Some things aren't meant to last, like Total's shale gas exploration license in Poland. While there is plenty of gas in the ground, it isn't economically viable to extract it at the moment, according to Total. Some of the major problems facing oil and gas players in Poland's shale are weak initial drilling results, lack of substantial geological information, and shrinking reserve estimates. In 2012, the Polish government revised its shale gas reserve estimates downwards by a shocking 90% after several exploratory wells turned up severely disappointing results.
That was it for ExxonMobil, Total, and Marathon Oil. These three upstream players couldn't find compelling well results to keep pouring millions into the country, so they all pulled out of Poland. Are Poland's shale ambitions about to fizzle out, or can two oil majors sniff out better drilling locations and pump some life back into Poland's energy sector?
Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) are still actively drilling in Poland, banking on additional well information in the coming months to paint a better picture of where Poland's hydrocarbon production is going to go.
To get a better picture of just how much gas is hidden underneath Poland's shale, ConocoPhillips has partnered up with 3Legs Resources to drill three appraisal wells in 2014. With an estimated 40 shale wells expected to be completed in Poland this year, the entire oil and gas sector will be effectively working together to try to find economically viable locations to drill.
Last year, ConocoPhillips was able to bring a very promising well online in northern Poland; the well was producing 8,000 cubic meters of natural gas a day. If similar wells can be discovered, then hydrocarbon producers will know what regions are worth exploring and which locations are complete duds.
Chevron is testing out a different region down south to see if it can dig up a new region to explore. Poland's state-owned energy company PGNiG has teamed up with Chevron to drill in southeastern Poland through four exploration licenses that allow Chevron to target four different areas.
2012 dry spell
In 2011, the U.S. Energy Information Administration predicted that as much as 5.2 trillion cubic meters of natural gas lays within Poland. That estimate has been racketed down to under 1 trillion cubic meters, however, as numerous wells came up empty in 2012.
It wasn't just that the wells weren't producing, but they also weren't economically competitive compared to shale wells drilled in the the U.S. Shale wells drilled in Poland cost two to three times more to complete than wells completed in the U.S., according to the Polish government. With results from initial wells posting mixed numbers, it's hard to justify investing in Poland over proven American shale plays. This has some worried that commercial natural gas production won't ever start up in Poland, a nation that consumes 15 billion cubic meters of gas a year.
Foolish conclusion: The dream
If ConocoPhillips or Chevron could replicate the 8,000 cubic meters a day output level seen by ConocoPhillips' "best" well, then Poland could theoretically supply a substantial amount of its own natural gas. The problem is that there is a very limited amount of data out right now, and with reserve estimates flying downwards and deterring further investment in Poland's shale, it's hard to say whether a viable industry will ever emerge.
Investments in Poland could provide significant upside for ConocoPhillips and Chevron as expectations are extremely low. On the flip side, both these players could end up wasting hundreds of millions of dollars in exploratory costs without ever being able to bring commercial gas production online due to a lack of output.
Chevron and ConocoPhillips have the cash flow to be able to invest in potential emerging plays, but shale wells have thus far been significantly less economical in Poland than in shale plays in America. If these oil majors can't dig up results soon, it may be time to call it quits.
In America, ConocoPhillips is doing wondrous things in shale plays like the Permian Basin, Bakken, and Eagle Ford to boost its output and margins by 3%-5% over the next few years. By selling off foreign assets, ConocoPhillips was able to direct most of its capex this year to grow onshore domestic output. If ConocoPhillips can't uncover substantial recoverable resources this year in Poland, it may be time to keep shifting its focus to plays that work.