Replicating the U.S. Shale Boom is MUCH Easier Said than Done

Despite initial optimism surrounding Poland’s shale gas potential, major challenges have forced energy companies to retreat from the country.

Jan 18, 2014 at 2:33PM

Just a few years ago, Poland was hailed as one of the most promising countries in Europe for the development of shale gas. But recent exits by a number of major energy companies highlight why the Eastern European nation has been unable to replicate the success of the U.S. shale gas boom. Let's take a closer look.

Unfulfilled eastern promises
Optimism about Poland's shale gas potential took off in earnest in 2011 when the U.S. Energy Information Administration estimated that it held potential shale gas reserves totaling 44 trillion cubic feet, among the largest in Europe. The EIA's encouraging estimates, combined with incentives offered by the Polish government, lured a number of major global energy companies to the country.

But the initial enthusiasm has since subsided due to a number of reasons. First, reserve estimates have been slashed from 44 trillion cubic feet to just 9 trillion cubic feet. Second, the challenging geology of Polish shale and the nation's relatively undeveloped infrastructure have turned out to be bigger hurdles than expected. And third, regulatory uncertainty surrounding tax policies has held back additional investment.

Companies retreating from Poland
As a result of these challenges, numerous players have retrenched from Poland, with Eni (NYSE:E) being the latest defector. The Italian supermajor first entered Poland in December 2010, when it acquired Minsk Energy Resources and became the operator of three shale gas licenses in the Polish Baltic Basin. But after years of unsuccessful drilling, Eni has decided to let its licenses expire, citing regulatory uncertainties and challenging geology.

ExxonMobil (NYSE:XOM) also decided to stop exploring for gas in the country in June 2012 following disappointing initial test results that failed to produce commercial quantities of gas. The next blow to Poland's shale ambitions came last May when both Talisman Energy (NYSE:TLM) and Marathon Oil (NYSE:MRO) scrapped their drilling programs in the country.

Talisman handed over its Polish concessions to joint venture partner San Leon Energy in an effort to refocus on its core production areas in North and South America and the Asia-Pacific region, while Marathon Oil decided to conclude Polish operations due to unsuccessful drilling results that failed to yield commercial quantities of hydrocarbons.

And then there were two
With Eni set to depart, Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) are now the only major global energy companies pursuing Polish shale gas projects. Chevron, which has acquired exploration licenses covering 5.6 million acres across Poland, Ukraine, Bulgaria, and Romania, recently announced that it will cooperate with Polish state-controlled gas company PGNiG to reduce costs and accelerate exploratory drilling within its acreage.

ConocoPhillips is also hopeful about shale exploration in Poland, especially after recent encouraging results from its test wells in the Baltic Basin, which it is developing jointly with 3Legs Resources, an Isle of Man-based oil and gas explorer. The joint venture partners plan to continue testing wells in their Baltic Basin concessions this year.

The Foolish takeaway
The fact that so many companies have given up on Poland highlights some of the major challenges involved in shale development. Not only is it necessary to have commercial quantities of oil and gas in the ground, but a sophisticated infrastructure network and economic incentives such as favorable tax policies are also crucial.

Indeed, the U.S. shale boom has been so successful because of well-defined and enforceable property rights that have encouraged massive amounts of capital investment, as well as the existence of a vast network of pipelines and other infrastructure to store, process and transport oil and gas. Without these advantages, shale development in the rest of the world is likely to proceed at a slower pace than it has in the U.S.

While Chevron, ConocoPhillips, and their integrated oil peers are turning to riskier shale exploration projects to help offset declining production from their mature fields, one energy company continues to mint profits. Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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