Development MaciejKaliski, MarcinKrupa, AndrzejSikora .............. 137 Infrastructural Challenges Linked to Extraction and Production of Unconventional Gas MariuszRuszel ............................................................................................................... 153 Prospects for UnconventionalGas Exports fromPoland to European Countries MariuszRuszel ................................................................................................................ 161 Unconventional Gas Sector Development in Poland Concessions and Taxes AleksanderZawisza .................................................................................................. 167 Legal Aspects of Unconventional Gas Exploration andProduction Projects in Poland RomanRewald, JarosawM.Jankowski ........................................................................... 175
AMERICAN SUCCESS ..................................................................................................................................................................47 4. 5. 6.
EU POLITICS & LEGISLATION ....................................................................................................................................................69 7. 8. 9. 10.
CHALLENGES FOR POLAND .................................................................................................................................................. 109 11. 12. 13. 14.
15. 16. 17. 18.
Authors.......................................................................................................................................................................................... 197
The views expressed in this publication are those of the authors and do not necessarily reflect any views held by the Kosciuszko Institute and the publication partners. They are published as a contribution to public debate. Authors are responsible for their own opinions and contributions and the authors do not necessarily support all of the opinions made by others in the report.
Introduction
Izabela Albrycht
American Dream About 20 years ago several pioneers of the energy industry in the U.S. embarked upon the challenging task of building the unconventional gas sector from scratch. They strongly believed in the American dream and hoped that the new source of energy would contribute to the lowering of gas prices and the strengthening of U.S. energy security. In time, thanks to their personal determination and support from the U.S. government, governmental agencies and expert centers, commercial production of unconventional resources was able to successfully begin. According to data for 2010, the annual production of unconventional gas in the U.S. amounted to approximately 137bcm of gas; the unit price had fallen from $12 per 1 mln Btu in 2008 to about $4 per 1 mln Btu in 2010 and the U.S. had become significantly less dependent on natural gas imports. Currently, major U.S. energy companies are engaged in the sector and at the same time, the U.S. government administration is undertaking a number of initiatives that will facilitate the expansion of unconventional gas production technology on a global scale. The U.S.s assumption of the leadership position in natural gas production in 2009 marked the crowning point of the gas revolution. Success Story Europe first heard about the American shale gas success story over two years ago. A number of expert centers announced that the Old Continent may also have abundant unconventional gas resources. However, the prospect of developing the unconventional gas sector did not meet with enthusiasm from all bodies responsible for shaping EU energy policy. Since then the pace of development of the unconventional gas sector has been dictated by the watchword European realism an oblique reference to the varied interests of individual EU Member States. As a consequence, what we can observe is a debate on the development of the unconventional gas sector in Europe that focuses primarily on unsubstantiated threats linked to hydraulic fracturing, instead of emphasizing the opportunities that this source of energy may open up. A situation like this is not conducive to joint constructive energy undertakings that
can produce multiple benefits for the whole of Europe. On the contrary it creates a climate that is conducive to lobbying activities which discredit and downplay the potential of unconventional gas. There is no doubt that in the near future such unfavorable opinions will be heard both in Poland and in the EU, seriously jeopardizing the prospects for unconventional gas development and negatively affecting the publics perception of this new source of energy. Content of This Publication The present publication, Unconventional Gas a Chance for Poland and Europe? Analysis and Recommendations, drawn up on the initiative of the Kosciuszko Institute in collaboration with experts from Poland, Europe and the U.S., attempts to thoroughly analyze the potential and opportunities linked to the exploitation of unconventional gas resources in Europe. At the same time, it aims to identify the challenges facing the European unconventional gas sector and formulate recommendations that will enable it to meet them. The report analyses infrastructural, economic, geological, environmental and legal conditions pertaining to exploration and production of unconventional gas resources in Poland and selected EU countries. It also presents North American experiences and facts relating to the unconventional gas sector, especially shale gas, along with conclusions that can be applied in Poland and in Europe in general. Hence, this publication can be a valuable source of comprehensive knowledge for investors, decision makers, experts and the public about unconventional gas a sector which has the potential for dynamic development not only in Poland, but also in other European countries. Opportunities for the European Union The annual natural gas consumption of the European market amounts to approximately 520bcm the majority of which is met by third country imports. Although geological and economic conditions affecting the unconventional gas sector in Europe may differ from those observed in the U.S., for Poland and a number of other EU countries, unconventional gas offers an unparalleled opportunity to not only significantly increase natural gas production and achieve energy security, but also to reduce CO2 emissions and boost economic competitiveness. Therefore, efforts devoted to exploration and research on unconventional gas resources in Europe should receive real support from the Polish government, a favorable reception from other EU countries and funds from the EUs budget. The Polish presidency of the EU Council opens up a perfect opportunity to form a coalition for shales in the EU and to shape the discussion on unconventional gas. The Polish government should take all necessary steps to ensure that the EU does not miss its chance to realize the European dream of energy independence and solidarity together with social prosperity.
Izabela Albrycht
In the near future, the Kosciuszko Institute intends to promote the ideas contained in this publication as well as to initiate an information campaign with the aim of presenting the real potential of unconventional gas to key decision makers and opinion leaders in Poland and the EU. Acknowledgements I would like to sincerely thank our partners and authors for their contribution to this publication and to invite readers to familiarize themselves with its content. I believe this publication will become a starting point for an honest and fact-based discussion about unconventional gas and the role it plays in the strengthening of energy security and economic competitiveness of Europe. I look forward to establishing close cooperation with entities interested in the subject.
Introduction
Main Thesis
Technology, Resources & Safety Unconventional gas resources significantly exceed conventional resources and can provide mankind with a substantial extra energy supply.
(S. Rychlicki, J. Siemek, Chapter 1)
A type ofunconventional gas which has recentlygained in importanceisshale gas. The technical capabilities of shale gas production have been and still are the subject of deep research in the US and Europe.
The U.S. industry has made strong and continued progress in mitigating environmental impacts such as surface footprint, emissions, water usage, waste disposal, or habitat fragmentation. In places where energy development occurs near populated communities, extra measures are put in place to minimize traffic, noise, any impacts on views, and general intrusion.
(G. Lewis, T. Smith, K. F. Perry, Chapter 4)
Increasingthe share of gasin the energy sectorcancontributeto reducing CO2 emissions. In addition, unconventional resources produce two and a half times lower carbon emissions than burning fossil fuels coal, lignite, oil or oil products.
Embracing natural gas as a key part (along with the addition of significant increases in renewable energy generation) of the most economically attractive mix to achieve 2030 targets and delivering on 20/20/20 commitments without restricting future options or increasing costs for 2050. This analysis suggests 120 to 140 bcm of additional supply could be required to achieve these objectives. Unconventional gas would be an important supply addition to supplement new pipeline and LNG imports that will also likely be required in Europe.
(G. Lewis, T. Smith, K. F. Perry, P. Poprawa, Chapter 3)
11
American Success Unconventional gas reserves in U.S. are estimated at ca. 90tcm. Annual production of unconventional gas in the U.S. amounts to approximately 137bcm, of which 70bcm is produced from shale. This figures constitute respectively 23% and 12% of gas consumed in the U.S. per year. Gas from shale is produced at an even lower cost than that of natural gas import through pipelines, LNG or conventional resources exploitation
Unconventional gas, including shale gas, has significantly affected the price of natural gas in the U.S. market and is increasingly being considered as a fuel which, in the future, will lead to significant changes on the world gas market. The slow decline in natural gas prices in the world has its origin in an excess of supply of gas, but this is mainly due to: the economic crisis of 2008 (a fall in demand), the rapid increase in production capacity of LNG and the significant increase in unconventional gas production in the U.S. Persistent oversupply can put pressure on gas exporters to move away from oil-price indexation, which can lead to further lowering of prices. Europe has started to feel the U.S. gas revolution in an indirect way oversupply of gas in the U.S. (an increase in unconventional gas production) has resulted in increased deliveries of LNG to terminals located in Europe rather than in the U.S.
(M. Tarnawski, Chapter 5)
Gazprom was forced to respond by cutting its prices to some of its European customers in order to they can maintain market share.
(A. Riley, Chapter 8)
Large-scale industrial exploitation of unconventional gas, not only in the U.S. but in other European countries or Asia as well, may seriously upset the existing balance of power between countries that export and import natural gas. Major changes in the U.S. natural gas market can therefore be regarded as the beginning of changes in the geopolitical balance of power related to energy security. Due to a technological revolution in the energy sector in 2009, the U.S. became the largest producer of natural gas in the world.
(M. Tarnawski, Chapter 5)
Given the economic incentives between low priced U.S gas and much higher priced EU gas there is a compelling economic argument export of shale gas sold as LNG into the European market between 2015 and 2020. As a consequence, even without any development of unconventional gas in the European Union unconventional gas will have a significant impact on our
12
energy security. The worst case scenario, without any shale gas development in Europe itself, is an increasing competition for the European market between LNG and LNG shale and existing conventional pipeline deliveries.
EU Politics & Legislation Given the scale of CEE and German supply dependence and the prospect of gas cut offs; increasing supply dependence by virtue of Nord Stream and the German rejection of nuclear power as well as the prospect of the Russian gas deficit the prospect of substantial domestic unconventional gas resources in Europe is welcome. Unconventional gas is likely to have a significant impact on current European gas supply dependency on Russia.
Based on the EIA and ARI report, Europe has far smaller shale gas resources than the other major continents. Nonetheless, also in this case, their cumulative amount of 15.5tcm, if viewed in relation to some 520bcm of EUs annual consumption, indicate the importance of shale reservoirs as a gas source.
(P. Poprawa, Chapter 2)
Once the European unconventional gas industry has developed to scale and has properly got its costs under control it will be very competitive against both Russian gas, hauled all the way from Siberia and LNG. Focus on gas would allow the Union to rapidly cut CO2 emissions ... Furthermore, because most European gas fired power stations only operate at 45% capacity, it would be possible to increase use to around 65%-70% without any additional investment. If a corresponding amount of coal fired production were taken out of production, approximately CO2 200mt emissions would be cut. It would also save an estimated renewable investment when currently capital is scarce of between 80-120 billion. This ability to get significant CO2 emission cuts at zero capital costs underlines both the value of the role gas can play and also the way it has not been factored into European climate change policy. As a matter of urgency the European Union institutions need to reassess its approach to gas in combating climate change.
It is also important to recognise that there are at least two major obstacles to shale gas providing any significant alternative to Russian supply dependency: completion of the single market in gas and the environmental barriers. Liberalisation both legal and physical needs to be completed as rapidly as possible to open up the European gas market to new gas sources. The European Commission should be encouraged to ensure full implementation of the third energy package, and its DG Competition needs
Main Thesis
13
to be ready to apply the competition rules across the entire European gas sector without fear or favour. LNG suppliers and unconventional gas producers will be able to rely on EU rules to ensure market access. These suppliers are likely to incentivise network owners to physically reinforce the single market in gas with new pipeline connections across national borders. This physical barrier remains in the lack of interconnection West-East and North-South, making it much more difficult for a genuine single market in gas to operate. This lack of physical interconnection is particularly oppressive for CEE States, and the Baltic States as the Russian East to West pipelines effectively segment each EU Member State market as far West as the OderNiesse line.
Environmental issues are one of the major political barriers to unconventional gas development of in Europe; therefor the discussion on the environmental impact of unconventional gas extraction technology should be based on the facts presented, among others in this publication. There is no denying that there are impacts of energy development on the environment. Processes used in hydraulic fracturing are generally invisible and below the surface. Although unconventional gas activities require more water than conventional gas activities, unconventional gas production is still quite efficient relative to other sources including coal, biomass, and nuclear. Fracturing fluid migration into fresh water aquifers has not been observed. As noted earlier, the fracturing takes place very far below fresh water supplies and when fractures are monitored with micro-seismic measuring they are found to not reach nearly far enough to cause water contamination. Flowback water characteristics are consistent with ranges observed with produced water generated in the production of conventional natural gas. This includes a low concentration of suspended solids and total organic content. Man-made chemicals of concern are usually at very low or non-detectable levels. The fracturing process does generate many small seismic events. Each small crack made in the rock can be measured. But these are not felt on the surface by people and there has not been any relationship proven or demonstrated between fracturing and seismic events of the magnitude of small quake.
(G. Lewis, T. Smith, K. F. Perry, P. Poprawa, Chapter 3)
There is no specific regulation devoted to this very method of natural gas extraction, however it is already extensively regulated, especially with regard to environmental protection. Most of the relevant EU regulations use flexible mechanisms and therefore would not need particular amendments in order to be duly adjusted to unconventional gas production. Furthermore, it is unlikely that there would be any legislation adopted especially with respect to limit the unconventional gas production (i.e. issue a temporary moratorium), since such an action could be considered as one that affects the Member States choice between different energy sources and the general structure of their energy supply and as such they would require unanimity in the EU Council.
(P. Szalgowski, Chapter 7)
14
One can not underestimate the strong pressure on the EU administration from Russia a country whoseinterests aremost at risk of successful unconventional gas production in the EU.How effective could be the pressure, the perfectly demonstrates the construction of the Nord Stream pipeline having little in common with a common energy policy and the principle of EU solidarity, while stopping the EUs core diversification investment - the Nabucco gas pipeline. Member States have to be prepared to create a robust but attractive regime to encourage investment into shale gas exploration and production.
Challenges for Poland U.S. Energy Information Agency report presents high recoverable gas resources in Poland which amount to 5.3 tcm. However it is important to note that shale gas resources are estimated based on an insufficient amount of currently available data and therefore might differ substantially from actual resources. The list of concession holders for shale gas exploration includes a significant number of global majors, shale gas sector specialized operators, Polish gas and oil companies that have been built up on the basis of conventional hydrocarbon exploration and production, as well as small independents. Most of these wells will be drilled during the period 2011-2014. So far, some 10 wells have been drilled and one shale gas well has been fractured. Reports and releases of BNK Petroleum (2 wells) and 3Legs (3 wells) indicate positive first results.
(P. Poprawa, Chapter 11)
In the optimistic scenario, the growth potential of natural gas consumption in Poland may be more than 15bcm per year. In the realistic variant, the increase in demand for gas may be less than 5bcm per year. In the optimistic scenario, we assume the continuation of the anti-climate change trend in the EU policy, and thus a dynamic development of power and heat capacity based on natural gas, which would reach approximately 20-21% share in total production capacity, and in other areas, substitution at the level of 20-30% of the consumption of other fuels, which implies not only the replacement of liquid fuels (LPG, LFO, HFO), but also of coal, as well as return of the demand for natural gas from the chemical industry to the pre-crisis level. In the intermediate scenario, the increase in gas consumption in the energy sector ensues only from the construction projects of new blocks based on natural gas, while in other areas, primarily from the substitution of liquid fuels and only to a minimal extent solid fuels; the chemical industry permanently reduces the demand for natural gas to the current level. The largest increase in demand for natural gas may come from the backward energy sector based on solid fuels - being potentially the largest recipient of unconventional gas. Natural
Main Thesis
15
gas currently provides only a little bit more than 19% of energy for heating for households4. Therefore, it seems quite possible to increase gas consumption by the household sector and the chemical industry. It should be remembered that this potential can only be evaluated correctly in relation to the increase, in supply of natural gas from domestic production, including primarily from unconventional deposits. Lack of adequate supply of natural gas translates into an increased risk of interruption of supply in the case of turbulence associated with gas imports from Russia, and this situation is still effective in deterring most potential consumers of the above mentioned raw material, especially in the most sensitive areas of energy and industrial processing. Taking into account the specificity of shale gas extraction profile, characterised by an enormous increase in productivity of the deposit in the first periods and subsequent strong decline, as well as poor use of domestic resources by Polish mining companies, reflected in the very high reserves-to-production ratio (R/P), we may expect extraction at the level of even 100bcm of gas per year in the next 10-15 years.
(M. Kaliski, M. Krupa, A. Sikora, Chapter 13 & 14)
Production of unconventional gas at a level of just 15bcm annually would totally suffice to cover Polands gas demand (even taking into account the expected 5bcm consumption growth) and would mean independence from foreign gas suppliers. Provided production exceeds the above mentioned levels, Poland could become an important gas provider for European markets.
(M. Koaczkowski, Chapter 12)
In Europe, Poland represents one of the major potential sources of shale gas supply. In the light of its own dwindling natural gas reserves, Britain may well become one of its main customers.
(K. Boyfield, Chapter 9)
Unconventional gas extraction and production may therefore contribute to increasing Polands energy security and to eliminating numerous geopoliticaland infrastructural risks, which up till now have affected the Polish gas imports. Shale gas could help Poland to reduceCO2 emissions. For the unconventional gas revolution to became a reality, changes are necessary in the Polishgas market. The unconventional gas production is the factor which could be tremendously positive and it could contribute to developing a competitive and commercial gas market in Poland. Liberalising the gas price on the domestic market seems to be the sine qua non condition for
16
unconventional gas production. In parallel that would alleviate the negative aspects of the oil indexation. It is reasonable to expect that once large scale production of unconventional gas is under way in Poland it will trigger off a reduction in price both of domestic and imported gas. In a pessimistic scenario, it is estimated that the costs of unconventional gas production in Poland may be up to 50% higher than in the USA. From October 2009 to June 2011 gas prices on the NYMEX2 fluctuated from $3.73/mBtu to $6.01/mBtu, with an average of $4.5/mBtu. Therefore, the calculated price per cubic meter varied from $133/1000 m3 to $214/1000 m3, with an average of $161/1000 m3. Assuming that unconventional gas production costs are 50% higher in Poland than in the U.S. and that the prices quoted on NYMEX reflect production costs, it is safe to assume that the prices in Poland could oscillate between $200/1000 m3 and $321/1000 m3, with an average of $240/1000 m3 approximately. As was stated before, the full contractual price of Russian gas (which constitutes 90% of gas imported to Poland) given in the intergovernmental agreement is not disclosed. However, reliable media sources state that to obtain comparable prices of Russian gas, oil would have to be priced at around $45-70 per barrel. Similarly, to achieve a price of $240/1000 m3, oil would have to be valued at $55/bbl. It is worth noting here that, on average, oil was traded at $80/bbl in 2010, with the price rising up to $95/bbl at the end of 2010 and $127/bbl in April 2011. The price has been fluctuating around $105-125/bbl in the last three months, i.e. from April 12, 2011 to July 12, 2011 and further price increases are anticipated. These calculations clearly show that the Russian gas provider would have to reduce prices significantly in order to compete with unconventional gas producers on the Polish market.
(M. Koaczkowski, Chapter 12)
Another challenge for the shale gas revolution in Poland is to create favourable conditions of unconventional gas production for investors, but Polands long term intergenerational interests must also be taken into account. The elements comprising favourable conditions are: 1. defining the maximum extraction volumes at state and concession levels in order to avoid excessive and reckless exploitation; 2. linking concession charges and taxes with the gas market and gas prices; 3. establishing a company modelled on Petoro (Norway) or EBN (Netherlands) which would legally own 15-25% shares of all the concessions and that would act as a means of governmental control and protection of the states energy interests; 4. launching an investment fund out of a portion of the operating fees aimed at supporting the research and development sector.
(A. Zawisza, Chapter 17)
Main Thesis
17
Unconventional gas exploration and production in Poland require special drilling appliances and an appropriate technical infrastructure, as well as experienced staff are needed to carry out the processes of horizontal and vertical drilling as well as hydraulic fracturing. The prospect of probable unconventional gas sector development in Poland means that huge infrastructure investments need to be planned and implemented. Due to this, the development and modernization of transmission, transportation and storage infrastructure for unconventional gas constitute a big investment challenge. The existing gas pipeline structure is suited to importing gas from the East. Naturally, the development of a gas transmission and distribution infrastructure in Poland will be yet another crucial issue. A properly developed gas pipeline network (including distribution pipelines) will enable supplying of unconventional gas to end users throughout the whole country as well as transportation to underground gas storages. It will also enable potential export through interconnectors and the LNG terminal in winoujscie, or in the case of bigger volumes, through the second part of the Yamal-Europe pipeline. It is important to realize that unconventional gas production will require the creation of infrastructure connecting the extraction plays with gas pipeline networks. The realisation of these immense undertakings, which will develop and modernize the transmission infrastructure of natural gas in Poland, requires huge financial resources. The development of the unconventional gas sector in Poland could, however, eventually lead to the enhancement and modernization of the Polish natural gas transportation and transmission network. Also the creation of unconventional gas R&D centers is in Polands best interest.
(M. Ruszel, Chapter 15&16)
Business operators should promote the introduction of important changes to unconventional gas legislation that would bring more stability to the relevant legal environment in Poland. Transparent rules of the law would have a major influence on increasing investment safety for businesses commencing licensed activities in Poland.
(R. Rewald, J. M. Jankowski, Chapter 18)
At present, despite the conclusions of this publication there are a significant number of potential opponents, who stand against unconventional gas exploration and production. They can be found both amongst EU countries and amongst exporters supplying natural gas to the EU market. That is why for the past few months a heated debate on unconventional gas could be observed at the EU forum, initiated mainly by opponents and skeptics of this new natural gas production technology. Poland, for which the development of the unconventional gas sector is an unprecedented opportunity, must take decisive and integrated actions both internally and at the EU level to oppose the lobbies which seek to deprecate the importance of unconventional gas, and to provide fact-based and reliable information about the impacts of this resource on the environment and on the EUs energy security.
18
Poland can lead and, to a large extent, direct the discussions at the EU forum on unconventional gas production and use. The Polish presidency of the EU Council is a particularly suitable platform for instigating such actions. During this presidency, it is crucial for all Polish bodies participating in the EU decision-making processes with support of energy-oriented think tanks as well as expert and research centers to undertake coordinated actions. Such a chance might not be repeatable and therefore the Polish government should take the consistent actions on this important issue.
(I. Albrycht, M. Ruszel, Chapter 10)
Main Thesis
19
BASIC INFORMATION TECHNOLOGY, RESOURCES&SAFETY
1. Unconventional Gas Characteristics of Deposits andTechnology of Extraction

StanisawRychlicki, JakubSiemek
Unconventional gas resources significantly exceed conventional resources and can provide mankind with a substantial extra energy supply. In addition, unconventional resources produce two and a half times lower carbon emissions than burning fossil fuels coal, lignite, oil or oil products. The diagram below captures well the essence of classifying natural gas resources into conventional and unconventional ones (Holditch 2006 and Masters 1979, as presented in IEA 2009).
Fig. 1.1 Typology of natural gas resources
100 mD High quality reservoirs
Higher concentration Easier to develop More permeable
Conventional
10 mD Low quality reservoirs
Unconventional
Coalbed methane 0,1 mD
Tight gas 0,1 mD Shale gas
Larger volumes
0,001 mD
More advanced technologies needed
Gas hydrates
Volume
Source: Own figue based on: IEA 2009, World Energy Outlook
23
Unconventional natural gas resources include: natural gas reservoirs with low permeability (from 0.1 mD to 0.001 mD) located in pore spaces of limited connection between one another, so-called tight gas; natural gas (methane) contained in coalbeds (so-called coalbed methane CBM); natural gas contained in loamy and mud rocks (so-called shale gas, gas in shale formations); Gas contained in hydrates. Despite strong efforts and developments in research, no efficient technology of shale gas production has been developed so far. Natural gas hydrates occur in northern Arctic areas and in underwater deposits. It was hydrates which prevented the success of rescue operations to close the underwater oil spill after the explosion on the BP oil platform in the Mexican Gulf (2010). Reviews estimate hydrates resources to be between 1 0001012 and 51012 cubic meters and therefore in excess of the worldwide total amount of natural gas resources. The technical capabilities of shale gas production have been and still are the subject of deep research in the U.S. and Europe. Currently 12% (70bcm a year) of U.S. gas is produced from shale at an even lower cost than that of natural gas import through pipelines, LNG or conventional
Fig.1.2 Exploitation of conventional (on the right) and unconventional (on the left) deposits
SEAL
GAS RESERVOIR (sandstone)
GAS/SOURCE ROCK (shale, coalbed methane)
Source: Own figure based on: DTE Energy, Unconventional gas production
24
resources exploitation. The commitment of U.S. companies to exploration and exploitation of shale gas deposits (Barnett Shale, Forth Worth basin, central Texas) is illustrated by the data on the number of wells since 1981. In the first 15 years from that date, only 300 vertical wells were drilled, whereas in 2002-2006 as many as 2000 horizontal wells (Devon Energy) were drilled. Shale plays containing gas are characterised by the following features (Boyer 2006, Schlumberger): great thickness and regional extensiveness; lack of obvious seal layers and structural traps; absence of well defined gas/water contact, though the water saturation can amount to 75-80%; natural fracturing; estimated ultimate recovery (EUR) that is significantly lower than that of conventional resources and amounts to around 20-40%; very low matrix permeability;
Fig.1.3 Gas exploitation from the typical shale deposit, Barnett Shale (USA)
BARNETT SHALE
ELLENBERGER (Water Bearing Formation)

Source: Own figure based on: DTE Energy
VIOLA (Frac Barrier)
Unconventional Gas Characteristics of Deposits andTechnology of Extraction
25
An important indeed, perhaps the most important element of shale gas extraction is shale stimulation treatment. The aim of the stimulation is to upgrade very low matrix permeability, which is achieved by hydraulic fracturing intensifying the gas flow. During the process of fracturing a tight stream of low-viscosity, water based fluid is pumped down the wellbore under high pressure. The next step is pumping down the gel. The fissures created are penetrated a few hundred meters (more than 300 m) from the well. Granulated sand or granule of ceramic, so-called proppant, is pumped down together with hydraulic fracturing fluid to allow the edge of the fissures to remain open. Hydraulic fracturing consumes large amounts of water, up to 10000-20000 m3 per well. Asingle fracturing consumes 2000 m3 and there are 5-10 operations needed for each well. Table 1.1 below lists chemical additives, comprising 0.49% of hydraulic fracturing fluid.
Table 1.1 Composition of chemical additives in hydraulic fracturing fluid with their common applications
Ingredient Acids Glutaraldehyde Sodium Chloride Formamide Borate salts Petroleum distillates Guar gum Citric acid Potassium chloride Potassium carbonate Ethylene glycol Isopropanol Overall % 0.123% 0.001% 0.010% 0.002% 0.007% 0.088% 0.056% 0.004% 0.06% 0.011% 0.043% 0.085% Purpose Dissolves minerals Eliminates bacteria in the water Delays break down of the gel polymer chains Prevents corrosion Maintains fluid viscosity Minimizes friction Thickens the water Prevents precipitation of metal oxides Creates a brine carrier fluid Maintains the effectiveness of other components Prevents scale deposits in the pipe Increases the viscosity of the fracture fluid Common applications In swimming pools Sterilizes Table salt Plastics Soap, cosmetics Cosmetics, pharmacy E-412, food industry Food additive Salt substitute Detergent, soap Antifreeze, windscreen washer Washing liquid, hair dye
Source: A.R.H. Datuk, 2010, Talisman Energy/Canada
26
The abstract was written on the basis of the following article: Rychlicki S., Siemek J., Shale Gas Resources and Technology (Gaz upkowy zasoby i technologia), Rynek Energii 3/2011.
Literature: 1. Boyer Ch., Kieschnick J., Suarez-Rivera R., Lewis E. R., Waters G., Producing Gas from Its Source, Oilfield Review, Schlumberger, Vol. 18, no. 3, 2006. 2. Datuk A. R. H., Shale Gas A True Energy Game Changer, World Gas Conference, Dallas, 2010. 3. International Energy Agency, World Energy Outlook, 2009.
2. European and Global Resources and the Potential ofUnconventional Gas

PawePoprawa
Unconventional gas exploration is globally still at a very early stage a long way from the production stage except in the U.S. and Canada. For this reason, anywhere outside North America, there are no data available which are essential for calculation of resources. Even in countries where exploration has already begun and unconventional gas wells are currently being drilled, like Poland, new data are still confidential. Therefore, at the current stage, all attempts to calculate shale gas resources in frontier basins are very preliminary and characterized by very high possible error bars. A common practice is to calculate resources with the volumetric method, which involves outlining in some way the acreage in a given basin which might produce gas, and looking for the closest possible U.S. or Canadian analogues to estimate the amount of gas per acre. With time, once production has started in a new play and has been recorded for at least a year or two, it will be possible to estimate resources in more detail by production decline curve analysis. This might bring significantly different estimates of global shale gas resources than the ones currently available. For a clear understanding of the meaning of figures characterizing unconventional gas resources, it is necessary to bear in mind that there are different categories of resources, which vary considerably in relation to each other. The most objective and straightforward category is geological resources of gas in place (GIP), referring to all gas accumulated in the unconventional reservoir formation. This figure, however, is of limited use since the major part of this gas cannot be extracted from shale. Gas which can be exploited and brought to the surface using current technology is referred to as recoverable gas. In the case of shale gas, usually only some 20% of GIP can be recovered, and the other 80% remains in the formation. However, as technology improves, this percentage is changing. A few years ago, gas recoverable from shale constituted only about 10% of GIP. Another category is the economic resources, which is the part of accessible recoverable gas which may be commercially produced. However, it changes significantly over time with varying costs of production and gas prices. In the following part of this chapter, as well as in Chapter 11 all figures represent recoverable gas reserves. As there is still very little knowledge about the potential of shale gas basins across the world except for North America, the discussion about resources is still at a rather preliminary stage.
29
Because of this, the results of individual alternative reports on given basins often vary substantially in relation to each other. What is useful regarding data comparability is the Report of the U.S. Energy Information Agency (EIA) and Advance Research Inst. (ARI) it covers most of the potential shale gas basins globally. This enables at least a relative comparison of prospective basins across all the continents; however, given values of resources are certainly questionable. Since the U.S. and Canada have already been producing gas from shale formations for several years, resource estimations for Northern America are more reliable than in other cases. More than 24tcm (862tcf ) of recoverable gas is reported by the EIA and ARI for U.S., and nearly 11tcm (388tcf ) for Canada (see Figure 2.1), which could be regarded as gigantic. For Mexico, which has a geological setting somewhat comparable to southern U.S., making analogues more reliable, nearly 20tcm is reported (see Figure 2.1). The same source reports gigantic shale gas resources in Southern America, particularly in Argentina (~22tcm), and Brasil (~6.4tcm). Also Chile, Paraguay and Bolivia are regarded as countries with considerable shale gas resources.
4.1. Zasoby wydobywalnego gazu upkowego w Ameryce Pnocnaj
Figure 2.1 Recoverable shale gas resources in North and South America
40 000 35 000
bcm of recoverable gas resources
30 000 25 000 20 000 15 000 10 000 5 000 0
Source: EIA and ARI report from 2011
The largest globally recoverable shale gas resources are suggested by EIA and ARI for China, equal to some 36tcm (~1275tcf ) (see Figure 2.2). With Chinas annual gas consumption in 2009 at the level of roughly 90bcm, this would be sufficient to supply the country for some 400years. On the basis of annual gas consumption predicted for 2020 equal to 300bcm the same resources would be equivalent to 120 years of Chinese gas consumption. However you look at it, the resource, if proven in the future, will change the energy structure of that region
30
PawePoprawa
4.2. Zasoby wydobywalnego gazu upkowego w Australia and Africa Figure 2.2 Recoverable shale gas resources in Asia,Azji
40 000
35 000
30 000 25 000 20 000 15 000 10 000 5 000 0
Source: EIA i ARI Report, 2011
significantly. India and Pakistan even if the prospects are smaller might still have considerable shale gas resources. The EIA and ARI report also suggests gigantic shale gas resources for Australia, equal to ~11tcm (see Figure 2.2). The other continent rich in shale gas is Africa, mainly northern (Arab) Africa and the Republic of South Africa. Recoverable shale gas resources for RSA are reported by EIA and ARI as equal to some 13.7tcm (see Figure 2.2). Gigantic resources are also reported for Libya and Algeria, equal to 8.2 and 6.5tcm respectively. Based on the EIA and ARI report, Europe has far smaller shale gas resources than the other major continents. Nonetheless, also in this case, their cumulative amount of 15.5tcm, if viewed in relation to some 520bcm of EUs annual consumption, indicate the importance of shale reservoirs as a gas source. Assuming that figure is correct, shale gas could supply ca. 30 years worth of European gas consumption. Making a more realistic assumption of European consumption being supplied from the shale reservoir, this amount of gas would be sufficient for more than 100 years. The two European countries with the most significant potential for shale gas are certainly Poland and France, with resources of ~5.3 and ~5.1tcm of recoverable gas respectively (see Figure 2.3). In the case of Poland, these resources are related to the Ordovician-Silurian basin, creating a strip crossing the country from NW to SE (see Figure 2.4). In France, the shale gas
European and Global Resources and the Potential ofUnconventional Gas
31
4.2. Zasoby wydobywalnego gazu upkowego w Europie

40 000 35 000
Figure 2.3 Recoverable shale gas resources in Europe
30 000 25 000 20 000 15 000 10 000 5 000 0
Source: EIA i ARI Report, 2011
resources are related mainly to the Mesozoic basin in the SE part of the country in the Marseille region (see Figure 2.4). The Paris basin could also have some limited shale gas resources, and, furthermore, there are better prospects for shale oil exploration. The other European countries do not have such great shale gas potential, except for the 2.3tcm of recoverable gas reported for Norway (see Figure 2.3). However, on the scale of an individual countrys energy mix, shale gas resources might be of some importance. Shale gas exploration has already begun in Germany, in the Lower Saxony Basin (Jurassic shale), and some potential is also suggested for Lower Carboniferous shale in NW Germany (see Figure 2.4). However, cumulative resources given by the EIA and ARI report are low and equal to 226bcm (see Figure 2.3). The same shale formations continue to the Netherlands, where their gas resources might be preliminarily estimated at 481bcm (EIA and ARI report). Slightly higher resources of Lower Carboniferous shale (566bcm) are reported by the same source for Great Britain. In northern Denmark and southern Sweden, gas might be accumulated in Cambrian Alum shale (see Figure 2.4), and resources have been reported as equal to 651bcm and 1160bcm. A few other basins in Europe are currently being considered for shale gas exploration. An interesting case is the Vienna Basin in NE Austria and its borderland with Slovakia and the Czech Republic. In this case, the great burial depth of the formation might limit the possibilities of commercial shale gas production. The other cases are Silurian basins in southern Romania, northern Bulgaria and SE Turkey (see Figure 2.4). Much attention has also been focused on the Dniepro-Donieck Basin in Ukraine and to a lesser degree, the Prypiat basin in Belarus. In both
32
PawePoprawa
cases, the shales are of the Upper Paleozoic age. In western Ukraine, a Silurian shale, which extends to that location from the main basin in Poland, might also contain unconventional gas accumulations. The very early stage of reconnaissance studies and the lack of key data are reasons for the current limited ability to estimate resources for Romania, Bulgaria, Ukraine and Belarus.
Figure 2.4 Location of major European basins with potential for shale gas exploration
European and Global Resources and the Potential ofUnconventional Gas
33
3. Environmental ImpactofUnconventional Gas Explorationand Production

GuyLewis, TrevorSmith, KentF.Perry, PawePoprawa
Unconventional gas development contributes to the supply of affordable and secure energy from the worlds cleanest burning fossil fuel. This versatile fuel provides an efficient source of power, affordable transportation in terms of natural gas vehicles, and efficient and affordable gas for end users. The environmental benefits of utilizing natural gas are well documented. In comparison to coal per unit of energy generated, natural gas emits 99% less mercury and sulfur dioxide and 82% less nitrous oxides than burning coal in a pulverized coal unit. A natural gas combined cycle power plant generates 50 to 60% less greenhouse gas than a comparably sized coal plant, although the net greenhouse gas lifecycle benefits have recently been questioned over concerns on the amount of methane potentially released during exploration and production activities. Natural gas power plants are also a superior complement to renewable power generation given their ability to be efficiently ramped up and down in output. As a transportation fuel, natural gas generates at least 30% less greenhouse gas than liquid fuels. Natural gas also provides improved efficiency for homes and businesses based on full fuel cycle analyses. For example, the production and delivery of natural gas to a customer is 91% efficient as compared to an average for electricity delivered to a customer at around 27% efficiency. For the U.S. situation, the Gas Technology Institute has calculated that by embracing natural gas in all of these uses in addition to increasing its energy from renewable sources, the U.S. can reduce its greenhouse gas emissions by 25% in 10 years and 42% by 2030 (as proposed by the U.S. House of Representatives). In doing so, the U.S. can rely on generally already proven technologies to achieve this environmental benefit of 3.000 metric tons by 2030 and save trillions of U.S. $ in imported energy. This path provides time to develop new technologies that further reduce the carbon footprint of natural gas utilization to enable targets beyond 2030 to be achieved. The benefits of enhancing natural gas supply in Europe has been highlighted by the European Gas Advocacy Forum as an efficient pathway to achieving Europes CO2 abatement targets of 40-45% by 2030 and 80% by 2050 relative to a 2010 baseline. Their assessment identified embracing natural gas as a key part (along with the addition of significant increases in renewable energy generation) of the most economically attractive mix to achieve 2030 targets and delivering on 20/20/20 commitments without restricting future
35
options or increasing costs for 2050. This analysis suggests 120 to 140bcm of additional supply could be required to achieve these objectives. Unconventional gas would be an important supply addition to supplement new pipeline and LNG imports that will also likely be required in Europe. However, all industrial activities including energy resource development have an impact on the environment and the benefits of cleaner burning natural gas are being evaluated in comparison to the environmental impact of unconventional gas exploration and production activities. This section will highlight the issues associated with unconventional gas development, identify the potential impact and the importance of addressing each issue, and consider these issues from the Polish perspective. The issue that gets the most attention associated with shale gas is hydraulic fracturing and the impact of hydraulic fracturing will be considered before considering other issues. The hydraulic fracturing technology is used to create permeability in the unconventional resources beyond what Mother Nature has provided and enable commercial flow rates. One of the first experimental fracture stimulation treatments on record is reported to have been in 1947 in the Kansas portion of the Hugoton field, which targeted four limestone gas pays at depths ranging from 2340 to 2580 feet deep. That stimulation job was conducted in four separate hydraulic fracturing treatments or stages, each of which involved pumping 1000 gallons (4000 l) of napalm or thickened gasoline through jointed tubing. Since then, over 1 million hydraulic fracturing jobs have been completed and the fluids used are much more benign. Today work continues to further fine-tune the approach with more precise sizing and placement by multi-stage fracturing. The industry has become more efficient over time and can continue to do so. There have been many concerns raised associated with this process. Some of these concerns have been sensationalized in the documentary Gasland, in a series of articles in March 2011 published in the New York Times, and outlined in many internet blogs. There is no denying that there are impacts of energy development on the environment, but some of these treatments neglect and distort facts. This is a lot of new attention to a process that has been used for over 2 million wells utilizing billions of gallons of fluid over a 60 year period. In part, this is due to significant activity taking place in populated areas that have little experience with natural gas production. There is a large amount of water required, chemicals are introduced into the water, and the processes used are generally invisible and below the surface. The vast majority of applications are performed without incident, but good news is not news. The internet allows many points of view to be shared and supporting evidence does not need to be provided. The solution is doing good science and providing transparency to exploration and production activities. This can lead to a separation between fact and fiction and allow for the focus to be put on any risks to the environment that might be real and the mitigations to further reduce impact over time.
36
The potential for environmental impact does exist and operators have not always been very aggressive on reaching out to affected communities and explaining the process. As a result, there is often confusion and several potential concerns get combined under the heading of concerns associated with hydraulic fracturing. These include the volume of water required, the potential for ground water contamination, the potential for spills of water at the surface, and the potential for seismic activity. Each of these will be assessed in this section. The water requirements are significant. Water demand is 3 to 5 million gallons (ca. 110000-190000 hl) per multi-stage horizontal well with 89% of this water used for fracturing. By 2015, activity in the U.S. Marcellus shale drilling program is projected to use 28million gallons (more than 1 million hl) per day. It is not expected that shale gas activity in Poland will reach this same high level. But even if it did, this is still less than the water required to support one electric generation station scrubber and less water than required for many other uses. A 2007 assessment organized by the Gas Technology Institute of water consumption in the Dallas-Ft Worth region of Texas identified that the combined water consumption for activity in the Barnett gas shale was less than many other uses of water including even watering golf courses. In total, water for Barnett Shale development was found to represent lessthan 1% of the total freshwater use in the Dallas-Ft. Worth Region. This is a significant amount of water but all energy generation requires water. Although unconventional gas activities require more water than conventional gas activities, unconventional gas production is still quite efficient relative to other sources including coal, biomass, and nuclear. Operators have continued to make great strides in recent years to manage the environmental challenges of sourcing fresh water for hydraulic fracturing and treating. One of the most important developments has been the practice of reusing the flow-back water from one well for part of the volume required for the next wells hydraulic fracturing effort. Typically, about 25% of the water used flows back over the first few weeks after the hydraulic fracturing and, as a result, this reuse reduces the potential for environmental impact, reduces ton-miles required in water transportation, decreases air emissions, decreases carbon footprint, lowers truck traffic densities, reduces road wear and generally leads to greater stakeholder acceptance. These efforts are still transportation-intensive with 1 million gallons (ca. 40 000 hl) flowing back from one well requiring over 200 truck loads and four times that typically needed in total for the next well. In addition to reuse, operators sometimes dispose of flow-back and produced water by deep well injection at Class II wells, but this option is only available in regions where the geology is suitable for deep injection and the wells have been drilled. Re-introducing the water from hydraulic fracturing into surface or ground water can be environmentally safe if the water first is sufficiently treated but these treatment technologies can be very expensive. Developments continue within the industry to reduce the cost of these treatment technologies. In the meantime, some water treatment
Environmental ImpactofUnconventional Gas Explorationand Production
37
is important for re-use as well to protect equipment and the shale formation from damage. This portfolio of options allows operators to be flexible and allow for the freshwater requirements for shale gas development to be minimized. Fracturing fluid migration into fresh water aquifers has not been observed. As noted earlier, the fracturing takes place very far below fresh water supplies and when fractures are monitored with micro-seismic measuring they are found to not reach nearly far enough to cause water contamination. One source of confusion is that the majority of the water is not recovered back at the surface as flow-back water. This has led some to believe that this non-recovered water seeps back to the surface through the earth and contaminates fresh water aquifers. This is not the case. This water stays deep in the earth, kept from migrating by the same low permeability that causes the need for hydraulic fracturing in the first place. Although it is not demonstrated that fractures can reach fresh groundwater, there is the potential for spills at the surface and leaks and ruptures in surface casing if cementing jobs are not performed properly. As a result, it is important to understand what is put into fracturing fluids. The content of hydraulic fracturing fluids has changed over time. Today, there is a movement towards green fluids. There is much confusion over what these fluids contain. Fracturing fluid is typically 90.6% water and another 9.0% is the proppant or sand that is used to keep the fractures open. The proppant is generally sand for coalbed methane applications as well but light strength proppants such as sintered bauxite or medium strength compounds are also used when required to handle higher pressure situations. The remaining 0.4% is made up of chemicals added for features such as to reduce friction and protect equipment from corrosion. These chemicals are not unique in their use for fracturing. They are chemicals encountered in other uses including household detergents, food additives and maintaining swimming pools. The risk should not be diminished and ignored, but it is important context to note that these are chemicals generally encountered elsewhere in human activity. Another key issue with produced and flow-back water is salt content. Solids content rises dramatically from a shale well after the first few days following a fracture application. The good news as an operator is that the flow rate has usually fallen dramatically so the total salts generated are limited. This fluid should not be reintroduced untreated into the drinking water supply. For CBM, the seams must be dewatered for a long period of time. The water from dewatering efforts is brackish but has less dissolved salt than in produced water from shale wells. GTI has supported the industry by leading some of its sampling efforts. Flowback water characteristics are consistent with ranges observed with produced water generated in the production of conventional natural gas. This includes a low concentration of suspended solids and total organic content. Man-made chemicals of concern are usually at very low or non-detectable levels. Oils and greases are also at very low and non-problem levels, but some control may be needed. Heavy metals are lower than in municipal sludge which among its other uses includes use as fertilizers. What flows back is mainly water with a degree of total dissolved solids in a mixture of carbonates, chlorides, sulfates, nitrates, sodium and
38
other minerals. So there is a treatment challenge if these waters are to be reintroduced into the natural ecosystem. But if handled properly with sustainable operating practices, there should not be contamination. There have been some documented cases of localized surface releases of fluids at the surface caused by spills and casing ruptures. In these cases in the U.S., regulators have fined the operators and the operators have cleaned up the local spill and provided alternate sources of fresh water until monitoring provided assurance that the water quality was restored. These cases provide the strong case for voluntary release of information on fracture fluid constituents and identification and adoption of sustainable operating practices. There have been assertions as highlighted earlier of more general contamination of water resulting from shale gas development. The most recent example is a Duke University study finding that methane concentrations in surface water near Marcellus shale drilling sites are higher than in nearby surface waters not near drilling sites. The details of this study merit further review. However, it is premature to draw conclusions. Actual baseline measurements of sites were not taken prior to drilling activity and it is possible that this methane concentration was already higher in the measured locations. It is also possible that the higher methane concentration was the result of older wells already drilled in the area that may not have had adequate cement treatments or were abandoned without adequate plugging. Additional evaluation of this report and a few of the assertions made by the public and media will help separate fact from fiction and enable experts to focus on any real sources of risk. The final issue associated with the hydraulic fracturing process is that the process causes earthquakes. This concern has been raised in association with a small quake in Texas, a cluster of small quakes in Arkansas, and the most recent event in the UK in a region of shale gas development. Of course, the fracturing process does generate many small seismic events. Each small crack made in the rock can be measured. But these are not felt on the surface by people and there has not been any relationship proven or demonstrated between fracturing and seismic events of the magnitude measured in these specific instances. The prevailing view is that these very small fractures do not induce larger seismic events but evaluations continue. There has been more concern highlighted associated with injection of fluids into deep injection wells (for water from unconventional gas activities and from other sources). In these cases, the wells were being operated in regions near natural faults. One example is an injection well in Texas that was potentially linked to a small quake and that Chesapeake shut down after it was shown to be near a previously undetected natural fault.The recent Arkansas swarm was in an area that has had similar clusters well before fracturing began but this event has led to a moratorium on new injection wells in Arkansas. Scott Ausbrooks, geohazards supervisor of the Arkansas Geologic Survey, has said, What we believe is happening is when the old (fracking flowback) water is put into the deeper (disposal) wells, it reduces the friction in the fault (fault-line). This doesnt cause a quake, it just speeds up the process. The quake will happen somewhere
39
down the line anyway, but this process may be making them happen sooner. Although not caused directly by hydraulic fracturing for shale gas, this is an area that would benefit from additional research to understand the risks of deep well injection in regions with these wells located near natural faults. There are issues beyond hydraulic fracturing and water consumption that generate concerns associated with unconventional gas resource development. These include surface disturbance, the impact of trucks used to transport water, solid waste generation, noise, and emissions. Each of these is getting attention by the industry. One activity focused on this is the Environmentally Friendly Drilling Program led by the Houston Advanced Research Center, or HARC. In addition to a focus on lower impact drilling rigs, construction of roads to remote drilling sites that naturally disappear after activity is completed, and development of lower impact site logistics, this program has developed a voluntary best practice scorecard that can be utilized by each operator to provide transparency on the environmental quality of their operations. This effort is now being brought to Europe as the European Environmentally Friendly Drilling Program being led by the University of Leoben in Austria. An example of reducing surface impact is the use of multiple wells off a single pad and other steps that allow operators to now farm more surface area of resource from the same surface area. The progress has been amazing, from 502 acres (~200 ha) per wells in 1970 to over 32 000 acres (almost 13 000 ha) possible today. In any case, unconventional gas development is quite efficient. The energy content generated over the life of one Marcellus shale gas well on a 0.25 acre (0.1 ha) of land is equivalent to 500 acres (~200 ha) of windmills. The industry continues to advance on this front. The best capabilities developed to date need to be transferred to new production areas. In addition, the industry continues to increase reservoir coverage by extending laterals further out and adding more fracture stages. Shale gas laterals are now reaching 6500 feet and being fractured with as many as 38 stages. Some operators are reducing the distance between laterals. But opportunities to further reduce impact and raise productivity remain. For example, it is estimated that only half of the hydraulic fracturing stages generate their potential in production. Increasing fracturing effectiveness through better models and design will generate more natural gas for the same surface area, trucking, and water requirements. In addition to issues associated with possible contamination from flow-back and produced water from shale gas activities, recent New York Times articles highlighted concerns of contamination from solid wastes generated by the drilling activity. These concerns have included the potential mobility of contaminants, including naturally occurring radioactive materials, from landfills where these solid wastes have been deposited. Highlighted sources of potential contamination have been drilling mud additives and compounds present in the rock itself that could get concentrated into the drilling fluid and returned to the surface. Testing to date has indicated that these solids are suitable for municipal landfills, but concerns continue to be highlighted in the media. An example is the reported radiation level of
40
the solid wastes generated by the U.S. Marcellus shale play. However, actual analysis of the generated drilling waste solids suggest radioactivity levels at or near background radiation levels already present at the surface and below limits set for municipal landfills. Another issue associated with solid wastes is the volume of material generated that needs to be disposed of. A typical long lateral horizontal shale gas well can generate 1700 tons of solid waste after dewatering. By the fifth year of exploration in Poland at the pace suggested by some recent projections, the total solid waste generation will be over 200 000 tons per year. This volume of material is high enough to warrant consideration of efficient and economic beneficial use alternatives. The final issue to be addressed in this chapter is air emissions generated by exploration and production activities. These emissions can include smog producing nitrous oxide compounds as well as methane which is a significant greenhouse gas. In the first years of shale gas development, these emissions were higher than they are now. An example of reductions in nitrous oxides is the experience of Pinedale in the U.S. where the U.S. Bureau of Land Management recognized the efforts to address air quality issues in 2009. New emission technologies had reduced nitrous oxide emissions by over 80% from 2005 levels. In the case of methane emissions, the cumulative emission reductions by the partners in the voluntary STAR program organized by the U.S. Environmental Protection Agency between 2000 and 2008 totaled over 800 bcf. This was achieved by adoption of improved equipment and practices to limit methane emissions during the production and gathering of natural gas. This is very important given that methane has 21 times the impact as a greenhouse gas as carbon dioxide. A recent report issued by Professor Howarth of Cornell University highlights the importance of these emissions. This report alleges that the methane generated during unconventional gas resource production is sufficient to negate the benefits highlighted earlier in this section for natural gas as a source of power relative to coal. The report cites a recent revised inventory of methane emissions issued by the U.S. EPA. However, a number of recent detailed evaluations of the Cornell report highlight issues with the assumptions made. Included in these are that the Cornell report assumes methane is 105 times worse than CO2 as a greenhouse gas (instead of 21 times), that the EPA inventory did not factor in the improvements measured by the STAR program, and that unaccounted for inventory losses were counted as emissions which is not accurate. Correcting for these factors supports the conclusion that natural gas used for power plants generates less than half the greenhouse gas impact as coal plants.
41
The Polish Perspective on the Environmental Impact ofUnconventional Gas Exploration and Production
Some aspects of the environmental impact of shale gas exploration and production are specific to a given geological structure (basin) or a given region/county. This is related to specific features of the geological setting, the type of landscape and the dominating land use, as well as legal regulations. From this perspective, Poland is a particularly interesting case, as this is the first country outside North America (U.S. and Canada) likely to develop shale gas production on a significant scale, and therefore also the first such country in Europe. A specific geological characteristic of formations that are a target for exploration in Poland is their relatively old Ordovician to Silurian age (~420 to ~460 million years old), whereas most U.S. and Canada basins produce gas from Devonian-Carboniferous or Mesozoic shales (~390 to ~65 million years old). Due to the evolution of the biosphere on the Earth, having an impact on the organic matter from which gas is generated, this might have some importance for shale gas exploration. The only other known old gas-bearing shale is Utica shale in NE USA and SE Canada. Environmental protection is, from this countrys perspective, one of the motivations for shale gas exploration. Currently, Polands energy sector is highly dependent on hard coal and lignite, and therefore is characterized by high emission of greenhouse gases. Hard coal and lignite account for some 60% of Polands energy mix and for roughly 90% of electricity production. Partly for this reason, Poland is the second lowest gas consumer per capita in the EU after Sweden. The importance of natural gas as the cleanest burning fossil fuel will grow in Poland in the near future; however, an efficient, reliable and economic source of gas is required for this. Shale gas might therefore become for Poland an energy source which would allow it to reduce greenhouse gases emission. To achieve this, however, venting and emission of methane to the atmosphere, addressed by Professor Howarth of Cornell University, must be managed properly. This requires regulations as to obligatory flaring of methane coming to the surface and flow back waters, as well as good technical standards of the gas transport infrastructure. As one of the main sources of methane emission is leakage from the pipeline system and compressor stations. The fact of local production of gas in Poland and therefore only short transport to consumers through newly built infrastructure would have an advantage in comparison to gas coming from the NE part of European Russia or from western Siberia, transported in a very long, partly old, pipeline system, proven to be a source of continuous methane emission. Water consumption for fracturing is a common concern in public discussion on shale gas, as discussed in a previous paragraph. However, water availability characteristics are always unique for an individual sedimentary basin or even for its individual zones. Poland is not a dry country, and water use for hydraulic fracturing certainly cannot affect aquifers to a considerable degree. Available resources of aquifers in Poland are equal to 13 626mcm/year, currently
42
consumed at an average rate of approximately 11.5% (per year) (Polish Hydrogeological Survey data). However, it is important to note that the shale gas basin is located in central and southern Pomorze, eastern Mazowsze and the eastern Lublin region, which are regions with significantly lower water consumption. In the case of renewable water resources from aquifers, the amount of water extracted is less important than its rate. In each local case regulations as to the maximum rate of water extraction from the given aquifer are required, and such a system is already successfully functioning in Poland. The cumulative amount of water required in the future for the shale gas industry in Poland is large, however, not if compared with other types of water consumption. In current simulations by the Polish Geological Institute, the city of Warsaw alone consumes 4-10 times more water annually than could be anticipated as the cumulative annual water consumption for hydraulic fracturing in the whole of Poland. Nonetheless, aquifers are not the only source of water for hydraulic fracturing. The other sources are surface water, particularly rivers and deeper formations of brackish waters or brines. These sorts of brines are available in the discussed region of Poland at a depth of several hundred meters. Reuse of flow back water from previous hydraulic fracturing will also help to reduce water consumption. Possible water pollution by drilling or fracturing must, furthermore, be discussed in the context of the specific local characteristic of the given basin, as the probability of the impact of such activity on aquifers is to some extent related to the geological structure and setting. However, concern that drilling through aquifers could affect their quality is in general irrelevant, as casing and cementing during drilling is sufficient to prevent any contact of drilling mud of fracturing fluids with aquifers. The technological process of drilling itself is identical, irrespective of whether it is conducted for shale gas, conventional hydrocarbons or deep hydrothermal resources or for scientific purposes, and only at the completion stage is a specific technological approach applied to unconventional hydrocarbon resources. In the case of Poland, a cumulative number of more than 7100 deep wells (>1000 m) have been drilled to date, each involving drilling through aquifers, and no cases of water contamination have been reported. A separate issue is concern for the possible impact of hydraulic fracturing on aquifers due to connections created by induced fractures. This concern is generally based on a misconception and a lack of geological knowledge, but in the case of Poland there are additional reasons to exclude such a possibility. The fractured formation is located at a depth of 3500-4500 meters below the surface, and induced fractures have penetrated some 200 m laterally and 100 m vertically at most. Above, there are some 2000-3000 m of isolation by Upper Silurian mudstone and marl, as well as locally by Zechtein evaporates and Triassic mudstone and shale, while aquifers are present at a depth of several meters to 100-300 m below the surface at most. The only way of contact between fracturing fluids and aquifers is therefore a spill on the drilling pad. The drilling pad, however, might/can be maintained by proper regulations, monitoring and execution of best practice.
43
A discussion on possible concentrations of naturally occurring radioactive materials in solid wastes from fracturing is also hardly relevant to shale as an exploration target in Poland. The Upper Ordovician and Lower Silurian shale in Poland does not contain elevated concentrations of natural radioactive elements. Also, concern for Earth tremors triggered by hydraulic fracturing is irrelevant in the case of Poland, being a non-seismic country. Since shale gas production requires a denser grid of wells in a larger area than in the case of gas production from conventional fields, a conflict between nature protection on the surface and land access required for gas exploration might be an issue locally. In Poland, the acreage with potential for shale gas production is, however, generally located outside areas covered by the Nature 2000 protection program. More intense drilling for shale gas than in the case of gas production from conventional fields also raises some concerns as to the surface fingerprints of drilling activity. Current technological improvement, in particular longer horizontal intervals and multi well drilling pads, allow for a significant reduction in the surface impact of shale gas exploitation. Such technology could reduce the amount of drilling pads per one concession block in Poland (usually about 250 000-300000 acres/1000-1200 km2) to 50-100, each occupying around 2,5-10 acres (1-4 ha). The cumulative acreage of drilling pads on an individual block might therefore be in the range of around 124-990 acres (50-400 ha), and assuming that on the national scale in Poland no more than 30-50 blocks out of a total of some 80 allocated blocks might produce gas in the whole country, some 3700-49400 acres (1500 to 20 000 ha) might be used for drilling. This is, however, only a temporary use for a few to several months at each location, and afterwards the land would be recultivated and returned to its previous use, which is usually agriculture. Reaming permanent production infrastructure is minor and has virtually no surface impact. What should be regarded as important for shale gas production in northern and eastern Poland (central and southern Pomorze, eastern Mazowsze and the eastern Lublin region), where the shale gas basin is located, is the relatively low population density and the mostly agricultural use of land. In the zone of probable gas production, the population density is mostly in the range of 20-60 person/km2. The only exceptions are the vicinity of Warsaw and Gdask agglomerations. In addressing the potential environmental impact of unconventional gas exploration and production activities, it is important to acknowledge that lack of trust is an issue. The public is seeking information from a knowledgeable and credible source and may not see the industrys view or even the view of regulators to be credible. As a result, facts alone may not be sufficient. How stakeholders are engaged will be as important as the facts as this will not be an academic scientific discussion. It is vital that there be an authentic sharing of information and careful listening to alternative viewpoints. Environmental groups and communities need to be part of the conversation on these activities and joint evaluation of the
44
facts can help provide assurance and build the required credibility. Of course, the industry should consistently and proactively adopt best practices tailored to the Polish situation. R&D opportunities remain to further reduce the impact and these can be prioritized. Poland has an opportunity to lead the way for Europe by consistently utilizing sustainable operating practices and engaging in transparent dialogue from the very start.
45
AMERICAN SUCCESS
4. Unconventional Gas: TheNorthAmerican Experience

GuyLewis, TrevorSmith, KentF.Perry
The unconventional gas plays of North America are numerous, covering substantial areas of the eastern, southwestern, northern, southern, and western states of the U.S.; vast areas of Canada have extensive unconventional gas plays as well. Some have estimated that shale gas in particular could provide as much as half of the natural gas production in North America by 2020 which would amount to over 14tcf of natural gas per year representing more than $70 bln of revenue at current market prices. It has been called a revolution. However, the making of this revolution has over a 20 year history. Few people had heard of unconventional gas just 5 years ago. Even for those in the United States that had some knowledge of unconventional resources such as shale gas, tight gas, and coalbed methane, they did not grasp the potential of these resources to transform energy markets around the world. Geologists and E&P companies, however, have known about the gas contained in these resources for decades. Drillers would often record gas shows as they drilled through these rock formations on their way to accessing conventional gas reservoirs. The gas was known to be in the rock, but the knowledge and the technology to recover the gas economically and sustainably was not. It took substantial investment in collaborative research and technology development for unconventional gas to become what some have called a 20 year overnight success. This section describes the history of unconventional gas research and development in the U.S. It focuses on the collaborative framework used and the advanced technology developed by key players, which enabled the rapid development of these vital resources. It also describes the lessons that can be learned from the North American experience. The approach to developing unconventional gas in Poland will need to be adapted and tailored for the Polish situation and to consider Polish experiences, but the North American experience can add value. Finally, this section will address the current state of resource development in the U.S. and what remains to be done for unconventional gas to reach its full potential. In the early 1980s, collaborative development of unconventional gas in the United States was launched with the help of research programs led by the Gas Technology Institute (GTI),
49
anon-profit independent energy research and technology development organization formerly known as the Gas Research Institute (GRI). The programs were enabled with funding provided by the U.S. government and with support and oversight provided by the U.S. Department of Energy. These collaborative research programs helped harness and add momentum to the efforts of innovative entrepreneurs and made possible the scientific understanding, experimentation, and new technology development that unlocked the potential of Americas new natural gas. An entirely new industry of energy innovation was built on the development of advanced technologies deployed by many energy developers, natural gas field service providers, and engineering solution providers. It started in 1982 when GTI (as GRI) led the worlds first effort to develop unconventional gas resources with a research program targeting coalbed methane. GTI managed a collaborative team of experts from industry and academia and developed the technologies that have enabled CBM to grow from nothing to now making up fully 12% of total U.S. gas supply. GTIs collaborative model was also used to manage parallel programs for gas shale and tight sands production. Together, these three programs contributed to advancements in hydraulic fracturing technology and a fundamental understanding of gas adsorption/desorption in rock formations. What changed the game was the realization that one could economically create permeability in low permeability hydrocarbon bearing formations. Hydraulic fracturing a 60 year old process of pumping a mixture of water, chemicals and sand under high pressure into underground layers of rock and recent advances in horizontal drilling and seismic imaging are the key technologies critical to unlocking unconventional gas resources. Credit for first economically extracting gas from shale generally goes to George Mitchell, former head of Mitchell Energy and Development Corp. In the early 1980s Mitchell and his completion engineers took a chance and started experimenting with hydraulic fracturing in low permeability shale that proved successful. At the same time, Mitchell scientists, using state of the art techniques developed through these collaborative programs, did new core studies on shale gas that proved the gas in place figures were actually four times more than previously believed. Other technology developments led by GTI, including micro seismic for measuring fracture performance and fracture modeling software, were leveraged by Mitchell and dramatically improved their production results. Today, these technologies are key components in the operations of all fracturing service companies. In 2000, Devon Energy Corporation acquired Mitchell Energy and combined hydraulic fracturing with horizontal drilling to make shale gas wells more productive. Horizontal drilling enables a single vertical well to turn horizontally and follow a seam of hydrocarbon bearing rock for long distances, thus increasing the contact area of the well with the formation. Devons success freed the gas to flow in greater volumes and at a much lower unit cost than previously thought possible.
50
Following Devons success, other independent producers including Chesapeake Energy, Range Resources, and EOG Resources to name a few have experienced tremendous success with their own developments. In the last couple of years, this success has drawn the attention of oil and gas majors, many of which initially overlooked unconventional gas development in favor of developing large conventional resources. Today, major players including ExxonMobil, Shell, and Chevron have now taken substantial unconventional gas lease positions through strategic partnerships and acquisitions of independent producers. In 2007, the Research Partnership to Secure Energy for America (RPSEA) was awarded the contract to manage the Ultra-deepwater and Unconventional Natural Gas and Other Petroleum Resources Research and Development Program created by the United States Energy Policy Act of 2005. RPSEA is a non-profit corporation composed of a consortium of over 150 top U.S. related entities dedicated to increasing Americas supply of energy. RPSEA has focused on continuing to develop and adapt technology following a technology road-map created for the U.S. DOE by GTI to support RPSEAs Unconventional Gas R&D program, now the largest collaborative unconventional gas technology program in the world. The key to enabling unconventional gas development in the United States has been and continues to be the bringing together of the right partners and technology-based solutions to make unconventional resources productive. Experience has shown that developing new gas resources requires collaborative efforts between a broad and diverse group of participants including personnel from E&P Operators and Service Companies, Universities, Consulting Firms, Private Research Organizations, Oil and Gas Associations, National Labs and Public Geological Surveys. Some bring new ideas while others perform basic research. Others provide test well sites and equipment to test new concepts in the field and many participate in the dissemination and transfer of concepts to others in the gas industry. Today, unconventional gas research and technology development in the United States is focused on identifying, developing, and deploying technologies that enhance the economic efficiency and reduce the environmental footprint of field production activities. No two unconventional gas plays have the exact same geological characteristics, so technology known to work effectively in one play may have to be adapted or re-invented altogether to make another play productive and economical. Such technology development and adaptation is underway today in collaborative projects where participants are working to better understand these plays unique characteristics, their gas production potential, and the techno-economic and societal challenges to their development. The lessons learned and techniques developed will be transferred and leveraged by others developing new emerging plays. Whether in the U.S. or elsewhere around the globe, developing an unconventional gas endowment requires characterizing the resource, applying the appropriate well drilling and
Unconventional Gas: TheNorthAmerican Experience
51
completion techniques, ensuring the required infrastructure is in place, and managing the reservoir over time. Of course, good environmental stewardship is also essential in order to earn and maintain the license to develop the resources. Because geologic settings are uniquely different from one play to the next, it is essential that developers have a clear understanding of the formations characteristics and gas potential. Accurate mapping of the resource and determination of the total size, volume, distribution and nature of the gas must be performed. Production mechanisms tailored to the characteristics of the formation must be studied and verified, leading to the development of an appropriate technology roadmap for resource development. Conventional drilling practices are often readily adapted to the new unconventional plays. However, completion and stimulation practices must be modified to address issues specific to characteristics of the formations. Some formations are likely to require new approaches and advanced technology for both drilling and completion of new wells. For instance, the approaches that have enabled the development of the Barnett Shale resource in Texas have been found to be ineffective when applied to the New Albany Shale resource in Illinois, Indiana, and Kentucky. It is recognized that well-costs need to be reduced considerably to produce gas in economically marginal areas, and fit-for-purpose equipment may be required to access certain resources in challenging terrain. Coiled tubing drilling (CTD) is one approach that continues to be developed in the U.S. with this objective. The European Environmentally Friendly Drilling Program has been established to further develop these adaptations. Gas produced from unconventional resources is typically marketed through the existing natural gas gathering and pipeline systems. Once produced, the gas typically does not require any special handling as compared to the conventional gas resources being produced. However, there may be instances where new infrastructure and new technology is required to process the gas and condition it to pipeline quality standards. Unconventional gas reservoirs may perform contrary to conventional understanding of gas reservoirs. For example, efforts to produce gas from coal seams often began by producing only water until reservoirs were lowered in pressure allowing gas to desorb from the coal. At this point gas began to flow and be produced in ever increasing quantities while the water production declined. This was opposite to gas production from conventional reservoirs where gas production occurred at the greatest volume initially and then declined over time. Water production was normally minimal at the outset of production and increased over time. A critical success factor of the U.S. research programs continues to be technology dissemination. Developing any new resource that is technology dependent will need a focused effort to transfer results. Unconventional gas involves a wide spectrum of stakeholders, from
52
small and mid-size gas producing companies to universities to the majors and those service companies that support them. As such, dissemination programs must be designed for the intended audience and must effectively reduce the risk associated with applying new technology and processes. Finally, the North American experience has shown that enthusiasm for this vast resource endowment can be tempered by respect for factors that profoundly affect the sustainability of this energy sector, including infrastructure requirements, public perception (e.g. clean-burning, reduced greenhouse gas loading per mm Btu, etc.), and potential environmental impacts. With regard to public opinion and regulatory interaction, the unconventional gas industry has received the most resistance regarding questions about the long term environmental impacts of development, particularly the perceived impacts of hydraulic fracturing and the management of waste streams that are associated with the development of shale gas resources. The effective management of water and other high volume waste streams in a manner that is economical and protective of human health and the environment will be critical to the shale gas industrys ability to grow and maintain a high pace of energy development well into the 21st Century. The U.S. industry has made strong and continued progress in mitigating environmental impacts such as surface footprint, emissions, water usage, waste disposal, or habitat fragmentation with careful planning, outreach, and the demonstration and deployment of sustainable, innovative processes, fit-for-purpose technologies and techniques that maximize efficiency. In places where energy development occurs near populated communities, extra measures are put in place to minimize traffic, noise, any impacts on views, and general intrusion. Still, the potential for natural gas to serve a leading role in a sustainable energy portfolio is not certain. Despite the knowledge and technical, economic and operational efficiencies achieved by collaborative partnerships in the past and present, questions still persist about the safety and environmental sustainability of exploration and production activities. Political risks exist that stem from perceptions regarding the safety of pipeline operations as well as concerns regarding the impact of hydraulic fracturing processes on the environment and local communities. Work remains to help create an environment in which key stakeholders view industry representatives as trustworthy partners in efforts to improve the safety of unconventional gas operations. Creating confidence in natural gas and its ability to deliver benefits to our economy, environment and energy security for decades to come requires that efforts continue to bring innovative thought leaders together, including those who may be skeptical of unconventional gas development, and share information while engaging policy makers and the public in a balanced and fact-based discussion of how best to technically, economically, and sustainably develop unconventional gas.
Unconventional Gas: TheNorthAmerican Experience
53
5. The Influence of the U.S. Gas Revolution on International Gas Markets Economic and Political Implications and the ImportanceofEnergy Security
MarcinTarnawski
Natural gas production in the world in recent years has been characterized by a steady increase (2987bcm were extracted in 2009), except for a small decrease caused by the financial crisis of 2008. The most important effect of the events of 2008 was that Russia was replaced by the United States as the leading world gas producer. These two countries together produce 40% of the natural gas in the world and are, in this respect, far ahead of the Gulf States, which unlike the oil sector, play a much smaller role in gas production. It was the increased gas production from unconventional gas plays that exerted a considerable influence on the position of the U.S. Unconventional gas, including shale gas, has significantly affected the price of natural gas in the U.S. market and is increasingly being considered as a fuel which, in the future, will lead to significant changes on the world gas market. Despite the fact that shale gas has been extracted for more than 100 years in the Appalachian Basin and Illinois Basin, until the mid 1990s the exploitation was of marginal economic importance. It is only the rise in natural gas prices in
Chart 5.1 Natural gas production in the world (% share by country in 2009)
Source: Own graph on the basis of data from the BP Statistical Review of World Energy 2010
55
recent years and advances in hydraulic fracturing and horizontal drilling technology that have increased the profitability of shale gas extraction. Several years ago, experts argued that the best years of the American gas industry belonged to the past and that the sector would never revive again (extraction had been decreasing since the 1980s, because reserves of conventional gas were becoming depleted). At the beginning of this century, U.S. companies began to extract unconventional gas, the chemical composition of which is not significantly different from ordinary natural gas. It is, however, far more difficult to extract. In 1996 the U.S. mined 8.5bcm of unconventional gas. Ten years later, the figure was 31bcm, and in 2010 137bcm. Due to a technological revolution in the energy sector in 2009, the U.S. became the largest producer of natural gas in the world.
Chart 5.2 Natural gas production in the U.S. in 2002-2010 in bcm (including the unconventional gas share)
800 700 600 500 400 300 200 100 0 2002
gas (total)
gas (unconventional)
2003
2004
2005
2006
2007
2008
2009
2010
Source: Own graph based on data from BP Statistical Review of World Energy 2010 and the Energy Information Agency
At the moment, the U.S. is still an importer of natural gas but the latest forecasts show that U.S. unconventional gas resources have the potential to make the country self-sufficient in this respect. In 2009, the level of imports amounted to about 105bcm, compared to approximately 112bcm in 2008 (down by 6.7%) and approximately 130bcm in 2007. The U.S. imports gas from Canada: around 92bcm (by gas pipeline; gas from Canada accounts for approx. 15% of annual consumption), Trinidad and Tobago: around 7bcm, Egypt: about 4bcm, Nigeria, Qatar and Norway (through liquefied natural gas terminals that cater to about 2% of annual consumption). In the U.S., approx. 25% of energy comes from the use of natural gas, the main consumers (of gas) being: power plants (30%), industry (27%), households (21%), other commercial activity (14%) and other (about 8%). The price of gas is composed of two main components (not including taxes): the cost of the natural gas (commodity costs) and costs of gas distribution and delivery to the consumer (transmission and distribution costs). Natural gas prices depend on supply and demand on the market. Factors affecting supply include: the volume of gas production, the volume of imports and storage capacity an increase in production leads to a drop in prices, while a drop in production causes an increase in prices. Factors affecting
56
MarcinTarnawski
demand include: economic growth, weather and oil prices an increase in demand (for gas) raises prices, a decline in demand for gas leads to falling prices. The most important factors affecting gas prices in the U.S. are: Most of the gas consumed in the U.S. comes from domestic production, so a decline in production translates into higher gas prices. Higher gas prices mean greater ability to explore new plays, and thus increase extraction; Weather, particularly natural disasters (hurricanes, tornadoes), causes a decrease in gas production; The importing of gas (primarily through a pipeline from Canada) and the price of the imported natural gas, Due to the fact that LNG meets only 2% of demand, it affects prices on the domestic market to a lesser extent; High economic growth increases the demand for goods and services provided by industry, which in turn needs more gas; Long and cold winters cause an increase in the heat demand of households, which increases pressure on gas prices; High summer temperatures cause an increase in electricity consumption, part of which is produced in gas power plants; The amount of stocks in underground gas tanks is of fundamental significance at times of higher demand for gas by households and industry in the summer and winter.
Chart 5.3 Average monthly gas prices (in USD) on the NYMEX Exchange (Henry Hub)
14 12 10 8 6 4 2
07/2008 08/2008 09/2008 10/2008 11/2008 12/2008 01/2009 02/2009 03/2009 04/2009 05/2009 06/2009 07/2009 08/2009 09/2009 10/2009 11/2009 12/2009 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010 08/2010 09/2010 10/2010 11/2010 12/2010 01/2011 02/2011 03/2011 04/2011
Source: Own graph based on GASearch Energy Intelligence (http://www.gasearch.com/)
The Influence of the U.S. Gas Revolution on International Gas Markets
57
However, it was the increased supply of gas due to exploitation of gas from unconventional sources (about 137bcm in 2010) that had the greatest impact on the drop in gas prices in the U.S. market. Price trends on the New York Stock Exchange (Henry Hub contracts) began to increasingly move away from trends in other regional markets. In Henry Hub contracts at the beginning of 2010, the price paid was approx. $6 per 1 mln Btu (British thermal unit, burning one cubic meter of gas provides about 36 thousand Btu). At the beginning of May 2011, the price was already more than lower. The price of oil increased during this period in New York by about 10%. Extraction of unconventional gas on an industrial scale has revolutionized the U.S. market. The market has changed so much that LNG terminals are now only partially used to import natural gas and with their help, the U.S. has begun to export gas (the first delivery to the UK took place in December 2010) (for more information see Chapter 9). The impact that U.S. unconventional gas has had on gas prices outside the United States is quite another matter.
Chart 5.4 Intercontinental trade in natural gas production and consumption by continent for 2009 in bcm 1200 1000 800 600 400 200 0
North America Central and South America Middle East Asia and Pacific production
consumption
Europe
Africa
Source: Own chart based on BPs Statistical Review of World Energy 2010)
The over 20% U.S share of world extraction of natural gas should give the country a significant influence over price developments on world markets. But in reality the situation is not so clear. The following graphs show clearly that, if in the case of oil, you can talk about a world market, in the case of natural gas, a global market does not exist. This is due to the difficulty of transporting gas over long distances. Gas (as opposed to oil) is usually consumed in places where the gas is produced; there are rare cases where gas is transported to other places but only in the case of LNG. This situation has a lot to do with the way natural gas is transported i.e. largely through pipelines. Construction of pipelines requires, on the one hand, huge financial outlays, and on the other, conclusion of long-term gas contracts. The infrastructure needed to transport LNG, which is only just developing, is not limited by these considerations the gas is transported in LNG carriers and the contracts are short-term and often ad hoc, since contracts
58
MarcinTarnawski
are concluded on the spot market (concerning 20% of short-term transactions). Therefore, in future, thanks to the development of LNG trade, you can expect the emergence of a global market for short-term transactions in natural gas.
Chart 5.5 Intercontinental oil trade/production and consumption by continent for 2009 in thousands of barrels (Mbbl) 30000 25000 20000 15000 10000 5000 0
North America Central and South America Europe Middle East Africa Asia and Pacific production consumption
Source: Own chart based on BPs Statistical Review of World Energy 2010)
The slow decline in natural gas prices in the world has its origin in an excess of supply of gas, but this is mainly due to: the economic crisis of 2008 (a fall in demand), the rapid increase in production capacity of LNG and the significant increase in unconventional gas production in the U.S. Persistent oversupply can put pressure on gas exporters to move away from oil-price indexation, which can lead to further lowering of prices. Europe has started to feel the U.S. gas revolution in an indirect way oversupply of gas in the U.S. (an increase in unconventional gas production) has resulted in increased deliveries of LNG to terminals located in Europe rather than in the U.S. However, the European terminals have excess gas handling capacity relative to the limited number of suppliers. Already, the large supply of LNG in the UK has forced Norwegian natural gas out, which is now directed to Germany, where it competes with gas from Russia. LNG has started a revolution on gas markets (through its increased transport capacity) with the result that natural gas prices on different continents are likely to be more closely linked. Thanks to the commercial exploitation of unconventional gas, the U.S. can play an increasingly important role on the global gas market. Moreover, it is worth noting that some of the LNG terminals that have been built over the last few years in the U.S. (e.g. the Sabine Pass) remain unused due to unconventional gas. The decline in demand for LNG is also reflected in its global prices. However, due to the fact that the fall in demand overlapped with economic crisis, it is hard to determine what portion of the price decrease was caused by less purchase of gas and what portion by the increase in unconventional gas supplies. Undoubtedly, unconventional gas is likely to exert a significant influence on the global market for natural gas and can also cause major changes in the gas
59
market in Europe. Large-scale industrial exploitationof unconventionalgas, not only in the U.S. but in other European countries or Asia as well, may seriously upset the existing balance of power between countries that export and import natural gas. In Europe the situation may change, especially in the region of CEE, because Russia is the sole regional provider of natural gas. It may also lead to a situation where new investments in the trans-European pipelines, such as Nord Stream and South Stream, will not prove economically viable. Major changes in the U.S. natural gas market can therefore be regarded as the beginning of changes in the geopolitical balance of power related to energy security. Apart from the symbolic change of world leader in gas production, as well as new directions of gas supply due to the availability of LNG, it is worth mentioning Chinas promising unconventional gas potential. U.S.-Chinese cooperation assumes that American experience will help China start exploitation of their resources and, consequently, accelerate the development of the natural gas sector, and will in the future also attract foreign investors. Due to the predicted potential of unconventional gas resources in China, the country may become a major energy player, and slowly start to become less of an importer of Russian gas. These facts and predictions mean that a completely opposite trend concerning the natural gas sector can be discerned in Russia. Technological advances in the extraction of unconventional gas (and its future perspectives) are treated as some kind of a threat to the dominant position of Gazprom in Europe and the concerns future plans (more on the issue in Chapter 8). In fact, forecasts which predict a continuation of the downward trend in gas prices in the world are particularly challenging and threatening to Russias position as an energy superpower. Already in 2009, Russia reported a decline in natural gas exports to Europe, which was caused by the saturation of the U.S. market by its own resources and the construction of new LNG terminals in many European countries. This trend is likely to cause difficulties in the exploitation of the Shtokman Field, which is planned to provide gas for the Nord Stream pipeline. While American unconventional gas was only an indirect threat to Russia, reports of potentially huge recoverable gas reserves in Poland or China, among other countries, may be seen as a direct danger. In a report published in January 2010, the Russians themselves came to similar conclusions. In their analysis of the reasons which contributed to the decline in exports of Russian gas to Europe, they attributed the decline to: The opening, by Qatar and other countries, of new gas liquefaction installations and the increase in the capacity of regasification terminals in Europe (in early 2010 gas from longterm contracts was already twice as expensive as that purchased in markets for short-term transactions); The closure of the worlds largest gas market, namely the U.S. market, because of the increasing possibility of unconventional gas production, which resulted in the diversion of LNG exports to European markets.
60
MarcinTarnawski
Possible consequences of the U.S. gas revolution for international markets: Economic: the most likely scenario is a decline in gas prices on all markets in the world (oversupply of gas in the United States will cause a movement of LNG to other markets such as Europe, where we also will see an increase in the amount of gas, which will consequently lead to lower prices). Other possible scenarios are: the creation of a world gas market (rather than regional, as a result of the increase in trade of LNG), a change from long term transactions to short-term (spot) markets or a move away from oil-price indexation, and, furthermore, falling gas prices may raise doubts about the economic viability of Russian infrastructure projects (Nord Stream and South Stream); Political: these mainly concern the European continent and are connected with the possible decline in the importance of Russia as the major supplier of gas to European markets. Access to LNG or exploitation of their own unconventional gas resources by European countries may effectively weaken Russias ability to use gas as an instrument of foreign policy, while the possible exploitation of unconventional gas in China could adversely affect SinoRussian relations and change the balance of power in the field of energy in favour of Asia; Energy Security: any form of diversification of energy sources increases the energy security of a given country, so the access of European countries to LNG together with the possible exploitation of unconventional gas resources in Europe may diminish the fear of Russia using its access to natural resources to achieve political objectives. Of course, all the above mentioned possibilities are only predictions of how the international situation may develop; the only thing that is certain (and noticeable) in the case of unconventional gas is the drop in gas prices, felt with varying intensity in different parts of the world (but this is due to the functioning of many regional gas markets and not just one global market).
61
6. Transfer of American Experiencein the Unconventional Gas Sector to the European Context
IzabelaAlbrycht
The technological revolution in the field of unconventional natural gas production in the U.S. has led to significant changes in the structure of the American market, allowing greater energy independence and lower prices for industrial as well as individual clients. Currently, it is certain that unconventional gas resources are also located in Europe, and the largest of these resources are probably situated in Poland. In seeking the best practices for the development of the unconventional gas sector, Europe should look towards North America to learn of existing practices and approaches to development but recognize the importance of adapting these for the situation in Poland. Although European preliminary research and expert studies on shale gas have intensified since 2009, the development potential of this sector as well as possible benefits energy security, reduction of CO2 emission and increasing competitiveness of the economy have still not been comprehensively presented to the general public and decision-makers. Unconventional gas is becoming one of the main topics of the energy debate in the EU. Practically all participants in the gas market: government bodies, politicians, businesses and European customers are becoming increasingly interested in the issue. However, it is worth noting that enthusiasm for unconventional gas is not universal in all EU Member States. Besides the protests of radical environmentalists and antiglobalists, the energy policy of governments of key EU countries may also negatively influence the prospects for unconventional gas extraction. Therefore, we should strive, above all, to keep the discussion about unconventional gas based on facts instead of emotions, gossip or information fabricated for lobby groups needs. Secondly, governments, both Polish and American, should consistently aim to eliminate the obstacles to the shale gas sector in Poland. We should therefore try to create frameworks for joint, long-standing and beneficial business cooperation between Poland and the U.S. and between the EU and the U.S. based on exchange of experiences and respect of mutual interests.
63
An institutional basis for the expansion of shale gas extraction technology was formed by the launching of the Global Shale Gas Initiative (GSGI) in April 2010 by the Department of State. The GSGI establishes strategic cooperation with countries which are potentially rich in unconventional resources. The GSGI aims to help them to safely and economically extract and utilize these resources. The Initiative assumes the use of international cooperation mechanisms to transfer American experience relating to technical aspects and regulation of the unconventional gas sector. U.S. government agencies cooperating with the Department of State within the framework of the GSGI include: the U.S. Agency for International Development (USAID), the U.S. Geological Survey (USGS), the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), the Commercial Law Development Program (CLDP), the Environmental Protection Agency (EPA) and the Department of Energys Office of Fossil Energy (DOE/FE). Poland accepted an invitation to the GSCI in July 2010, which was confirmed during the Warsaw visit of Hilary Clinton. She declared then that the decision was a sign of Polands leading role in the global energy sector. In August 2010, representatives of Poland together with delegates from 19 other countries (including China, India, Jordan, Chile and RSA) took part in the first GSGI conference to discuss the challenges of regulations, technology, economy and politics related to exploitation of unconventional gas. Cooperation with the GSGI opens up good prospects for Poland and we should undoubtedly continue to aim to create an operational framework for it and effectively make use of the knowledge and experience of our American partners. It is also in the Polish interest to sign as soon as possible beneficial contracts concerning Polish-American cooperation on R&D and economic matters, and apart from that issue concessions for exploring and extracting unconventional gas. The fact that leading energy companies, including American ones, are operating in Poland constitutes an opportunity for broadening bilateral contacts that go beyond strictly commercial relations. Besides, the U.S. is the best example of a country implementing effective policies in the discussed area. In December 2005, Washington signed a bilateral scientific and technological cooperation agreement with the Norwegian government, which introduced a range of practical and very interesting solutions. It provided for joint research projects, training of experts, sharing of equipment and technical materials as well as facilitating the granting of visas to scientists. The agreement introduced additional provisions concerning transfer of technology and information and protection of intellectual property rights. A similar agreement was concluded between the U.S. and China in 2009 (Shale Gas Resource Initiative). For Poland, negotiating such an agreement with the U.S. would create a stimulus for development not only in the energy sector, but also in other sectors of the economy.1 We should also keep in mind that American expert centers, which have dealt with the development of natural gas in the U.S. for many years, can provide us with the most reliable information and knowledge necessary for development of the shale gas sector. The Gas Technology Institute (GTI) is a prestigious expert center that is planning to implement expert projects in Poland. For
1 Based on: Albrycht I., Shale Gas? Yes we can!, the Kociuszko Institue policy brief, May 2011.
64
IzabelaAlbrycht
several dozen years, the GTI, together with the U.S. Department of Energy, has been involved in researching hydrocarbon resources. The Institute has experience in preparing and implementing various programs related to unconventional gas (e.g. minimizing of environmental effects). This knowledge and experience, supplemented with that of other American experts and also experts from Poland and other regions of Europe, should be used by the Polish Exploration and Production Industry Organization (Organizacja Polskiego Przemysu PoszukiwawczoWydobywczego OPPPW), especially once unconventional resources extraction will be in progress. Consultations in the area of environmental implications and a comprehensive system for informing the general public about the strategic significance of unconventional gas will both be of great importance. GTI has been directing, performing, and monitoring shale gas R&D for 20 years and is therefore in possession of a rich collection of data on the environmental effects of unconventional gas extraction as well as data on the economic profitability of its production. Cooperation with American experts should serve not only in know-how transfer, but also help in evaluating recent negative media coverage of the unconventional gas sector. The Americans have many years of experience in the unconventional gas sector. They have information which will help to verify the arguments of shale gas opponents in Europe. An example of how useful such information could be is analysis of a well-known the New York Times article2. Its author formulated the thesis that apparently shale gas producers are illegally overestimating their well production capacities, well efficiency and amount of shale gas resources. Shale gas companies were compared to financial speculators, who contributed to the global economic crisis in 2008. Such articles constitute fuel for unconventional gas opponents. However, years of observations conducted by many experts suggest that after initial decline the wells have a relatively stable level of production in the longer term. The production decline in single well or several wells does not provide evidence of an overall decline across all plays. Not every well will be profitable, but despite the fact that the first year can bring significant production declines, there is a high percentage of American shale plays which are profitable at the level of $5 per 1m Btu. Additionally, experience comes with time and helps companies to reduce costs. Thus, the majority of experts doubt that the price of American shale gas will exceed $5.50 per 1 m Btu in the foreseeable future. Each successive evaluation of gas potential, technology has advanced and more basins have been evaluated, hence forecasts are rising. According to experts, there is documented evidence that due to technological advancement in shale gas extraction, the well production will increase further. The amount of resources that it is profitable to extract is approaching the amount that is technically recoverable because well efficiency and productivity are constantly increasing. This has definitely not been taken into account in skeptics forecasts. European expert centers have also failed to correct this erroneous information in the media. In order to improve the future prospects of unconventional gas extraction, it is also important for Polish companies to broaden specialist know-how, especially in areas such as advanced
2 Insiders Sound an Alarm Amid a Natural Gas Rush, http://www.nytimes.com/2011/06/26/us/26gas.html?_r=1&hp (15.07.2011).
Transfer of American Experiencein the Unconventional Gas Sector to the European Context
65
shale gas extraction techniques (e.g. hydraulic fracturing). The production technology used in the U.S. will probably require some modification and adjustments to the different geological structures in Poland e.g. unconventional gas resources occur much deeper than in the U.S. For these reasons, Polish extraction companies together with Polish universities of technology should right now start researching into developing our own technologies or possibly adapting technologies applied in the U.S. Such actions would strongly support the capacities and potential of the Polish exploration and production sector, which has already succeeded and already has well-developed technology in many areas. In the political dimension, we should expect a diplomatic and PR offensive from the U.S. aimed at creating a better political and social climate for shale gas in Europe3. Due to the specific nature of unconventional natural gas extraction, we can expect protests and lobbying actions similar to ones in the U.S. which will put forward environmental objections and obstruct the start of commercial production of unconventional gas in Poland and Europe (more on that in Chapter 10). Undoubtedly, the American administration should in the near future contact leaders of Western European countries, especially Germany, to support the development of the unconventional gas sector. In order to enable cooperation between Poland and the U.S. on building the unconventional fuels sector, improving methods of their exploration both technologically and ecologically and increasing their cost-effectiveness, American diplomacy should take steps to present to European leaders the American gas success story. The more so, because we cannot rule out the possibility that there will again be cases of instrumental use of energy in Russian foreign policy (by means of gas exports to EU countries) in the future. Also, Russia has not stopped implementation of successive investments aimed at making the EU dependent on Russian gas. After having built the first branch of Nord Stream pipeline, the country is currently lobbying for the South Stream pipeline4 (more in Chapter 8). The Polish government should also appeal to the U.S. for greater involvement in a common defense against a negative campaign by all those interest groups whose aim is to discredit shale gas extraction technology and to block the opportunity for dynamic development of this sector. The U.S. can provide information and knowledge and U.S. experts can help address the concerns about the unconventional gas sector posed by interest groups. Currently, the most active pressure groups are the French nuclear lobby and a lobby connected with the Russian gas industry. Their common interest seems to be creating negative PR around the issue of shale gas, which they do on the basis of environmentalists arguments, which, however, have not been supported in Europe by any scientific research so far, and also on the basis of questioning the economic viability of deposits, which is also not backed up by facts, as shown in the case of the New York Times article mentioned above, for example.
3 Albrycht I., op. cit. 4 Ibidem.
66
IzabelaAlbrycht
In the nearest future, unfavorable opinions about shale gas will undoubtedly be often voiced both in Poland and in the EU, posing a real threat to the prospects of development of this sector, because the mentioned lobbies are striving to create a negative reception of this issue by the public. The U.S. should thus support Poland in providing facts about shale gas, which might help to address the concerns raised by decision makers and the public. It is especially important now, before strategic projects of diversification of gas supplies to Europe have become operational (e.g. Nabucco). By presenting facts, we should convince our European partners that the EU interest must finally come before the interest of countries outside the EU, including Russia, and must have priority over the profits of selected European energy companies, which have been protected until now5.
5 Ibidem.
Transfer of American Experiencein the Unconventional Gas Sector to the European Context
67
EU POLITICS & LEGISLATION
7. Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation

PiotrSzlagowski
A rapid development of unconventional gas exploration and exploitation in the U.S. and emerging prospects for a similar scenario in Europe raise an issue regarding the adequacy of EU regulations with respect to such activities. On the one hand, there is a question of environmental concerns and on the other a question of incentivizing gas production that could devote to security of supply in the EU. Although both of these themes should be borne in mind, the aim of this paper is limited. Its goal is to map the main legislative acts that may influence potential exploitation of unconventional gas in the EU and to indicate directions in which these regulations may be amended or developed in order to adjust them to unconventional gas exploitation. For these purposes the paper contains examination of the current primary EU law provisions with significance (or such potential) for unconventional gas exploitation projects as well as a review of relevant acts of secondary EU law. The selection of respective legislative acts took into account the preliminary risk and impact assessments concerning unconventional gas production that were so far executed1. According to these analyses, the key risks concern water contamination of groundwater by chemical substances, soil pollution, waste treatment, land and landscape impact, impacts arising during the construction of wells. In this context it shall be emphasized that this review does not contain an exhaustive list neither of legislative acts nor of regulations therein contained that may have an impact on unconventional gas production. Instead, the review indicates the areas of regulation that are most likely to affect those operations.
Treaty Law and the Precautionary Principle

Within the post-Lisbon treaty framework, any sectorial regulation on unconventional gas would most likely be based either on Article 191 and 192 of the Treaty on the Functioning of the European Union (TFEU), which contain provisions on environmental protection, or
1 See: Wood R., Gilbert P., Sharmina M. and Anderson K., Shale gas: a provisional assessment of climate change and environmental impacts, Tyndall Center for Climate Change Research, 2011; Fifth Report Shale gas, House of Commons, Energy and Climate Change Committee, 10 May 2011 (available at: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenergy/795/79502.htm).
71
on Article 194 TFEU, which alone forms the Title XXI of TFEU on energy and sets out the EUs goals within this field (i.e. ensuring the functioning of the energy market, ensuring security of energy supply, promotion of energy efficiency, energy saving and the development of new and renewable forms of energy and promotion of the interconnection of energy markets). Importantly for any future legislation on unconventional gas, any measure established with the aim of achieving any of goals listed in Article 194 shall not affect a Member States right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply. In contrast, Article 192(2)(c) TFEU stipulates that measures affecting a Member States choice between different energy sources and the general structure of its energy supply may be adopted by the Council provided that it acts unanimously. However, as in the case of Article 194, no such exemption refers to measures affecting Member States right to determine the conditions for exploiting its energy resources. The relation between the two titles of TFEU to a certain extent reflects the tension between environmental concerns and concerns regarding the security of supply both of which need to be taken into account when assessing the regulatory framework for unconventional gas production. It should be noted however that, in contrast to the notion of security of supply, environmental protection is well-rooted in the primary EU law. The chief evidence of this fact is Article 194 itself which stipulates that EU energy policy shall take into account the need to preserve and improve the environment.
Secondary Law
Legislation on Permits
Directive on Authorizations for Prospection, Exploration and Production of Hydrocarbons The aim of Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons2 was to provide a level-playing-field for all agents in the industry. Hence the Directive set out criteria for granting the exclusive right to prospect, explore for or produce hydrocarbons that were supposed to guarantee that permit application procedures would be based on objective and non-discriminatory conditions. Apart from listing the minimum set of criteria, the Directive allowed Member States to impose other requirements and conditions on the exercise of activities covered by the Directive provided that they are justified by imperative requirements in general interest (Article 6(2)).In the context of the aim of this paper it can be said that although Directive 94/22/EC refers to an important issue concerning unconventional gas production, it does
2 OJ L 164, 30.6.1994, p. 3.
72
PiotrSzlagowski
not put any burden on entities applying for respective authorizations. On the contrary, it was aimed at preventing Member States from imposing unjustifiably demanding conditions for access to this particular market.
Legislation on Water
Water Framework Directive It is argued that due to the fact that the process of hydraulic fracturing involves injection of fracturing fluid containing chemicals into the soil, there is a risk that these substances may infiltrate into groundwater. For this reason the Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy3 (Water Framework Directive) may be of certain importance for unconventional gas operations. Although it contains a general prohibition of (Article 11(3)(j)) of direct discharges of pollutants into groundwater, several exemptions are foreseen, including one for exploration and exploitation of hydrocarbons. It stipulates that if the environmental objectives for respective groundwater body are not compromised, the Member State may allow for a discharge of pollutants. Groundwater Directive Directive 2006/118/EC of the European Parliament and of the Council of 12 December 2006 on the protection of groundwater against pollution and deterioration (the Groundwater Directive) complements the provisions of the Water Framework Directive through setting underground water quality standards and introduction of measures to prevent or limit discharge of pollutants into groundwater. Both the Water Framework Directive and the Groundwater Directive require that pollution of water resources does not exceed defined maximum concentration of chemicals and pollutants. Although extraction of unconventional gas does not necessarily lead to discharging substances into groundwater4, should such scenario be possible, the unconventional gas producers will have to adjust the mixture of fracturing liquid in order to minimize its impact and to monitor those effects on water composition.
Legislation on Chemicals
REACH Hydraulic fracturing of rock layers the method of unconventional gas exploitation requires the use of fracturing fluid which consists of a mixture of chemical substances. This aspect of shale gas operators activities falls under the scope of Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006
3 OJ L 327, 22.12.2000, p. 1. 4 Environmental Agency (UK), Shale gas. Memorandum, 5 April 2011 (available at: http://www.publications.parliament.uk/pa/cm201011/ cmselect/cmenergy/writev/shale/sg23.htm).
Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation
73
concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), establishing a European Chemicals Agency, amending Directive 1999/45/EC and repealing Council Regulation (EEC) No 793/93 and Commission Regulation (EC) No 1488/94 as well as Council Directive 76/769/EEC and Commission Directives 91/155/EEC, 93/67/EEC, 93/105/EC and 2000/21/EC5. The aim of REACH is to ensure a high level of protection of human health and the environment through regulation of manufacturing, placing on the market and use of chemical substances and their mixtures on ones own. Despite some voices of criticism6, it is generally accepted that the provisions laid down in REACH are underpinned by the precautionary principle. Therefore through four measures i.e. registration, evaluation, authorization and restriction the regulation is to provide that no undesired substances will enter circulation. The burden of obligation lays on manufacturers, importers and downstream users; it is for them to ensure that they carry out their respective activities in such a manner that chemical substances do not adversely affect human health or the environment. For each of these categories of entities the regulation foresees a separate set of obligations adapted to the scope of their activities. Given the fact that shale gas operators use mixtures of chemical substances in the course of hydraulic fracturing, they are likely to fall into a category of downstream users of these substances. According to a legal definition contained in REACH, a downstream user is any natural or legal person established within the Community, other than a manufacturer, importer, distributor or customer, who uses a substance, either on its own or in amixture, in the course of his industrial or professional activities (Article 3(13)). Downstream users are obliged to apply risk management measures for dangerous substances identified by the supplier and communicated through Safety Data Sheets. They also have the right to make their use of a substance known to the manufacturer so it can be registered as an identified use and covered in the suppliers chemical safety assessment. In this case they have to provide sufficient information to enable the supplier to prepare an exposure scenario for the use. However, if they prefer to keep their use confidential for business reasons, they may conduct their own chemical safety assessment and report this use to the European Chemicals Agency (ECHA)7. ECHA may review registration dossiers submitted by the industry for chemicals used in hydraulic fracturing and verify the risk management recommendations suggested by the registrants for particular uses. According to the no data no market rule, if a substance or its particular use has not been pre-registered, it cannot be neither placed on the market nor used. Apart from that, for certain substances that arecarcinogenic, mutagenic or toxic to the reproductive system (so-called CMR substances), anauthorization for use or placing on the market will be granted only if the applicant can demonstrate that risks from the use
5 OJ L 396, 30.12.2006, pp.1-849. 6 See e.g. Hansen S.F., Carlsen L., Tickner J.A., Chemicals regulation and precaution: does REACH really incorporate the precautionary principle, Environmental Science and Policy, Vol.10, Issue 5, August 2007, pp. 395-404. 7 See Guidance for downstream users. Guidance for the implementation of REACH, European Chemicals Agency, January 2008.
74
PiotrSzlagowski
in question can be adequately controlled.Moreover, REACH allows to restrict use or placing on the market of certain substances. For this purpose it is necessary to show that it constitutes risk to human health or the environment. If the risk is unacceptable and needs to be addressed on a Community-wide basis, then new restrictions may be introduced or existing ones may be amended through the comitology procedure. If the risk is not adequately controlled and needs to be addressed, then a dossier conforming to the REACH requirements is prepared. Finally, it is noteworthy that despite the fact that REACH provides a comprehensive regulatory system on the EU level, it is the Member States that are responsible for enforcing the regulation and implementing penalties in case of non-compliance (Article 126). The division of these competences between European and national bodies may potentially lead to tensions on ground of applied regulatory policies. The screening process of registration dossiers submitted by the industry for chemicals used in hydraulic fracturing will be of high importance regarding the necessity of adjustment of EU regulations to unconventional gas production. Should these dossiers already mention their use inunconventionalgas activities and should the risk management recommendations suggested by the registrant be satisfactory (see Section Latest developments below), there would be no need for any further steps under REACH.
Legislation on Biodiversity
Birds Directive Directive 2009/147/EC of the European Parliament and of the Council of 30 November 2009 onthe conservationof wild birds8(the codified version of Directive 79/409/EEC as amended) creates a comprehensive scheme of protection for all wild bird species naturally occurring in the Union. The directive stipulates that the protected species shall be subject of special conservation measures concerning their habitat in order to ensure their survival and reproduction in their area of distribution. The directive emphasizes that creation of protected areas is one of the main measures to achieve this objective. For this purpose Member States are supposed to establish a coherent network of special protection areas (SPAs) comprising all of the most suitable territories for the conservation of protected bird species9. With respect to these areas, Member States are bound to avoid pollution or deterioration of habitats or any disturbances affecting the birds (Article 5). Habitats Directive The aim of the Council Directive 92/43/EEC on the Conservation of natural habitats and of wild fauna and flora10 is complementary to that of the Birds Directive. In particular,
8 OJ L 20, 26.1.2010, p. 7. 9 Since 1994 SPAs form part of the Natura 2000 network (see further). 10 OJ L 206, 22.7.1992, p.7.
75
the Habitats Directive provides the establishment of special areas of conservation (SACs) which play a parallel role to that of SPAs under the Birds Directive though with regards to the natural habitats and the populations of species of wild fauna and flora. SPAs and SACs jointly form the Natura 2000 network of protected areas. Unlike SPAs, SACs are not designated by Member States only; their establishment is a result of a more elaborated process. First, each Member State compiles a list of the best wildlife areas containing the habitats and species listed in the Habitats Directive. Then, the list is submitted to the Commission which evaluates it and selects areas which are to become SACs. Since exploitation of unconventional gas is significantly more land consuming than in the case of conventional gas, the Birds Directive and the Habitats Directive by preventing operators from access to parts of land may in result prevent them from access to some of the resources.
Legislation on Mining Waste

Mining Waste Directive The majority of legislative acts applicable to unconventional gas production refers to extraction of the resource and activities preceding thereof. In contrast, Directive2006/21/ ECof the European Parliament and of the Council of 15 March 2006 on the management of waste from extractive industries11 (Mining Waste Directive) regulates the back-end operations. The Mining Waste Directive provides an obligation that extractive waste must be managed in specialized extractive industry waste facilities and in compliance with specific rules (in accordance with the best available techniques criterion). Apart from fulfilling a number of safety requirements, the waste facility operators must provide a financial guarantee that ensures the existence and availability of funds to restore the site once the facilities operations cease. Although all measures regarding establishment and operating of the facility as well as the site restoration after its closure do not have to be fulfilled by the gas producer himself and are typically outsourced, they still involve essential costs which add up to an overall cost paid by the gas producers.
Other Legislation
Environmental Impact Assessment (EIA) Directive Arguably, exploitation of unconventional gas using the method of hydraulic fracturing is a project that may have a significant effect on the environment. Any intervention in the natural surroundings and landscape, including those involving the extraction of mineral resources, which may have such an effect falls under the scope of Council Directive No 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment12 (EIA Directive).
11 OJ L 102, 11.4.2006, p. 15. 12 OJ L 175, 5.7.1985, p. 40.
76
PiotrSzlagowski
The aim of this regulation is to provide that in case of projects likely to have significant effects on the environment by virtue, inter alia, of their nature, size or location, a procedure the environmental impact assessment ensuring that environmental implications are duly taken into account before the decisions of the competent authority or authorities which entitle the developer to proceed with the project are made. The directive distinguishes two categories of projects for which developers are obliged to carry out the EIA. First category comprises projects considered as having significant effects on environment and therefore requiring a mandatory EIA (Article 4(1)). Projects of this kind are listed in Annex I to the directive. Point 14 of this Annex refers to extraction of petroleum and natural gas for commercial purposes where the amount extracted exceeds 500 tonnes/day in the case of petroleum and 0.5mcm /day in the case of gas. Therefore, any unconventional gas exploitation project that would be able to extract the resource in amount exceeded the above limit needs to undergo the EIA procedure. Projects that would not reach this threshold, and other projects listed in Annex II, constitute the second category of projects. For these the EIA procedure is not mandatory; the Member States are allowed either to examine case-by-case whether a given project should undergo the EIA procedure or not, or they may set thresholds or criteria in order to qualify the projects for EIA (Article 4(2)). The EIA procedure comprises several stages. In the first step the developer is required to provide competent authorities with a detailed dossier of the project, including in particular: a description of the project comprising information on the site, design and size of the project; a description of the measures envisaged in order to avoid, reduce and, if possible, remedy significant adverse effects; the data required to identify and assess the main effects which the project is likely to have on the environment; an outline of the main alternatives studied by the developer and an indication of the main reasons for his choice, taking into account the environmental effects; a non-technical summary of the information listed above. Submission of the required information by the developer is followed by consultations with the competent authorities and the public (Article 6). Moreover, if the project is likely to have significant effects on the environment in another Member State, then that Member State is invited to participate in the decision-making process (Article 7). The results of consultations and the information gathered in the course of the EIA must be taken into consideration by a competent authority in the development of a consent procedure (Article 8). Once a decision to grant or refuse development consent has been taken, the competent authority or authorities shall inform the public and other Member
77
States, if they were consulted on trans-boundary effects of the project. In particular, the competent authority shall make publicly available the content of the decision and any conditions attached thereto, the main reasons and considerations on which the decision is based, including information about the public participation process, and a description, where necessary, of the main measures to avoid, reduce and, if possible, offset the major adverse effects (Article 9). Finally, the Member State needs to ensure that Members of the public concerned have access to a review procedure before a court of law or another independent and impartial body established by law to challenge the substantive or procedural legality of such decisions (Article 10a). On the one hand the EIA procedure guarantees that all environmental concerns of the public are duly taken into account. On the other hand, due to its complexity and a potentially large number of participants, and in result its length and cost required to address the environmental concerns, the EIA procedure is likely to be an important obstacle for unconventional gas operators. Legislation Implementing the Aarhus Convention With reference to public participation in decision-making concerning environment EIA Directive is complemented by an another set of EU legislation implementing the United Nations Economic Commission for Europe Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters of 25 June 1998, better known as the Aarhus Convention. The rights established by the convention can be divided into three categories: the right of access to environmental information, i.e. the right to receive environmental information that is held by public authorities; the right of public participation in environmental decision-making, which means that public authorities should enable the public affected to comment on proposals for projects that may affect the environment and taking these comments into due account in decision-making; the right of access to justice, i.e. the right to review procedures and to challenge decisions of public authorities that have been made without respecting the two aforementioned rights or environmental law in general. The first two pillars of the Aarhus Convention are transposed to the EU law by, respectively, Directive 2003/4/EC of the European Parliament and of the Council of 28 January 2003 on public access to environmental information and repealing Council Directive 90/313/EEC13 and Directive 2003/35/EC of the European Parliament and of the Council of 26 May 2003 providing forpublic participationin respect of the drawing up of certain
13 OJ L 41, 14.2.2003, p. 26.
78
PiotrSzlagowski
plans and programmes relating to the environment and amending with regard to public participation and access to justice Council Directives 85/337/EEC and 96/61/EC14. The last piece of this set of legislation is Regulation (EC) No 1367/2006of the European Parliament and of the Council on the application of the provisions of the Aarhus Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters to Community institutions and bodies15 which covers issues concerning all three pillars. The impact of EU legislation implementing the Aarhus Convention on unconventional gas exploitation projects is similar to that of the EIA Directive. The rights granted to the public, work as a safeguard for environmental protection. However, addressing the environmental concerns by unconventional gas operators would incur certain costs. It is the role of public authorities to find a balance between the two contradictory interests.
Latest Developments
The growth of the industrys interest in unconventional gas extraction in Europe leads the EU institutions to reassess its significance for the EU policies in two areas, i.e. environmental protection and security of energy supply. With reference to the latter it is essential to indicate that the conclusions of the European Council of 4 February 2011 contain a following point: In order to further enhance its security of supply, Europes potential for sustainable extraction and use of conventional and unconventional (shale gas and oil shale) fossil fuel resources should be assessed16. As for the area of environmental protection, in its initial step the Commission requested the European Chemicals Agency to review registration dossiers submitted by the industry for a series of chemicals, generally used in hydraulic fracturing, in order to identify whether these dossiers mention their use inunconventionalgas activities and to assess the risk management recommendations suggested by the registrant(s)for such uses 17. After receiving the ECAs report the Commission intends to decide whether any further action on its part is needed18.
Conclusions
The aim of this paper was to indicate and review the main legislative acts that may influence the potential exploitation of unconventional gas in the EU. Carrying out that task
14 15 16 17 OJ L 156, 25.6.2003, p. 17. OJ L 264, 25.9.2006, p. 13. European Council, Conclusions, EUCO 2/1/11, 4 February 2011, para. 7. Answer to a parliamentary question given by Mr Potonik on behalf of the Commission, P-004342/2011, 9 June 2011 (available at: http:// www.europarl.europa.eu/sides/getAllAnswers.do?reference=P-2011-004342&language=EL). 18 Ibidem.
79
has shown that although there is no specific regulation devoted to this very method of natural gas extraction, it is already extensively regulated, especially with regard to environmental protection. As it was further demonstrated, most of the relevant EU regulations use flexible mechanisms (see EIA Directive or REACH) and therefore would not need particular amendments in order to be duly adjusted to unconventional gas production. Furthermore, it is unlikely that there would be any legislation adopted especially with respect to limit the unconventional gas production (i.e. issue a temporary moratorium), since such an action could be considered as one that affects the Member States choice between different energy sources and the general structure of their energy supply and as such they would require unanimity in the Council. Moreover, one of the most visible conclusions is that almost all relevant EU legislation is aimed at the protection of the environment. This shows the imbalance as mentioned in the beginning of this paper between arguments emphasizing the environmental impact of unconventional gas production and arguments underlining the aspect of the security of supply. The latter has been addressed only on political level (see Section Latest developments) and has not yet been transferred into law. The issue of the tension between the two abovementioned notions should be further observed, since the debate over unconventional gas production may bring developments in this matter.
80
PiotrSzlagowski
81
8. European Unconventional GasResources as an Alternative toGas Dependency on Russia

AlanRiley
Unconventional gas, and particularly shale gas, does offer Europe the prospect of significant supply security but it will take a considerable amount of determination and effort to deliver it. Gas market liberalisation both in terms of physical infrastructure and legal rules on open market access have to be completed. In addition, EU energy and climate change policy will have to be remodeled to take account of the opportunities of deploying gas to create rapid cuts in CO2 emissions. The greater political obstacles to unconventional gas development in Europe are perhaps the environmental questions which have to be robustly and effectively addressed. If these steps are taken then Russian gas dependency will decrease reducing the market power and political influence of Gazprom and the Russian Federation across the EU states of Central and Eastern Europe and the Baltic States. The recent Cambridge Energy Research Associates (CERA) report indicates there are 173 trillion cubic meters of shale gas in place in Europe. It is therefore very easy to jump to the conclusion that all Europes energy security problems are solved. We only have to develop this domestic resource base and we have an endless supply of gas for all of the European Unions Member States. We no longer have to worry about supply dependency on Gazprom; gas supply shortages or high gas prices. In reality we need to curb our enthusiasm. In the first place the CERA reports huge number is gas in place, not actually commercially recoverable resources which are likely to be much smaller. Clearly however, even 10% recoverability, 17tcm, would be enormous for the European Union and would add significantly to supply security. In the second place there are a significant number of barriers, from geology; to building industry scale support services for shale gas development; to licensing and costs of production to environmental concerns.
83
This paper is divided into five parts. The second part considers the scale and nature of Russian gas dependency in the CEE Member States. The third part looks at the promise of unconventional gas; part four looks at the barriers to the delivery of that promise and part five offers aconclusion.
Russian Dependency: Myth or Reality?

Until the January 2009 Ukraine/Gazprom dispute most West Europeans could not see what the fuss was about. Russia had proved a reliable supplier of gas to Europe even at the height of cold war tensions in the 1980s. This concept however of Russia as a reliable supplier was always a myth. It depended on which Europe you were talking about. The Europe of the 15 or the Europe of the 27? From an all Europe perspective Russia was far from a reliable supplier. ASwedish Defence Research Agency paper in 2006 identified in some detail over 40 politically motivated energy cut offs between 1991 and 2004 (mostly gas, some oil)1. Gazproms market dominance underpins its ability to cut off states from gas supplies across the CEE states from the Baltic States which remain gas islands, to states in the rest of CEE who depend heavily on gas. The Baltic States, Slovakia and Bulgaria take 100% of their gas from Gazprom; Romania, and the Czech Republic over 70%; Hungary, Slovenia and Poland over 60%2. Theoretically states could switch to an alternative source of gas. However this solution is very problematic. Most of the gas transmission networks are East-West. There were no means at all (until recently) to move gas West-East or North-South across the Union. What is more, there were very few alternative sources of gas to Gazprom in the CEE states. The other alternative would be to switch fuel3.The cheapest option is coal. However, that has significant CO2 emission costs and would make it impossible to reach any EU CO2 targets. Nuclear is very expensive and takes a long time to bring on stream. Renewable energy can only provide marginal supply, cannot provide base load and in respect of wind power needs gas as a back up. These realties give Gazprom significant market and political power across the region which far too many Western European policymakers have not appreciated.
1 Larsson R., Russian Energy Policy: Security Dimensions and Russias Reliability as an Energy Supplier, Swedish Defence Research Agency, Stockholm 2006, p. 14. 2 Liuhto K., The EU Needs a Common Energy Policy Not Separate Solutions by its Member States, Econpapers (2009)22. 3 Pierre Noel argues that one has to look at gas in the context of the ability to deploy other fuel sources. Clearly while it is correct to say that states such as Poland do have a much greater degree of security due to the fact that gas is not dominant in the overall fuel supply mix that argument overlooks the difficulty of switching base load fuels. There is a compelling case to contend that when one takes into account the CO2 policy of the European Union combined with the cost, delay and political difficulties of installing nuclear capacity it is in fact very challenging to replace gas base load capacity. Such challenges reinforce dependence even if a states dependence is nowhere near a 100% dependence on Russian gas and there is significant proportion of coal and nuclear already in the base load mix. This dependence factor is reinforced by the lack of alternative gas supplies to Russian gas in most of the CEE and Baltic State region. For a contra argument see: NoelP., Beyond Dependence: How to Deal with Russian Gas, ECFR, London 2008.
84
AlanRiley
The compelling political reality in respect of energy cut offs is that they do not have to take place regularly in order for the supplying state to obtain significant influence over the dependent states. Dependent states end up living in the shadow of the prospect of a supply cut off. Governments facing the fact dependence see it as reducing their policy options. One silver lining was the commercial reality that Gazprom had to bring its gas through the CEE states in order to reach its most profitable Western European markets. This reduced the prospect of the threat and therefore the scale of Russian influence on CEE states. Unfortunately the development of Nord Stream by creating a direct route to market via the Baltic Sea to Germany increased the prospect of a supply cut off as cut offs could be contemplated without threatening supplies to Western Europe. Until very recently it has been questionable whether Nord Stream would be entirely completed. So although the first stage of Nord Stream providing for carrying capacity of 27.5bcm was in the process of being completed by 2012, it was open to question whether the second stage which would deliver a further 27.5bcm would ever be delivered. An uncompleted Nord Stream project would have had a significantly less negative impact on CEE Member States supply security. Unfortunately, the recent decision of the German government to close all nuclear power stations by 2022 is likely to reinforce German energy dependence on Russia and reduce German willingness to support steps to greater energy security across the whole CEE region. It is also likely to result in the full completion of Nord Stream with all 55bcm coming on stream by 2013/14 and also give life to South Stream as Gazprom seeks to tie in their principal customer in the run up to the final closure of German nuclear power stations. Hence, so far from CEE dependence on Russian gas decreasing one can make a compelling case for arguing that it is currently on the increase. German requirements to ensure gas fired power generation in replacement of nuclear power are likely to result in more direct pipelines bypassing the CEE states, leaving them more vulnerable to Russian influence. In respect of supply dependence for the CEE states and for Germany there is also a further question: the actual ability of Gazprom to deliver gas as the great supergiant Nadym Pur Taz fields deplete. The latest research suggests that investment has not been maintained at a level that will allow new fields to replace all the depleted capacity of existing fields4. One can hope that increased domestic pricing and efficiency gains might be able to help in ensure sufficient liquidity to protect exports to Europe. That may well however turn out to be an over optimistic view of the situation as gas prices reform has stalled in the face of oncoming Parliamentary and Presidential elections.
4 Abdulkarim R., The EU Natural Gas Supply and the Possible Russian Gas Shortage, Muller 2010.
European Unconventional GasResources as an Alternative toGas Dependency on Russia
85
The Promise of Unconventional Gas

Given the scale of CEE and German supply dependence and the prospect of gas cut offs; increasing supply dependence by virtue of Nord Stream and the German rejection of nuclear power as well as the prospect of the Russian gas deficit the prospect of substantial domestic unconventional gas resources in Europe is welcome. The story of the sudden arrival of unconventional gas onto the U.S. market is now well known and does not need to be repeated here. It is sufficient to say that in 2009 the United States replaced Russia as the worlds largest gas producer; unconventional gas reserves are of the order of 90tcm5. U.S. unconventional gas development has already had a significant impact in Europe as it has caused a significant LNG supply diversion from the U.S. to Europe resulting in falling gas prices across European spot markets. This has forced Gazprom to respond by cutting its prices to some of its European customers in order to they can maintain market share. This LNG effect is reinforced by the capital already committed to LNG liquefaction production which will take global production from 240bcm in 2008 to 410bcm in 20146. Liquefaction production is likely to be further increased by the economic incentives to sell LNG into the high priced European market from the U.S. Already two shipments of shale gas LNG have been made into the UK market7. The U.S. authorities have recently given national security clearance for shale gas to be exported as LNG. Given the economic incentives between low priced U.S. gas and much higher priced EU gas there is a compelling economic argument export of shale gas sold as LNG into the European market between 2015 and 2020. As a consequence, even without any development of unconventional gas in the European Union unconventional gas will have a significant impact on our energy security. The worst case scenario, without any shale gas development in Europe itself, is an increasing competition for the European market between LNG and LNG shale and existing conventional pipeline deliveries. All Europe therefore will be faced with significant gas market liquidity derived from a variety of sources fulfilling the Churchill standard for energy security8. What will however further underpin European energy security is the reality of substantial quantities of unconventional gas available domestically. According to a recent extensive study by CERA unconventional gas in place in Europe is up to 173tcm. As explained above, this is gas in place, not recoverable resources. However, even if only 10% were recoverable, this would make an enormous difference to European supply security. The CERA report itself predicts gas
5 6 7 8
Ibidem. World Energy Outlook, EIA Paris 2009. First LNG Cargo from U.S. to UK in 50 Years arrives at Grain LNG, Platts, London, November 2010. Safety and certainty in oil lie in variety and variety alone, Hansard, July 17th 1913. For a further discussion of the development of Churchills views on energy security see Yergin D., The Prize: The Epic Quest for Oil, Money & Power, Simon & Schuster, New York 1992 p. 134-146.
86
AlanRiley
production of between 60 and 200bcm in Europe by 20259. Another way of looking at this is to recognise that if Europe is only able to access 10% of the gas in place this is equivalent to approximately one-third of the total Russian gas reserve of 47tcm. Furthermore, unlike Russian gas it is virtually on site in its own market district. As a consequence, once the European unconventional gas industry has developed to scale and has properly got its costs under control it will be very competitive against both Russian gas, hauled all the way from Siberia and LNG. It is important to recognise however that while unconventional gas has had an impact on the European market via LNG diversion domestic production will take at least few years to be developed on any scale. For all the discussion about European shale gas so far not a single molecule of European derived gas has been sold anywhere within the EU. It is also important to recognise that there are at least two major obstacles to shale gas providing any significant alternative to Russian supply dependency: completion of the single market in gas and the environmental barriers.
Completion of Market Liberalisation and Environmental Questions: Barriers to Unconventional Gas Development
Legal and Physical Market Liberalisation At first sight the development of a European single market for gas looks very much like it is substantially assisted by the existence of significant imports of LNG and locally produced shale gas. One of the difficulties of ensuring market liberalisation in Europe and a single European gas market is that gas supplies have been scarce. Either gas was produced by the domestic incumbent or it came from the domestic incumbents foreign partner, such as Gazprom, on a long term supply contract. In either case the market was largely foreclosed and very little gas would be sold across national borders. In addition, none of the incumbents had any incentive to build cross-border infrastructure. The third energy package and the Commissions antitrust prosecution of energy companies has begun to reduce the power of incumbents and force unbundling in some cases10. The difficulty however remained that gas was scarce. If Gazprom provided most of a states gas supply, liberalisation would not make that much difference, there would be still one gas supplier and no alternative physical infrastructures to carry a non-existent alternative source of supply. Furthermore, technical liberalisation, even ownership unbundling, would not physically open up the energy markets. It is true that with ownership unbundling the economic incentives of the unbundled network owner are much greater to increase capacity where there is economic
9 CERA, op. cit. 10 Both E.ON and RWE have been forced under threat of competition law prosecution by DG Competition to unbundle and sell off their electricity and gas networks. The Commission has now launched over a dozen antitrust prosecutions against major energy incumbents following the 2005 Sectoral Inquiry into the electricity and gas sectors. It is this prosecution drive that has really begun to open up the European gas market. However, the third package contained in Directive 2009/73/EC will allow DG Comp and DG Energy to pile further pressure on the energy companies by forcing unbundling or a very high degree of surveillance over network operators.
87
need, rather than just increasing prices and minimising capacity. However, where there is no alternative source of gas supply and no expectation of any additional supply even an unbundled network owner will not invest in new capacity. The arrival of growing quantities of LNG and the prospect of significant supplies of domestic unconventional gas transforms that market dynamic. Large quantities of LNG and unconventional gas at often lower prices than pipeline gas create real economic incentives to increase capacity. As a result of domestic unconventional gas production additional pipeline capacity may well be built in Poland to deliver gas into the German market. Equally, LNG shipments into the UK may well see an increase in the laying of new supply pipelines across the Channel and onward west-east pipelines into the European market. The interaction between EU liberalisation and antitrust rules and the entrance of LNG suppliers and unconventional gas producers into the European market bodes well for European energy security. These suppliers are likely to incentivise network owners to physically reinforce the single market in gas with new pipeline connections across national borders. In addition, LNG suppliers and unconventional gas producers will be able to rely on EU rules to ensure market access. Incumbents are likely to buckle faced with well funded corporate actors who can rely on EU liberalisation rules and can call on the full force of the Commissions Marines, DG Competition, with their powers to undertake unannounced raids on corporate HQs, issue market access orders and impose heavy fines if new entrants have their route to market blocked. This interaction between EU rules and LNG suppliers and unconventional gas producers will provide a major boost to the completion of the EUs single market in gas reinforcing Europes supply security. However, while very positive it is not the whole of the story. While the EU liberalisation and competition rules need to be applied with vigilance to ensure the market remains open to new suppliers, there is a limit to the extent to which the legal liberalisation rules can ensure an open market. To create a truly single market where gas suppliers, including both LNG and shale gas companies, can sell their gas freely requires deep physical interconnection of the market. This physical barrier remains in the lack of interconnection West-East and North-South, making it much more difficult for a genuine single market in gas to operate. This lack of physical interconnection is particularly oppressive for CEE States, and the Baltic States as the Russian East to West pipelines effectively segment each EU Member State market as far West as the OderNiesse line. Pipelines travel in one direction and there is little or no interconnection between the pipelines and no possibility of reverse flow. However, following the January 2009 Ukraine/Russia dispute the European Union did establish a European Energy Programme for Recovery with approximately 1300 million spent on
88
AlanRiley
establishing interconnectors and reverse flow of pipelines11. This had had a significant positive impact on supply security as reverse flow and interconnection projects have abounded across the Union creating a much more resilient and coherent physical European gas market. The difficulty remains however is that an interconnection is still limited across the CEE EU Member States and particularly in respect of the Baltic States, the EUs gas islands. Significant supply dependence on Russia will remain if physical interconnection is not completed, no matter how much gas is available elsewhere in Europe and no matter how much technical legal liberalisation of gas markets occurs. A second phase of the European Energy Programme for Recovery is required to substantially complete the physical single market in gas. This should include the interconnection of the Baltic gas islands with the rest of the European gas network. In addition, LNG and shale gas producers are likely to want to themselves invest in new infrastructure to bring their gas to market. Planning rules in Member States, while they need to be robust and environmentally sound need to also be able to unreasonable delay such projects. Such projects can significantly enhance individual Member State and European supply security.
The Environmental Questions: Observations

The greater political obstacles to unconventional gas development in Europe are perhaps the environmental questions. As these are dealt with elsewhere in this volume, this chapter will therefore limit itself to three observations. Firstly, there is clearly a danger that environmental objections could terminate unconventional gas development in Europe. As argued above, however, even if no unconventional gas development takes place in Europe, there will be a substantial inflow of LNG into European markets undermining Russian gas dependency. Secondly, it is clear however that environmental allegations have immense and almost unquestioned power in Europe. This is not good for Europe or the environment12. The power of environmental allegations in European policy making can be demonstrated by the reaction in France. Almost on the French release of the anti-shale gas film Gasland the French government took steps to prohibit shale gas exploration. What is puzzling about this reaction and the entire furore over the environmental impact of unconventional gas, is that extent to which well known and ordinary energy practices such as horizontal drilling and hydraulic fracturing have been demonised. Gasland itself managed to demonise hydraulic fracturing whilst at
11 For an assessment of the programme see Report from the Commission to the Council and the Parliament on the Implementation of the European Energy Programme for Recovery, European Commission, Brussels, Com(2011) 217 Final. 12 One of my real concerns here is that unjustified and overblown environmental argument can significantly damage public and public support for bearing down on CO2 emissions. There is a real danger here that unjustified alarmism in respect of unconventional gas will have a significant detrimental effect on the ability of activists to be heard in the future.
89
the same time getting the environmental issue the wrong way round. As hydraulic fracturing occurs very deep underground with usually a mile of stone between water aquifers and the fracturing there is no danger from the fracturing. The danger, as ever, and as with any other gas or oil operation, comes from the drilling. The core issue is always to ensure that the drilling operation is safe. This is an entirely manageable process which can be reinforced, as in the UK with regulatory inspection of the drilling. The other major environmental issue is leakage of fracturing fluids again, this is a well known process in the energy industry which can be managed to world class standards and proper regulatory surveillance13. Notwithstanding the ordinary nature of the processes involved unconventional gas has been subject to a barrage of allegations over the last year. A number of questionable reports have been published which were immediately taken up across Europe as a reason to stop any shale gas development. Almost no closer examination was taken of those reports. Take for instance the Tyndall Report one of its key conclusions was that deployment of unconventional gas resources would not cut CO2 emissions for as long as there was no global cap on such emissions14. The world would continue to use coal but just alongside gas. Hence, there was no real possibility on a global scale of cutting CO2 emissions by switching from coal to gas. One can take that argument apart by looking at the United Kingdoms use of coal. 65% of British coal is imported. In addition to cutting CO2 emissions by up to one-third, if we switched from coal to gas, any large scale development of shale gas in the UK will reduce British imports, improve the balance of payments, generate tax revenue and employment, as well as removing the noxious non-CO2 neurotoxin pollution from British skies, in particular the very damaging inorganic mercury emanating from coal fired power stations. Those advantages, which apply to many states across the planet given the variety of locations that shale gas is found in and the number of countries that import coal, create surely a very powerful incentive to shift from coal to gas and hence cut CO2 emissions even without some form of global emissions cap. These allegations and the production of such questionable reports need to be more directly challenged by energy companies; public authorities and the European professoriate. Such allegations are doing neither European energy security nor the environment any good. The third observation is that in order for unconventional gas to play a significant role in providing relief from Russian supply dependence, European energy and climate change policy has to be reviewed. The 20/20/20 strategy will make it very difficult to give gas a greater role in energy supply as one of the major objectives is 20% of energy production from renewables by 2020. The option for renewables was always going to be expensive but we now live in an austerity
13 For a solid and balanced discussion of the dangers of unconventional gas operations see Shale Gas, Energy & Climate Change Committee, House of Commons, UK Parliament, Westminster 2011. 14 Wood R. and others, Shale Gas: A Provisional Assessment of Climate Change and Environmental Aspects, Manchester, 2011.
90
AlanRiley
world with great capital scarcity. It is therefore open to question how far we can deliver renewables on the scale required without much higher gas prices and with the prospect of pushing millions of Europeans into fuel poverty. By contrast, a focus on gas would allow the Union to rapidly cut CO2 emissions by switching off coal fired power stations and deploying more gas. Furthermore, as it was recently pointed out in the European Gas Advocacy Forum paper Making the Green Journey Work, because most European gas fired power stations only operate at 45% capacity, it would be possible to increase use to around 65%-70% without any additional investment15. If a corresponding amount of coal fired production were taken out of production, approximately CO2 200mt emissions would be cut. It would also save an estimated renewable investment when currently capital is scarce of between 80-120 billion. This ability to get significant CO2 emission cuts at zero capital costs underlines both the value of the role gas can play and also the way it has not been factored into European climate change policy. As a matter of urgency the European Union institutions need to reassess its approach to gas in combating climate change.
Conclusion
Unconventional gas is likely to have a significant impact on current European gas supply dependency on Russia. Its presence is already being felt via diversion of LNG into European markets. We now have a good chance of seeing at around the same time, four or five years from now, the entering of shale derived LNG and domestic unconventional gas in significant quantities into European markets. However, for that gas to successfully provide competition to Russian gas, EU Member States and the European Union itself need to take a number of decisive steps. First, Member States have to be prepared to create a robust but attractive regime to encourage investment into shale gas exploration and production. As we know from the recent EIA report on World Shale Gas Resources shale gas exists all over the world in large quantities16. The view that plentiful capital chases scarce gas resources has reversed itself. Plentiful gas resources now chase scarce capital, and as a consequence an attractive tax and licensing regime is essential. That regime needs also to be robust to ensure the highest environmental standards are in maintained and all EU environmental legislation is complied with in full. Secondly, liberalisation both legal and physical needs to be completed as rapidly as possible to open up the European gas market to new gas sources. The European Commission should be encouraged to ensure full implementation of the third energy package, and its DG Competition needs to be ready to apply the competition rules across the entire European gas
15 EGAF, Making the Green Journey Work, Brussels 2011, p. 45. 16 World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, EIA, Washington DC 2011.
91
sector without fear or favour. Where markets cannot deliver key infrastructure, such as the Baltic gas islands, the Union needs to be ready to provide support so that all Member States would be part of a common gas network. Thirdly, the environmental questions need to be addressed. The environmental movement in Europe is currently setting itself up for a very great fall by attacking such common or garden oil and gas processes such as horizontal drilling and hydraulic fracturing. Activists have to recognise the danger of undermining their own credibility. The real danger here is that the green movement as a whole misses the real environmental issue in relation to shale gas: if the world has access to vast gas resources then there is a real danger that we shift into gas complacency and then never actually take the steps necessary to deal with CO2 emissions. Gas complacency is the real green issue in relation to shale gas. In addition to the activists incredibly attacking shale gas production, we have a Brussels elite project of insisting on the 20/20/20 strategy even in the face of the economic crisis and the prospect of pushing large numbers of already economically stressed consumers into fuel poverty. Current climate change targets need to be redesigned to allow gas to ensure radical CO2 cuts at low cost while putting in place a strategy that ensures Europe moves on to full decarbonisation and does not remain in gas complacency. This will probably require greater investment in energy efficiency, consideration of a progressive carbon tax and investment in renewable research and development. If Europe takes the steps outlined above to develop shale gas, create a genuine open market for gas and redesigns its climate change policy then unconventional gas should be able to play a significant role in reducing supply dependence on Russian gas. In addition, such a pro-gas policy will allow the Union to achieve radical CO2 cuts at much lower costs than under current climate change policy.
92
AlanRiley
9. Development of the UnconventionalGas Sector inEurope from a UK Perspective

KeithBoyfield, ZiwaseNdhlovu
The New Opportunity Shale gas has the potential to transform the UK energy scene reckons Dieter Helm, professor of economics at the University of Oxford and one of the most respected energy economists in Europe. Professor Helm judges that the move towards exploration and drilling for shale gas will represent a paradigm shift in the economics of energy. It promises to emerge as a major long term source of energy supply and a significant threat to those advocating a move into renewable sources of energy such as offshore wind, tidal power and solar energy. Consequently, Professor Helm now refers to the pre-shale gas world, where nuclear and renewable energy made sense because of the rising price of oil and gas, and now the post-shale gas world which requires European policy makers to re-evaluate their approach to renewables and gas. The significance of such trends is beginning to be appreciated by informed observers and academics of the energy scene but policy makers, particularly politicians, have been slower to grasp the longer term influence on the energy market. In general, they continue to extol the importance of investing in renewable sources of energy. In Europe, Poland represents one of the major potential sources of shale gas supply. In the light of its own dwindling natural gas reserves, Britain may well become one of its main customers. Although the current Coalition government in the United Kingdom is keen to profess its commitment to renewable energy and a balanced energy mix at least while the present Secretary of State, Chris Huhne MP, remains in office economic realities point to Britain relying on gas and nuclear power for much of its energy needs. The UK Power Supply Market In recent decades the UK has been mainly reliant on three sources of energy to generate electricity, namely coal, natural gas and nuclear. Historically, Britain was heavily dependent upon coal fired stations but the privatisation of the industry and the adoption of a more market orientated energy market has led to the coal industry shrinking dramatically. Its costs of
95
production were often not competitive with sources of imported coal (which had a lower sulphur content) or, more significantly, from other sources of primary generation, especially North Sea gas used as a primary fuel for Combined Cycle Gas Turbine plants (CCGT). However, it is important to note that as reserves of offshore natural gas are exhausted the UK is switching to becoming a net energy importer, even in the thermal sector where for its coal fired capacity, the UK remains dependent upon Russian supplies of coal, a fact which could potentially impact UK energy security of supply. Our pie chart (see Figure 9.1) analyses the respective share of net electricity supplied in the UK by fuel input in 2009. This chart shows that the most important source was gas at 45%. Compared to 2008 gas had recorded a slip of just one percentage point but it is worth stressing that the 2008 total was a record high in terms of gas contribution to electricity generation. Coals share at 28% was 3 percentage points less than in 2008 and 6 percentage points lower than in 2007. Nuclears 18% share in 2009 was five percentage points higher than in 2008. Nuclear generation in 2008 was the lowest recorded since 1981 due to maintenance work and outages. Renewables share increased from 6%in 2008 to 7% in 2009. Of this, winds share was 3%, up from 2% in 2008. Other fuels, including oil and net pumped storage, fell from 2% in 2008 to 1% in 2009, while net imports share also fell, to 1% in 2009, the lowest since 2003. Coal fired generation now contributes less than 30%of the UKs power supply output. As a fossil fuel it is a major contributor to carbon emissions and filter equipment is still expensive to fit. Whereas the previous Labour government encouraged some coal fired electricity generation, mainly to maintain jobs in the deep mine coal industry a sector with over a centurys link to the Labour Party the current Coalition government drawn from the Conservative and Liberal Democratic parties has no such traditional tie or sympathy (Indeed, in the case of the Conservatives, quite the reverse). In short, few miners voted for the Coalition. Ministers in the new Coalition government prefer to promote the potential surrounding renewable sources of energy, notably onshore wind, offshore wind, tidal power and geothermal power. In encouraging renewable energy the Government is seeking to provide a range of subsidies, but these are likely to be insufficient to realise the ambitious goals set by the current Administration for the contribution to be made by renewables. The question yet to be convincingly answered is how is all this proposed investment to be funded? Taxpayer funding is limited given the substantial public sector debt mountains faced by many EU Member States, not least Britain.
96
Alternative Sources of Gas: the Shale Gas Option Faced with these pressures, and given the colossal capital sums1 required to develop a range of renewable energy sources including offshore wind farms, the prospect of importing gas in the form of natural gas via the Southern Corridor along such proposed pipelines as Nabucco or TAP from the Caspian Sea and shale gas from countries such as Poland now appears to be increasingly attractive. In Poland, for example, there are plans to drill 125 shale gas wells. Already, 7 wells have been completed and the results are currently being assessed. A successful drilling programme could exert an immense influence on the future energy map of Europe. As was stated in Professor Alan Rileys chapter (see Chapter 8), many EU Member States are all too aware of their reliance on Russian sources of gas. Indeed, Europe is dependent on Russia for about a quarter of its natural gas. Furthermore, the incentives to find reliable sources of shale gas are all the greater given Germanys recent announcements to phase out nuclear energy and to limit the emissions caused by coal fired power stations in the interests of combating global warming.
Figure 9.1 Chart showing breakdown of UK electricity generated in 2009 by primary source
1 1 7 18 45
gas coal nuclear renewables
28
other fuels import
Source: DECC
The UK Gas Shale Scene While some initiatives have been taken to drill for shale gas in the UK, the potential is believed to be relatively limited. Indeed, the first moves to drill for shale gas have already triggered an attack on the whole industry by a clutch of environmental NGOs. This did not come as a surprise to experienced industry observers. WWF Scotland, for example, has repeatedly called for hydraulic fracturing to be banned, following news that a company was seeking permission for
1 It is estimated that the potential market investment from public and private sources may amount to as much as 100 bln in present prices.
Development of the UnconventionalGas Sector inEurope from a UK Perspective
97
Scotlands first shale gas exploration at Aith, near Falkirk. Hyberbole has so far characterised this debate2 with the mass media focusing on earth tremors allegedly associated with some initial drilling for shale gas in the Fylde area of Lancashire in North West England. Significantly, the Coalition government has stated that it has no current plans to carry out a review over shale gas drilling in the UK. A recently published parliamentary select committee report on the issue concluded that there was nothing inherently dangerous about this form of drilling. Meanwhile, DECC is awaiting a report from the British Geological Survey and Keele University on the causal reasons behind these recent seismic events, prior to announcing any further policy proposals. But it can be safely assumed that there will be a raft of further scare stories fanned by environmental pressure groups in the British media, particularly the tabloid press, centering on the alleged dangers surrounding hydraulic fracturing and the environmental repercussions associated with this form of gas drilling, fanned by U.S. NGO antishale stories. Given the dense population levels found in much of the UK, voters sensitivities towards exploitation of the environment and the issues surrounding sub-soil mineral rights, this leads us to conclude that the main contribution shale gas is likely to make to the UK energy economy is through imports. In this context, shale gas will have to compete with traditional forms of gas imported from the Norwegian sector of the North Sea as well as in the form of LNG imported into the Milford Haven port facility in South West Wales. There are also ambitious plans to import gas via the Nabucco pipeline from the Caspian Sea region, a rich source of hydrocarbons. It is worth noting that Britain has been one of the strongest supporters of this exciting new development. As Angus Miller, Energy Adviser to the UK Foreign Office observes, For the UK, gas is once again becoming an increasingly abundant energy source. Indeed, coupled with CCS on gas generation, it is possible to assume that some more expensive renewable technology might become a victim of gas abundance. European unconventional could well emerge as a significant part of the UKs energy mix, not just in the form of U.S. LNG, but directly through its East Coast interconnectors. All of which will increase UK and European energy security, especially when enhanced through delivery of the outcomes of the EUs Third Energy Package. Conclusions Shale gas offers the potential to help diversify and secure European energy supplies. The pressing requirement is to identify the economic potential of shale gas in CEE and to demonstrate the economic case for exploiting these unconventional gas supplies using Europes pipeline network. According to estimations the potential is awesome. Europes challenge is to guarantee that shale gas production is assured and profitable. But perhaps the clinching argument in favour
2 See for example, Blackpool earthquake tremors may have been caused by gas drilling, The Guardian, 1 June 2011; Earthquake fears halt shale gas fracking, Financial Times, 1 June 2011.
98
of shale gas and a significant increase in the level of shale gas imports, as part of the overall energy mix is the prospect of helping many millions of UK citizens from falling into the trap of fuel poverty. The concept of fuel poverty is reached when households are required to spend more than 10% of their net income after tax on heat and light. In 2008, there were 3.3 mln households in England classified as being in fuel poverty (i.e. 16% of all households). Alarmingly, this is almost three times the number of households that were in fuel poverty at the low point in 2003. However, with the cost of renewable energy set to soar and the general level of electricity and heat forecast to climb steeply, unless additional and alternative sources of energy such as gas shale are exploited, we are likely to witness an increasingly tense political debate about the cost of power with the environmental lobby losing out to the economic argument. Indeed, Professor Helm reckons that as many as 6 or even 7 mln households will be classified as suffering from fuel poverty within the next five years. Given this prospect, politicians of all political hues are likely to encourage new, cheaper sources of energy to lift people out of this impasse. This is shale gas great opportunity. If this newly emerging industry can crack its costs of production, its future development looks assured.
Development of the UnconventionalGas Sector inEurope from a UK Perspective
99
10. The Political Impulse for Unconventional Gas Development in Europe the Role of the Polish Presidency of the EU Council
IzabelaAlbrycht, MariuszRuszel
Given the high estimated volumes of unconventional gas resources in Europe, the prospects for the development of this particular sector may appear very promising. Unconventional gas not only provides an opportunity to achieve energy security in the gas supply sector through an increase in resource self-sufficiency, but also allows the European Union to respond to the challenge of reducing CO2 emissions and increasing the competitiveness of the EU economy. Despite significant progress made in the area of European integration, the energy interests of many EU Member States are still highly diverse. Even among some of the countries endowed with unconventional gas resources, no unequivocal endorsement on the part of governments and businesses exists for their exploitation. Unconventional gas development is not in the interest of those EU Member States who for years have been developing and supporting particular energy sectors such as nuclear and renewable energy. Furthermore, for those countries where maintaining the status quo in business relations with their economic partners will lead in the near future to achieving their energy objectives (favorable long-term gas contracts, joint infrastructure projects), the prospects of unconventional gas production are also inconvenient. Arguments that may in the future prompt EU countries to increase the share of natural gas in their energy portfolios fall into two main categories: on the one hand, they may be related to the necessary closing of old nuclear plants or to political decisions made by governments to abandon nuclear energy power altogether; on the other hand, they may pertain to the fact that the renewable energy sector, including wind energy, requires the building of gas plants in order to balance energy supply in the system. Furthermore, another reason for EU countries to actively engage in exploration activities for this new energy source is that unconventional gas, being a low emission fuel, can provide a temporary solution in the transition from a fossil-fuel-based energy industry to one solely relying on renewable energy sources. At present, there are a significant number of potential opponents, who stand against unconventional gas exploration and production. They can be found both amongst EU countries and amongst exporters supplying natural gas to the EU market. That is why for the past few
101
months a heated debate on unconventional gas could be observed at the EU forum, initiated mainly by opponents and skeptics of this new natural gas production technology. Their demands are intended to immediately impose a Europe-wide moratorium on the exploration and extraction of shale gas and oil resources in accordance with the principle of prevention. It needs to be emphasized that their arguments are emotion-and not fact-based. Recent attempts to extract unconventional gas in Europe have not confirmed their claims about the environmental risks linked to the use of hydraulic fracturing technology. There is no doubt that such voices, clearly opposed to the development of the unconventional gas sector, will be heard in the near future both in Poland and the EU, posing a real threat to its future development. Therefore, it is to be expected that further actions will be undertaken at the EU level with the aim of downplaying the importance of unconventional gas. These actions may be inspired either by energy companies of countries exporting gas, such as Gazprom, or by national energy companies of major EU players France, which opts for nuclear energy and Germany, which promotes renewable energy and relations with Russia. The not entirely unequivocal position on unconventional gas officially presented by the European Commission (EC) may to some extent facilitate actions being undertaken by the aforesaid entities as well as other skeptics who oppose the application of new natural gas production technology in Europe. A good example that perfectly illustrates the Commissions attitude is a debate on the possibility of using natural gas from alternative sources in Europe that took place on 8 March 2011 in the European Parliament (EP). The EC representatives, including Gnther Oettinger (Germany), the EU Commissioner for energy, admitted that unconventional gas ensured greater independence for the U.S. However, he cautioned that the situation in Europe is different and may require that regarding development of the unconventional gas sector a number of other difficulties be taken into account, such as protection of the environment and underground waters or obtaining the consent of local communities. Contrary to the promising estimates drawn up by geologists, Mr Oettinger stated that the development of unconventional gas resources can be treated only as a means to supplement the gas importing system and in no way would it be capable of replacing traditional gas imports to the EU. According to the Commissioner, imports from Norway, Russia, Algeria and other exporting states will remain at the forefront of gas supply activities1. The position presented by the Commissioner may also have been influenced by the fact that in recent months the EC has favored the development of renewable energy based infrastructure and has been supporting a pilot program of CCS installations. During the debate, some representatives of EU Member States expressed skeptical views on the possibility of unconventional gas production in Europe. Arguments in favor of the development of the unconventional gas sector were put forward by Sen Kelly (Republic of Ireland), Andrs Gyrk (Hungary), Elena Bsescu (Romania) and Alejo Vidal-Quadras (Spain)
1 Recorded debate, the European Parliament, http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP// TEXT+CRE+20110308+ITEM-020+DOC+XML+V0//EN, (12.03.2011).
102
who argued that Europes high dependency on gas imports should persuade it to seize the emerging opportunity more boldly. In their view, the example of the successful and economically viable production of shale gas in North America should persuade the EU to more actively engage in supporting development. Similarly, the majority of Polish MEPs were favorably disposed towards the development of the unconventional gas sector. However, active opponents of the development of the unconventional gas sector in Europe have managed to initiate further legislative and extra-legislative actions at the EU level, which undoubtedly have a detrimental effect on the public perception of this energy source. An unequivocal example of such actions is the Written declaration on shale gas and oil exploration of the European Parliament (no 0032/2011) of 6 June 2011, signed by five MEPs, including three MEPs from France (Corinne Lepage, Philippe Juvin and Jos Bov), one from Denmark (Anna Rosbach) and one from Portugal (Edite Estrela). Furthermore, on 16 June 2011, French MEP and vice-president of the EP agriculture committee, Jos Bov, handed the Polish PM a demand to introduce a moratorium on shale gas extraction by means of hydraulic fracturing, as it is an environmentally harmful technology2. In autumn 2011, the EP is expecting a report from the EC regarding the environmental impacts of shale gas production and CO2 emissions. Poland, for which the development of the unconventional gas sector is an unprecedented opportunity, must take decisive and integrated actions both internally and at the EU level to oppose the lobbies which seek to deprecate the importance of unconventional gas, and to provide fact-based and reliable information about the impacts of this resource on the environment and on the EUs energy security. Most importantly, the Polish government needs to embark on a nationwide information campaign that will prevent foreign politicians and environmental activists from co-opting Polish society into joint actions against unconventional gas development3. Moreover Poland, being the country with probably the largest reserves of shale gas in the EU, needs to be prepared to refute arguments and allegations propounded by various opponents of shale gas development (individual EU countries, energy companies and environmental organizations). According to Polish geologists and experts and Polish Oil and Gas Company (PGNiG SA) representatives, the unconventional technology does not pose a threat to the environment. The documented results of the environmental research carried out by the PGNiG SA in Markowola proved it. Thus, these results should be taken into account by Polish expert centers when carrying out accurate studies and analyses, aimed at influencing the course of the EU debate on the development of the unconventional gas sector. It is therefore reasonable for unconventional gas exploration and extraction to gain the status of a joint European project and for the resource itself to be perceived in the EU as a common
2 Bove: zakaza szczelinowania ska przy wydobyciu gazu upkowego w UE, available at: http://www.euractiv.pl/energia-i-srodowisko/artykul/ bove-zakaza-szczelinowania-ska-przy-wydobyciu-gazu-upkowego-w-ue-002733 (18.06.2011). 3 An example that illustrates such actions is a motion prepared by Jos Bov in collaboration with members of the local community in gmina Grabowiec, near Zamosc and submitted to the Polish PM.
The Political Impulse for Unconventional Gas Development in Europe
103
source of energy. Poland can lead and, to a large extent, direct the discussions at the EU forum on unconventional gas production and use. The Polish presidency of the EU Council is a particularly suitable platform for instigating such actions. During this presidency, it is crucial for all Polish bodies participating in the EU decision-making processes with support of energyoriented think tanks as well as expert and research centers to undertake coordinated actions. The Polish presidency should concentrate predominantly on creating a better political climate for unconventional gas in Europe and developing a roadmap for its extraction: efforts should be made both in relation to indicating further directions for the development of EU joint energy and climate policy and EU budget assumptions for 2014-2020. Given the fact that the greatest development challenge facing this sector in Poland and other EU Member States is political barriers that can effectively hinder the extraction of unconventional gas in the EU, the success of the Polish presidency will be measured in terms of its capabilities to form a broad political coalition in support of shales4. Since a discussion on the new EU financial perspective will be initiated during the presidency, the task facing Polish diplomacy appears to be even more important. The debate will establish a framework for future financial negotiations in the context of energy policy. It is therefore crucial that issues related to unconventional gas make their way to the EU financial agenda. Currently, the lack of a financial framework conducive to the development of the unconventional hydrocarbon sector poses a real and extremely serious threat to R&D on adapting extraction technologies to European geological settings and on minimizing their environmental impact. It needs to be emphasized that the goodwill of politicians and European leaders as well as political tussles over the new EU budget will play a major role in deciding the allocation of EU funds for R&D projects and infrastructure investments essential for the dynamic development of the shale gas sector in Europe. This is particularly important in the light of the fact that Polish companies together with Polish technological institutions of higher education should already be organizing and conducting scientific research with the aim of developing their own extraction technologies or possibly adapting the technology of hydraulic fracturing already used in the U.S. Financial resources from EU funds (7th Framework Programme) need to be gained for these projects, especially as gas is classified as a low emission source of energy5. The Polish government faces two important and difficult challenges: confronting the political actions undermining the importance of unconventional gas development, and making use of Polands opportunity to influence topics raised during EU debates that comes with its leadership of the EU Council. Therefore, it is incomprehensible that the program of the Polish presidency with which many journalists, experts, opinion leaders and politicians are already quite familiar does not devote a single sentence to the issue of unconventional gas.
4 Albrycht I., Gaz upkowy? Yes we can!, a policy brief of the Kosciuszko Institute, May 2011. 5 Ibidem.
104
The energy security of Europe is a priority of the Polish presidency, but unconventional gas is not mentioned a single time amongst the resources whose production and export could strengthen the energy security of Poland and Europe6. Besides effective political actions, it is necessary to efficiently manage both European policy and the legislative process. Taking into account the fact that the majority of key decisions concerning energy policy are made by the EU Council and the EP with the support of the EC through an ordinary legislative procedure, then if this legislative process is applied to issues concerning the unconventional gas sector, political actions undertaken by Polish representatives in the EU should target institutions that are involved in this process. Permanent Representation of the Republic of Poland to the EU The Permanent Representation of Poland to the EU will have a particularly important role to play and should make continuous efforts to actively build formal and informal coalitions in favor of developing EU energy security based on the increased use of Europes own energy resources, including unconventional gas. The Polish energy attach should systematically work on convincing EU partners, emphasizing the benefits derived from the development of the unconventional gas sector for the EU. The Polish representatives in the EU, including the staff of the Permanent Representation and Polish MEPs, should make it their priority to reach out with arguments and fact-based, reliable analyses concerning unconventional gas to MEPs of other Member States and the offices of key EU Commissioners. The so-called soft power approach should be employed to target MEPs assistants, EU institutions staff as well as experts and analysts of the key research institutions and analytical centers in Brussels. The European Parliament It is important that Polish MEPs actively participate in submitting amendments to documents being drawn up. In addition, it is essential for them to persuade other MEPs representing different factions in the EP to vote for particular solutions. However, this strategy seems to work most effectively before (until) the first reading of a draft report at the committee stage. A very significant step would be for a Polish representative to be appointed an MEPRapporteur on unconventional gas report should one be initiated. In connection with the above, Polish MEPs should closely monitor the EU legislative initiative and try, within their own political group, to attain the status of MEP-Rapporteur. More importantly, however, they should, regardless of their political affiliations in Poland, jointly undertake actions on the EP forum that will support the building of a positive climate for unconventional gas in the EU. In order to do that, Polish MEPs have at their disposal a wide array of parliamentary and extraparliamentary tools, such as resolutions, public hearings and conferences.
6 Compare: http://pl2011.eu/sites/default/files/users/shared/o_prezydencja/program_polskiej_prezydencji_w_radzie_ue.pdf, accessed on (1.07.2011).
105
The Council of the European Union Shale gas coalitions built by the Poles will play a significant role during voting in the chief decision-making institution the EU Council. Poland should take advantage of the coalition capabilities existing, for instance, within the V4 Group, which in total comprises 58 out of 345 votes, amounting to 16.81% of all EU Council votes (Poland has 27 votes, Czech and Hungary have 12 votes respectively and Slovakia has 7 votes). EU Member States establish their intergovernmental positions during the sittings of working groups attended by the EU ministers responsible for particular departments. Taking into account the fact that the majority of consensuses reached during the sittings of working groups are adopted by the EU Council with no amendments, it seems crucial that Polish representatives in the working groups should show they can act on issues that may have an impact on the development of the unconventional gas sector in a decisive and effective manner. The European Commission Influencing the ECs decision-making processes is probably the most difficult thing to do. If the EC were to be involved in drawing up a draft legislative act concerning unconventional gas, it would be advisable to reach the members of the EC expert and counseling committees who may participate in drafting such a document. Bearing in mind that decisions made by the EC have a highly political profile, the lobbying activities targeting this institution must involve bottom-up lobbying7. Once the draft has been passed on for open public consultations, then Polish institutions should actively take part in them. In addition, Polish experts specializing in unconventional gas should closely monitor the process of appointing teams of experts preparing reports on unconventional gas by the EC and actively support their work. It has to be remembered that the ECs legislative initiatives are often politically inspired by recommendations of EU Member States, political priorities of countries holding the presidency, requests put forward by the EP or the European Council to draw up a legislative act8. Poland should take advantage of these processes and take the political initiative to build a roadmap for unconventional gas in the EU during the current presidency. In parallel to actions undertaken by the Polish government, lobbying activities for unconventional gas should also be carried out by Polish companies such as the PGNiG SA, which has an office in Brussels and is a member of such European umbrella organizations as: Gas Infrastructure Europe, European Energy Forum and Eurogas. In cooperation with the Polish government, PGNiG SA can monitor draft legislative acts being drawn up and stay alert to any political actions that may downplay the importance of unconventional gas.
7 Jasiecki K., Molda-Zdziech M., Kurczewska U., Lobbing, Oficyna Ekonomiczna, Krakw 2006, p. 256. 8 Kurczewska U., Molda-Zdziech M., Lobbing w Unii Europejskiej, Instytut Spraw Publicznych, Warszawa 2002, p. 17.
106
It is necessary for Poland to undertake integrated initiatives and actions within the framework of all EU institutions, so that the production and use of unconventional gas will become not only a Polish but also an EU priority in favor of the strengthening of EU energy security. Particularly during the Polish presidency, these political efforts should be undertaken under a political umbrella unfurled by the Polish government. The Polish PM along with his ministers should employ all means possible in order to persuade the EU decision-makers responsible for the shaping of the EU long term energy strategy to take into account the fact that EU Member States have a diverse energy mix. The EU leaders need to understand that selected energy sectors cannot be promoted at the expense of the energy security of a number of EU countries. Each and every EU Member State should have the ability to make independent decisions about the direction of diversification processes and the optimal path that would lead to safeguarding stable energy supplies. For Poland and a number of other EU Member States, unconventional gas offers such an opportunity and therefore its exploration should be financially supported to the same extent as other EU energy projects (e.g. renewable solar, wind and hydro energy or CCS installations). Certainly, Poland can seek out allies to join the shale gas coalition from among closer and more distant neighbors, including the V4 Group, Romania, Bulgaria and Lithuania. It can probably also rely on the goodwill of Great Britain and Sweden and try to persuade Germany to participate in the initiative. During the ongoing Polish presidency, the Polish PM should seek to convince European stakeholders to adopt a declaration that would open the door to a more dynamic development of the unconventional gas sector in Europe. A good opportunity for this could be the European Council Summit concluding the Polish leadership of the EU Council. With such a political breakthrough, the Polish government could in the long term strive for the allocation of resources from the EU budget for the development of R&D projects and unconventional gas investments. However, as long as unconventional gas is regarded as a highly controversial and environmentally damaging resource in EU salons and on the European streets, it is hard to imagine such a situation arising9.
9 Albrycht I., op.cit.
107
CHALLENGES FOR POLAND
11. Resources and Potential ofUnconventional Gas in Poland

PawePoprawa
Poland is currently attracting significant attention from the energy industry, mostly focused on shale gas exploration. Apart from the U.S. and Canada, Poland is the country with the highest shale gas exploration activity globally. What makes Poland unique is the size of the basin being explored, the amount of research and drilling done so far and planned for the near future, and the number and identity of companies involved. Initially interest in shale gas exploration was limited to the Lower Paleozoic basin on the western slope of the East European Craton; however, with time, other shale formations were also considered as exploration targets, mainly the Lower Carboniferous shale in SW Poland (see Figure 11.1). Currently, a few other formations in Poland are being studied for unconventional hydrocarbons accumulation potential. The first concessions for shale gas exploration were granted by the Ministry of Environment in 2007. However, the main shale gas rush took place mostly in 2008-2010. As a result, some 80 concession blocks were granted in the area of the Lower Paleozoic basin in northern and eastern Poland and another 5 concessions were granted in the area of Lower Carboniferous shale in SW Poland (see Figure 11.2). The list of concession holders for shale gas exploration includes a significant number of global majors, shale gas sector specialized operators, Polish gas and oil companies that have been built up on the basis of conventional hydrocarbon exploration and production, as well as small independents (see Figure 11.2 and Table 11.1). The following companies are currently active in shale gas exploration in Poland: ExxonMobil, Chevron, ConocoPhillips, Total, Marathon, ENI, Talisman, Nexen, Polish Oil and Gas Company, Orlen, LotosPetrobaltic, Petrolinvest, 3Legs, BNK Petroleum, RAG, Sorgenia, San Lion, Strzelecki Energy, Quadrilla, Composite Log, DPV Services, San Lion and others. The cumulative number of obligatory explorations wells is equal to 125, and another several dozen wells are optional. Most of these wells will be drilled during the period 2011-2014. So far, some 10 wells have been drilled and one shale gas well has been fractured. Reports and releases of BNK Petroleum (2 wells) and 3Legs (3 wells) indicate positive first results.
111
Figure 11.1 Location of basins with potential for shale gas exploration in Poland: Lower Paleozoic shale (in dark gray extending from NW to SE Poland, and in light gray in SE Poland) and Lower Carboniferous shale and tight gas hybrid (in light gray in SW Poland)
areas of docummented potential for unconventional gas areas of unknown or low potential for unconventional gas
Source: Own figure on the basis of: Poprawa. P., Gaz upkowy w Polsce (Shale gas in Poland), PIG
Even though the Lower Paleozoic basin is currently being intensively explored, the amount of data for shale gas resources calculation is still by far insufficient for conclusive estimates. Irrespective of this, a number of reports have been published during recent years presenting different approaches to resources estimates (see Figure 11.3). In 2009, Wood Mackenzie reported that the cumulative amount of recoverable gas in the Lower Paleozoic basin in Poland was equal to 1.4tcm. At the same time, the Advanced Research Institute released a report concluding that the quantity of recoverable gas for the same basin was 3tcm, while in 2010 Rystad Energy calculated these resources as equal to 1tcm. In 2011, another study resulted in a report ordered by U.S. Energy Information Agency from the Advanced Research
112
PawePoprawa
Institute, discussed in more detail in Chapter 4. This report presents even higher recoverable gas resources in the Lower Paleozoic basin, which amount to 5.3tcm. Other estimates are presented by 3Legs in their stock market Admission document, where an independent consulting company is referred to as reporting approximately 1tcm of recoverable gas for 6 Lane (ConocoPhillips/3Legs) concessions in the northern part of the basin alone. From this compilation it is easy to conclude that with time and better knowledge on the basin geological setting and shale characteristics, estimated gas resources are increasing a phenomenon also observed earlier in the USA.
Figure 11.3 Compilation of potential recoverable resources of Lower Paleozoic shale gas in Poland, as well as recoverable conventional gas resources in Poland, annual production of conventional gas in Poland, and annual gas consumption in Poland. It is important to note that shale gas resources are estimated based on an insufficient amount of currently available data and therefore might differ substantially from actual resources
5,3tcm Recoverable shale gas resources in Poland (Energy Inform. Agency; 2011) 3tcm Recoverable shale gas resources in Poland (Advanced Res. Int.; 2009) 1,4tcm Recoverable shale gas resources in Poland (Wood Mackenzie; 2009)
1tcm Recoverable shale gas resources in 6 Lane concessions only (3Legs; 2011) 1tcm Recoverable shale gas resources in Poland (Rystad Energy; 2010) 140,5bcm Conventional gas resources in Poland
14bcm Annual gas consumption in Poland 5bcm Annual gas production in Poland
1000
2000
3000
4000
5000
6000
Resources and Potential ofUnconventional Gas in Poland
113
Figure 11.2 Map of concessions for shale gas exploration in Poland. Source: Ministry of Environment (June 2011). Operators: A ConocoPhillips & 3Legs, B Polish Oil & Gas Comp., C Talisman & San Lion, D ENI, E BNK Petroleum (with RAG &Sorgenia), F Realm, G Petrolinvest, H Marathon (with Nexen), I Strzelecki En., JExxonMobil (partly with Total), K Quadrilla, L LotosPetrobaltic, M Chevron, N Composite Log, O Orlen, R DPV, S San Lion, T 3Legs; P pending application
* shale gas exploration concessions and applications **conventional gas exploration concessions and applications
Source: Boda R., Siekiera D., Szuflicki M., PIG, 2011
Table 11.1 Concessions for exploration, prospecting and production of oil and natural gas reserves in Poland
Concessions for exploration and prospecting of hydrocarbon deposits
Concessions for production of hydrocarbons
Company 1 4 2 16 1 1 2 5 1 2 20 1 1** 2 4 1 5 1 2 4 1 -
Number of all concessions for exploration and prospecting of conventional and unconventional hydrocarbon deposits.*
Number of concessions for exploration and prospecting of conventional hydrocarbon deposits only.
Number of concessions for exploration and prospecting of both unconventional and conventional hydrocarbon deposits.
Number of concessions for exploration and prospecting of unconventional hydrocarbon deposits only.
Number of concessions for production of hydrocarbons obtained from deposits.
Blue Energy Sp.zo.o
CalEnergy Resources Poland Sp. zo.o.
Celtique Energie Poland Sp. zo.o.
Chevron Polska Energy Resources Sp.zo.o.
Cuadrilla Polska Sp. zo.o.
Composite Energy (Poland) Sp. zo.o.
DPV Service Sp. zo.o.
21
Energia Cybinka Sp. zo.o. Sp. kom. (Aurelian Oil & Gas Poland Sp. zo.o.)
Energia Kalisz Sp. zo.o. Sp. kom. (Aurelian Oil & Gas Poland Sp. zo.o.)
Energia Karpaty Wschodnie Sp. zo.o. Sp. kom. (Aurelian Oil & Gas Poland Sp. zo.o.)
Energia Karpaty Zachodnie Sp. zo.o. Sp. kom. (Aurelian Oil & Gas Poland Sp. zo.o.)
Energia Torzym Sp. zo.o. Sp. kom. (Aurelian Oil & Gas Poland Sp. zo.o.)
Energia Zachd Sp. zo.o. (Aurelian Oil & Gas Poland Sp. zo.o.)
ExxonMobil Exploration and Production Poland Sp. zo.o.
FX Energy Sp. zo.o.
20
Gas Plus International Sp. zo.o.
Gora Energy Resources Sp. zo.o. (San Leon Energy Plc) 1
Helland Investments Sp. zo.o. (Realm Energy International Co.) 4 1 1 82 11 225 2 232 1 78 1 5 141 3 4 3 15 6 3 1 11 7 2 2 3 6 1 3 1 -
Indiana Investmetns Sp. zo.o. (BNK Petroleum)
Joyce Investments Sp. zo.o. (Realm Energy International Co.)
Lane Energy Poland Sp. zo.o. (3Legs Resources Plc)
Lane Resources Poland Sp. zo.o. (3Legs Resources Plc) 3
Liesa Energy Sp. zo.o. (San Leon Energy Plc)
LOTOS Petrobaltic S.A.
Marathon Oil Poland Sp. zo.o.
11
Maryani Investments Sp. zo.o. (Realm Energy International Co.)
Misk Energy Resources Sp. zo.o. (Eni Spa)
Orlen Upstream Sp. zo.o. (PKN Orlen S. A.)
PGNiG SA
93
PL Energia S.A.
RWE Dea AG S.A.
Saponis Investments Sp. zo.o. (BNK Petroleum)
Silurian Sp. zo.o. (PETROLINVEST S.A.)
Strzelecki Energia Sp. zo.o.
Talisman Energy Polska Sp. zo.o.
Vabush Energy Sp. zo.o. (San Leon Energy Plc)
ZOK Sp. zo.o.
Suma
234
* excluding CBM ** concerning unconventional gas (tight gas) resources
Source: Ministry of the Environment http://.mos.gov.pl/
12. Gas Market Liberalisation and Increase in Energy Security as a Result of Unconventional Gas Sector Development in Poland
MaciejKoaczkowski
The level of energy security of Poland in terms of stable and continuous natural gas supply at competitive prices can be considered as unsatisfactory (see Energy Security of Poland 2010 Opening Report published by the Kosciuszko Institute in 2010). 70% of natural gas consumption in Poland is met by imported gas, 90% of which in turn is provided by one supplier (Gazprom), with very limited infrastructural possibilities of providing alternative sources. Currently, importing natural gas is not regarded as a regular commercial commodities purchase and hence any increase in delivery volumes from Russia requires an intergovernmental agreement (see the case of the gas agreement between the Republic of Poland and the Russian Federation signed on 29th October 2010). The political factor adds an unquantifiable element to the gas price, which means that the full import cost is not known. This, in turn, makes it impossible to carry out economic optimization. The domestic market is dominated by PGNiG SA, which exercises a monopoly over all links of the gas value chain apart from transmission1. Due to monopolization, all segments of the market are heavily regulated and controlled from fixed tariffs for all natural gas sold in Poland to a legal obligation on importers to maintain strategic gas reserves. Such policy is unresponsive to market demands and hampers the arising of competitive and commercial trading of natural gas. Currently natural gas constitutes (only) 13% of primary energy utilization in Poland, with a very limited usage of gas for electricity and heat production. Therefore the deficiency and precariousness of the Polish gas sector have no notable direct impact on the Polish power generating system and any negative influences can only have a minimal effect. However, the importance of natural gas to the power sector, and consequently to society and the state, is predicted to grow significantly (see more in Chapter 13 and 14).
1 Gas Transmission Operator GAZ-SYSTEM is responsible for transporting gas via the transmission network throughout the country. It is also an Independent System Operator of the Yamal-Europe pipeline. The Yamal-Europe pipeline belongs to EuRoPolGAZ and is used mainly (90%) for transmitting natural gas from Russia through Poland to Europe and to deliver 3bcm to Poland.
119
The above mentioned issues constitute current challenges that the Polish gas sector faces. In the near future, they will also influence the electricity sector in terms of its economics and stability. Some of the above issues have to be resolved first in order that the unconventional gas revolution can actually take place while other issues, in turn, will be rectified by the revolution. It is worth emphasizing that all of these changes will be tremendously positive and that they will contribute to developing a competitive and commercial gas market in Poland. Gas Self-Sufficiency Polish domestic natural gas production amounts to 4.1-4.3bcm annually, while the annual consumption amounts to approximately 14bcm; this results in a 70% import dependency (10bcm imported annually). The authors of Chapter 13 estimate the maximum potential growth in yearly consumption to be 15bcm (with 5bcm a more realistic estimate of predicted growth) and the unconventional gas production potential to be 40-80bcm per year. These figures indicate that production of unconventional gas at a level of just 15bcm annually would totally suffice to cover Polands gas demand (even taking into account the expected 5bcm consumption growth) and would mean independence from foreign gas suppliers. Provided production exceeds the above mentioned levels, Poland could become an important gas provider for European markets. It is worth mentioning here as has been shown, for example, in Germany, France, Italy and Spain that import dependency does not necessarily jeopardize the stability and continuity of the gas supply and does not inevitably lead to high prices and a market monopoly. The key prerequisites for a stable and cheap gas supply are the ability to import from a range of alternative suppliers and the existence of a competitive market. However, in Polands case, gas production self-sufficiency will have a dramatic effect on the security of the gas supply. Commercial Relations The lack of import dependence will result in Poland not being forced to sign intergovernmental agreements in order to gain the possibility of purchasing natural gas. As a consequence, regular commercial trading will commence without an unquantifiable political factor involved in the transaction. Provided a foreign supplier offers attractive supply conditions that are competitive with domestic ones, a reciprocally beneficial and uncoerced agreement can be reached, which is free of political aspects (which is not the case now). In this way, non-financial costs will no longer be generated and the actual full price of importing gas to Poland will be disclosed. Geopolitical factors posing a continuous risk to gas supply stability (e.g. as a result of a conflict between Russia and transit countries: Belarus and Ukraine) will cease to exist. Currently,
120
MaciejKoaczkowski
such conflicts cause regular disruptions and stoppages in gas transmission (see Chapter 8). Moreover, the chances of supply discontinuity due to technical issues will be reduced as the gas will be transported over much shorter distances. Currently, gas is transported via Russia by one pipeline from sources which are a few thousand kilometers away (the pipeline splits before it reaches Ukraine and Belarus). The current arrangement will be replaced with a domestic pipeline network transmitting gas to places up to a few hundred kilometers away at the maximum. Such a structure will allow for prompt use of diversion routes in case of technical issues as well as the ability to actively participate in the restoration process (which can be of vital importance, as PKN Orlen found out when the oil pipeline in the Maeikiai refinery broke down). Price Liberalisation The sale of natural gas in Poland is subject to tariffs. These are established on the basis of average gas sourcing and supplying costs and the retail price is dependent on the import price and costs of production. This results in several negative effects: Price below the market value subsidising imports using profits from domestic production results in a lower price for the end user than the market price. As a consequence, a certain amount of market demand is artificial and therefore the economy is not able to receive price signals that are indispensible for efficient resource allocation. At the same time, marketisation (liberalisation) of domestic gas prices would not necessarily lead to growth in its retail price. An increase in final retail price would make demand more realistic and in the case of a fall in demand, foreign suppliers would most likely be partially pushed off the market first (as domestic production is generally cheaper than foreign gas). Hence, it is likely that suppliers would reduce the import prices to sustain volume, Limiting competition/consolidating the monopoly setting end users prices lower than the market value makes the Polish market less attractive for other potential suppliers to enter, Lack of economic signals to increase domestic production Polands conventional gas reserves are comparable to German ones; however, German domestic production is approximately two times bigger than Polish production. Even though many market experts have pointed out that increasing domestic production would have a very positive influence on the security and economics of supplies, the level of production has remained stable. One of the reasons for this could be the gas pricing formula currently in place. PGNiG SA is not interested in increasing domestic production as it would result in further subsidizing of imported gas rather than increasing its profits, Lack of motivation for PGNiG SA to decrease costs the fact that the level of the gas tariff is established on the basis of costs means that the monopolist is not motivated to decrease
Gas Market Liberalisation and Increase in Energy Security
121
costs at all. Actually, their core business activity seems to be a political game with the regulator and politicians, consisting in attempting to classify as much of their expenditure as they can as justified costs. With lack of competitive pressure, and costs fully accepted by the regulator, PGNiG SA Management Board is not motivated to make often socially painful (especially in companies with a lot of historical baggage) cuts. Moreover, reducing some of the costs is very likely to prove that cost cuts are actually feasible and to invite regulatory pressure for further cost reductions, Decreasing PGNiG SAs profits and diminishing the companys potential PGNiG SA produces 4bcm of gas annually, but does not achieve commensurate profits. Supposing average production costs amount to $150 per 1000 m3 (and many experts in the field claim that costs are only half this: $75 per 1000 m3) and the average import price is $350 ($75 per oil barrel), the net profits from the E&P segment of PGNiG SA should total $800 million, The gas production margin is taken over by the foreign supplier the gas import subsidies result in the foreign supplier effectively acquiring the profit margin, The aforementioned features of the gas market in Poland exert a negative influence on energy security and market functioning. Liberalising the gas price on the domestic market seems to be the sine qua non condition for unconventional gas production. In parallel that would alleviate the negative aspects of the current situation. Price Reduction It is reasonable to expect that once large scale production of unconventional gas is under way in Poland it will trigger off a reduction in price both of domestic and imported gas. Another important aspect anticipated is de-linking between gas prices and oil indexation and valuing gas on a gas-to-gas competition basis. It is estimated that the costs of unconventional gas production in Poland may be up to 50% higher than in the USA. From October 2009 to June 2011 gas prices on the NYMEX2 fluctuated from $3.73/mBtu to $6.01/mBtu, with an average of $4.5/mBtu. Therefore, the calculated price per cubic meter3 varied from $133/1000 m3 to $214/1000 m3, with an average of $161/1000m3. Assuming that unconventional gas production costs are 50% higher in Poland than in the U.S. and that the prices quoted on NYMEX reflect production costs, it is safe to assume that the prices in Poland could oscillate between $200/1000 m3 and $321/1000 m3, with an average of $240/1000 m3 approximately. As was stated before, the full contractual price of Russian gas (which constitutes 90% of gas imported to Poland) given in the intergovernmental agreement is not disclosed. However, reliable media sources state that to obtain comparable prices of Russian gas, oil would have to be priced at around $45-70 per barrel. Similarly, to achieve a
2 See http://www.forexpros.pl/commodities/natural-gas-historical-data. 3 Conversion factor from BP Statistical Review of World Energy 2011.
122
MaciejKoaczkowski
price of $240/1000 m3, oil would have to be valued at $55/bbl. It is worth noting here that, on average, oil was traded at $80/bbl in 2010, with the price rising up to $95/bbl at the end of 2010 and $127/bbl in April 2011. The price has been fluctuating around $105-125/bbl in the last three months, i.e. from April 12, 2011 to July 12, 2011 and further price increases are anticipated. These calculations clearly show that the Russian gas provider would have to reduce prices significantly in order to compete with unconventional gas producers on the Polish market. Comparing the prices of Russian gas in Poland and Germany also shows it is feasible to reduce prices. According to reliable media sources, it can be estimated that PGNiG SA pays at least 10% more than their German counterparts. Moreover, the delivery point on Yamal for Poland (gas compressor station in Kondradki) is located nearly 700 km closer to the gas deposits than Mallnow, the German one. Even so, gas is more expensive in Poland. Currently, PGNiG SA imports about 1bcm of gas from the German provider VNG. This is actually Russian gas re-exported from Germany (delivered to Germany via the Yamal-Europe pipeline). It is the most costly imported gas in Poland. Again, if Poland became self-sufficient as far as gas is concerned, the German suppliers would have to either decrease prices to make them more competitive or stop (or at least reduce) trading on the Polish market. The recently signed contract with Vitol, the Swiss-registered gas provider, also reveals potential for price reduction. According to the official PGNiG SA statement, the cost of 550mcm of gas and its transmission to the Polish border (a cross-border gas infrastructure point is going to be completed in Cieszyn at the turn of September and October) has been contracted at 550 million annually for a duration of three years. Thus the price at the Polish border will reach about $4604 per 1000 m3 approximately. Competitive Market The appearance of large quantities of gas on the Polish market, which will most probably be in the hands of various entities, will generate excellent conditions for the existence of a competitive market. End users, traders and other middlemen will gain access to various suppliers who will have to compete against each other. What is also important is that, with no import requirements as such, pipeline capacities currently used to balance the market will be freed, and will be able to be used for further price optimization and will also allow additional alternative suppliers to enter the market. Looking at the structure of the unconventional gas exploration industry it can be safely assumed that due to the large number of companies in the sector there is no real danger of monopolization or cartelization aimed at fixing prices. It can be anticipated that the market
4 With the USD-EUR exchange rate of 1.4.
123
will be rather a competitive one. According to the International Energy Agency, a price of $4-5/ mBtu is the price where marginal cost equals marginal revenue (costs are different for different resources though) and just such prices have been observed on NYMEX consistently for a significant period of time. This indicates that the market in the U.S. is extremely competitive with all the accompanying benefits. The fact that there are a significant number of companies operating in this segment in Poland allows us to expect similar effects. What is important in this context is that, even if the foreign gas suppliers are not actually present in the market, they will still act as an additional source of pressure on Polish suppliers, motivating them to constantly strive for optimization and price competitiveness. Gas is a safe and competitively priced fuel for the power industry Creating a competitive gas market in which various suppliers compete for customers by means of price, flexibility, supply stability, etc. will provide ideal grounds for and should also be a precondition for starting large scale production of gas-based electricity. Conclusions The level of energy security of Poland in terms of a stable and continuous natural gas supply at competitive prices can be considered as unsatisfactory. Some of the problems of the current gas market in Poland should be challenged and resolved in order for the unconventional gas revolution to happen, while others, in turn, will automatically be resolved by the revolution. Reforming and improving the current situation, i.e. creating a competitive market with a stable and reasonably priced gas supply is a matter of utmost priority, especially in relation to utilizing gas for electrical energy production. Unconventional gas production at the level of 15bcm annually will fully meet demand (assuming consumption grows by another 5bcm) and will make Poland self-sufficient in this area. Moreover, any potential excess output could present Poland with new opportunities of exporting gas onto European markets. Such a scenario would have a remarkable effect on the security of gas supply and gas prices. The geopolitical risks will disappear and the chances of supply disruptions due to technical issues will be reduced, while relations with foreign suppliers (Russia and other countries) will continue at a purely commercial level. Any potential gas import will only depend on its attractiveness; the unquantifiable political factor will be eliminated. Due to the necessity to marketise prices, the subsidizing of imported gas with (profits from) domestic production will stop, which at the same time will equalise competition conditions and will motivate companies (both unconventional and conventional gas producers) to increase production when favourable market conditions exist. Putting an end to cost-based tariffs will pressure PGNiG SA to increase its efficiency, but it will also allow the company to
124
MaciejKoaczkowski
take full advantage of its conventional production, securing profits estimated at $800 million annually with given current level of production. The gas production profit margin will no longer be taken over by foreign suppliers. It is expected that costs will decrease, both in terms of importing gas and end user prices. Moreover, oil-indexed pricing of gas will not take place anymore and foreign suppliers will be forced to reduce prices significantly in order to compete with unconventional gas producers on the Polish market. The emergence of large amounts of gas in Poland in the hands of several providers will generate perfect conditions for creating a competitive market, while imported gas will serve as a means of further cost optimization and market diversification. Due to the fact that Poland does not have a realistic potential to consume all the expected output, it is predicted that Poland could become an important gas exporter, especially to the Baltic Sea region and the Visegrad Plus Group (see Chapter 16).
Although Maciej Koaczkowski, the author of this article, works for the Ministry of Foreign Affairs, the opinions expressed in this article are his alone and do not necessarily reflect the standpoint of the Ministry of Foreign Affairs.
125
13. Prospects for Utilising Unconventional Gas in Poland: thePotential of the Power Industry as a Possible Direction of Gas Consumption
MaciejKaliski, MarcinKrupa, AndrzejSikora
The forecasts of the most respected organisations attempting to determine the demand for primary energy sources have not taken into account the fact that the shale gas exploration fever in Poland may, in the mid-term, lead to changes in the structure of the gas market and create a possibility of decreasing imports of conventional gas by compensating for it with domestic production of unconventional gas. Estimates regarding the size of resources in Poland are sufficiently promising for the authors of this chapter to carry out an analysis which can be used to determine the capacity of the Polish power generating sector to absorb natural gas. They have decided to base their estimates on the assumption that the unconventional gas sector in Poland will develop dynamically the production of unconventional gas will reach a level of 20-30bcm per year. Even assuming that only a part of the energy sector switches to natural gas, it turns out that the substitution potential or the potential increase in total energy consumption due to natural gas is so promising that it constitutes another argument in favour of Polish and European decision-makers supporting the development of the unconventional gas sector. In order for such a scenario to become real, new electricity and heat generation capacities will be needed in Poland. Taking into account the specificity of shale gas extraction profile, characterised by an enormous increase in productivity of the deposit in the first periods and subsequent strong decline, as well as poor use of domestic resources by Polish mining companies, reflected in the very high reserves-to-production ratio (R/P), we may expect extraction at the level of even 100bcm of gas per year in the next 10-15 years. The analysis of the Polish gas market should focus on the power sector, being potentially the largest recipient of unconventional gas. The forecast of demand for fuel and energy by the year 2030, prepared by the Energy Development Agency (Agencja Rozwoju Energetyki), assumes that, until the year 2030, gas consumption growth in Poland will be of 40%, with compound annual growth rate (CAGR) at the level of 1.44%. The forecast of the University of Athens, the
127
Fig. 13.1. Forecasts of natural gas consumption in Poland

25 20 15 13,9 15,2 13,3 16,5 14,4 16,3 16,1 17,9 16,1 19,1 16,4
10 5 0
2008
2010
2015
2020
2025
2030
ARE forecast of natural gas consumption 2009 PRIMES forecast of natural gas consumption 2009
Source: PRIMES Model Baseline 2009, Forecast of demand for fuel and energy until the year 2030 for the Polish market developed by ARE, March 2009.
so-called PRIMES model1, foresees only a 20% increase in gas consumption in Poland by 2030 (CAGR 0.8%), with the largest growth observed in the next five years (nearly 2.5bcm) and then remaining almost at the same level until the end of the forecasted period.2 The volume of the new demand for gas will therefore be shaped at the level of between 2.5 to 5bcm of (high-methane) natural gas per year for the next 10-20 years. In both projections, the share of natural gas in primary energy consumption will increase to 14.5-14.7% by the year 2030.
bcm
For obvious reasons, none of the reported forecast includes in its assumptions unconventional gas production. According to the EDA projection, natural gas production in Poland will be at the level of 4.6~5bcm of gas annually, while the PRIMES model assumes a slow decline in production, from the current 4.1 to about 3bcm per year over the next twenty years. The estimated demand gap, in the amount of 13-14bcm per year in the PRIMES model and 15-16bcm per year in the EDA projection, would be supplied with imports, mainly of Russian gas. In this situation, there appears the question of what could be the primary energy consumption structure and the potential demand for natural gas, if the calculation assumed that domestic production is increased by at least 20-30bcm per year. Is the Polish economy able to absorb this volume and in what areas is it possible (putting aside the price issues)? The answer to this question requires decomposition of energy consumption into individual segments of the economy3, where the fuel substitution by natural gas is at least theoretically possible, and calculation of the substitution potential or the overall increase in energy consumption by natural gas. As the basis for the calculations, we uses the data provided by the Central Statistical Office (Gwny Urzd Statystyczny GUS) in the studies on fuel-energy economy in the years 2007, 2008 (CSO 2009a) and on fuel and energy carriers consumption in 2008 (CSO 2009). TheCSOs materials determine consumption both in natural values and energy values (TJ), which de facto indicates the actual heating values of the particular types
1 The projection of the University of Athens included in the so-called PRIMES model, whose third version was developed (Baseline 2009) and published in Q3 2009, as well as the Forecast of demand for fuels and energy up to 2030 for the Polish market drawn up in March 2009 by the Agency of Energy Sector Development for the Ministry of Economy in order to examine possibilities of achieving quantitative objectives included in the draft energy policy for Poland by 2030, taking into account current and projected EU requirements. 2 For the sake of comparability, all volumes expressed in the projects in million tons were converted into bcm, assuming net calorific value (NCV) at the level of 37,7 MJ/m3 (9000 kcal); in the ARE projection, the value of 35,5 MJ/m3 (8500 kcal) was used for the purpose of conversion, hence all the values expressed in bcm are 6% higher in the projection. 3 From the analysis, we exclude the consumption of: fuels for the purpose of traction (although natural gas as CNG can be used also for this purpose), coking coal for coke production, petroleum products in the refining industry, black coal and coke in the steel industry, timber in timber product and furniture industry, electricity and heat.
128
of fuels. For better visualisation of the substitution potential, we indicate the final values not only in energy values (TJ), but also in terms of tons of oil equivalent (toe) and in two variants in million m3 of natural gas, by adopting net calorific value of 1 m3 of gas as 37,7 MJ (value used in BP Statistical Review of World Energy) and 36 MJ (value resulting from the conversion of data contained in the CSOs studies, which is the actual average calorific value of high-methane natural gas in Poland). The Structure of Consumption of Fuels and Energy Carriers Table 13.1 presents the structure of consumption of fuels and energy carriers in the energy industry4 in the year 2008. Natural gas, even if mentioned as the third energy fuel in Poland, constitutes only about 3% in the consumption structure, while in the entire European Union it is close to 21%5. The share of installed electricity and heat generation capacity based on gas fuel in Poland in the total generation capacity constitutes only 3,7%, while in the EU it is 26,6%. Currently, natural gas consumption in the power industry is only 1.3bcm of highmethane gas per year. Theoretically, in the segment of power industry, consumption at the level of 44.3-46.4bcm of gas would be possible assuming that 100% of the capacity would be based on combustion of natural gas.
Table 13.1. Consumption of fuels and energy carriers in the areas of production and supply of electricity and heat (PKD code 40.1 and 40.3) in 2008
Energy industry Black coal Lignite Natural gas Coal gas, blast furnace gas and gas waste fuels Biogas and biomass Peat and wood Water and wind energy Petroleum products Other raw materials TOTAL Theoretical potential for growth (consumption of other fuels and carriers without natural gas) in TJ 1 025 322 522 710 47 615 22 133 17 065 13 907 10 752 10 315 276 1 670 095 in thous. toe 24 489 12 485 1 137 529 408 332 257 246 7 39 890 in million m3 (for 36 MJ) 28 481 14 520 1 323 615 474 386 299 287 8 46 392 in million m3 (for 37,7 MJ) 27 210 13 872 1 264 587 453 369 285 274 7 44 322 structure 61,4% 31,3% 2,9% 1,3% 1,0% 0,8% 0,6% 0,6% 0,0% 100,0%
1 622 480
38 752
45 069
43 058
97,1%
Source: Own calculations based on the CSOs study on fuel-energy economy in the years 2007-2008 (CSO 2009b)
For obvious reasons, switching entirely to natural gas is virtually impossible. Assuming, after the projections contained in the PRIMES model, that the demand for fuels to power plants and combined heat and power plants (CHP plants) in 2020 will be at the level of 40.2 million toe and the share of gas consumption in the fuel consumption structure at the level of the
4 The power production industry includes power plants and CHP plants registered in the Polish Classification of Activities (PKD) under numbers 40.1 and 40.3. 5 PRIMES model data (Baseline 2009).
Prospects for Utilising Unconventional Gas in Poland: thePotential of the Power Industry
129
current EU average, i.e. 21%, we obtain a hypothetical increase in natural gas demand from the energy sector to the level of 9.4-9.8bcm of high-methane gas per year, which translates into an increase in demand of 8.1-8.5bcm of gas per year. The EDA forecast assumes a slightly higher demand in this period, i.e. 41.8 million toe, which translates into a bigger total (9.8-10.2bcm) and new (8.5-8.9bcm) gas demand. In order for this scenario to come true, new production capacity would be needed. The forecast of demand for fuel and energy until the year 2030, elaborated by EDA based on the information obtained from energy companies, assumes that around 7GW of gross production capacity (based on black coal and lignite) will have been withdrawn from use in Poland by the year 2020, and another 7 GW (black coal) will be withdrawn after the year 2020. It means that nearly half of the current power generation capacity based on solid fuels (black coal and lignite) is to be replaced by new units. This needs to be augmented by the increase in energy capacities related to the increased demand for electricity and thermal energy, estimated between gross 6.900 MW (PRIMES model) and gross 8.200 MW (EDA forecast) in the following 10 years, and in the next decade between 120 MW gross (PRIMES) and 7.000 MW gross (EDA). As a result, by 2030 between 21.400 and 29.000 MW of new gross electricity and heat production capacity should be build in Poland in the power industry. Planned Production Capacity From the information provided by energy companies, it ensues that the plans, in various stages and with varying degrees of probability, include construction of five large power blocks to be fuelled by natural gas (Table 13.2)6. The implementation of all the above projects may increase the demand for natural gas by 2.6-3.9bcm per year (depending on the basic load rate), thereby increasing the share of gas in electricity and heat generation in power and CHP plants maximally almost to 11%.
Table 13.2. Planned production capacity in the power industry based on natural gas
Company Energa/ESB Electrabel Polska (GDF Suez) Electrabel Polska (GDF Suez) CEZ Tauron RAZEM Location Gdask Poaniec Wocawek Skawina Stalowa Wola Planned capacity (in MW) 800 833 446 430 400 2909 Potential gas consumption10 at basic load (60%) and 58% energy efficiency (LHV/CCGT) (in mcm)* 725 755 404 390 362 2 636 Potential gas consumption at basic load (90%) and 58% energy efficiency (LHV/CCGT) (in mcm) 1 087 1 132 606 585 544 3 954
* Calorific value of gas = 36 MJ/m3 Source: Own calculations based on information from energy companies
We omit the still rather vague plans of PKN Orlen.
130
The assumptions of the current Polish energy policy provide for the construction of two nuclear power plants, each with a capacity of 3.000 MW. The works on the location of the first one have already begun, and its is practically certain, while the second unit, given the increased availability of natural gas, could be replaced by new gas blocks, which would increase the demand by a further 2.7-4.1bcm of high-methane natural gas, but only around the year 2025 and later. This represents a total of 3.000 MW based on natural gas, 3.000 MW based on nuclear power and 3.000MW, which are currently planned for nuclear energy, but in the case of an increased supply of gas may be based on natural gas. The remaining part should be supplemented with coal blocks, producing between 9.800MW and 10.800 MW gross, and renewable energy sources, accounting for between 2.600 MW and 9.800 MW gross. As in the case of nuclear power, the emergence of a significant supply of gas from unconventional sources may become a factor encouraging the change of generation capacity in the direction of natural gas. There remains the question of profitability of the replacement, i.e. the price of the gas which taking into account the investment and operating costs, and CO2 emission fees will be competitive with respect to other fuels. Table 13.3 presents the results of the analysis based on the most recent data in possession of the authors of this publication. With the cost of CO2 emissions of approximately 14/ton,7 gas would be competitive with respect to nuclear power if the price of high-methane natural gas (calorific value 36 MJ/m3), with transmission, did not exceed $13,5/million BTU (ca. $460/1000m3), while competitiveness with respect to coal units requires the price, including transmission, to be about $11,5/million BTU (ca. $393/1000 m3). Assuming transmission costs8 at $0,58-0,77/million BTU ($19,8-26,4/1000 m3), the price for the material itself should range from $10,7/million BTU (competitive with coal) to $12,7/million BTU (as an alternative to nuclear power). Comparing these figures with the prices guaranteeing profitability of shale gas extraction in the U.S. market, we see that gas from unconventional sources could be an interesting alternative to coal as a fuel for the energy industry, but only assuming that production costs in Poland will not be higher than in the United States, which is a rather unlikely scenario. Lack of adequate resources for exploration and drilling, and environmental issues tend to support the opposite phenomenon: unconventional gas production costs may be even 30-50% higher than in North America, which means $9-12/million BTU ($310-400/1000 m3)9. In this scenario, the CO2 emission fees should be at the level of 20-30/ ton of CO2 to ensure competitiveness with coal, which does not seem quite unlikely. It can therefore be concluded that natural gas, including gas from unconventional sources, can be a competitive alternative to coal and nuclear power if the costs of production are no higher than in the U.S. or if the price of CO2 emissions rise significantly.
7 Average for the third quarter of 2009, currently around 11-12 euro/ton. Source: CIRE. 8 Source: Own calculations based on the tariff of Operator Systemu Przesyowego (Gas System) and the volume of demand for the units presented in Table 13.2. 9 The calcucation methodology varies from the one employed in Chapter 12 due to a different approach towards prices calculation. In this chapter, the chosen model is that of fuel switching (e.g. coal, LPG, LOO) to natural gas basing on the prices in years 2008-2009. Calculations were made for a border price for making such a decision.
131
Table 13.3 The economics of the new electricity generating units

Period Total cost Efficiency Fuel price Variable cost Fuel price with transport costs Fuel price with transport costs Fuel price with transport costs Constant cost at 4800 h/y load The total cost of MWh without fuel Fuel price at 100% efficiency Investment cost at 10% discount rate Price per ton or 1000m3, including the costs of transport The cost of CO2 emissions at a price of 14 /ton Emissions of CO2 per MWh
Net capacity
Type of generation capacity /MWh 20,7 30,2 19,5 29,0 9,4 14,5 35,0 30,9 38,6 26,9 40,6 14,5 0,4 78,6 0,000 0,0 4,9 36% 58% 58% 50% 50% 5,0 3,3 34,6 0,065 0,9 X2 50% 2,9 1,5 21,6 0,345 4,8 X1 58% 6,6 7,4 66,8 0,100 1,4 23,7 42% 91,8 X1+26,4 X2+35,5 83,5 48,3 55,9 48,3 62,0 5,0 3,8 44,3 0,745 10,4 21,6 46% 76,3 9,94 9,94 X1/0,58 X2/0,58 1,76 33,13 28,28 24,01 27,12 6,6 7,2 68,7 0,168 2,4 18,6 40% 89,7 7,46 5,0 3,6 46,2 0,880 12,3 16,6 45% 75,1 7,46 /MWh /MWh /MWh t/MWh /MW h /MWh % /MWh /MWh /GJ 2,07 2,07 2,76 2,76 N/D 9,20 7,85 6,67 7,53 N/D 12,78 10,91 9,26 10,46 N/D 13,48 11,51 9,77 11,03 $/GJ 2,88 2,88 3,84 3,84 35 35 35 35 25 25 40 3,03 3,03 4,05 4,05
Capital expenditures
Unit
MW
million years
$/million $/ton or BTU $/1000 m3 25,6 25,6 103,6 103,6
Lignite PC
500
875
Lignite PC + CCS
500
1 275
Black coal PC
400
660
Black coal PC + CCS
400
980
Natural gas CCGT
200
150
Natural gas CCGT + CCS
200
230
Nuclear power EPR
1500
4 500
N/D 460,0 392,6 333,4 376,5
Natural gas CCGT Vs. Nuclear Power (X1)
Natural gas CCGT Vs. Coal Power (X1)
Natural gas CCGT + CCS vs. Nuclear Power (X2)
Natural gas CCGT + CCS vs. Coal Power (X2)
PC the installation of exhaust gas wet desulphurisation and denitrification, CCS CO2 capture and storage, CCGT a gas-steam block with combined-cycle gas turbines, EPR a pressurised water reactor with closed circuit cooling
Source: Own calculations based on the data from: the Forecast of demand for fuel and energy until the year 2030 for the Polish market, EDA, March 2009; Tackling Investment Challenges in
Power Generation In the IEA countries, IEA, 2009; Energy Prices & Taxes Quarterly statistics 2009 THIRD QUARTER, IEA, 2009; CIRE data; and CSO data. The price for lignite was assumed to consti-
tute 75% of the price of black coal per 1 GJ. Coal units prepared to be expanded with CCS (the so-called capture ready).
The development of power industry based on natural gas, however, faces two rather significant obstacles. First of all, the decisions concerning the configuration of future power plants should be made today or in the nearest future, based on the currently available data and documented sources of primary energy. As for today, unconventional gas in Poland is still a hypothesis based on fairly strong evidence but still only a hypothesis. Other sources of gas in Poland, namely extraction from conventional sources and import do not provide sufficient comfort and security of supply for investment in new capacity in the energy sector, so most of the decisions will probably be heading in the direction of solid fuels: black coal, lignite and nuclear energy. The second factor of uncertainty is the relationship between the prices of particular fuels and the level of future costs of CO2 emissions. Depending on whether the EU policy on climate change continues to be that strict or becomes softer, natural gas, both conventional and unconventional, will be either a source of energy very competitive to alternative fuels, especially coal, or still a very expensive and non-cost-effective resource. It should be therefore assumed that the most likely scenario is that of an increase in demand for natural gas from the energy sector by about 3-4bcm per year by 2020. After 2020, it is possible to double this volume, but this will depend on the progress in the development of unconventional gas production in Poland and the economic impact of the implementation of the EU policies on CO2 emissions. Table 13.4 presents the structure of consumption of fuels and energy carriers in the area of power processing without consumption for non-energy uses.
Table 13.4 Consumption of fuels and energy carriers in 2008 in industrial processing, without consumption for non-energy uses, coking coal for coke production, petroleum products in the refining industry, black coal and cokeinthesteel industry, timber in timber product and furniture industry, electricity and heat
Industrial processing Black coal, coke, lignite Natural gas Biogas, waste and biomassa Petroleum products and LPG Peat and wood Coal gas and blast furnace gas TOTAL Theoretical potential for growth (consumption of other fuels and carriers without natural gas) Theoretical potential for growth at 20% substitution of other fuels and carriers in TJ 159 746 156 139 53 288 10 092 3 506 3 223 385 994 229 855 45 971 in thous. tons 3 815 3 729 1 273 241 84 77 9 219 5 490 1 098 in mcm (for 36 MJ) 4 437 4 337 1 480 280 97 90 10 722 6 385 1 277 in mcm (for 37,7 MJ) 4 239 4 144 1 414 268 93 86 10 244 6 100 1 220 structure 41% 40% 14% 3% 1% 1% 100% 60% 12%
Source: Own calculations based on the CSOs study on fuel-energy economy in the years 2007-2008 (CSO 2009b)
The data presented include the use of fuels and energy in industrial and non-industrial heating plants, aswell as the direct consumption of a given energy carrier by entities included in section D according to the Polish Classification of Activities (PKD) in 2004, without consumption for non-energy uses, coking coal for coke production, petroleum products in the refining industry, black coal and coke in the steel industry, timber in timber product and furniture industry, electricity and heat. Unlike in the case of the power industry, natural gas has become a very important source of energy for industrial companies. Its share in the consumption of fuel, taking into account the exclusions described above, is more than 40%, only slightly giving
133
way to carbon fuels. That is why the potential consumption growth of this raw material in this sector is considerably lower than in the power industry. Hypothetically, in the industrial processing segment, assuming 100% substitution of the fuels possible to be replaced by natural gas, consumption at the level of 10.2-10.7bcm of gas would be possible, which given the current consumption of 4.2-4.3bcm gives an extra volume in the amount of 6.1-6.4bcm of high-methane gas per year. Such a scenario is, of course, unlikely, but increased consumption of natural gas by about 1-1.2bcm over the next ten years seems possible if additional economic incentives are introduced (positive, i.e. tax reliefs, subsidies and EU grants, or negative, i.e. taxes and charges on emissions of CO2), supporting the substitution of coal, which is significantly cheaper, but less environment friendly. If the status quo is maintained, the only possible increase in demand equals around 200-300mcm of gas per year, relating mainly to the replacement of less competitive petroleum fuels and imported liquefied petroleum gas. The price of one ton of CO2 emission levelling the attractiveness of coal and high-methane natural gas ranges from 31 to 40/ton of CO2, assuming average prices for coal and natural gas for the Polish industry as reported by the International Energy Agency10 in the first half of 200911 and the difference in emissions equal to 4 tons of CO2 between burning of 1000 m3 of natural gas with calorific value of 36 MJ/m3 and its energy equivalent in coal. In the case of the biggest consumers (consumption above 150 thousand tons per year), even 22-23 per ton of CO2 emission could encourage them to change the fuel. Besides the price, other significant barriers to a more robust replacement of petroleum fuels or coal by natural gas at the moment are: the availability of this raw material, the related guarantees of supply and monopolistic market structure (see more in Chapter 12). The emergence of large, as for the Polish conditions, volumes of gas supplied by independent gas companies will certainly be an important stimulus accelerating the process of gasification of the Polish industry. The determining factor for changing the fuel in agiven company remains primarily the economic balance, and in this respect the decisions of the European Union on counteracting the climate change are of key importance, as they are reflected in the price of the rights to emit CO2. Summary In the optimistic scenario, the growth potential of natural gas consumption in Poland may be more than 15bcm per year. Compared with the level of current consumption, we obtain a giant increase in demand, over 100%, but in the view of production growth up to 40-80bcm per year, this is not a volume that would give an adequate level of comfort for potential investors. However, we should keep in mind that only 100% gasification of the whole economy would be able to manage all or most of these volumes and such a scenario is quite improbable. In the realistic variant, the increase in demand for gas may be less than 5bcm per year, which means that the domestic market potential would be a significant barrier to the development of gas
10 Cf. Energy Prices & Taxes, Quarterly statistics, Third Quarter 2009. 11 A similar result is obtained if we take into calculation the average values from the period 2001-2008.
134
production from unconventional sources. The largest increase in demand for natural gas may come from the backward energy sector based on solid fuels. A key factor for the chosen path of development of new power and heat generation capacity in Poland is the time. The sooner we obtain confirmation of resource availability and level of unconventional gas production costs in Poland, the more likely the probability of drawing the attention of energy companies to this fuel as the primary source of energy for the newly-built blocks.
The abstract was written on the basis of the following article: Kaliski M., Krupa M., Sikora A., The potential of the Polish energy market as a possible direction of monetisation of the Polish unconventional natural gas resources, Katedra Ekonomiki i Organizacji Przedsibiorstw Uniwersytetu Ekonomicznego w Krakowie, ISBN 978-83-62511-25-9; Krakw 2010, pp. 792-806.
Literature: 1. Baseline 2009 and 2007 PRIMES model. National Technical University of Athens (NTUA). 2. BP Statistical Review of World Energy, June 2009 and Review 2010. Available at: www.bp.com. 3. Centrum Informacji o Rynku Energii website, www.cire.pl. 4. CSO, Gospodarka paliwowo-energetyczna w latach 2007, 2008, Warszawa 2009a. 5. CSO, Zuycie paliw i nonikw energii w 2008 r., Warszawa 2009b. 6. Energy Prices & Taxes Quarterly statistics THIRD QUARTER IEA, 2009. 7. GAZ-SYSTEM S.A. website. Available at: www.gaz-system.pl. 8. Godec M., Kuuskraa V., Van Leeuwen T., Economics of Unconventional Gas, in:Advanced Resources International, July 2007. 9. Grecki W., Perspektywy odkrycia nowych z wglowodorowych w Polsce. III Kongres Naftowcw iGazownikw 2008, December 2008. 10. Grabowski P., Krupa M., Sikora A., ISE Sp. z o.o. Analiza charakterystyka mechanizmw antykryzysowych zwizanych z dostawami gazu moliwych do zastosowania wposzczeglnych pastwach czonkowskich UE i zapotrzebowania UE na gaz ziemny w perspektywie 2030 r. Warszawa, October 2009. Presentation in the collection of the authors. 11. Kaliski M., Stako D., Prognozy energetyczne Polski w perspektywie roku 2025. In:Wiertnictwo Nafta Gaz, volume 22/1 2005. 12. Kaliski M., Siemek J., Sikora A., Szurlej A., Moliwe scenariusze polityki energetycznej Unii Europejskiej wzakresie zapewnienia stabilnych dostaw gazu ziemnego do Europy rodkowej i Wschodniej w kontekcie polityki energetycznej Rosji. In: Rynek Energii 3/2009. 13. Kuuskraa V., Scott S., Worldwide Gas and Unconventional Gas Shales: A Status Report. Arlington, VA:Advanced Resources International, Inc. 14. Nawrocki J., Bilans zasobw gazu ziemnego w Polsce, Warszawa 2010. 15. PEP2030, Energy Policy of Poland until 2030, ARE Forecast, 5 November 2009. Available at: www.mg.gov.pl. 16. Rychlicki S., Siemek J., Trends in gas supply to Europe actual conditions and future tendencies. In: Energy Policy, vol. 10, special issue 2, 2008. 17. Tackling Investment Challenges in Power Generation In IEA countries, IEA, 2009. 18. Wood MacKenzie Unconventional Gas Analysis Service, Poland/Silurian Shales, August 2009.
135
14. Prospects for Utilising UnconventionalGas inPoland: the PotentialoftheNon-EnergySectoras a Possible DirectionofGasConsumption andBasic Barriers toUnconventional Gas Sector Development
Lack of an adequate supply of the natural gas on the Polish market means an increased risk of interruption of supply for households and industrial consumers in a case of turbulence, related to natural gas imports from Russia. This situation is still effective in deterring most potential consumers of this raw material, especially in the most sensitive areas of energy and industrial processing. The authors carried out the analysis starting from the potential growth in demand for natural gas in various areas of the Polish economy and the segment of households. The analysis indicates that a possible increase in the supply of natural gas from domestic production including primarily from unconventional deposits will encounter the basic barriers and constraints arising from lack of proper transmission and storage infrastructure, which seems not to be prepared for the change of the transmissions direction or gas export, if necessary. The authors point to gaps in the capacity of the main parts of the transmission system in Poland. Based on the available data, the authors have analysed and discussed the barriers to the transmission capacities of the main transmission lines within the country, taking into account the planned new investments, particularly in the areas where the increased production of shale gas in Poland is expected. During the numerous workshops, meetings and symposia, the basic potential barriers to unconventional gas exploration in Poland have been defined, including: situation of the resources near the Natura 2000 areas, strong environmental organisations, changes and heterogeneity of environmental protection regulations (more in Chapter 2); dense population in extraction areas; protectionism of the domestic market of service companies (especially drilling companies), lack of competitiveness on service market, impediments to the entry of foreign drilling companies (e.g. Polish/EU authorisations for operators of drilling equipment) (more in Chapter 15); difficult and lengthy procedures for importing drilling equipment from outside the EU; tenders for drilling activities (time/price); lack of market liberalisation and uncertainty as regards gas prices resulting from insufficient liberalisation of the domestic gas market (more in Chapter 12);
137
unclear (difficult) regulations regarding concessions for gas exploration and subsequent extraction (more in Chapter 17 and 18) as well as rights to geological information, and often high prices of geological information; lack of tax and financial incentives (more in Chapter 17); lack of Polish technical thought (the need to purchase technologies); generation gap among Polish drilling specialists (lack of specialists in the country); Energy Policy of Poland until 2030 (PEP2030 2009), which does not force gas as an energy source. At the moment, recoverable resources of conventional natural gas are about 140bcm (the Polish Geological Institute1), while the output is just over 4bcm per year, which gives one of the highest reserves to production ratios (R/P) in Europe, equal to about 34.6. If we use this ratio to calculate the potential extraction from the previously cited estimate of unconventional natural gas deposits, the final figures are very high in the Polish context: from 40.5bcm (the lower limit of the range) to 86.8bcm (the upper limit of the estimates) of natural gas extraction per year2. Taking into account the profile of shale gas extraction, the considerable increase in productivity of a given deposit at the beginning of its exploitation and its subsequent sharp fall as well as the poor exploitation level of deposits owned by Polish concerns (mainly the Polish Oil and Gas Company PGNiG SA), which can be seen in the poor R/P ratio, we can presume that gas exploitation may reach 100bcm of gas a year in the next 10-15 years.
Table 14.1 Use of natural gas as a raw material for non energy production
Consumption for non energy uses The whole industry, including: Chemical Industry Chemical industry share in the total consumption Ammonia production (nitrogenous fertilizers) share in the total consumption unit mcm mcm % % 2007 2 305 2 249 97.6% 97.2% 2008 2 314 2 305 99.6% 95.0%
Source: Own calculations based on: the CSOs study on fuel-energy economy in the years 2007-2008 (CSO 2009a); thedata of the Polish Chamber of Chemical Industry (Annual Report 2009); and the study on the best available techniques in the chemical industry in Poland (entitled: Najlepsze Dostpne Techniki (BAT) Wytyczne dla Brany Chemicznej w Polsce Przemys Wielkotonaowych Chemikaliw Nieorganicznych, Amoniaku, Kwasw i Nawozw Sztucznych) prepared for the Ministry of the Environment, September 2005
One of the fundamental problems seems to be the lack of adequate transmission network for the additional volumes of gas that might appear, all the more that energy development based on natural gas is facing fairly significant obstacles. Obstacles in the development of power industry based on natural gas were described in Chapter 13.
1 Compare Nawrocki J., Bilans zasobw gazu ziemnego w Polsce, January 2010. 2 It refers to the estimation of the Wood MacKenzie 1.4tcm and the Advanced Resoruces Int 3tcm gas recoverable resources.
138
A special category of demand for natural gas in the area of manufacturing is its consumption for non-energy uses, mainly as a source of hydrogen for chemical and petrochemical processes. In Poland, a major consumer of natural gas as a raw material for production is chemical industry, and more accurately fertilizer industry, which uses gas to produce ammonia as a key intermediate for the production of nitrogenous fertilizers (Table 14.1). It should be noted that the fertilizer market has been getting weaker since 2008 and the collapse of the market could be clearly seen in data for 2009, when the market recorded a 21% fall in ammonia production, which translated into a decline in demand of nitrogen plants for natural gas from around 2.2bcm per year to 1.8bcm. The biggest clients in the field are the Zakady Azotowe Puawy S.A. which consume (together with energy usage) around 900mcm/year, Anwil S.A. in Wocawek (500mcm/year), Zakady Chemiczne Police S.A. (500mcm/year), the Zakady Azotowe in Kdzierzyn (400mcm/year) and the Zakady Azotowe w Tarnowie -Mocicach S.A. (150mcm/year). The potential for increased consumption of fertilizers in the domestic market is not so impressive. The redundant production capacity of Polish plants is partly directed towards exports, which constitute 30% of the total production volume. Unfortunately, the recently observed lack of gas prices adjustment on the Polish market to spot prices on the European markets has deteriorated the price competitiveness of Polish nitrogen plants, as evidenced by data for 2009. A negative scenario predicts that the 2009 falling trend in fertilizer production may be permanent and cause a further drop in gas demand from the chemical industry estimated at around 400mcm a year.
Table 14.2 Production of ammonia and nitrogenous fertilisers in the years 2006-2009 in Poland
Production of ammonia Maximum capacity Effective capacity* The use of maximum capacity The use of effective capacity Production of nitrogenous fertilisers in terms of pure ingredient Export of nitrogenous fertilisers The share of export of nitrogenous fertilisers in production Estimated consumption of natural gas for production of nitrogenous fertilisers (ammonia)** Unit thous. tons thous. tons thous. tons % % thous. tons thous. tons % million m3 2006 2 434 2 920 2 680 83% 91% 1 707 536 31% 2 216 2007 2 462 2 920 2 680 84% 92% 1 818 632 35% 2 241 2008 2 414 2 920 2 680 83% 90% 1 692 547 32% 2 198 2009 2 002 2 920 2 680 69% 75% 1 503 N/A N/A 1 823
* Effective capacity was calculated assuming 30-day break in the operation of the system. ** Estimation assuming an average gas consumption for ammonia production at the level of 32.5 GJ/Ton of NH3; the averaged value calculated taking into account the capacities based on the conventional reforming and semi-combustion (installations in Puawy and Kdzierzyn).
Source: Own calculations based on: the CSOs study on fuel-energy economy in the years 2007-2008 (CSO 2009); the data of the Polish Chamber of Chemical Industry (Annual Report 2009); the data of Analytical Centre of the Customs Administration (Polish: Centrum Analityczne Administracji Celnej) for the years 2007-2008; and the study on the best available techniques in the chemical industry in Poland (entitled: Najlepsze Dostpne Techniki (BAT) Wytyczne dla Brany Chemicznej w Polsce Przemys Wielkotonaowych Chemikaliw Nieorganicznych, Amoniaku, Kwasw i Nawozw Sztucznych) prepared for the Ministry of the Environment, September 2005
Prospects for Utilising UnconventionalGas inPoland: the PotentialoftheNon-EnergySector
139
That is why any increase in demand for natural gas from the chemical industry in Poland is hardly probable. A positive scenario would only expect a return in demand to the level of consumption recorded in the years 2006-2008. Nitrogen plants are signalling an increasing need to change or diversify suppliers of this raw material, which provides an opportunity for new entrants in the shape of unconventional gas producers as they stand a good chance of attracting excellent (balanced, stable) customers. Reaching the above client groups in most cases is possible on the basis of direct contracts between the supplier and the customer, thus obtaining customers by the new operators on the gas market seems to be relatively easier. Other consumer groups, as presented below, are composed mostly of minor (in terms of volume of the gas consumed), distributed units, hence the effective sale of gas to these entities may be carried out properly only through distributors. Table 14.3 presents the volume of consumption of natural gas and alternative fuels by other sectors of the economy: agriculture, construction, trade, waterworks and sewerage companies, transport (only for heating purposes), administration, public services (schools, hospitals, etc.), small manufacturing and service businesses. A characteristic feature of this group of customers is low consumption per entity, but due to the large number of operators quite a substantial volume of aggregate demand. What is important is the fact that in the fuel consumption structure in these areas petroleum products and liquefied gas, which are easier to replace, play quite a prominent role. The total energy equivalent for these fuels in the form of high-methane natural gas is close to 1bcm per year. Therefore, the effective potential for substitution of other fuels by natural gas is, in our opinion, not much smaller in this area than in the industry, and amount to up to 30% of the total consumption of other fuels, which gives 1.13-1.19bcm of high-methane natural gas per year. The last group of consumers of natural gas most diffuse, but with a considerable share in the total consumption of this fuel are households3. Natural gas currently provides only a little bit more than 19% of energy for heating for households4. Therefore, according to the authors, it seems quite possible to increase gas consumption by the household sector by up to about 3bcm per year in the perspective of the next decade. Given the infrastructure problems (see the next part of the analysis), it is worth analysing the potential demand from households located in areas adjacent to the possible regions of shale gas production. The theoretical total substitution of black coal, LPG and LHO in the regions of Pomorze, Kujawsko-Pomorskie, Mazowsze and Lublin amounts to over 2.15bcm of high-methane natural gas, and approximately 15% (320mcm) of it would be from liquid fuels, which are more susceptible to substitution. Slightly smaller volume, i.e. 1.72bcm, of which 260mcm from liquid fuels, is offered by the neighbouring voivodeships Wielkopolska, d, Podkarpacie and
3 Kaliski M., Krupa M., Sikora A., Potencja polskiego rynku elektroenergetyki jako moliwy kierunek monetyzacji polskiego gazu upkowego, (in press). 4 Without taking into account consumption of electricity for heating, which in Polish conditions is a very costly and very rarely used option.
140
Table 14.3 Consumption of fuels and energy carriers in 2008 in the other sectors of economy
Other sectors Natural gas Black coal, coke, lignite Petroleum products and LPG Peat and wood Biogas, waste and biomass TOTAL Theoretical potential for growth (consumption of other fuels and carriers without natural gas) Theoretical potential for growth at 30% substitution of other fuels and carriers in TJ 88 008 79 679 37 476 23 946 1 517 230 626 142 618 42 785 w tys. toe 2 102 1 903 895 572 36 5 508 3 406 1 022 inmcm (for 36 MJ) 2 445 2 213 1 041 665 42 6 406 3 962 1 188 inmcm (for 37,7 MJ) Structure 2 336 2 115 995 635 40 6 120 3 785 1 135 38% 35% 16% 10% 1% 100% 62% 19%
Source: Own calculations based on the CSOs study on fuel-energy economy in the years 2007-2008 (CSO 2009)
witokrzyskie5. This means that it would be possible, without significant investments in infrastructure, to ensure demand of between 0.6 and 1.2bcm of high-methane natural gas from the household sector. Larger volumes will require considerable development of transmission and distribution networks. Table 14.4 summarises our analysis regarding the potential growth in demand for natural gas in various areas of the Polish economy and the household sector. Referring to the data presented there, it should be remembered that this potential can only be evaluated correctly in relation to the increase, as assumed at the beginning of this chapter, in supply of natural gas from domestic production, including primarily from unconventional deposits. Lack of adequate supply of natural gas translates into an increased risk of interruption of supply in the case of turbulence associated with gas imports from Russia, and this situation is still effective in deterring most potential consumers of the above mentioned raw material, especially in the most sensitive areas of energy and industrial processing. In the optimistic scenario, we assume the continuation of the anti-climate change trend in the EU policy, and thus a dynamic development of power and heat capacity based on natural gas, which would reach approximately 20-21% share in total production capacity, and in other areas, substitution at the level of 20-30% of the consumption of other fuels, which implies not only the replacement of liquid fuels (LPG, LFO, HFO), but also of coal, as well as return of the demand for natural gas from the chemical industry to the pre-crisis level. In the intermediate scenario, the increase in gas consumption in the energy sector ensues only from the construction projects of new blocks based on natural gas, while in other areas, primarily from the substitution of liquid fuels and only to a minimal extent solid fuels; the chemical industry permanently reduces the demand for natural gas to the current level.
5 Other voivodeships that are located close are Mazury, Zachodniopomorskie and Podlasie, but significant investments would be required in these regions to develop the transmission and distribution infrastructure.
141
Figure 14.1 The volume of the potential total (100%) substitution of black coal, liquid petroleum gas and light fuel oil in the household sector in terms of million m3 of high-methane natural gas*
19% 20% 23% 23% 14% 16% 14% 15%
15% 11% 13% 14% 10% more than 500mcm from 500 to 800mcm from 300 to 500mcm less than 300mcm the main area of shale gas exploration XX% share of LPG and LFO in the total 9% 14% 6%
* This calculation does not include consumption of wood and peat due to the lack of data on their consumption, broken down by region.
Source: Own calculations based on the CSOs study on the consumption of fuel and energy carriers (CSO 2009b)
In the optimistic scenario, the growth potential of natural gas consumption in Poland may be more than 15bcm a year. Compared with the level of current consumption, we obtain a giant increase in demand, over 100%, but in the view of production growth from 40-80bcm per year, this is not a volume that would give the adequate level of comfort for potential investors. However, we should keep in mind that only 100% gasification of the whole economy would be able to manage all or most of these volumes, and such a scenario is quite improbable. In the intermediate variant, the increase in demand for gas may be less than 5bcm per year, which means that the domestic market potential would constitute a significant barrier to the development of gas production from unconventional sources. The largest increase in demand for natural gas may come from the backward energy sector based on solid fuels (more in Chapter 13).
142
Table 14.4 Potential growth in demand for natural gas in selected sectors of the Polish economy and the household sector in mcm (36MJ/m3)
Total demand for fuels and carriers (base year 2008) Energetics Industrial processing (for energy uses) Non-energy consumption (chemistry) Other sectors of economy Households* Own consumption (extraction and transport) TOTAL 46 392 10 722 2 312 6 406 10 339 Consumption of natural gas (2008) 1 323 4 337 2 312 2 445 3 651 Theoretical potential for growth (consumption of other fuels and carriers without natural gas) 45 069 6 385 0 3 962 10 339 Effective potential for substitution an optimistic scenario 9 750 1 270 0 1 190 3 100 Effective potential for substitution an intermediate scenario 2 720 280 -400 1 000 1 200
269 76 440
269 14 337
0 65 754
0 15 310
0 4 800
* Without heat from CHP plants.

Source: Own calculations based on the above assumptions and CSO data
Gas infrastructure as main obstacle for increasing natural gas supply in Poland The natural gas transmission and distribution infrastructure in Poland consists of: Gas pipelines: high pressure: above 1.6 MPa mainly transit and transmission system, higher medium pressure: from 0.5 to 1.6 MPa, main distribution average pressure: from 0.01 to 0.5 MPa, systems low pressure: below < 10 kPa,
Gas compressor stations, Reduction and measurement stations, traditionally divided into: Distribution Gas Nodes, Reduction and measurement stations degree 1, Reduction and measurement stations degree 2,
Underground gas storages (UGS). Transit of gas through Poland is carried out by the YamalEurope pipeline, owned by System Gazocigw Tranzytowych Europol-Gaz S.A. (which is not an independent operator; major shareholders are: Gazprom 48%, PGNiG SA 48% and Gas-Trading S.A. 4%6). The operator ser6 According to the recent arrangements between Gazprom and PGNiG SA, the only ones to remain are to be Gazprom and PGNiG (50%).
143
vice is performed by GAZ-SYSTEM S.A. on behalf of PGNiG SA. The length of the Polish section of the Yamal-Europe natural gas pipeline is approximately 680 km, the pipe diameter is 1420 mm, and the maximum working pressure is 8.4 MPa. The pipeline is supported by gas compressor stations: in Szamotuy, Wocawek, Ciechanw, Zambrw and Kondradki, with the target installed capacity (of the combined five stations) of 600 MW. The achieved target capacity of the first branch is 32.3bcm of natural gas per year. On the route of the pipeline two entry points for natural gas to the Polish transmission network were built: in Wocawek (with maximum technical capacity of 350 thousand m3 per hour, which is more than 3bcm per year) and in Lwwek (with maximum technical capacity of 270 thousand m3 per hour, which is more than 2.3bcm per year). The Yamal-Europe gas pipeline, on the other hand, has no entry points to the national system, making it useless for the purposes of potential gas export. Ultimately, the Yamal-Europe pipeline was to consist of two branches with a total capacity of up to 65.7bcm of gas per year. In connection with the change of Russias export strategy and the decision on creation of pipelines bypassing transit countries (Nord Stream, South Stream), the construction of the second branch of the Yamal-Europe pipeline was suspended indefinitely, which is a certain opportunity for building in its place adedicated export pipeline for shale gas, which could export about 30-40bcm of gas annually. The reality of this task depends largely on the formal and legal possibilities to build the pipeline. The national transmission system consists of two separate natural gas transmission systems: transmission system for high-methane natural gas (E), transmission system for nitrified natural gas (Lw), significantly smaller than the transmission system for high-methane natural gas, which is subject to gradual replacement and exchange for high-methane natural gas transmission system. In Poland, natural gas is distributed through a transmission network with a length of approximately 9 675.1 km (pipelines with diameters from 80 to 700 mm) operated by Operator Gazocigw Przesyowych GAZ-SYSTEM S.A. It should be noted that the entire transmission system in Poland comprises 13 858 km, 1600 gas stations and 18 gas compressor stations. The transmission system is complemented by networks belonging to gas distribution companies almost 118,000 km in total (without connections), of which nearly 97% belongs to 6 distribution companies from the PGNiG SA Capital Group. Points of entry into the national transmission system can be divided into two groups. The first group, through which the imported gas flows into the national transmission network, consists of the entry points at the Polish borders. Such connections exist both on the east and west borders and within the country from the transit Yamal-Europe pipeline. A characteristic feature of the Polish system of external connections is their unidirectional nature; in the case of almost all the points, the gas may be transported only to Poland, with no
144
Figure 14.2 The Yamal-Europe gas pipeline in the context of the transmission system in Poland
Gdask Olsztyn
Wocawek Lwwek Mallnow Pozna Gustorzyn Warszawa
Kondradki
Piotrkw Trybunalski Wrocaw Katowice Krakw Jarosaw
Source: GAZ-SYSTEM S.A.
Figure 14.3 Natural gas transmission system operated by OGP GAZ-SYSTEM S.A.
Gdask
Tietierowka Wocawek
Pozna
Lwwek Gubin
Rembelszczyzna Wysokoje Warszawa
Lasw
Wrocaw
Guchoazy
Entry points E system pipelines Lw system pipelines
wierklany Tarnw
Drozdowicze
Branice
Source: GAZ-SYSTEM S.A. Thickness of the pipelines lines does not reflect its real capacity. Detailed information regarding capacity available on the website: www.gaz-system.pl.
145
Table 14.5 The transmission system operated by OGP GAZ-SYSTEM S.A. (as at 31 December 2008)
Property assets of OGP GAZ The transmission system SYSTEM S.A. Gas transmission pipelines 6 768.2 km
Assets leased from PGNiG SA 2 906.9 km
possibility of the reverse, making it very difficult to sell excess gas or gas obtained from mining. This means that today there are no technical possibilities of exporting gas from Poland.
Total assets 9 675.1 km
The second group are the entry points from gas mines, which are connected to the transmission Gas stations 507 316 823 network of OGP GAZ-SYSTEM. There are currently Gas compressor stations 13 1 14 several dozen connections of this type, and the Source: Report on the results of the safety monitoring of natural situation in this respect is rather undetermined gas supply for the period from 1 April 2007 to 31 December as their number increases with the utilisation of 2008, Annex to the Regulation of the Minister of Economy of 7 May 2009 (Monitor Polski of 2009, No. 31, Item 448) newly discovered gas deposits. However, there are situations where after the exhaustion of the deposits the connections are unnecessary and should be or are liquidated. In total, more than 6.5bcm of high-methane gas and more than 3bcm of nitrogen-rich gas may be pumped into the networks from the Polish deposits. It is difficult to clearly define the level of maximum capacity for the pipelines themselves, that is why the table below presents the actual capacity of the infrastructure for given parts of the infrastructure system. Table 14.8 indicates rather small possibilities of using the existing natural gas transmission system to transport shale gas, both inside the country and for export. The areas of potential shale gas production are located on the territory of three regional branches of GAZ-SYSTEM: Tarnw, Rembelszczyzna and Gdask. At the moment, thepossibility of introducing gas into the system is primarily located in the branch in Tarnw: in the regions of Przemyl (technical capacity of around 1bcm per year at entry points), Jarosaw (650mcm), Leajsk (320mcm),
Table 14.7 Connections to the transmission system in Poland
Country Ukraine Ukraine Belarus Belarus Russia Russia Germany Germany Germany Germany Czech Republic Czech Republic Operator at the entry point Uktransgaz Uktransgaz Bietransgaz Bietransgaz Europol GAZ Europol GAZ ONTRAS ONTRAS ONTRAS Gaz-System Operator at the exit point GAZ-SYSTEM Karpacka SG GAZ-SYSTEM GAZ-SYSTEM GAZ-SYSTEM GAZ-SYSTEM GAZ-SYSTEM GAZ-SYSTEM MOW ONTRAS Place Drozdowicze Hrubieszw Wysokoje Tietierowka Wocawek Lwwek Lasw Gubin Subice Kamminke Guchoazy Branice The direction Maximum total capacity of the supply in million m3 per year Poland Poland Poland Poland Poland Poland Poland Poland Poland Germany Poland Poland 5 682.4 255.5 5 490.0 188.9 3 057.6 2 371.7 1 054.2 17.6 N/A 87.8 105.4 1.4
Severomoravske plynarenske GAZ-SYSTEM Severomoravske plynarenske GAZ-SYSTEM
Source: Report on the results of the safety monitoring of natural gas supply for the period from 1 April 2007 to 31 December 2008, Annex to the Regulation of the Minister of Economy of 7 May 2009 (Monitor Polski of 2009, No. 31, Item 448)
146
Rzeszw (980mcm), Lubaczw (460mcm) and Tarnw (840mcm). In the central part of the Lublin Region, there is a large gas mine Megiew (290mcm), while on the border between the southern part of Mazowsze and the Lublin Region another one, in Styca (290mcm), which are the entry points located closest to the potential areas of shale gas production. On the rest of the Mazowsze (Rembelszczyzna) and Pomorze (Gdask) branches, in the absence of gas mining activities, there are no internal entry points of the gas into the system. However, as regards the transmission of the potential volume of shale gas, the capacity of the entry points, which can be fairly easily and quickly build, is not aproblem. Theproblem are the capacities of the pipelines themselves.
Table 14.6 Gas distribution networks in Poland (at the end of 2008)
Network length Distribution network operator (km) Mazowiecka Spka Gazownicza Dolnolska Spka Gazownicza Grnolska Spka Gazownicza Karpacka Spka Gazownicza Pomorska Spka Gazownicza Total PGNiG Capital Group G.EN Gaz Energia MOW CP Energia Total 18 337 7 637 20 489 43 928 8 970 113 933 2 350 1 200 300 117 783 Wielkopolska Spka Gazownicza 14 572 The volume of gas distributed (mcm per year) 1 897 1 725 988 1 371 2 004 882 8 867 90 25 28 9 010
Source: PGNiG Annual Report for 2008, Report on the results of the safety monitoring of natural gas supply for the period from 1 April 2007 to 31 December 2008, Annex to the Regulation of the Minister of Economy of 7 May 2009 (Monitor Polski of 2009, No. 31, Item 448), Prospectus of CP Energia
Figure 14.4 Interconnection with the Polish gas system
Kamminke
Poty Szczecin Wocawek Lwwek Tietierowka
Subice Wysokoje Gubin
Lasw Hrubieszw
Connections Gas distribution Guchoazy Branice Drozdowicze
Source: Own study
147
Table 14. 8 Capacity of the transmission system in Poland (data for 2008)
Branch in Rembelszczyzna Branch in Gdask mcm per day bcm per year mcm per day bcm per year mcm per day bcm per year mcm per day bcm per year mcm per day E and Lw network E and Lw network Branch in wierklany mcm per day bcm per year The entire transmission system bcm per year
Branch in Tarnw bcm per year
Elements of transmission infrastructure
mcm per day
Peak capacity* x x x x x x x x 19.8 x 32.0 x 29.1 x 17.4 none x 20.2 x 4.6 x none 19.8 x 11.8 x 24.4 x 17.4 x x x 18.7 x 61.2 x 26.6 x 3.8 x none x 52.8 x 5.3 x none x 0.8 x none x 14.8 x 0.6 x none none 0.3 25.6 none 25.6 17.9 x 8.4 x 6.5 x 3.1 x 0.3 x x x x x x x 16.9 x 7.9 x 10.9 x 5.0 x 10.3 x 67.7 53.8 28.7 74.9 157.4 132.2 32.8 165.0 x x x x x x x x
gas pipelines
16.7
entry points for gas from import
17.5
entry points for gas from domestic production (mines, nitrogen removal plants)
12.5
entry points for gas from USG
16.8
total entry points
46.8
exit points (without USG)
33.1
exit points to USG
8.1
total exit points
41.2
Effective capacity** 5.1 5.9 3.8 0.7 10.4 10.1 0.7 10.8 16.5 6.0 none none 16.8 26.6 16.5 6.0 9.8 16.2 5.9 52.4 3.4 3.6 0.4 4.0 none none 44.0 0.4 0.7 0.2 none n.a. 12.3 4.4 23.2 20.4 3.8 24.2 15.6 5.7 8.4 3.1 6.5 14.1 5.1 6.6 2.4 9.1 3.3 2.4 4.5 0.6 7.4 7.4 0.6 8.0 4.2 2.9 0.5 none 3.5 14.5 none 14.5 1.5 1.1 0.2 none 1.3 5.3 none 5.3 8.6 0.3 none none 0.3 21.4 none 21.4 3.1 0.1 none none 0.1 7.8 none 7.8 56.4 49.9 23.4 62.4 136.3 110.1 27.4 137.5 20.6 18.2 8.5 1.7 28.6 40.2 1.7 41.9
gas pipelines
13.9
16.3
10.4
14.0
total entry points
40.7
27.6
exit points to USG
6.7
total exit points
34.3
Branch in Tarnw bcm per year bcm per year mcm per day bcm per year mcm per day bcm per year mcm per day bcm per year mcm per day bcm per year mcm per day
Branch in Rembelszczyzna Branch in Gdask E and Lw network E and Lw network Branch in wierklany
The entire transmission system mcm per day bcm per year
Elements of transmission infrastructure
mcm per day
Completed transmissions (2008) N/A 4.7 1.8 0.4 6.9 4.2 0.5 4.8 8.0 2.9 4.9 1.8 7.6 2.8 none none 0.7 0.2 1.3 0.5 8.0 2.9 4.3 1.6 6.3 2.3 2.2 none 2.2 6.3 2.3 4.9 1.8 10.3 3.7 2.6 none none 0.6 0.2 0.9 0.3 none none 1.0 0.8 none 0.8 N/A N/A none n.a. 6.3 2.3 N/A N/A 6.3 2.3 4.4 1.6 3.0 1.1 2.6 0.95 0.0 none none 0.0 5.7 none 5.7 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.0 none none 0.0 2.1 none 2.1 N/A 29.2 11.2 2.6 42.9 38.0 3.4 41.4 10.7 4.1 0.9 15.7 13.9 1.3 15.1
gas pipelines
N/A
12.9
4.8
1.1
total entry points
18.8
11.6
exit points to USG
1.5
total exit points
13.0
* Peak capacity for pipelines has been determined on the basis of transmissions realised in the peak day (26 January 2009), for entry and exit points on the basis of the data provided by Gaz System (technical capacity of the entry and exit stations).
**Effective capacity of pipelines and entry points (without transit points) and exit points was defined as 83.33% (20 out of 24) of peak daily capacity, multiplied by 365 days a year for annual capacity, except for USG, where annual capacity equals active storage capacity. The source of data for the transit points was the Report on the results of the safety monitoring of natural gas supply for the period from 1 April 2007 to 31 December 2008, Annex to the Regulation of the Minister of Economy of 7 May 2009 (Monitor Polski of 2009, No. 31, Item 448).
Source: Own calculations based on data provided by GAZ-SYSTEM S.A., Report on the results of the safety monitoring of natural gas supply for the period from 1 April 2007 to 31
December 2008, Annex to the Regulation of the Minister of Economy of 7 May 2009 (Monitor Polski of 2009, No. 31, Item 448) and PGNiG SA
The transmission system operator does not provide accurate data on the reserves of transmission capacity, however, from the available information, it can be concluded that the additional transfer of about 2-2.5bcm annually in the area of the branches in: Tarnw (ca. 0.81bcm), Rembelszczyzna (ca.1-1.2bcm) and Gdask (0.2-0.3bcm) would probably be feasible (Fig. 14.5). A more precise estimate would be possible only after the preparation of the new distribution network plan, taking into account the future volumes of natural gas from unconventional deposits. In the light of these data, we conclude that the transmission system in its present form is unable to provide efficient transport, even for the intermediate variant of demand growth (5bcm per year), let alone the optimistic version (15bcm) or export. An alternative to the expansion of transmission networks may be to replace the current imports; then the available network capacity reaches from 13-15bcm per year, but in light of the obligations arising from contracts already concluded with Gazprom the scenario is rather unlikely.
Figure 14.5 Visualisation of the typical transmission capacity on the map of the transmission system (high methane gas E)
Kamminke
Szczecin
0,6~0,7
Poty
1,1~1,2 0,3~0,4 1,5~2,0
1,5~1,7
Wocawek
Tietierowka
0,1 1,5~1,7 2,5~3,0

Wysokoje
0,1 0,1
Subice Gubin
Lwwek
Lasw
1,0
Connections
0,2 0,7~1,0 2,0~2,5

Guchoazy Branice Hrubieszw
in bcm per year
1,0 1,0 1,0
Gas distribution Gas import
Drozdowicze
0,7~1,0
Production of natural gas
3,0~4,0
Source: Own calculations based on the data published by GAZ-SYSTEM S.A.
150
The abstract was written on the basis of the following article: Kaliski M., Krupa M., Sikora A., Market and institutional barriers for development of shale gas production in Poland. Katedra Ekonomiki i Organizacji Przedsibiorstw Uniwersytetu Ekonomicznego w Krakowie, ISBN 978-83-62511-25-9; Krakw 2010 pp. 807-826.
Literature: 1. Baseline 2009 and 2007 PRIMES model. National Technical University of Athens (NTUA). 2. BP Statistical Review of World Energy, June 2009. and Review 2010. Available at: www.bp.com. 3. Centrum Informacji o Rynku Energii website. Available at: www.cire.pl. 4. CSO, Gospodarka paliwowo-energetyczna w latach 2007, 2008, Warszawa 2009a. 5. CSO, Zuycie paliw i nonikw energii w 2008 r., Warszawa 2009b. 6. Energy Prices & Taxes Quarterly statistics, THIRD QUARTER 2009, IEA, 2009. 7. GAZ-SYSTEM S.A. website. Available at: www.gaz-system.pl. 8. Godec M., Van Leeuwen T., Kuuskraa V., Economics of Unconventional Gas In:Advanced Resources, July 2007. 9. Grecki W., Perspektywy odkrycia nowych z wglowodorowych w Polsce. III Kongres Naftowcw iGazownikw 2008, December 2008. 10. Grabowski P., Krupa M. and Sikora A., ISE Sp. z o.o. Analiza charakterystyka mechanizmw antykryzysowych zwizanych z dostawami gazu moliwych do zastosowania wposzczeglnych pastwach czonkowskich UE i zapotrzebowania UE na gaz ziemny w perspektywie 2030r., Warszawa, October 2009. Presentation in the collection of the authors. 11. Kaliski M., Stako D., Prognozy energetyczne Polski w perspektywie roku 2025. In:Wiertnictwo Nafta Gaz, volume 22/1 2005. 12. Kaliski M., Siemek J., Sikora A., Szurlej A., Moliwe scenariusze polityki energetycznej Unii Europejskiej w zakresie zapewnienia stabilnych dostaw gazu ziemnego do Europy rodkowej iWschodniej w kontekcie polityki energetycznej Rosji. In: Rynek Energii (3/2009). 13. Kaliski M., Krupa M., Sikora A., Potencja polskiego rynku elektroenergetyki jako moliwy kierunek monetyzacji polskiego gazu upkowego. In: Restructuring in the face of new economic challenges. Management Strategy Analysis, Krakw, Katedra Ekonomiki i Organizacji Przedsibiorstw Uniwersytetu Ekonomicznego, (eds.) Borowiecki R., Jaki A., p. 792-806, in press. 14. Kuuskraa V., Stevens S., Worldwide Gas and Unconventional Gas Shales: A Status Report, Arlington, VA: Advanced Resources International, Inc, 2009. 15. Nawrocki J., Bilans zasobw gazu ziemnego w Polsce, Warszawa 2010. 16. PEP2030, Energy Policy of Poland until 2030, ARE Forecast, 5 November 2009. Available at: www.mg.gov.pl. 17. Rychlicki S., Siemek J., Trends in gas supply to Europe actual conditions and future tendencies. In: Energy Policy, vol. 10, special issue 2, 2008. 18. Tackling Investment Challenges in Power Generation In the IEA countries, IEA, 2009. 19. Wood MacKenzie Unconventional Gas Analysis Service, Poland/Silurian Shales, August 2009. 20. Zalewski A., Sytuacja popytowo-podaowa na wiatowym i krajowym rynku nawozw mineralnych w 2008 roku. In: Roczniki Naukowe Stowarzyszenia Ekonomistw Rolnictwa iAgrobiznesu, Volume XI, notebook 3, 2009.
151
15. Infrastructural Challenges Linked to Extraction and Productionof Unconventional Gas

MariuszRuszel
Unconventional gas exploration and production in Poland require special drilling appliances and an appropriate transport infrastructure. The prospect of probable unconventional gas sector development in Poland means that huge infrastructure investments need to be planned and implemented. The production of unconventional gas requires appropriate technical infrastructure that will enable the provision of the appropriate amount of water and other substances used for extraction of the gas. Furthermore, an appropriate amount of specialist equipment and experienced staff are needed to carry out the processes of horizontal and vertical drilling as well as hydraulic fracturing. The vertical and horizontal drilling are indispensable for estimating the exact potential of unconventional gas. The estimated cost of creating a wellbore in Polish conditions is $1520 million1. It should be noted that due to a limited number of drilling companies and an insufficient amount of drilling equipment, the pace of unconventional gas development may slow down and costs of drilling services may turn out to be unattractive. Development may be further hampered by the fact that procedures for importing the equipment from outside the European Union are long and complicated and, moreover, there is no competition on the domestic servicing market. However, if the existence of large quantities of unconventional gas is confirmed, a domestic industry producing drilling equipment for gas exploration might develop, which consequently would lead to decreasing production costs2. The issue of expense does not only concern wellbore: according to media reports the cost of each hydraulic fracturing operation will amount to over $1 million. Usually, a dozen such operations are needed for 1 kilometre of a horizontal well. Therefore, the creation of an appropriate infrastructural basis for production (for the shale gas sector) will require
1 http://gazlupkowy.pl/koszty-otworu-przy-poszukiwaniu-gaz-lupkowego-w-polsce-15-20-million-usd/ (The cost of a borehole in exploration of shale gas in Poland is $15-20 mln) (5.06.2011). According to other sources, the cost of one borehole that is 3000 m deep is about $6-7 mln. Czyewski A., wieboda P., Jak zbudowa sektor gazu upkowego w Polsce (How to develop a shale gas sector in Poland), available at: http://www.demosservices.home.pl/www/files/Raport_Gaz_Lupkowy_A4_light.pdf (30.05.2011). 2 Polska moe produkowa urzdzenia do poszukiwa gazu upkowego (Poland can produce appliances for exploration for shale gas), available at: http://www.cire.pl/item,54754,1.html?utm_source=newsletter&utm_campaign=newsletter&utm_medium=link (3.06.2011).
153
incessant investments in equipment and innovative technologies that improve the efficiency of the unconventional gas extraction process as well as of the substances used at this stage. It is important to note that due to dynamic progress in research on improving technologies of unconventional gas production currently being conducted in the U.S. (read more in Chapter 4), we are not able to definitively state what the unconventional gas production process will look like in 5-10 years. This means that the creation of unconventional gas R&D centres is in Polands best interest. Such conditions would make it possible for Poland to take advantage of the sceptical position of France and Germany towards the production of this fuel and to become the EU leader in this field. As the technology develops, the infrastructural challenges concerning extraction will change. Once the unconventional gas extraction stage has been successfully completed, a new chapter of infrastructural challenges will open, linked with ensuring an adequate transmission infrastructure. Currently, Poland lacks transmission pipelines and storage infrastructure that would allow storage of a bigger volume of strategic natural gas reserves3. The existing gas pipeline structure is suited to importing gas from the East (more in Chapter 14). Due to this, the development and modernization of transmission infrastructure for unconventional gas constitute a big investment challenge4. A properly developed gas pipeline network (including distribution pipelines5) will enable supplying of unconventional gas to final consumers throughout the whole country as well as transportation to underground gas storages (UGS). It will also enable potential export through interconnectors and the LNG terminal in Swinoujscie, or in the case of bigger volumes, through the second part of the Yamal-Europe pipeline (more in Chapter 16). Naturally, the development of a gas transmission and distribution infrastructure in Poland will be yet another crucial issue. The responsibility for this rests with a joint stock company owned by the State Treasury, namely Operator Gazocigw Przesyowych GAZ SYSTEM S.A., while responsibility for development of the distribution pipelines rests with natural gas distribution companies that belong in 97% to PGNiG SA Capital Group6. According to the accepted investment plan, GAZ SYSTEM S.A. is supposed to build about 1000 km of transmission pipeline network between 2011 and 2014. Most importantly, new
3 According to Act of 29 October 2010 on strategic reserves, the Minister of Economy is responsible for the reserve system. Strategic reserves are created in case of endangerment of safety and defence of the country, safety, public order and health or occurrence of a natural disaster or a crisis situation, in order to support realization of tasks in the field of the countrys security and defence, reconstruction of critical infrastructure, mitigation of disruption in supply continuity that serve in the functioning of th economy and fulfilling basic needs of citizens, rescuing their health and lives, as well as fulfilling international commitments of the Republic of Poland. 4 Gas transmission pipelines are pipelines of high pressure of more than 1.6 MPa and of a diameter from 80 to 700 mm. 5 Gas distribution pipelines are pipelines: of low pressure below 10kPa, average pressure from 0.01 MPa to 0.5 MPa, elevated average pressure from 0.5 MPa to 1.6 MPa. 6 These are: Mazowiecka Spka Gazownicza, Wielkopolska Spka Gazownicza, Dolnolska Spka Gazownicza, Grnolska Spka Gazownicza, Karpacka Spka Gazownicza and Pomorska Spka Gazownicza. In addition to Grupa Kapitaowa PGNiG, the operators of the distribution network are: G.EN Gaz Energia, MOW, CP Energia.
154
MariuszRuszel
pipelines will be created in the NW part of the country. winoujscie-Szczecin and Szczecin -Lwwek are strategic sections. The winoujscie-Szczecin pipeline, about 80 km long, will link the LNG terminal to the gas transmission network. The pipeline will be connected to the planned Szczecin-Lwwek pipeline, 188 km long, next to which a gas compressor station in Goleniw was completed in March 2011. The Szczecin-Gdask pipeline, 256 km long, built in the West Pomeranian Voivodeship (Wojwdztwo Zachodniopomorskie) and Pomeranian Voivodeship (Wojewdztwo Pomorskie), will be another important section. The investment is to be finished in 2013 and is to ensure the transmission of natural gas from the LNG terminal in winoujscie to the cavern underground gas storage (Kawernowy Podziemny Magazyn Gazu) in Kosakowo, which are under construction, and to similar facilities in Mogilno, which are currently being enlarged. The most important goal of this investment is to create the right conditions for supplying greater amounts of gas to northern Poland by increasing the capacity of the transmission system. The above mentioned investments are an answer to the poorly developed transmission infrastructure of natural gas in this part of the country. If, one day, the decision to build a second LNG terminal in Gdansk is made, the importance of the Wocawek-Gdynia pipeline, which is going to be built by the end of 2011, will increase. In addition to the above mentioned sections, GAZ SYSTEM S.A. plans the construction of successive ones in central Poland: Rembelszczyzna-Gustorzyn and Gustorzyn-Odolanw, which will enable the transmission of gas in two directions, as well as gas reception from UGS in Wierzchowice and Mogilno7. Very big investments are being implemented in Dolny lsk, where the following pipelines are being built: Polkowiceary, JeleniwDziwiszw, Dziwiszw-Taczalin, TaczalinRadakowiceGaw and Zdzieszowice-Wrocaw. GAZ SYSTEM S.A. will also build the following sections: Skoczw-Komorowice-Owicim, Strachocina-Podgrska Wola and Hermanowice-Strachocina (see Map 15.1). These pipelines, along with construction or extension of gas compressor stations, will also enhance the transmission of natural gas from Ukraine. It should be noted that GAZ SYSTEM S.A. is already thinking about the implementation of yet another immense investment project (for years 2015-2017), the goal of which is to build another 800 km of gas transmission pipelines. During this period, the company plans to enhance natural gas transmission capacity in Lasw and by building interconnector between Poland and the Czech Republic. It is important to realize that unconventional gas production will require the creation of infrastructure connecting the extraction plays with gas pipeline networks. Most probably, gas transmission pipelines will not be directly connected to drilling sites, which is going to make the construction of an upstream pipeline network necessary. It is likely that a part of the infrastructure connecting extraction plays with the network will have a temporary
7 Gazocig Gustorzyn-Odolanw (Gustorzyn-Odolanw gaspipe), available: http://www.gaz-system.pl/system-przesylowy/dofinansowaniez-ue/program-operacyjny-infrastruktura-i-srodowisko/gazociag-gustorzyn-odolanow.html?L=1 (1.06.2011).
Infrastructural Challenges Linked to Extraction and Productionof Unconventional Gas
155
character, so after the deposits are exhausted these elements will need to be dismantled. This necessitates building several thousand gas pipelines of various types in Poland. It is difficult to define the scale of infrastructural investment unambiguously at present, as a lot of things will only become clear after research on the potential of unconventional gas in Poland has been completed.
Map 15.1. Existing and planned system Gas transmission pipeline gas pipelines
Gdynia
Gdask
Gas pipeline Wocawek Gdynia
[on the section Gniew Wiczlino]
LNG terminal
winoujcie
Gas pipeline winoujcie Szczecin Gas pipeline Szczecin Lwwek
Gniew
Szczecin
Gas pipeline Szczecin Gdask
Wocawek Gustorzyn Rembelszczyzna
Lwwek
Warszawa
Gas pipeline Rembelszczyzna Gustorzyn Odolanw Gas pipeline Gustorzyn Odolanw
ary Gas pipeline Polkowice ary Gas pipeline Jeleniw Dziwiszw Gas pipeline Dziwiszw Taczalin Gas pipeline Taczalin Radakowice Gaw Gas pipeline Zdzieszowice Wrocaw Polkowice Jeleniw Taczalin Gaw Dziwiszw
Wrocaw
Zdzieszowice Owicim Skoczw
Podgrska Wola Hermanowice
Gas pipeline Skoczw Komorowice Owicim Gas transmission pipelines: Gas pipeline E- methane-rich natural gas pipelines Strachocina Pogrska Wola Lw- high nitrogen natural gas pipelines Gas pipeline EuRoPol Gaz S.A. gas transit pipeline Hermanowice Strachocina Planned investments
Source: GAZ SYSTEM S.A., available: http://www.gazsystem.pl/fileadmin/centrum_prasowe/wydawnictwa/PL/system_gazociagow_ przesylowych_-_inwestycje_GAZ-SYSTEM_SA.pdf (2.06.2011)
Some gas pipelines are currently being constructed in order to enable the transmission of unconventional gas to UGS (see Map 15.2) owned by PGNiG SA. Currently, the storage capacity amounts to 1.83bcm of natural gas and does not contribute significantly to the energy security of the country. The report of the Kosciuszko Institute, The Energy Security Of Poland 2010 Opening Report, emphasises that the active capacity of UGS constituted
156
MariuszRuszel
about 12.5%8 of annual consumption of gas in 2009, which was not sufficient to provide energy security in a situation of peak consumption or a crisis. The report points out that the lowest secure level of capacity of UGS in relation to yearly consumption is 15-20%, while 25% is an optimal level9. The fuel from UGS is used to balance seasonal fluctuations. Storage facilities are filled in summertime and emptied, depending on need, in wintertime. Currently, PGNiG SA owns eight UGS: Wierzchowice (575mcm), Husw (350mcm), Strachocina (150mcm), Swarzw (90mcm), Brzenica (65mcm) and KPMG Mogilno (377mcm), Daszewo (30mcm), Bonikowo (200mcm). Kosakowo UGS is currently under construction, while studies are being conducted in Goleniw. PGNiG SA plans to increase the capacity of the UGS. The following UGS are going to be enlarged: Wierzchowice up to 1.2bcm (2012)10, Husw up to 500mcm (2011), Mogilno up to 800mcm (2018), Strachocina up to 330mcm (2011), Kosakowo up to 250mcm (2020). It is important not only to increase the capacity of these facilities, but also to improve the technical capabilities of daily gas transportation from these UGS. Currently, this stands at 34.63mcm (if the underground gas storages are 100% full)11. However, the daily peak demand for natural gas in January March, for example, amounts to about 55-56mcm, which justifies increasing technical capabilities of daily gas transportation from storages. The enhancement of underground gas storage capacity up to over 3bcm of natural gas would allow maintenance of energy security in Poland in the case of interruptions of natural gas delivery lasting from 2 to 3 months. A further expansion of the underground gas storages capacity after 2015 would allow part of the unconventional gas supply to be stored in these facilities. The realisation of these immense undertakings, which will develop and modernize the transmission infrastructure of natural gas in Poland, requires huge financial resources. The development of the unconventional gas sector in Poland could, however, eventually lead to the enhancement and modernization of the Polish natural gas transportation and transmission network. The development of the natural gas transmission infrastructure being implemented by GAZ SYSTEM S.A. is being significantly co-financed by two European funds: Trans-European NetworksEnergy (TEN-E), European Energy Programme for Recovery, and also Program Operacyjny Infrastruktura i rodowisko (Operational Programme: Infrastructure and Environment). Some of the underground gas storages developed by PGNiG SA have received financial support from the European Union amounting to 390 million, i.e. about 1.54 billion PLN. The EU subsidy must be used by the end of June 2015. Jointly, by 2015 investments in underground gas storages will amount to 3.5 billion PLN and will contribute to increasing gas storage capacities from the present 1.83bcm to more than 3bcm. The
8 9 10 11 In 2009 the joint capacity of the underground storage facilities amounted to 1.66bcm. Energy Security of Poland Opening Report The Kosciuszko Institute, Krakow-Brussels 2010, p. 53. The final capacity of the storage facility is planned to be 3.5bcm. The technical parameters of work of the underground storage facilities available at: http://www.pgnig.pl/osm/magazyny/parametry/ (7.09.2009).
157
scale and the pace of the planned infrastructure investments may be insufficient in the light of the development potential of the unconventional gas sector and consequently this may create a real barrier to its development. The Polish government should take this into account in its declaration of support for the unconventional gas sector. In order to effectively apply for EU subsidies for infrastructure development which is one of the main possible sources of revenue for such development cooperation between the government and companies wholly owned by the State Treasury is needed. In this way lobbying in Brussels for the development of this kind of investments could be facilitated. Cooperation in this realm as well as cooperation with respect to the allocation of funds for the new EU budget 2014-2020 is both in the countrys and in energy companies best interest (more in Chapter 10).
Map 15.2 Natural gas transmission system in Poland along with current and potential routes of supply
NORWAY
Baltic Pipe
UGS Kossakowo
Gdask
LITHUANIA
Amber
Niechorze Szczecin Kocino Gorzw Wlkp. Mallnow Pozna Zielona Gra Bydgoszcz
Olsztyn Biaystok
Bobrowniki Kondradki
Wocawek UGS Mogilno

d
WARSZAWA
Jamal II
BELARUS Wysokoje
GERMANY
Lasw
UGS Wierzchowice
Wrocaw Opole Kielce Katowice Lublin
UKRAINE
UGS Swarzw
Krakw
UGS Sarmatia Brzenica UGS Husw

Rzeszw Drozdowicze
THE CZECH REPUBLIC
UGS Strachocina Nabucco
SLOVAKIA
Source: http://www.rynekgazu.pl/index.html?id=84 31.12.2010, [quoted from:] Dr.Sc. Tadeusz Leszczyski
158
MariuszRuszel
To conclude, the production of unconventional gas in Poland is a great opportunity not only to increase home production of gas, but also to modernize the countrys gas infrastructure. It is advisable to create investment aids enabling linear investments (mines, energy networks, gas pipelines)12. Simultaneous development of infrastructure and unconventional gas production will create an opportunity to improve the gas provision system and reach a bigger number of end consumers. Consequently, Poland will have a possibility to use larger quantities of unconventional gas and to store it in enlarged underground gas storages. Thanks to developed interconnectors, the surplus of unconventional gas will, in turn, be able to be sold to neighbouring states.
12 Na upkach Amerykanie poami sobie zby (Americans will break their teeth on shale gas) available at: http://www.cire.pl/item,54670,1. html?utm_source=newsletter&utm_campaign=newsletter&utm_medium=link (30.05.2011).
159
16. Prospects for UnconventionalGas Exports fromPoland to European Countries

MariuszRuszel
Predicted unconventional gas resources in Poland are among the largest in the European Union. Starting production from them could be an opportunity for strengthening crisis mechanisms in case of gas supply disruptions and for co-developing the energy security of the EU. The development of interconnectors between Central and Eastern European countries might enable the transport of unconventional gas that has been produced in Poland. The expanded gas infrastructure should to the greatest possible extent not only be developed to meet the increasing demand for natural gas in Poland but also to enable export in the future. Recommended actions include avoidance of long-term gas contracts that could fill the capacity of particular interconnectors in only one direction. If, during the next few years, it turns out that Poland is able to export several billion cubic metres of unconventional gas, the prospects and challenges connected with the possibility of transmitting the gas both by sea and by land should be thoroughly considered. Obviously, this requires strategic decisions concerning investments, i.e. development of existing interconnectors so that they are reversible, including bi-directionality in the case of new connections and expansion of the LNG terminal in winoujcie by creating an unconventional gas liquefaction facility. The terminal in winoujcie would then become the second (largest) LNG export terminal in Europe after the Norwegian Snohvit terminal. In the longterm, if unconventional gas was exploited in Poland on an industrial scale, then it would be reasonable to build a second LNG terminal in Poland with a gas liquefaction facility. Export of unconventional gas by sea seems to be the most flexible form on condition of cost-effectiveness. Potential recipients of unconventional gas produced in Poland could be those countries whose demand for natural gas is systematically increasing, and whose structure of current contracts will not guarantee enough gas in the long-term. Obviously, the key factor that will determine interest in Polish gas is its price. If the price of liquefied unconventional gas is competitive, potential recipients of this resource may be Holland or Great Britain, which has a highly-developed infrastructure of LNG terminals and increasingly small reserves of their own gas (see more on this subject in Chapter 9). A second export route of several billion cubic metres of unconventional gas could be ensured by the planned network of interconnectors with some of our neighbours.
161
The Polish Lithuanian interconnector in the town of Budzisko would join the pipeline Kaunas Alytus with the pipeline Wocawek Gdynia, enabling export of approximately 1bcm to Lithuania1. At the same time, GAZ SYSTEM S.A. has announced subsequent investments in the years 2015-2017 part of which will go towards increasing the capacity of the Polish Lithuanian connection if it has been created by this time2. Currently, energy cooperation between Poland and Lithuania is not good for political reasons; however, a thaw in relations would create real opportunities for diversification of gas supplies from Poland to the Baltic States (see Chapter 8). Potential resources of natural gas in the Lithuanian area are meagre in terms of export possibilities, but sufficient for Lithuanian needs. It is rather improbable that U.S. companies with the necessary technologies will decide to invest in other European countries, because concentrating on the resources with the greatest potential, which are in Poland, is in their interest. If, due to full-scale unconventional gas exploitation in Poland, its price was lower than the price of traditional gas, then Belarus and Ukraine could also be potential markets. Apart from economic factors, potential cooperation in this area will be also determined by political factors, because the current energy policy of both countries is dependent on the Russian Federation. However, political realities indicate that it is not very probable that either of these countries will decide to choose a policy of diversification of natural gas supplies. Irrespective of the actions taken to develop the interconnectors of natural gas, political issues will be a decisive factor. It will be extremely difficult to export unconventional gas to Germany, because despite the decision to close nuclear power plants, this county will have enough natural gas supplied by the Nord Stream pipeline when it reaches its full capacity. The expansion of Polish German interconnectors will be in the interests of Berlin, but its aim will be to sell Poland the gas pumped between the OPAL Pipeline and the planned Szczecin Lwwek Pipeline (capacity of 2-3bcm per year) and through the Lasw connector, which is going to be expanded to a capacity of 2bcm per year. In relation to the above, the natural gas interconnectors in southern Poland are of special significance. A Polish Czech interconnector near Cieszyn is to be opened at the end of 2011. The connection will ensure a capacity of 0.5bcm of natural gas per year and over the course of time, after extension it will reach a capacity of 1.5 to 3bcm of gas. In turn, the Polish Slovak connection, which is planned to be constructed near the town of Komacza, will connect the Polish gas transmission system with the Brotherhood gas pipeline in the Vek Kapuany compressor station. This interconnector is said to have a capacity of 1 to 3.5bcm3. The extension (development) of interconnectors between Poland, the Czech Republic and Slovakia is to be a part of the planned structure of the North South Gas Corridor, which will create a gas transport route all the way from the LNG terminal in winoujcie to the Adria LNG
1 Matkowski A., Kiebik A.: Ssiedzkie poczenia gazowe z systemami gazowniczymi krajw otaczajcych interkonektory, Gazoprojekt, PGNiG Group, Warszawa 2011. 2 Sie gazocigw coraz dusza. Gaz System rozpoczyna gigantyczny projekt inwestycyjny, available at: http://biznes.gazetaprawna.pl/ artykuly/519347,siec_gazociagow_coraz_dluzsza_gaz_system_rozpoczyna_gigantyczny_projekt_inwestycyjny.html (4.06.2011). 3 There is also information that the interconnector is going to have a capacity of 5 billion cubic metres of natural gas per annum. In: Szansa na polsko-sowacki interkonektor w korytarzu Pnoc-Poudnie, available at: http://www.osw.waw.pl/pl/publikacje/best/2011-01-19/szansana-polsko-slowacki-interkonektor-w-korytarzu-polnoc-poludnie (30.05.2011) .
162
MariuszRuszel
terminal on the Croatian island Krk. Construction of the gas corridor will also create a potential transmission infrastructure for unconventional gas transport from Polish territory to CEE countries and additionally, it can supplement demand for natural gas in the Nabucco pipeline. However, it has to be taken into consideration that activities connected with the construction of the Adria LNG terminal, which has been planned for some years, have been delayed and that the potential gas corridor will have a limited capacity. Construction of the proposed Baltic Pipe gas pipeline, which would connect Polish and Danish pipelines, seems to be a sensible course of action. It should be taken into account that the highest point in the level of natural gas production in Denmark is estimated at around 2016 and later a decline in production is predicted. A decline in natural gas extraction in the next ten years in Norway cannot be ruled out either. Forecasts are cautious due to the agreement between Russia and Norway concerning the demarcation line in the Arctic, where there are substantial deposits of natural gas, and also because of the development of new extraction technologies. In a situation in which full-scale production of unconventional gas would yield an excess of several dozen billion cubic metres gas available for export on (from) the Polish market, it would be reasonable to make use of the infrastructure of the YamalEurope pipeline. Currently, this pipeline transports natural gas from Russia to Western European countries. The pipeline has a technical capacity of transporting 30bcm of natural gas (per annum); however, 90% of the capacity is contracted to Russian Gazprom and 10% to PGNiG SA. As a result, 27bcm of gas is transported through the YamalEurope pipeline from Russia to Western Europe annually. Presumably, it is in the Russian interest to retain control over the YamalEurope pipeline and aspire to take over concessions for unconventional gas extraction (production) in Poland or sign strategic agreements with the companies which have concessions to extract gas. The owner of the Polish section of the Yamal-Europe pipeline is EuRoPol Gaz S.A. and the operator of the pipeline is GAZ SYSTEM S.A. Russian Gazprom makes co-decisions concerning the Yamal-Europe pipeline through the joint-stock company EuRoPol Gaz S.A. in which it has, identically to PGNiG SA, 48% of shares, with 4% of shares belonging to Gas Trading S.A. According to decisions from the end of 2010, PGNiG SA and Gazprom will have 50% of the shares each. Presumably, the lack of consensus in the company may create a situation in which the problems will be solved at a political level, which will be less profitable for Poland. It has to be remembered that there is a possibility of constructing a second branch of the Yamal-Europe pipeline, which would increase the transmission capacity to 65.7bcm per year4. Currently, the amount of natural gas transported daily through the Yamal-Europe pipeline is 50mcm, whereas if a second line was constructed, the transporting capacity would increase considerably. The Yamal-Europe pipeline may constitute transporting infrastructure not only for Russian natural gas, but also for Polish unconventional gas. Probably Gazprom will strive
4 EuRoPol Gaz, available at: http://www.europolgaz.com.pl/gazociag_parametry.htm (30.05.2011).
Prospects for UnconventionalGas Exports fromPoland to European Countries
163
Map 16.1 The route of the gas corridor from the LNG terminal in winoujcie to the Adria LNG terminal
LNG winoujcie
Poland
Czech Republic Slovakia
for a situation which will guarantee it access to transporting capacity. PGNiG SA may have a similar stance. The EU, in turn, will strive for liberalisation of the Polish gas market and access to the Yamal-Europe pipeline on competitive conditions. Probably the U.S. will be an ally of the EU in this respect. This means that PGNiG SA will have to be prepared for functioning in competitive conditions. Full-scale unconventional gas production and its export may depend on progress in deregulation of the Polish gas market5. Simultaneous development of transmission infrastructure and unconventional gas production will create an opportunity for the whole EU to increase energy self-sufficiency and to increase the energy security of Europe.
If Poland becomes an unconventional gas exporter through a permanent gas pipeline infrastructure to CEE countries, the political importance of Poland in Croatia the EU will increase substantially. Unconventional gas export through pipelines will bring more LNG Adria economic and political benefits than sales of the resource through LNG terminals. However, everything depends on the amount of produced unconSource: Osiecki G., Polska namawia Bruksel: Docie si do gazocigu, available at: http://biznes.gazetaprawna. ventional gas made available for export. A reasonpl/grafika/484237,58860,polska_namawia_brukable situation would be if the EU Member States sele_dolozcie_sie_do_gazociagu.html, (4.02.2011) overcame their individual national interests and aspired to the development of a common energy policy based on energy solidarity and efficient use of their own energy resources, e.g. unconventional gas.
Hungary
5 See: Gwiazdowski R.: Konkurencja zamiast regulacji. To szansa dla polskiego rynku gazu, available at: http://biznes.gazetaprawna.pl/ artykuly/519676,konkurencja_zamiast_regulacji_to_szansa_dla_polskiego_rynku_gazu.html (25.06.2011).
164
MariuszRuszel
17. Unconventional Gas Sector Development in Poland Concessions and Taxes

AleksanderZawisza
Geological and mining activities, i.e. exploration, extraction and production of natural gas are in general highly regulated and tax-burdened. The scope and form of legal regulations have great significance for the profitability and effectiveness of managing the natural resources at the disposal of a given country. The law and economic regulations relating to managing natural resources geological resources in particular in any given country can be compared on the basis of the following criteria: 1. clarity of regulations; 2. their consistency; 3. economic coherence: commensurateness of tax levied with realised or potential profits, taking into account various complex risks inherent in all business ventures; 4. stability of law and tax system; 5. effectiveness of law enforcement. Geological exploration and extraction laws in any given country depend on: 1. 2. 3. 4. 5. 6. 7. 8. 9. legal and organizational culture; effectiveness of the justice system; the wealth of the state which is generated by non-mining sectors; the political system; the gross enrolment ratio; the type of natural resources; the distance from client-countries; the state of the world economy and the resulting prices of given commodities, amount of proven and unproven reserves and the state of their exploration as well as potential amount of prospective resources; 10. the population size; 11. the state and structure of the financial sector. In order to benefit a country in a long-term strategic way, legal regulations should prevent any unauthorized resources exploitation as well as creating conditions for the most effective
167
resources utilization. The relevant legal systems in Poland and Norway have been compared in the table below. Norway has not been chosen randomly it is seen as a model country; thanks to its licensing and taxing systems, it has secured steady and long-term profits from natural resources exploitation. Moreover, its exploration and production system is orientated towards balanced long-term operations. The procedures and methods of granting licenses as well as taxes levied are highly transparent and predictable. All of the above aspects contribute to Norways low country risk ratings and allow for higher extraction charges; thus return on investment is lower yet steady. Countries with abundant natural resources (especially oil and natural gas) have been trying to a lesser or greater extent to turn the profits generated by deposits extraction into long-term economic growth and financial security for future generations. This, of course, does not apply when the concessions are granted illegally (e.g. bribery) or the whole revenue generated benefits only one person: a president or a king. It can also happen that the exploitation charges are incommensurate with the real market value of the given commodity and that they are allocated to covering the current budget expenditure without contributing to the iron capital or any predetermined funds. Polish charges are currently inadequately low in relation to the type of resources and their genuine value as they are only $2 per 1000 m3. Norway Norway researched the situation of several countries that were incapable of effectively allocating and fully benefiting from enormous profits suddenly reaped from resources extraction. As a result, it took steps aimed at better oil and gas extraction revenue management. Negative examples of numerous countries show that obtaining easy money from natural resources extraction can lead to bad spending habits and slipping into a financial comfort zone. Failing to seize a perfect opportunity to modernize and develop a country is one of the less serious aspects. A sudden turbulence on the international markets can be more tangible and it may result in a state budget deficit and an unexpected inability to sustain social benefits at the current level. The Norwegian Government Petroleum Fund was established in 1990 with a view tobetter long-term intergenerational allocation of profits generated by natural resources extraction. The Norwegians drew conclusions from the 1970s and 1980s experience when oil prices (and consequently natural gas prices) fluctuated strongly, rendering government revenue from such sources unstable and unreliable and thus making it virtually impossible to draw up any long-term state development plans. Since the creation of the Norwegian Government Petroleum Fund, when revenue from resources extraction results in a budget surplus (after collecting taxes, including taxes levied on oil and natural gas exploitation), it is deposited into the Fund. In the first half of the 1990s there was a budget deficit in Norway due to the economic recession. However, in 1995 the state reported a budget surplus and the first amount of
168
AleksanderZawisza
money was transferred into the Fund, followed by further transfers in the following years. The Norwegian government predicts that the Fund is going to reach its peak in 2030 with 250% of the Norwegian GDP accumulated, after which there will be a gradual decrease in its growth. The Norwegian Government Petroleum Fund was renamed the Government Pension Fund Global on January 1, 2006 in order to raise the awareness of Norwegian society as to the significance of such a reserve fund. The strategic aim of the Fund is to invest in a variety of mediumrisk international financial instruments with the best possible stable long-term return. The Fund can only invest in assets on external markets and not in the Kingdom of Norway. The equity investments constitute 40% while the fixed-income debt securities amount to 60% of the Funds investment portfolio. The Funds stock investments can be equally divided into European (50%) and non-European markets (50%), while the debt securities are traded in Europe (55%), America (35%) and Asia and other parts of the world (10%). In 2004, the Fund declared its ethical principles for the investment strategy. Thus, the fund portfolio managers should avoid practices resulting in basic humanitarian and individual rights violations, an increase in corruption or severe environmental degradation. The Ministry of Finance established an independent Council on Ethics which issues recommendations on the possible exclusion of companies from the Fund investment portfolio due to an ethical guidelines breach. It is then the decision of the Ministry whether to exclude a company at the Councils recommendation. Russia The Russian Federation gains a significant amount of its revenue from the profits generated by natural resources extraction. According to CIA analyses at the beginning of the 1980s, 80% of the Soviet Unions foreign currency was obtained due to oil and natural gas exports. Not much has changed since then as far as both convertible currency and foreign exchange reserves are concerned; however, seminal changes have been observed regarding extraction profits management. Russia is the country that has benefited most from the rising prices of oil and natural gas in recent years. High revenues generated from export of the above mentioned commodities enabled the government to establish the Stabilization Fund in 2004 (with a view to securing resources for the pension fund), which was later split into the Reserve Fund and the National Wealth Fund. The former invests in low-risk securities only and serves as a balance tool for the budget that can be used when oil prices suddenly drop while the latter consists of higher risk and higher return financial instruments. Moreover, in the 2010s the percentage of taxes from the energy and mining sector constituted 50% of all taxes, since all elements of the oil and gas value chain, i.e. extraction, domestic consumption and export, are highly taxed. Natural resources extraction including oil and natural gas extraction is subject to a fossil fuel extraction tax. In the case of natural gas, the charge amounts to 147 roubles per 1000 m3. The tax rate on oil extraction is calculated on the basis of the following components: the
Unconventional Gas Sector Development in Poland Concessions and Taxes
169
Table 17.1 Comparison of the legal regulations concerning the unconventional gas extraction in Poland and Norway
Norway
Criterion
Poland
Exploitation system controls
Parliament: by introduction of new laws (legislative power). Government: execution through ministers responsible for environment and local mining authorities.
Parliament: by introduction of new laws as well as by controlling the largest ventures and supervising new projects. Government: executive power over the mining sector through relevant ministries and specially appointed agencies. Extraction control and securing a significant amount of revenue for the state budget. Encouraging cooperation between companies, especially in terms of developing and implementing new technologies.
Goals of licensing system
Extraction control and securing a slight amount of revenue for the state budget.
Prospection and exploration concessions
Concession for resources exploration is granted for 3-5 years following an application. It is valid for up to 1200 square km. The license holder has the right to exclusive resources exploration and prospection on a particular area of land and for the particular period of time the concession is valid for. Holders of concessions are also given priority over others when applying for a production concession. In Poland there are no strict rules governing protection of deposits, neither relating to undeveloped ones nor partially exploited ones. This means that the resources management sector is a grey area of the Polish law. (see Chapter 18 for more information on concession granting)
There is a pre-selection organized by the Norwegian Petroleum Directorate at the beginning of the licence granting process. This aims at determining the companys experience in the field, its financial situation and its equipment capacity. The Norwegian Continental Shelf has been divided into a number of lease blocks. An exploration concession can be granted for a block, a part of it or even several blocks and it is usually valid for 3 years. However, it does not guarantee the exclusive right to exploration of the area. Also, a license holder may be legally obliged to disclose or sell information concerning results of their exploration activities. The outcomes of the exploration ventures should be reported to the Ministry of Petroleum and Energy within 3 months of their completion.
Production concessions and how they are granted
By way of an administrative decision, the production concessions are granted by the minister responsible for the environment. For oil and natural gas extraction, permission from the minister responsible for the economy is required (and only after consulting the relevant town or village mayor or city president). Establishment of mining usufruct takes place by way of agreement, subject to obtaining a concession. Establishment of the mining usufruct covering the prospecting for, exploration for and exploitation of oil and natural gas is preceded by a tender. The mining usufruct is established by means of an agreement (contract), which means that details of this agreement are agreed upon by parties. There are no fixed regulations in Polish law on the form of the usufruct agreement nor fees for the mining usufruct. It is safe to assume that in many cases the interests of the parties involved in the mining usufruct agreement are diametrically opposed, especially when the concession holder successfully discovers and proves the existence of a natural resources deposit. Management of the resources is carried out in accordance with the resources management project outlined in the concession application. (see Chapter 18 for more information on concession granting)
There is a pre-selection aimed at determining the companys experience in the field, its financial situation and its equipment capacity. The extraction licence grants exclusivity concerning surveying, exploration via boreholes, extracting and production of oil and natural gas within the lease block the concession is valid for. It is granted for an initial period of 4-6 years, with the possibility of extending it up to 10 years. If all the concession conditions are fully complied with, it is possible that the concession will be further extended to 30 years. The concessions are granted in so-called licensing rounds. The rounds can be compared to a periodic tender with bidding for a particular good in a particular way. The rounds are organized to choose the most beneficial bid and they usually relate to areas where no mining ventures have been carried out so far. The licensing rounds under the Awards in Predefined Areas (APA) program focus on the mature areas of the Norwegian Continental Shelf, where exploration activity has been prevalent for some time.
Criteria on the basis of which the concessions are granted What is taken into consideration is the technical capacities, financial capacity and the exploitation and production plan drawn up for the given block. The extraction licences are granted to groups of companies in order to increase transparency and control over mining activities.
There are no explicit rules established in this matter.
Operator
Operators are non-existent in the Polish system governing mining activities. The natural resources are managed by the entity that has obtained the concession or any other entity appointed by the concession holder as long as they can prove relevant qualifications.
Within a group of companies that has obtained a concession, an operator is appointed by the Ministry of Petroleum and Energy. The operator is responsible for carrying out extraction activities within the scope specified by the licence agreement as well as for coordinating the activities of the companies in the group.
Taxes and charges
The charges for the prospection and exploration concession are purely nominal. The charges for the mining usufruct are not disclosed; as was previously stated they are administered at the discretion of the minister responsible for the environment. The exploitation charge on the resources extracted is announced annually by the ministry of environment and does not correspond to the actual market value of the resources.
The licence charges/fees are merely aimed at controlling the application process (an application fails if the licence charge has not been settled). All the extracting companies are burdened with a standard 28% CIT tax and a special 50% exploitation tax. The revenue generated by the companies is calculated on the basis of normative prices which have been set in order to avoid price manipulation by the companies. The methods of calculating normative prices are specified in the normative pricing law enacted by the Petroleum Pricing Board (Petroleumsprisrdet) and are supposed to correspond to the market value of oil. The normative prices for a particular block are set once a month. The way of calculating the income base for the special 50% tax can be described as: The operational income (using normative prices) operational expense flat amortization of the investment (at 16.66% rate) expenses for research and development (R&D) CO2 and NOx taxes and area charge net costs = the taxation basis for the 28% flat tax uplift (7.5% of the investment value that can be deducted for 4 years) = the taxation basis for the special 50% tax rate.
State-owned exploitation companies; states share in the natural resources deposits
The state has no direct or indirect shares (e.g. through a company like Petoro in Norway or EBN in the Netherlands) in any concessions. PGNiG SA, in which the state owns 72% of shares, holds most of the prospection and exploration and production concessions of hydrocarbons but only 15% of shale gas concessions.
The state owns 67% of shares in StatoilHydro, the leading extraction company on the Norwegian Continental Shelf which provides the government with first-hand information and experience in the field. Moreover, the Norwegian government is a direct stakeholder in a significant number of extraction fields and, being one of the shareholders, contributes to financing the investment projects and benefits from the revenue generated by production licences. However, the state is a passive shareholder; StatoilHydro is responsible for managing the natural resources deposits. Petoro is an entirely state-owned (100% shares) company that is the actual Norwegian licence holder responsible for control over profits generation and management of the deposits.
Fig. 17.1 The amount of funds collected in the years 2008-2010 on the Reserve Fund
70 60 50 40 30 20 10 0
bln $
08 /20 01 / 01
Reserve Fund
09 /20 31 / 12
Fig. 17.1 The amount of funds collected in the years 2008-2010 on the National Wealth Fund
40 35 30 25
12/30/2008
12/30/2009 12/30/2010
bln $
20 15 10 5 0 01/01/2008
01 /0 1/ 20 08
National Wealth Fund
monthly average oil price reported on the Rotterdam wholesale market, Urals crude oil price and the Russian ruble: American dollar exchange rate set by the Central Bank of the Russian Federation. The fossil fuel tax generated 33% of Russian budget revenue in 2009. With regards to the oil sector, the companies extracting oil are taxed 90% of their export revenue if the oil price exceeds $25/bbl. Another source of flexible revenue for the Russian budget is the customs duty on natural gas, oil and various petroleum products.
172
AleksanderZawisza
Oil and natural gas have proved to be assets of the utmost importance to the Russian economy both during the recession and during growth. Oil prices have been continuously rising since 1999, which has contributed to increasing Russian GDP. However, this flourishing period in the Russian economy ceased with the onset of the global economic crisis. The plummeting demand for energy resources and pressure to decrease their prices had a significant impact on the financial condition of the Russian Federation. Recommendations for Poland Creating favourable conditions of unconventional gas production for investors is a prerequisite for the shale gas revolution in Poland, but Polands long term intergenerational interests must also be taken into account. The elements comprising favourable conditions are: 1. defining the maximum extraction volumes at state and concession levels in order to avoid excessive and reckless exploitation; 2. linking concession charges and taxes with the gas market and gas prices; 3. establishing a company modelled on Petoro (Norway) or EBN (Netherlands) which would legally own 15-25% shares of all the concessions and that would act as a means of governmental control and protection of the states energy interests; 4. launching an investment fund out of a portion of the operating fees aimed at supporting the research and development sector.
Unconventional Gas Sector Development in Poland Concessions and Taxes
173
18. Legal Aspects of Unconventional Gas Exploration andProduction Projects in Poland

RomanRewald, JarosawM.Jankowski Weil, Gotshal & Manges
This chapter presents an analysis of the legal environment of the process of obtaining concessions and mining usufructs by investors for prospection, exploration or production of unconventional natural gas resources in Poland. The authors elaborate in detail, but in a way useful for investors, on the regulatory issues contained in the existing (remaining in force until January 1, 2012) geological and mining legislation, and well as listand compare these issues with Community legislation and the changes to the geological legislation introduced by new regulations that enter into force in January 2012. The chapter indicates the main legal risks and uncertainties encountered by businesses in the course of the investment process, in view of public as well as private law. The summary presents the conclusions addressing the main risks identified by the authors.
Legal Environment until January 1, 2012

Poland lacks separate legal regulations which would apply directly to operations in the field of prospection, exploration and production of unconventional gas. Therefore, the commencement of any business activities in this field is governed by the same regulations as those applicable to conventional natural gas resources. Consequently, the legal environment does not account for certain unique conditions of commencement and proceeding with activities related to unconventional gas resources. The exploitation of these resources is mainly governed by the Act Geological and Mining Law of February 4, 1994 (Journal of Laws of 2005, No. 228, item 1847, consolidated text, as amended) (hereafter the Geological Law) which remains in force until January 1, 2012. The first part of this text describes the present legal situation. According to the Geological Law, any business involving prospection and exploration of mineral resources as well as production of minerals from resources requires a concession. Concessions are granted for a specific term not exceeding 50 years, unless the applicant requests that a concession be issued for a shorter term. The typical term of a concession for unconventional natural gas resources is five years. A concession authorizes the holder to pursue business activity within an area specified in the concession, save that a single concession
175
may not cover more than 1.200 km (approximately 296.526 acres). The average area of coverage for concessions granted in Poland is 853 km2 (approximately 210 781 acres). The competent licensing authority for granting concessions is the Minister of the Environment.
Procedure of Obtaining a Concession

Concession granting procedures are governed by the Geological Law and the Freedom of Business Activities Act of July 2, 2004 (Journal of Laws of 2010, No. 220, item 1447, consolidated text, as amended) (hereafter the Business Activities Act). The Ministry of the Environment has not yet prepared an information package for business operators intending to operate in the field of unconventional gas prospection, exploration and production containing accurate and detailed information on statutory requirements, even though such packages are usually published by the President of the Energy Regulatory Authority and other agencies, as is the case in respect of commencing business activities related to electricity or heat production or distribution. There is also no official form of application for a concession. Consequently, every business operator prepares its own application. Obviously, while preparing an application for a concession a business operator should be aware that the more thorough and exhaustive the application (with all the necessary attachments), the more effective the concession granting process. The duration of the concession proceedings depends on the completeness of the submitted application as well as on the business operators proactive approach to supplementing the necessary documents. Thus, it is recommended that concession applications should be filed in due advance before the intended date of commencement of the licensed activities. The Minister of the Environment will grant a concession when all statutory requirements are fulfilled, including when an opinion (for prospection or exploration concessions) or approval (for production concessions) is issued by the appropriate cooperating authorities (such as: the Minister of the Economy, the Minister of Infrastructure, the local county governor, town mayor or president), provided that there are no substantial reasons for refusal to grant the concession. Their opinions issued in the course of the concession proceedings are not binding and are only used as supplementary materials for the Minister of the Environment. Their approval, on the other hand, mandates the granting of consent for the operator to proceed with the contemplated licensed activities, even if it involves some conditions. Their refusal to approve, although not binding on the Minister of the Environment, may constitute a substantial reason for the ultimate refusal to grant a concession. To avoid unnecessary delays in the process, the Geological Law states that unless the cooperating authority takes a stand on the matter within 14 days of receiving the proposed draft decision, the wording is deemed accepted by the Minister of the Environment. The scope of the presented documentation should allow to determine that the business operator meets the applicable statutory requirements. The Minister of the Environment assesses
176
RomanRewald, JarosawM.Jankowski
the completeness of the application and determines whether or not all the requirements are met. Before issuing the concession, the Minister of the Environment may: (i) request the business operator to submit missing documentation within a prescribed deadline (certifying that the operator meets the legal criteria required for pursuing the specified business activities), otherwise the application will be left unrecognized; and (ii) verify the facts reported in the concession application to ensure that the business operator meets the requirements for pursuing licensed business activities and that it guarantees the proper performance of these activities. The option of requesting the business operator to remedy any oversights in documentation stems from Art. 50 of the Business Activity Act and as well as the Code of Administrative Procedure. Failure to remedy any indicated oversights in documentation as specified in the respective notice, constitutes sufficient grounds for leaving the application unrecognized. This, consequently, leads to the closing of the original proceedings and creates a need to resubmit the application with all the required documents. As long as the documents submitted previously to the Minister of the Environment remain valid, they may be used in the second filing of the application. Mandatory Elements of a Concession Application Irrespective of the type of activity (prospection or exploration or production of minerals from fields/sites) any application by a business operator for a concession, as well for awarding a mining usufruct, should contain the following mandatory elements prescribed in Article 18(1) of the Geological Law and Article 49(1) of the Business Activities Act: (i) details of the applicant, its registered seat and address, with an address of the primary place of business; (ii) the number in business registry or records of economic activities, as well as a tax identification number (NIP); (iii) the type and scope of business activities to be covered by the requested concession; (iv) the applicants title to the site on which the business activities will be pursued, or an indication that the applicant intents to acquire title to the site; (v) the anticipated duration of the concession, specifying the date of launching the business activities; (vi) an indication of the financial resources available to the applicant to ensure the proper performance of the activities covered by the application, and (vii) stamp duty as applicable. In the context of component (vi), the Geological Law does not specify the method of evidencing a business operators financial credibility. Unless the licensed activities are to be financed externally (e.g. under loan agreements), the business operator should present bank statements or financial statements, as appropriate, to indicate either its own resources or the resources of its parent company, stating that the latter will transfer the necessary funds to the subsidiary. Further requirements applicable to concession applications depend on the type of intended activity and matters governed by separate laws, particularly those envisaged by environmental protection legislation.
Legal Aspects of Unconventional Gas Exploration andProduction Projects in Poland
177
Optional Elements of a Concession Application Apart from the mandatory components of the concession application the Minister of the Environment may impose further obligations on the business operator in certain specific circumstances. Firstly, if it is warranted by the interest of the State or social interest, particularly related to environmental protection, the granting of a concession may depend on establishing security on any claims which may arise as a result of the licensed activities (Article 17(1) of the Geological Law). It seems that this obligation may be most significant for activities involving the production of natural gas from unconventional sources. The Minister of the Environment determines the form and value of such security instrument in the language of the concession document, which depend on the type of business activity, the area covered by the concession, the duration of the concession and any potential harmful environmental impact of the contemplated activities. Secondly, the Minister of the Environment may require the business operator to present in its application certain data defining the legal situation of real properties impacted by the contemplated business activities and in case the legal status of these properties is not fully determined, it may require the submission of cadastral information regarding such properties. In the context of pursuing business activities that involve production of unconventional gas, the Minister of the Environment may demand the submission of geological documentation. This request may be related to the need to verify the data included in the concession application. Elements of a Concession Application Depending on the Type of Licensed Activities Prospection or exploration concession. A plan of geological works must be attached to an application for a concession for prospection and exploration of unconventional gas. The plan should define the following: (i) the purpose of the intended works, applicable methodology and appropriate geological documentation; (ii) the time schedule of the works; (iii) the area to be covered by the geological works; and (iv) the necessary undertakings for the protection of the environment, particularly involving underground waters, and the method of closing the headings, drill bores, soil rehabilitation and damage protection measures. These matters are governed by the Regulation of the Minister of the Environment of December 19, 2011 concerning plans of geological works (Journal of Laws of 2001, No. 153, item 1777). Pursuant to this Regulation, a plan of geological works must be signed by a person certified by the Minister of the Environment to conduct, supervise and manage geological works. Production concession. An application for a concession for the production of unconventional gas should specify several elements. The application must indicate what deposit or part of a well/deposit of the mineral will be subject to extraction and the extent and method of intended extraction of the mineral. In this respect, it is required to determine the quantity of the mineral, including the anticipated output per annum and throughout the entire duration
178
of the licensed business activity concession, as well as specify the method of extracting the mineral. Also, the investor must indicate to what extent it intends to exploit the well/deposit resources, including all the associated minerals and co-existing useful trace elements, as well as what measures it will take to achieve this goal. The law requires operators to utilize mineral resources reasonably, so it is recommended that the extent of intended exploitation of well/ deposit resources be defined by the business operator in its application so as to utilize the minerals in an integrated manner, without leaving any resources behind. Finally, the application must show the designated location of the mining/production area and the mining/production site. In this context, the mining/production area will be the concession area defined for the purposes of the production of minerals on the basis of geological documentation and well exploration plan. There are some additional documents that should be attached to the application. The applicant should attach proof of the applicants right to use the geological documentation. The business operator must not only prove that it is in possession of such documentation but also that it is authorized to use the information contained therein for the purposes of pursuing licensed activities. The objective of this requirement is to avoid any irregularities related to illegal trade in geological documentation. Also required is a well/deposit exploration plan, accompanied by an opinion issued by the appropriate mining regulator. Pursuant to the Regulation of the Minister of the Environment of December 28, 2001 concerning well/deposit exploitation plans (Journal of Laws of 2001, No. 157, item 1866), the exploration plan based on the geological documentation must take into consideration the specific engineering and economic circumstances and the business operators intentions as regards the protection of mineral deposits and production technology guaranteeing that negative environmental impact is minimal. Finally, it is necessary to include in the application proof of the applicants title to the property to be used as the site or a promise to establish such title. This would need to include the ability to use real properties situated within the limits of the designated mining area and to mine on the real property. In practice, these interests are usually either freehold ownership, perpetual usufruct, leasehold or lease. An agreement obligating the owner to establish such interest or a preliminary agreement for its acquisition may suffice. In certain justified circumstances and when it would not constitute a threat to the environment, the Minister of the Environment may release the business operator applying for an authorization to produce unconventional gas from certain requirements prescribed by the Act (Article 26 of the Geological Law). This option is an exception from the general rule, stating that an application should be complete and meet all statutory requirements. There are no specific criteria for such a discretionary waiver exemption in the Geological Law, as its range of use is only restricted to such circumstances where there are no environmental risks. It seems that the exemptions may be available in situations where meeting all the concession requirements could be pointless (e.g. with respect to small deposits). It is difficult to determine the range of such discretionary exemptions and this provision may give rise to significant doubts regarding the excessively discretionary rights of the Minister of the Environment.
179
Because no single concession has to date been issued in Poland for production of unconventional gas, how formalistic will be the approach taken by the Minister of the Environment with respect to the abovementioned elements of a concession application remains to be seen. Environmental Components of a Concession Application Business operators applying for concession may have to obtain additional administrative decisions at different stages of the investment process, as required by environmental legislation. The following decisions should particularly be considered: (i) environmental conditions decision; (ii) water law administrative decisions issued pursuant to the Act of July 19, 2011 Water Law (Journal of Laws of 2005, No. 239, item 2019, consolidated text, as amended), including a decision to determine the coastline, a decision on the exemption from prohibitions in force in areas at risk of flooding, and Water Law permits (including permits for utilization of waters, development of water engineering facilities). In addition, if the licensed activities are qualified as having a significant potential impact on the environment, and therefore an environmental impact assessment will be required, any installations will be subject to investment inspection by the regional environmental protection inspector for compliance with environmental protection requirements. Environmental Conditions Decision. An administrative decision of key importance for licensed activities is the so-called environmental conditions decision, issued pursuant to the provisions of the Act of October 3, 2008 on Reporting Environmental Data, Protection of the Environment, Community Participation in Environmental Protection and Environmental Impact Assessments (Journal of Laws of 2008, No. 1999, item 1227, as amended). In the course of a procedure to issue a decision on environmental conditions, all probable environmental impacts are identified. In certain justified cases, an obligation to carry out an environmental impact assessment may be imposed on the operator in order to identify any potential threats and specify the proper remedies to eliminate or minimize these threats. The environmental conditions decision is a mandatory item of a concession application for the production of unconventional gas. At the stage of applying for a prospection and exploration concession, business operators are required to attach the environmental conditions decision if the intended scope of the concession is to include at least one of the following types of works: (i) geological works carried out with the use of explosives; or (ii) prospection or exploration in the marine territories of the Republic of Poland; or (iii) prospection or exploration using underground methods; or (iv) prospection or exploration employing the drilling method if the bores are deeper than 1 000 meters. On the other hand, if obtaining the environmental conditions decision is not necessary for the concession application and the business operator intends to prospect and explore mineral deposits within the limits of the Natura 2000 European Ecological Network (areas with
180
this qualification occupied approximately 19.7% of the entire territory of Poland in 2009 and their sizes continually vary) or in the vicinity of such areas, then it may be necessary to conduct an assessment of the impact of the licensed activities on the Natura 2000 European Ecological Network areas in the course of the concession proceedings. This does not always imply the need to obtain an environmental conditions decision. Considering the complexity of the process of obtaining an environmental conditions decision, which may be time-consuming and take even more than a year, it is common practice in the field of granting concessions for prospection and exploration of unconventional gas (in non-marine areas) for business operators to apply for a prospection concession, authorizing them only to carry out seismic works (2D and 3D seismic lines) without the possibility of drilling. By doing so, business operators do in fact reserve a certain concession area for the exploration of unconventional gas. Once having this permit, they would proceed with the subsequent stages of obtaining an environmental conditions decision. As soon as the environmental conditions decision is issued, the business operator would apply for the modification of the concession through extending its scope with activities involving drilling works and underground works. Such application for the modification of a concession is complete only with an environmental conditions decision and an updated geological works program. Specific Regulations Applicable to Foreign Business Operators Business operators from the European Union Member States, members of the European Foreign Trade Associations parties to the European Economic Area agreement (including Iceland, Norway, Liechtenstein and Switzerland), and business operators from third-party States outside the European Economic Area which are free to exercise freedom of business operations under relevant agreements signed to that effect by these countries with the European Community and its Member States (including Russia and Ukraine), may commence and carry out licensed activities in Poland directly, i.e. without an intermediary branch or daughter company. Business operators from countries outside the above list must commence the licensed activities in Poland through a branch in Poland or a Polish special purpose company, unless this requirement is excluded pursuant to a ratified international treaty between Poland and the given business operators country of origin. Bilateral Investment Treaties signed by Poland also have a significant impact on pursuing licensed activities (as at March 1, 2008, Poland was a party to 61 Bilateral Investment Treaties). In case of business operators from the United States of America this is the Treaty between the Republic of Poland and the United States of America concerning business and economic relations, of March 21, 1990 (Journal of Laws of 1994, No. 97, item 467, as amended) with the Protocol between the Republic of Poland and the United States of America to the above Treaty, signed in Brussels on January 12, 2004 (Journal of Laws of 2005, No. 3, item 14) the rights to engage in mining on the public domain are dependent on reciprocity.
181
When applying for a concession for prospection, exploration or production of unconventional gas, foreign business operators who do not need or intend to use a foreign branch or a special purpose vehicle in Poland should present an excerpt from the appropriate national company register (equivalent of the Polish business register). Proof of a tax identification number issued in the country of incorporation will be required, however, a document certifying the assignment of a Polish VAT ID by a Polish tax authority will also be acceptable. Conformity of the documents presented by a foreign business operator with the legislation of the place of issue should be confirmed by an apostille according to the Convention of October 5, 1961 on Abolishing the Requirement of Legalization for Foreign Public Documents (Journal of Laws of 2005, No. 112, item 938). Documents originally submitted in a foreign language should be translated into the Polish language by a sworn translator. A business operator domiciled or incorporated abroad is required to nominate a contact person for service of process in Poland, unless such operator authorizes a representative domiciled in Poland to carry out its corporate affairs. Unless a contact person is nominated, all notices addressed to that business operator will remain in case files while being deemed effectively served.
Promesa of Concession
Pursuant to the Business Activities Act a business operator intending to commence activities involving prospection, exploration or production of unconventional gas may apply for a promise to issue a concession, or a promised concession (promesa). A promesa is given in accordance with the regulations applicable to the actual concession and remains valid for a specified period, not less than six months. During the validity period of the promise, the Minister of the Environment may not deny a concession for the activities defined in the promise, unless the facts or legal circumstances of the case as specified in the application for the promise have changed, or the business operator failed to meet all the requirements prescribed in the promise, or certain other circumstances occurred justifying a refusal to grant aconcession. Thus, a promise to issue a concession is a binding obligation upon the Minister of the Environment to grant a concession, provided that the applicant meets certain specific requirements specified in the promise. The promise, however, does not entitle the holder to carry out actual operations in the licensed area. It may serve as a helpful instrument for a business to obtain financing for the contemplated investment project and to obtain the actual concession in the future, as the business operator is required to gather the documents envisaged in the Geological Law during the phase of applying for a promise to issue a concession.
Reasons Justifying Denial of a Concession

The Geological Law sets out the circumstances in which the Minister of the Environment may deny the grant of a concession for prospection and exploration or production of unconventional gas. As the legislation sets forth the mandatory contents of an application for
182
a concession, it means that the submission of a non-compliant application is an obvious reason to refuse to grant a concession. At the same time, according to Article 26b of the Geological Law, a concession may be refused if the contemplated business activities violate the environmental protection requirements, including those relating to the reasonable management of mineral deposits, also in respect of mining secondary minerals, or if the business would prevent the designated use of the real property involved (designation of real properties is specifically evaluated in the context of the local spatial development plan). The refusal to grant a concession is always discretionary for the Minister of the Environment. Even if the applicable criteria are not met, the Minister of the Environment may but does not have to deny a concession. On the other hand, the reasons justifying the refusal to grant a concession must be disclosed and substantiated by the Minister of the Environment. The Minister of the Environment may deny a concession or restrict the scope of such concession if the business operator fails to meet the requirements for carrying out the licensed business activities, or in case of a threat to State defense or the State or citizens security (Article 56(1) of the Business Activities Act). Furthermore, the refusal to grant a concession may be a consequence of a cooperating authoritys refusal to approve the concession (Article 16(2) of the Geological Law). In the context of unconventional gas, this situation could take place as a consequence of the refusal by the Minister of the Economy to grant a concession for the production of resources, or the refusal by the Minister of Infrastructure to approve licensed activities involving prospection, exploration or production of resources within the limits of marine territory of the Republic of Poland. Despite the lack of specific regulations in this field, it seems reasonable to assume that a cooperating authority may refuse to grant its approval only in the case of meeting one of the criteria specified in the Geological Law and the Business Activities Act. A cooperating authority may not discretionally refuse to approve the concession application unless it is mandated by law. In the case of refusal to grant a concession, the Minister of the Environment will be required to present a factual and legal justification of its position. A business operator not satisfied with the decision may file an appeal, in accordance with the provisions of the Code of Administrative Procedure, and to pursue this procedure in order to prove that the position of the Minister of the Environment was unjustified.
Qualification of concessions in the context of public procurement law

Aside from the issue of whether a public tender must be used in the granting of concessions, there is another aspect of the public procurement law applicable to unconventional gas exploration and extraction. The issue is whether or not the holders of concessions are obligated to use public tenders in all their contracting. The answer to this question depends on whether the exploration and extraction activities could be considered under Polish law as sectoral which means a part of a certain division or sector of the Polish economy.
183
According to the Public Procurement Law (Act of January 29, 2004, Journal of Laws of 2010, No. 113, item 759, consolidated text, as amended) (hereafter the Public Procurement Law), sectoral contracts are contracts awarded for the purpose of conducting business activities in the field of prospection, exploration or production of natural gas (including unconventional gas). In the context of sectoral contracts, the parties required to follow the Public Procurement Law include non-government entities who are not under the dominant influence of any other entities required to follow the Public Procurement Law if they carry out sectoral business activity on the basis of special or exclusive rights, even if their licensed activities are not financed with public funds. Special or exclusive rights under the Public Procurement Law are those granted under an administrative decision resulting in a reservation of certain types of activities exclusively for one or more business operators, unless such rights must be granted to those who meet certain criteria set forth in separate legislation. Therefore, one must first determine if the businesses carrying out prospection, exploration or production of unconventional gas obtain any special or exclusive rights with their concessions. Special or exclusive rights. Special or exclusive rights are those that the Minister of the Environment grants to one or more business operators on the basis of administrative discretion without the use of objective, non-commensurate or non-discriminating criteria. Under the Geological Law operating a business involving prospection, exploration or production of unconventional gas is dependent on obtaining an administrative decision from a licensing authority where the principle of freedom of economic activity is excluded with respect to this type of business, and therefore the concessions appear to qualify as special or exclusive rights. This alone, however, would not determine a business operators duty to adhere to the provisions of the Public Procurement Law. It is also necessary to verify whether mere compliance with the concession requirements of the Geological Law obligates the Minister of Environment to grant such concession. Among these requirements it would be difficult to find any criteria that the Minister of the Environment would not need to evaluate in the granting of the concession due to the special nature of licensed unconventional gas activities. These requirements certainly meet the criteria of objectivity, commensurability or non-discrimination. The Minister of the Environment may not deny a concession on the basis of the failure to attach any document to the application which is not enumerated in the provisions of the Geological Law. An analysis of the nature of reasons justifying the refusal to grant a concession indicates that the Minister of the Environment does not have any discretion to define a list of business operators allowed to carry out activities involving prospection, exploration or production of unconventional gas. The only subjective reasons to deny a concession may be related to a cooperating authoritys refusal to approve the application for a concession. Accordingly, it would be reasonable to claim that approval may be refused only on the
184
grounds of one of the criteria defined in the Geological Law and the Business Activities Act. Therefore, it appears that prospection, exploration or production of unconventional gas does not fall under the definition of special or exclusive rights. Practical Guidance. Because no concession for production of unconventional gas has as yet been issued in Poland, the matter of Public Procurement law applicability to this activity has not yet been finally resolved. Accordingly, it is not clear whether or not the public administration will follow the above interpretation and consider the business operators excluded from the obligation to follow the Public Procurement Law while operating in the field of unconventional gas. The Business Activities Act provides businesses with a right to seek prior individual legal interpretation of the Public Procurement Law from the President of the Public Procurement Office and operators may wish to obtain this interpretation for a specific business.
Mining usufruct agreement

Running a business activity involving prospection, exploration or production of unconventional gas not only requires a relevant concession, but also the conclusion of a mining usufruct agreement. This is due to the fact that unconventional gas is the property of the State Treasury. Any rights to these resources are granted on the basis of a mining usufruct authorizing the business operator to exploit the resources. The grant takes effect simultaneously with awarding a concession through an agreement signed between the business operator and the State Treasury represented by the Minister of the Environment. Only a holder of a concession may obtain the mining usufruct. Thus, the licensed unconventional gas prospection, exploration and production can be carried out only by a business operator who has obtained a relevant concession and is a party to a mining usufruct agreement. As a matter of principle the issuance of a mining usufruct for unconventional gas should be preceded by a public tender procedure. In practice, however, only one tender procedure was organized in this field in 2007 when 14 concessions and mining usufructs were granted. The Geological Law prescribes certain exceptions to the requirement of tender procedures for mining usufructs, including one where the investor intends to operate in an area where there is no requirement of a public tender for granting mining usufructs. A list of concession areas designated for tender procedures is included in Communication from the Government of the Republic of Poland concerning Directive 94/22/EC of the European Parliament and of the Council of May 30, 1994 on the conditions for granting and using concessions for the prospection, exploration and production of hydrocarbons (Official Journal of 2006-04-26, C 98/22). All other areas were excluded from mandatory tender procedures. Consequently, a business operator intending to explore unconventional gas in such an area applies directly to the Minister of the Environment for the conclusion of a mining usufruct agreement and the granting of a relevant concession. Despite the statutory requirement that the mining usufructs must be granted through a tender procedure for certain concession areas, this has not
185
been significantly implemented in Poland because multiple concession areas covered by the tender obligation had previously been allocated by the Minister of the Environment, before the tender obligation was added to the Geological Law (as at January 1, 2002). A mining usufruct agreement sets out the time period for issuing the usufruct, identifies the mineral deposit and its spatial location (indication of borderline), purpose of issuing the usufruct (type of allowed activities), amount and payment method of the fee for the mining usufruct, limitations on the manner of exercising this usufruct if any, regulations concerning transfers of mining usufructs (including conditions of transfer of rights arising from a mining usufruct agreement), and reasons and procedure of termination of the agreement. Expiry of a mining usufruct occurs in, but is not limited to, the following circumstances: expiry or termination of a concession, derogation of the usufruct and its transfer to the State Treasury, absence of any use for ten years or termination of the relevant mining usufruct agreement. All matters related to mining usufructs which are not addressed to the legislation are governed by use permit regulations of the Civil Code. Uncertainties may arise when a business operator applies for an amendment of a mining usufruct agreement. No specific conditions for such amendments are prescribed by the Geological Law. For instance, it is not clear whether or not such an amendment is possible with a condition precedent of modification of the concession. It seems that a conditional amendment seems to be desirable in view of the investment process.
Business Operators Right to Produce after a Deposit isDiscovered and Documented

In case the unconventional gas prospection or exploration phase is successfully completed, the next phase would be to commence gas production from the deposits. To do so, the business operator must obtain a production concession and conclude a mining usufruct agreement. The key issue in this context is a guarantee of a concession for an operator that has made certain investments in preparing geological documentation of the deposit to commence activities capable of generating profits from the discovery. According to the Geological Law, operators are protected in this area in two ways, thus being able to proceed from exploration onto production. Firstly, a business operator that has recognized and documented an existing mineral deposit and prepared its geological documentation with the accuracy required for obtaining a production concession has priority with respect to that mining usufruct over other operators (Article 12 of the Geological Law). In other words, this business operator has a valid claim against the State Treasury for a mining usufruct. Because all details of each mining usufruct are negotiated by the parties, it is possible that a dispute could occur between the operator and the Minister of the Environment, particularly as regards the anticipated term of a mining usufruct or the method of payment for issuing such usufruct. One would expect that the
186
operator would have a claim for the issuance of a mining usufruct on market conditions, so as to ensure profitability of the project and meeting the applicable environmental requirements, including those guaranteeing reasonable management of the mineral deposit. However, the actual standing of the Minister of the Environment may be highly discretionary in this respect. Accordingly, a dispute may ensue which would significantly extend the business operators project development process. Unless the operator exercises its right of first refusal during the period of two years from the notification that the Minister of the Environment accepted the filed documentation, the mining usufruct for that deposit goes to a public tender procedure. Because a mining usufruct is functionally associated with a concession, the business operator who has priority to enter into a mining usufruct agreement shall have the same priority as regards obtaining the relevant concession. Secondly, an operator that has covered the costs of geological works carried out on the basis of the concession shall have a free of charge, exclusive right to use the information thus obtained for the purpose of production of minerals (Article 47(3) of the Geological Law). This provision was enacted due to the fact that the State Treasury is authorized to receive geological information related to prospection or exploration of unconventional gas, including any information contained in the geological documentation. This right to the geological information is valid for five years from the expiration of the deposit prospection and exploration concession, on the basis of which the business operator conducted works constituting the source of information. A mandatory component of a production concession application is a certificate of title to use geological information. In fact, only a lawful holder of that right is allowed to apply for a concession. In the context of the two measures specified above, it can be concluded that the process of transition from exploration to production (notwithstanding the abovementioned doubts related mainly to the contents of a mining usufruct) is secured in favor of the business operator who explored the deposit in question.
Implementation of European Union Laws (Community Legislation)

Certain legal solutions prescribed by the Geological Law, including the obligation to issue mining usufructs through a tender, were implemented as a result of the obligation to harmonize Polish laws with the requirements defined in Directive 94/22/EC of the European Parliament and of the Council of May 30, 1994 on the conditions for granting and using concessions for the prospection, exploration and production of hydrocarbons (Official Journal of 1994-06-30, L 164/3) (hereafter Directive 94/22/EC). Directive 94/22/EC. Community Legislation imposes a legal framework requiring the implementation of transparent, objective and non-discriminating criteria of authorizing entities to commence activities relating to unconventional gas prospection, exploration and
187
production. Special emphasis is placed in Directive 94/22/EC on eliminating any signs of discrimination, and it is specified that the only reason justifying the refusal to grant a concession or imposing any limitation on a concession may be related to State security (public interest). The mechanism that guarantees transparent procedures is the mandatory publication of a notice inviting applications in the Official Journal of the European Communities. The publication procedure could be launched at the initiative of the Minister of the Environment or upon presentation by a business operator of an offer for licensed activities and setting a relevant deadline for other business operators to submit competitive applications. The requirement to publish a notice may only be waived in certain specific cases. Concession proceedings may be initiated without such publication if the area for which a concession is requested: (i) is available on a permanent basis; or (ii) has been the subject of previous proceedings that did not result in the grant of a concession; or (iii) has been relinquished by an entity. Directive 94/22/EC contains certain guidelines regarding the maximum allowed area and duration of a licensed project. It is further specified that the criteria of granting a concession should be based on consideration of the business operators technical and financial capabilities and their proposed exploration or testing schemes, as well as the prices offered for granting a concession. Member States are free to determine certain additional non-discriminating criteria, provided that they meet the objectivity requirement. All the criteria applicable to a given concession should be published in the Official Journal of the European Communities before the commencement of the tenders submission period. Directive 94/22/EC also sets forth the details of providing information concerning the criteria and requirements for commencing and closing operations. Directive 94/22/EC emphasizes the issue of guaranteeing the independence of businesses operating on the basis of a concession and defines the methods and limits of State intervention. The Directive states that the extent of State supervision over the functioning of the concession system should be limited to verification of a given projects compliance with the criteria and the requirements specified in the concession. Under Directive 94/22/EC, Member States retain the right to identify certain areas within their respective territories that will be available for operations related to prospection, exploration and production of hydrocarbons; a contrario, Member States are also authorized to exclude certain areas from such operations. However, no such exclusions are as yet prescribed by the existing Geological Law. Implementation into the national legal framework. Numerous controversies have arisen in respect of the adaptation of national laws to Community legislation. Consequently, Poland was requested by the European Commission to properly implement Directive 94/22/EC. The Commission stated that Polands implementation of the provisions concerning concession proceedings for the prospection or exploration and production of unconventional gas into the national legal framework was unsatisfactory. According to the Commission, a tender procedure should be organized before the granting of a concession for prospection, exploration or production of unconventional gas and not before the issuance of a mining usufruct.
188
Analysis of the provisions of the Geological Law may lead to the conclusion that the process of restricting access to deposits and the obligations of entities involved in prospection and exploration activities do not meet the standards defined by European Agencies. The provisions of the Geological Law do not take into consideration the detailed regulations on authorizing activities as prescribed by Directive 94/22/EC some of these regulations are left to secondary legislation, i.e. Regulation of the Council of Ministers of June 21, 2005 concerning a tender procedure for acquisition of a mining usufruct (Journal of Laws of 2005, No. 135, item 1131). Thus, in combination with supporting provisions of the Business Activities Act, there are certain doubts as to what steps should be taken by a business operator in order to obtain the relevant concession. Another important problem encountered by business operators is the restricted access to information regarding the stages of concession proceedings organized by the Minister of the Environment (the Minister of the Environment only publishes information concerning the initiation of proceedings, the subject-matter and the area covered by a concession). This is of special significance if several operators apply for concessions in the same area. Obligations of the Minister of the Environment in relation to public notification of the commencement of the concession proceedings were only specified in secondary legislation. In view of the provisions of Directive 94/22/EC, the non-existence of the following regulations could also qualify as default: (i) statutory definition in the Act of law of the criteria on the basis of which prospection, exploration or production licenses are granted to applicants; (ii) obligation to communicate the terms of the proceedings by the Minister of the Environment; (iii) regulation of the method of appointing tender committees; and (iv) detailed specification of the proceedings (including, but not limited to, the issue of explanations provided in the case of rejection of a business operators concession application).
New Legislation
On July 4, 2011 the President of Poland signed a new act on Geological and Mining Law (Act of June 9, 2011) (hereafter the New Legislation). Article 227 thereof states that it is to enter into force on January 1, 2012 and that as of such date the Act of February 4, 1994 (the Geological Law) should no longer be in force. The New Legislation addresses the majority of the issues arising in the context of the implementation of Directive 94/22/EC. Main features. The New Legislation maintains the obligation to obtain separate concessions for prospection or exploration and production of mineral deposits (hydrocarbons) (non-existence of so-called combined exploration and production concession) but it introduces a change to the procedure for granting licenses in the field of unconventional gas. The change involves a mandatory tender procedure applicable to all areas covered by the concessions granted by the Minister of the Environment. Thus, the obligation to conduct tender proceedings will be transferred from the mining usufruct stage to the concession stage, which would resolve the issue of non-compatibility with Directive 94/22/EC. The Parliament intends to increase competition among businesses applying for concessions. The following enumerative list of areas requiring a concession will be excluded from the tender procedure:
189
(i) permanently available areas, listed as areas where a concession is not subject to a prior tender procedure (such new list of concession areas should be published as a notice by the Minister of the Environment in the Official Journal of the European Union and in the Public Information Bulletin); or (ii) areas which have been the subject of a previous procedure that has not resulted in the grant of a concession; or (iii) areas relinquished by business operators; or (iv) areas covered by a right of first refusal to establish a mining usufruct in favor of the business operator that has explored the deposit and documented it (so as to enable the preparation of a deposit utilization plan) and has obtained approval of the geological documentation of the deposit. The validity of pre-emptive rights in the New Legislation was extended to five years (from the current two years) after the service of a decision approving the geological documentation. The extension of the validity of the pre-emptive right is a welcome provision and the new validity period seems to be sufficient for business operators to obtain a concession for production of hydrocarbons from deposits. New concession procedure. The New Legislation introduces a separate chapter exclusively dedicated to the granting of a concession for prospection, exploration or production of hydrocarbons, including unconventional gas. This chapter covers the issues related to the organization of a tender procedure. In particular, the following issues are specified: (i) scope of information which should be included in a notice of a procedure; (ii) terms of the procedure, which should be non-discriminating and give priority to the best hydrocarbon exploration or production systems; (iii) selection criteria; and (iv) communication obligations of the Minister of the Environment. Unlike in the present legal framework, the Minister of the Environment will be required to obtain an environmental conditions decision and approvals or opinions necessary for granting a concession before opening a tender procedure. The Council of Ministers will define the specific conditions of procedure through a relevant regulation to that effect. As soon as the successful entity is selected in the procedure, the Minister of the Environment will issue the concession and promptly sign a mining usufruct agreement. Detailed terms of a mining usufruct, particularly the identification of the area where the activities will be pursued, the duration of these activities and the amount and method of payment of the fee for the usufruct will be defined in an agreement signed by the authorized business operator with the Minister of the Environment representing the State Treasury. However, the New Legislation reserves that the detailed terms of the mining usufruct and amount of the fee payable for the usufruct, as defined in the agreement, may not vary from those set out in the notice of the tender procedure. A business operator applying for a concession under the new law will be specifically required to meet the following requirements beyond the scope of the existing wording of the Geological Law: (i) the business operator will be required to identify areas covered by special forms of protection, including nature protection and protection of historical monuments; and (ii) the business operator will be required to specify the method of preventing and remedying
190
any adverse impact of the intended activities on the natural environment. The production concession application will also have to specify the geological and hydrogeological conditions of the business operators production. The New Legislation does not provide for any extensions of the concessions duration. Therefore, an amendment of the existing concession will be necessary for any extension of the term. There will be no need for a new tender for the amendments (modifications) of the existing concessions, unless the purpose of such modification would be to expand the area covered. The New Legislation does not specify the standards applicable to the modification of existing concessions or whether the mining usufruct conditions (including the fee) will remain unchanged if the duration of a concession is extended. New business operators right to produce. The securing of the business operators interests upon discovery and documentation of a deposit appears to be a major issue under the New Legislation. The New Legislation envisages pre-emption in issuing a mining usufruct to a particular business operator and waiver of the tender procedure obligation with respect to the granting of production concessions. However, pre-emptive rights exist with respect to a mining usufruct and not a production concession. Under the New Legislation, the Minister of the Environment may (but does not have to) grant a concession upon the request of a business operator having such pre-emptive right. In this way, the business operator that has conducted exploration activities within a certain deposit is given the initiative to pursue the concession while the general rule is that the Minister of the Environment initiates the concession proceedings. After initiating the concession proceedings, the Minister of the Environment publishes a notice that an application for a concession has been submitted by a holder of a pre-emptive right. It is controversial in such case whether or not other interested business operators are allowed to submit their competitive concession applications. Under the New Legislation, the Minister of the Environment is required to compare all submitted applications (including the application of the holder of the pre-emptive right) on the basis of tender criteria, i.e. taking into account: (i) the business operators technical and financial capability; and (ii) the proposed technology for the works; and (iii) the proposed price for the mining usufruct. Thus, in functional terms the production licensing procedure will be similar to a general tender procedure. Due to the exclusive right vested with the authorized business operator to use geological information (for a term of five years from the expiry of the concession constituting the basis for completing the works that are the source of such information), the Minister of the Environment will not be able to grant a concession to any other operator during the validity of the former operators exclusive right to use geological information. Thus, concession applications filed by other operators will be rejected on the grounds of failure to present proof of title to use geological information to the extent necessary for carrying out the licensed activities. However, if the competitors decide to exercise the legal measures available to them
191
(appeals), they may delay effective completion of the selection procedure and consequently delay the granting of a concession to the operator that has discovered and documented the deposits. The Minister of the Environment will not be authorized to announce a public production concession procedure during the 5-year validity period of the business operators right to use geological information, as such announcement would constitute a breach of the exclusive rights vested with the operator that has explored and documented the deposits. In practice, the Minister of the Environment will have to wait until the expiry of the exclusivity period before being able to announce a tender procedure for a production concession concerning such a deposit. Significant changes. The New Legislation introduces the concept of mining property, which is applicable, among others, to any unconventional gas. The core purpose of this concept is to detach the land ownership from the deposit of minerals (hydrocarbons) and to assume that certain deposits are not part of the real property or the subject of land ownership. Deposits constitute separate mining property, which is only vested with the State Treasury. The State Treasury is only allowed to dispose of the subject of the mining property through issuing a mining usufruct under an agreement. Another important change in the New Legislation is the application of the provisions of the Civil Code to leaseholds with respect to matters not governed by a mining usufruct agreement (formerly applicable regulations were those concerning plain usufruct). While departing from real estate law towards contract law, the legislator has granted more freedom to the parties in determining the wording of agreements. However, this change carries certain ambiguities, including, but not limited to, the legal qualification of benefits drawn and the costs incurred by a business operator on licensed activities, or the scope of applicability of leasehold law (i.e. whether a business operator is allowed to demand a reduction of charges under Article 700 of the Civil Code due to a significant decrease of revenues from the subject of the leasehold if such decrease occurred for reasons beyond the operators control). Since the fee can be defined in a mining usufruct agreement as a lump sum, it will not constitute a form of lease hold (dzierawa). However, it might adversely affect the equivalence of remuneration. The New Legislation also contains certain ambiguities with respect to the terms of signing mining usufruct agreements, which might be a problem. Under the New Legislation, the business operator is liable for any damage caused under the Civil Code. Unless the perpetrator of the damage can be determined, the party responsible for the damage is the business operator authorized to carry out licensed activities as of the date of discovering the loss. Unless a business operator responsible for the loss, or its legal successor, can be found, the State Treasury is responsible for the loss. The changes contemplated by the New Legislation are related to the deadline for pursuing claims for damages. Under the New Legislation, the statute of limitations for such claims is five years from the date
192
of becoming aware of the loss. Damages may be pursued in court if mediating options are exhausted. The Act specifies a longer period for settling disputes out of court, namely 60 days (previously 30 days). The New Legislation implements certain regulations regarding the relationship between the business operator and the real property owner in respect of hydrocarbons, stating that a business operator licensed to produce natural gas from unconventional resources may claim the acquisition of the real property to the extent necessary to carry out the intended activities (this right used to be exclusively vested with the owner of the real property). According to transitional regulations set forth in the New Legislation, an application by a business operator for a concession in the field of prospection, exploration or production ofunconventional gas shall be considered on the basis of the provisions of the Geology Law, i.e. without a mandatory tender procedure or requirement to submit additional attachments as specified in the New Legislation.
Summary. Problems for Business Operators

In this chapter the legal aspects are discussed in general providing a broad view that should allow the businesses interested in prospection and production of unconventional gas in Poland to make a realistic evaluation of the legal environment and to familiarize themselves with some specific elements of this process. In the proceedings related to a concession for prospecting and production of unconventional gas the market practice often departs from the law, which is exemplified in a discussion about the statutory requirements for a concession application. This chapter could be considered as an introduction to a complex legal analysis that the businesses should undertake each time prior to making an investment decision. The issues identified in this chapter present only examples of complex processes by identifying the basic legal obstacles and uncertainties which may appear at different levels of the investment process. The key issues that should be considered by business operators intending to explore and produce unconventional gas in Poland include: lack of transparent rules of tender procedures, evident gaps in the regulations of the Geological Law, and incomplete implementation of Directive 94/22/EC to the Polish legal framework, as the Directive was implemented into two legislative acts of different levels of importance. From the business operators viewpoint, one must say that the existing legal environment does not make it easy to commence or pursue the investment processes involving prospection, exploration or production of unconventional gas in Poland. Certain objections may also be raised regarding the lack of detailed regulations regarding cases where a cooperating authority may refuse to approve a concession application.
193
Neither the Geological Law nor the New Legislation contain an integrated standard applicable to the extension of concession validity periods. Therefore, an amendment of an existing concession will be necessary for any extension of its term. Certain serious objections may be raised with respect to the lack of any regulations regarding the essence of mining usufructs in the Geological Law or the New Legislation. Details of each mining usufruct agreement are determined by the parties through negotiations and, therefore, it is possible that a dispute may occur between the operator and the Minister of the Environment. For example, there may be disagreement with respect to the anticipated term of a mining usufruct or the methods of payment for issuing such usufruct. This may lead to major delays in the project development process. As regards the New Legislation, there are uncertainties relating to the scope of applicability of leasehold regulations to mining usufruct agreements, as well as the issue of securing the business operators interests after the discovery and documentation of a deposit. These issues are of key importance for the investment process as they constitute a major risk in evaluating project financing options for production of natural gas from unconventional resources in Poland, and they may contribute to the legal uncertainty which could be perceived negatively by businesses. In the context of the Public Procurement Law it is not determined whether or not a concession to operate in the field of prospection, exploration or production of unconventional gas will be considered a special or exclusive right by the competent administrative authorities. Depending on the interpretation of this, business operators may or may not have to follow the Public Procurement Law in awarding contracts for conducting licensed activities. The application of the Public Procurement Law would significantly limit the freedom of contracting between businesses and would have a major impact on the profitability of a project. Considering the circumstances specified above, business operators should promote the introduction of important changes to unconventional gas legislation that would bring more stability to the relevant legal environment in Poland. Those responsible for the legislative process should address all risks and uncertainties, some of which are reported in this chapter. Transparent rules of the law would have a major influence on increasing investment safety for businesses commencing licensed activities in Poland.
194
Authors
Izabela Albrycht is the Chairman of the Board of the Kosciuszko Institute. A political scientist, she graduated from the Faculty of International and Political Studies at the Jagiellonian University and completed post-graduate studies in Public Relations at Tischner European University in Cracow. She is currently writing her Ph.D. (at the Faculty of International and Political Studies at the Jagiellonian University). She has organised numerous press and scientific conferences in Poland and abroad, and is the editor of many publications prepared by the Kosciuszko Institute. She has completed a half-year internship in the European Parliament. Keith Boyfield is an economist, who was educated at the London School of Economics. He is a writer and a Research Fellow of several well-known think tanks, including the Institute of Economic Affairs, the Centre for Policy Studies and the European Policy Forum. He chairs the Adam Smith Institutes Regulatory Evaluation Group, where he is a Senior Fellow. He is a regular contributor to The Wall Street Journal, the Financial Times and other leading newspapers and journals, including Financial Centres International. In August 2009, Keith was invited to become chairman of the pan-African business consultancy, Leriba Limited (www.leribarisk.com). Jarosaw M. Jankowski is a trainee advocate and an associate at the international law office of Weil, Gotshal & Manges. He graduated in legal studies from the Universiteit van Amsterdam and the University of Warsaw. Maciej Kaliski D.Sc. is a Full Professor at the AGH University of Science and Technology in Cracow, where he has taught and researched since 1970. He focuses on mining and engineering geology, the economics of companies, organisation and management. Current position: Professor at the Faculty of Drilling, Oil and Gas, (Deputy Head of the Department of Gas Engineering) at the AGH; since June 2011, Undersecretary of State at the
197
Ministry of Economy (previously from October 2008, Head of the Department of Oil and Gas). He is the author of more than 130Polish and foreign publications, including 15 books and 8 patents. (maciej.kaliski@mg.gov.pl.) Maciej Koaczkowski is an economist and Ph.D. student at the Warsaw School of Economics. He is also an alumnus of the University of Wrocaw and a Mannheim Universtitaet scholarship holder. He is currently employed at the Polish Ministry of Foreign Affairs, where he deals with energy policy concerning natural gas. Earlier he worked at the Prime Ministers Office and PGNiG SA. Marcin Krupa holds a M.Sc. in Economics; in 1995, he graduated from the Catholic University of Lublin. He is a scholarship holder of the University of Wisconsin-La Crosse, USA under the East Central European Scholarship Program. He is a partner and an advisor at the Energy Studies Institute Ltd. and has taken part in projects concerning natural gas and oil extraction and processing, and also relating to the energy sector in general for Polish clients. He is carrying out projects in Western Europe, Russia, Kazakhstan, the Baltic countries, and in Central, Northern and Sub-Saharan African countries. (marcin.krupa@ise.com.pl) Guy Lewis MBA, Managing Director for Exploration and Production at the Gas Technology Institute (GTI), USA. He is responsible for unconventional gas technology developments and collaborative R&D programs. For over 30 years, GTI has been collaborating with and performing R&D for industry, academia, and government policy makers to identify, develop, and deploy solutions for converting the potential of unconventional gas resources into reality. Previously, Mr. Lewis held senior leadership positions at BP and Amoco. He is a graduate of Northwestern University in Chemical Engineering and holds an MBA from the University of Chicago. Ziwase Ndhlovu is an associate with Leriba Limited. A Zambian, she holds a MEng (Hons) in Bio-Chemical Engineering from the University of Bath. She is currently studying for a MSc in Petroleum Engineering at Heriot Watt University in Edinburgh. Ziwase has garnered a broad range of experience analysing oil and gas assets in Africa, Australia, South East Asia and Latin America. She has worked as an oil and gas analyst for Chevron Sasol and Sasol Petroleum International, the South African mining, energy, chemicals and synthetic fuels group. Kent F. Perry Director, Exploration & Production Research at the Gas Technology Institute (GTI), USA. He is responsible for planning and managing a research program for recovery of unconventional natural gas in the U.S. He also serves as Team Leader, Unconventional Gas for Research Partnership to Secure Energy for America (RPSEA). Past experience
198
includes thirty years of natural gas engineering and gas production responsibilities including: gas storage engineering for Northern Illinois Gas Co., production engineering with Kansas-Nebraska Natural Gas Co. and exploration and production for Michigan Energy Resources Co. He holds a Bachelor of Science Degree in Petroleum Engineering from the Colorado School of Mines. He is a member of the Society of Petroleum Engineers and a past SPE Distinguished Lecturer on the topic of tight gas sands in the United States. He has participated in National Petroleum Council studies on the potential for natural gas in the U.S. and has authored several papers on low permeability natural gas resources and hydraulic fracturing. Pawe Poprawa M.Sc., he is graduated in geology from the Institute of Geological Sciences at the Jagiellonian University and in oil geology from the Faculty of Geology, Geophysics and Environmental Protection, AGH University of Science and Technology and University College, Dublin. Since 1995, he has been an employee of the Polish Geological Institute in Warsaw and since 2003 is the Chief Specialist and Head of the Petroleum Geology Laboratory. For several years, he has been carrying out research in the field of assessing the potential for occurrence of unconventional hydrocarbon deposits in Poland, in cooperation with Western and Polish energy companies as well as the public administration. Roman Rewald is a U.S.-qualified attorney and a partner at the international law firm of Weil, Gotshal & Manges. He has a legal degrees from Poland and the United States. Mr. Rewald is a board member and past chairman of the American Chamber of Commerce in Poland. Alan Riley Professor of Law at City Law School, City University, Grays Inn, London. He is a Fellow of the Respublica think tank and an Associate Research Fellow of the Centre for European Policy Studies in Brussels. He has written extensively on energy law and policy over the last decade (selected publications listed below). He is currently researching a number of questions concerning market liberalization, and market regulation in both the Russian and European Union gas markets. He is also currently working on a major paper examining the legal and geostrategic implications of the unconventional gas revolution. His recent energy papers include: *The Russian Gas Deficit: Consequences and Solutions (2006) CEPS Brussels *Out of Gas (with Frank Umbach) DGAP Berlin 2007 *Energy Security, Gas Market Liberalisation and our Energy Relationship with Russia (2007), European Parliament, Foreign Affairs Committee paper *Nordstream and Economic and Market Analysis of the North European Pipeline Project (2008-2009), European Parliament Foreign Affairs Committee paper *EU-Energy Liberalisation-Coming to a Member State Near You (2008), Competition Law Review *De-Weaponising the Energy Weapon, House of Commons Defence Select Committee (2009) *Can Nord-
199
stream and Southstream Survive in a Changing Gas Market? OGEL Special Issue EU-Russia Relations (2009) *The EU-Russia Energy Relationship: Will the Yukos Decision Trigger a Fundamental Reassessment in Moscow? (2010). Mariusz Ruszel is a graduate of the Faculty of International and Political Studies at the University of Lodz and currently a Ph.D. student at the same faculty. In the years 2006 2009, he worked for Jan Kuakowski, a Member of the European Parliament, while in the years 2009 2011 for the Podkarpackie Energy Agency (PAE) as a local development specialist. He lectured at the University of Lodz in the years 2007-2011, at the Young Diplomats Academy in 2008-2009 and in March 2011 at Universite Libre de Bruxelles (Erasmus STA). He is an expert at the Kosciuszko Institute and K. Pulaski Foundation, a member of the Polish International Studies Association and an author of numerous articles and analyses concerning energy safety and energy policy. Stanisaw Rychlicki D.Sc., is a Full Professor at the AGH University of Science and Technology in Cracow. In 1968 he graduated from the Faculty of Geology and Geological Prospecting at the AGH University of Science and Technology in Cracow. Since the beginning of his scientific career, he has mainly worked in the field of gas and oil engineering, in the broadest sense of this term. In the years 1980-86 he lectured at the University of Science and Technology in Algiers at the Faculty of Earth Science. He is the author and co-author of over a dozen books, monographs and papers as well as a few patents. He has worked on more than 350 Polish and foreign publications, including ones concerning the Polands energy model. He was the Dean and Deputy Dean of the Faculty of Drilling, Oil and Gas. In February 2008, he became a member of the Supervisory Board of PGNiG SA and was later appointed the Chairman. He is a member of several Polish and foreign associations, such as the International Gas Union and the World Petroleum Council, Society of Petroleum Engineering and SPWLA. He is the Chairman of the Drilling and Borehole Mining Section of the Mining Committee at the Polish Academy of Sciences. Jakub Siemek D.Sc., is a Full Professor graduated from the Mining Faculty of the AGH University of Science and Technology in 1958, and also holds degrees from the Faculty of Mathematics, Physics and Chemistry (specialisation Physics) at the Jagiellonian University in Cracow and the Adam Mickiewicz University in Poznan. He has worked on over 400 Polish and foreign publications and articles. Amongst his achievements has been the introduction of mathematical modelling to the organization of the exploitation of oil and natural gas deposits in Poland. He has also held prominent posts in the oil and gas field: Deputy Director of the Institute of Oil and Gas, Deputy Dean and then Dean of the Drilling, Oil and Gas Faculty, AGH, a member, then Vice-Chairman and finally Chairman of the Science Council of the Strata Mechanics Research Institute at the Polish Academy of Sciences, Editor-in-Chief of the publishing house Polish Academy of Arts and Sciences, Geoinformatica Polonica and the Polish Academy of Sciences quarterly
200
Archives of Mining Science the first Polish mining publication to be entered on to to the Philadelphia List (since 2008) and many others. He holds an honorary doctorate from Lucian Blag University in Sibiu (Romania) and is an honorary professor at both the National Mining University in Dnipropetrovsk and the Ivano-Frankivsk National Technical University of Oil and Gas (Ukraine), a member of the Scientific Research Society Sigma Xi (USA), the American Mathematical Society and the Society of Petroleum Engineers (USA). He is a foreign member of the Russian Academy of Sciences (RAEN), an honorary member of the Association of Engineers and Technicians of the Oil and Gas Industry and an ordinary member of the AIP. Andrzej Sikora D.Sc. (Engineering) graduated from the AGH University of Science and Technology in Cracow and completed training at School of Banking in Vienna, the University of Southern California Jackson, Mississippi, USA and INSEAD in France. He is the President of Board of The Energy Studies Institute Ltd. His specializations are: fuels, energy security, and optimization of energy. (andrzej.sikora@ise.com.pl) Trevor Smith MBA, Business Development Manager at the Gas Technology Institute (GTI), USA. He is building relationships as well as creating and expanding opportunities to develop GTIs Exploration and Production R&D business. He actively promotes global development of areas connected with natural gas, such as resource characterization, niche technology development, water management, sustainable operating practices, consulting and training. Piotr Szlagowski is a lawyer with expertise in energy and public international law; he is a doctoral candidate at the University of Warsaw, Faculty of Law, Institute of International Law. He graduated magna cum laude in Advanced Studies in Energy and Environmental Law (LLM) at the Katholieke Universiteit Leuven. He is an expert of the Kosciuszko Institute. Marcin Tarnawski holds a Ph.D. in political studies and currently lectures at the Institute of Political Studies and International Relations at the Jagiellonian University. He is the author of works and publications focused on the issue of international security, international economics, and the foreign and security policy of the Russian Federation. He is an expert of the Kosciuszko Institute. Aleksander Zawisza graduated from the Faculty of Economics and Sociology at the University of Lodz and a Ph.D. student at the same faculty; he is a former Ministry of Economy employee, a former manager and then Director of the OLPP Strategy Office. He currently works in the field of economic consulting.
201
PUBLICATION PARTNERS The Polish Geological Institute National Research Institute (PGI-NRI) is the oldest Polish nationwide scientific institution. It is involved in comprehensive studies of the countrys geological structure for practical use in the national economy and environmental protection. In addition to scientific activities in all fields of modern geology, the Institute was entrusted with the task of the Polish Geological Survey and the Polish Hydrological Survey. Moreover, it is responsible for the countrys security in supply of mineral resources, the groundwater management, and for monitoring the geological environment and warning against natural hazards and risks. The Institute cooperates with geological institutions from 30 countries. The Polish Geological Institute belongs to EuroGeoSurvey (EGS) the association of European geological surveys with its seat in Brussels. It participates in preparation of analyses done under EGS auspices and actively participates in the work of expert groups, whose aim is to advise appropriate structures of the European Commission. The Institute, on behalf of the State Treasury, gathers geological data from the area of the whole country. www.pgi.gov.pl
AGH University of Science and Technology is a technical school, serves the science and industry through educating students, the development of academic staff, as well as research and development. The University is one of largest in Poland, with a staff of about 3,900 (including nearly 500 independent researchers and scientists) and a total annual budget above 100 million Euros. AGH-UST is a leading Polish university in the field of modern technologies, also being of high position on the international scale. Long and rich tradition is also a factor determining the Universitys popularity AGH-UST has existed for 90 years and during this time it has educated groups of the most required engineers in Poland. Faculty of Drilling, Oil and Gas, was established in 1967. The Faculty graduates hold key positions in industry, mainly in the oil and gas sector and prove to be high class specialists in this field in Poland and abroad. The taking part in projects focused on modern methods (is the leading research in Poland) applied in petroleum engineering, geo-engineering, gas engineering (also in unconventional gas), surface gas supply systems, underground storage of gas, environmental protection, subsurface CO2 storage in gas, oil, aquifers, and coal-bed reservoirs. www.agh.edu.pl
Weil, Gotshal & Manges is a leading international law firm. It has been operating in Poland since 1991 and advises institutional clients on the largest transactions, litigation and energy projects. www.weil.com
PUBLISHER The Kosciuszko Institute a think-tank creating new ideas for Poland and Europe is an independent and non-governmental research institute founded in 2000 as a non-profit organization. Based on in-depth, interdisciplinary analysis, the Kosciuszko Institute promotes solutions published in the form of recommendations and expert reports. Its publications are addressed to EU institutions, government and local-government bodies, members of national and European parliament, the media, non-governmental organisations, entrepreneurs and advocates of the idea of independent thought and open debate. www.ik.org.pl Unconventional Gas a Chance for Poland and Europe? project was launched by the Kosciuszko Institute in 2010 as the first project on unconventional gas in Poland executed by the think tank organization. The aim of the project is to conduct a comprehensive expert analysis of the viability of unconventional gas extraction and its consequent opportunities for Poland and Europe. The practical recommendations delivered within the project will constitute an important reference point for the public debate on trends in Polish and European unconventional gas policy.
www.gazniekonwencjonalny.eu
MAIN PROJECT PARTNER Polish Oil and Gas Company (PGNiG SA) is the leader on the Polish gas market. The companys basic activities are exploration and production of natural gas and crude oil deposits, as well as import, storage, trade and distribution of gas and liquid fuels. PGNiG SA is actively exploring unconventional gas deposits in Poland. It has 15 shale gas exploration concessions with a total area of 12 000 km2. They include both very promising areas and more difficult ones. In March 2011, the drilling of the Lubocino-1 well on the Wejherowo concession in Pomerania (Pomorze) was completed. In this well, promising gas flows have been detected in Silurian shales, but analyses will last another several months it is still too early to comprehensively assess the deposits. Some pilot wells will be drilled in the Wejherowo concession area. Then, sites for locating the first extraction plays will be chosen. PGNiG SA is talking with potential partners for cooperation on shale gas exploration. The company intends to work independently and with the support of foreign partners.
www.pgnig.pl
Publication Unconventional Gas a Chance for Poland and Europe? Analysis and Recommendations, drawn up on the initiative of the Kosciuszko Institute in collaboration with experts from Poland, Europe and the U.S., attempts to thoroughly analyze the potential and opportunities linked to theexploitation of unconventional gas resources in Europe. At the same time, it aims to identify thechallenges facing the European unconventional gas sector and formulate recommendations that will enable it to meet them. The report analyses infrastructural, economic, geological, environmental and legal conditions pertaining to exploration and production of unconventional gas resources in Poland and selected EU countries. It also presents North American experiences and facts relating to the unconventional gas sector, especially shale gas, along with conclusions that can be applied in Poland and in Europe in general. Hence, this publication can be a valuable source of comprehensive knowledge for investors, decision makers, experts and the public about unconventional gas a sector which has the potential for dynamic development not only in Poland, but also in other European countries. Publication is a part of the Kosciuszko Institute project Unconventional Gas a Chance for Poland and Europe?
www.gazniekonwencjonalny.eu
Main project partner
Publication partners
The Kosciuszko Institute 2011 ISBN: 978-83-931093-5-7

Unconventional Gas - A Chance For Poland and Europe

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Unconventional Gas - A Chance For Poland and Europe

Hochgeladen von

Copyright:

Verfügbare Formate

Unconventional Gas aChanceforPoland and Europe?

Unconventional Gas aChanceforPoland and Europe? AnalysisandRecommendations

AMERICAN SUCCESS ..................................................................................................................................................................47 4. 5. 6.

EU POLITICS & LEGISLATION ....................................................................................................................................................69 7. 8. 9. 10.

CHALLENGES FOR POLAND .................................................................................................................................................. 109 11. 12. 13. 14.

15. 16. 17. 18.

BASIC INFORMATION TECHNOLOGY, RESOURCES&SAFETY

1. Unconventional Gas Characteristics of Deposits andTechnology of Extraction

Fig. 1.1 Typology of natural gas resources

100 mD High quality reservoirs

Higher concentration Easier to develop More permeable

10 mD Low quality reservoirs

Tight gas 0,1 mD Shale gas

More advanced technologies needed

GAS RESERVOIR (sandstone)

GAS/SOURCE ROCK (shale, coalbed methane)

ELLENBERGER (Water Bearing Formation)

VIOLA (Frac Barrier)

Unconventional Gas Characteristics of Deposits andTechnology of Extraction

Source: A.R.H. Datuk, 2010, Talisman Energy/Canada

2. European and Global Resources and the Potential ofUnconventional Gas

30 000 25 000 20 000 15 000 10 000 5 000 0

Source: EIA and ARI report from 2011

bcm of recoverable gas resources

30 000 25 000 20 000 15 000 10 000 5 000 0

Source: EIA i ARI Report, 2011

European and Global Resources and the Potential ofUnconventional Gas

4.2. Zasoby wydobywalnego gazu upkowego w Europie

Figure 2.3 Recoverable shale gas resources in Europe

bcm of recoverable gas resources

30 000 25 000 20 000 15 000 10 000 5 000 0

Source: EIA i ARI Report, 2011

European and Global Resources and the Potential ofUnconventional Gas

3. Environmental ImpactofUnconventional Gas Explorationand Production

GuyLewis, TrevorSmith, KentF.Perry, PawePoprawa

Environmental ImpactofUnconventional Gas Explorationand Production

GuyLewis, TrevorSmith, KentF.Perry, PawePoprawa

Environmental ImpactofUnconventional Gas Explorationand Production

GuyLewis, TrevorSmith, KentF.Perry, PawePoprawa

Environmental ImpactofUnconventional Gas Explorationand Production

GuyLewis, TrevorSmith, KentF.Perry, PawePoprawa

Environmental ImpactofUnconventional Gas Explorationand Production

GuyLewis, TrevorSmith, KentF.Perry, PawePoprawa

Environmental ImpactofUnconventional Gas Explorationand Production

4. Unconventional Gas: TheNorthAmerican Experience

GuyLewis, TrevorSmith, KentF.Perry

Unconventional Gas: TheNorthAmerican Experience

GuyLewis, TrevorSmith, KentF.Perry

Unconventional Gas: TheNorthAmerican Experience

800 700 600 500 400 300 200 100 0 2002

Source: Own graph based on GASearch Energy Intelligence (http://www.gasearch.com/)

The Influence of the U.S. Gas Revolution on International Gas Markets

The Influence of the U.S. Gas Revolution on International Gas Markets

The Influence of the U.S. Gas Revolution on International Gas Markets

EU POLITICS & LEGISLATION

7. Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation

Treaty Law and the Precautionary Principle

Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation

Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation

Legislation on Mining Waste

Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation

Exploitation of UnconventionalGas under EU Law: aReviewofRelevant Legislation