A number of technologies and processes that involve several players – companies, institutions and government agencies – is required in order to produce shale gas. Extractive sector rules, key players and mutual interdependence between them are presented in this article. These issues are essential for understanding the prospects for commercial shale gas production in Poland.
Upstream sector is defined as processes that are related to exploration and extraction of mineral resources from onshore and offshore deposits. The boundary of that sector is arbitrary set at the point in which the commodity is transferred to the transmission/distribution network or otherwise transported from the site of production. A distinction is often made between upstream, midstream (transmission) and downstream (petrochemical industry, refineries, distribution) sectors.
Industry overview
Oil and gas production involves many, often disparate, interests.
The government (the owner of mineral deposits in European countries) focuses on maximizing fiscal, economical or political benefits for the country it represents. At the same time the government is responsible for ensuring the protection of the environment and taking care of local communities' interests.
Concession holders (operators) are primarily interested in recovery of the funds they have invested in exploration undertaking, in project security and return on investment. To this end, thy hire service companies (contractors) that provide equipment, personnel and deliver operations commissioned by the concession holder.
Mining supervision authorities, Polish Geological Survey, Chief Inspectorate of Environmental Protection and its reporting provincial inspectorates, and other national agencies perform obligations under the law: they ensure compliance with environmental laws and regulations, terms and conditions of the concessions, etc.
Local communities are potential beneficiaries of the aforementioned activities and often proactively demand their rights.
Non-government organizations (including foundations) prepare independent studies on extractive industry development and its consequences. The latter two stakeholder groups are not considered in this article.
Duties, rights and obligations of particular stakeholders may vary from one country to another depending on the system of sharing the profits that are generated on extraction of mineables. A system based on licensing, as in effect in Poland, is presented in this article.
State Treasury (Government)
State Treasury, the holder of ownership rights in oil and gas accumulations located in Poland, is the chief player in the license-based system. Accordingly, State Treasury enjoys rights to oil and gas extraction and any profits generated therefrom.
State Treasury may wave this right by establishing a mining usufruct, usually by granting a concession for oil and gas exploration or production to a privately-owned company in exchange for specific fiscal or quasi-fiscal fees. Today, the following fees are levied in Poland:
- standard corporate income tax (CIT) of 19%,
- royalty fee equal to approx. PLN 5/m3 of the produced gas,
- mining usufruct fee,
- several petty fees.
In accordance with Geological and Mining Law Art. 141, the royalty fees goes to:
- the National Fund for Environmental Protection and Water Management (40%)
- municipalities with jurisdiction over concession area (60%).
Mining usufruct fee is equal to 50% of the royalty fee plus a percentage of deposit value. The latter component of the fee may prove very difficult to estimate. Specific nature of shale rocks and lack of any previous experience in long-term exploitation of accumulations in Poland and elsewhere make any precise assessment of resources an extremely difficult task.
According to the Ministry of the Environment, 92 concessions for unconventional oil and gas exploration and appraisal are in effect in Poland (as of 31 March 2014). Having proved the reserves and prepared a field development program on the basis of effected exploration studies, the company will enjoy preemptive rights to purchase a concession for oil or gas production. So far, none of the concession holders has obtained data and effects that are required in order to apply for a production concession.
Concession holders
The companies that have been awarded exploration concession agree to perform specific operations in order to assess the field. They take the risk by investing in the required exploration works, purchase of privately-owned land, drilling the wells and preparing them for production. Concession holder is called concession operator in the industry.
Operators fall into three groups:
- National Oil Companies (NOC), state-owned enterprises that are often granted monopoly for a sector in the energy industry. In Poland, Polish Oil and Gas Company enjoys exclusive rights for gas distribution.
- International Oil Companies (IOC), international corporations that invest in gas and oilfields across the world. IOC's operating in Poland include ConocoPhillips, Chevron or ENI. Considering an extensive range of operations and financial resources, these companies are able to allocate significant funds to exploration.
- Independents, smaller companies that operate on a regional basis and focus their efforts on particular fields. In Poland, active players include BNK Petroleum, Lane Energy Poland, San Leon Energy or FX Energy. Independent companies are not in possession of funds that are required for purchasing concessions in well proven and, consequently, expensive fields. The latter are normally held by NOCs or IOCs. Therefore, they are more likely to invest in novel or risk-prone projects.
Operators may combine their efforts by forming, for example, joint ventures wherein two or more companies invest in a a single concession. This strategy is adopted in the case of poorly investigated fields, such as Polish shales. The agreement between Lane Energy Poland and ConocoPhillips is an example of such cooperation whereby the costs, risks and potential profits from the development of several concessions in North Poland are shared by the two companies.
Service companies
Due to the complexity of exploration, operators contract out specific operations to external service providers (subcontractors). It should be noted that (a few exceptions apart) operators not own or operate directly mining equipment – drilling rig, pumps or pipelines. Service companies themselves do not hold shares in the concessions nor are entitled to share any profits from well production. Their role is limited to offering one or more services that are required for oil or gas production.
The services include but are not limited to:
- Seismic surveys – delivered on extensive areas to establish the best drilling locations and data analysis. Service providers include Geofizyka Kraków, Geofizyka Toruń and United Oilfield Services.
- Drilling operations – drilling a well to the pay formation using a drilling rig. This also includes the following:
- Casing running into the borehole (casing service)
- Casing cementation (cementation service)
- Drilling fluid preparation (mud service)
- Several other services.
In Poland, Exalo Group (POGC service companies consolidated in 2013) is the leader in terms of drilling rigs owned and operated. Other service providers include: Halliburton, KC Deutag, MND, Schlumberger, United Oilfield Services and Weatherford. Additional services may be present at a drilling rig owned by one of the companies.
- Completions – several services that perform jobs in previously drilled out wells. These include but are not limited to:
- Workover rigs – look like small drilling rigs, but are intended for various well repair or stimulation jobs
- Wireline service – involves running wireline logging tools, packers and perforation tools using a steel line (for example electric E-line). Wireline service providers include Exalo-Group , Geofizyka Kraków, Geofizyka Toruń, Schlumberger or Weatherford
- Coiled Tubing – flexible tubing pipes spooled on a reel. Comparing with workover rigs, Coiled Tubing is more mobile and quicker to assemble. They are used to perform various jobs in existing wells. Coiled Tubing is particularly useful in horizontal wells where wireline cannot be used. The services are offered by Exalo Group, Halliburton, United Oilfield Services, Schlumberger and other companies
- Fracturing Fleets – hydraulic fracturing services are mostly delivered using a fleet of pump sets to inject the fracturing fluid through casing pipes into pay formation. These services are available from Exalo Group (ZRG Krosno), Halliburton, Schlumberger, Weatherford, United Oilfield Services and other providers.
Several other auxiliary companies operate in the mining area to provide such services as mud monitoring, transport of water and raw materials, reservoir fluid release, analysis of geological parameters, downhole measurements, field pumps, flowback fluid treatment and management. Hundreds of specialist from several tens of companies must do their work at the drill site before natural gas starts to flow to the transmission pipelines from the well.
National authorities
Each concession granted imposes on concession holders several reporting obligations towards State Treasury. Moreover, mining companies are subject to a number of inspections made by government institutions.
Polish Geological Institute acts as National Geological Survey, which means that the Institute "collects geological data from the entire country on behalf of State Treasury". Accordingly, all reports on geological studies made in all wells and exploration concessions in Poland are submitted to the Institute.
Mining Offices, including Higher Mining Office "perform supervision and control" over exploration companies and oil&gas exploration projects. They test wells being drilled for compliance with HSE regulations, may charge fines for a failure to comply and control reservoir management at production stage.
Environmental Protection Inspectorate Authorities inspect oil&gas exploration companies for compliance with environmental regulations, including waste management, permits and procedures associated with the use of chemicals and environmental impact from exploration projects. Inspectorate is vested with several powers to punish defaulting entrepreneurs, ranging from fines to the order to discontinue operation of a non-compliant installation.
Summary
Understanding the complexity of the oil&gas market is a precondition for a viable analysis of its development prospects in Poland.
Transparent rules of play, as proposed by government institutions, is the first thing. The objective is to ensure that concession holders are able to assess financial, environment or safety obligations using a simple analysis. They will make a profit and loss account to make the decision on whether to embark on long-term capital projects in Poland. In the absence of transparent rules the decision would be either impossible to make or bear a huge margin of error, preventing any serious commitment.
Development of oil&gas service and a wider offer of service contractors. Competition between them is an essential factor for bringing down engineering costs, which are now a serious impediment to commercially viable gas production. At this point short-term interests of service companies and those of concession holders are disparate, as the former ones attempt to keep the prices on the existing high level.
The third issue is to ensure involvement of local communities and gain their support to exploration and production. High royalty fees (60% of the revenues go to the local budget) and the dialogue between concession holders and the community may help to achieve this goal. Providing information on both benefits and risks builds trust which is a precondition for gaining support of the local residents.
In order for shale gas production to be possible and commercially viable, the interests of all stakeholders have to be convergent and their mutual relations transparent.
author: Maciej Kowalski, Pulaski Fundation expert
