Oil and gas has been produced in Poland for more than 150 years. It may come as a surprise that Poland boasts, alongside the United States, the longest history of the upstream sector operation. However, the so-called “shale revolution” that reshaped the Polish market began across the ocean. Knowledge of existing status of the domestic upstream sector, its history, structure and legislative framework may help to reflect on the future of gas production from unconventional deposits, such as shale formations.
In petroleum industry, the notion of upstream (borrowed from hydrology where it denotes “the upper course of a river”) is understood as exploration and production of crude oil and natural gas. The point of oil or gas transfer to the transmission system or in which it is otherwise transported from the production site is the arbitrary boundary between upstream and midstream sectors of the industry.
A glimpse into the history…
Place: Łyczaków Hospital in Lwów (a city presently in Ukraine). Date: 31 July 1853, at night. A surgery is required in emergency to save a patient's life. However, the lighting system at that time did not guarantee a safe delivery of the surgical operation. The local pharmacist Ignacy Łukasiewicz appears with his invention – kerosene lamp – to illuminate the surgery room.
These critical circumstances marked the beginning of oil production, at first for lighting and then as fuel for the first automobiles. To capitalize on his invention, in the next year Łukasiewicz opened (in partnership with Tytus Trzecieski) the world's first oil mine at Bóbrka in the Podkarpacie (Sub-Carpathian) Region (still operational today). His successful business attracted competitors and several primitive hand-dug oil wells soon mushroomed in the region.
At the same time the first oil well appeared in the U.S.A., and was soon followed by tens of other wells. Oil price fell dramatically and so did the profits of Polish producers.
Small and scattered Carpathian oil reservoirs were unable to compete with American plays. Nevertheless, as late as 1909 Poland accounted for approx. 5% of the global oil output, but not for long. In the interwar period, production was concentrated in the regions of Borysław (75%) and Drohobycz – but for political reasons reservoir ownership passed to French hands. Concerns were raised that as a result of predatory exploitation Polish oil reserves could be exhausted by 1943.
The second World War changed the whole scene: Borysław and Drohobycz Regions were attached to USSR, while Poland retained only poorly productive Carpathian reservoirs. All surviving oil companies and refineries were nationalized. The entire upstream sector was transferred to the Oil and Gas Union (ZGNiG), the established in 1976 forbear of the existing Polish Oil and Gas Company (PGNiG). Oil exploration and drilling service companies, such as Poszukiwania Naftowe (Petroleum Exploration) Companies in Jasło and Piła or Geofizyka in Kraków and Toruń, were established at that time.
In People's Republic of Poland new oil and gas reservoirs were discovered in the Polish Lowland, Baltic Coast (Kamień Pomorski), as well as offshore in the Baltic (north of Rozewie Cap). As a result of ownership changes most state-owned enterprises were incorporated as joint stock companies in which State Treasury still holds a major stake.
The upstream sector falls into two distinct parts: the State and the companies. The former acts as both legislator and owner of energy mineables, as well as reaps the benefits therefrom. This means that State Treasury holds rights to oil and gas extraction and any profits from sales of these commodities. It may transfer these rights by establishing the so-called mining usufruct. Normally, this involves the award of concession for exploration or production of mineables in exchange for specific fiscal and quasi-fiscal compensations. Having examined technical capacity of a potential concession holder and any additional fees that are offered for the concession, the Ministry of the Environment (acting on State Treasury's behalf) awards the concession.
Several legislative acts regulate upstream sector operations, of which the most important include:
- Geological and Mining Law,
- Environmental Protection Law,
- Freedom of Business Act,
- Corporate Income Tax Act,
- Act on the Tax on Extraction of Certain Mineables,
- Ordinances by the Council of Ministers, Minister of the Environment, etc.
Several government institutions ensure compliance with legislative acts and obligations under the concessions. They include:
- Polish Geological Institute – National Research Institute acting as National Geological Survey which collects geological data from all over Poland. Reports on results of geological studies made in all wells and exploration concessions across Poland are delivered to the Institute,
- Mining Offices, including the Higher Mining Office, are in charge of supervision and control over exploration companies and hydrocarbon exploration operations. They assess drilling operations for compliance with HSE regulations and may impose fines for violation of applicable regulations and provide for management of reservoirs at the stage of production,
- Environment Protection Inspection ensures compliance of oil and gas exploration companies with environmental regulations, including waste management, procedures and permits for use of chemicals or environmental impact aspects. The Inspectorate is vested with extensive powers to impose sanctions ranging from fines to closure of non-compliant installations.
Companies are the other side and include:
- operators (concession holders),
- service companies.
According to Polish Geological Institute – National Research Institute, approx. 780,000 tonnes of oil were produced in Poland in 2013. PGNiG S.A. (controlled by State Treasury with a stake of over 70%) and Lotos Petrobaltic S.A. are the only oil producers.
PGNiG, which produces oil from onshore fields in the Polish Lowlands (Lubusz and West Pomeranian Region), Cararpathian Foothills and Carpathian Mountains, accounts for approx. 2/3 of the total domestic output. Its most productive field (since July 2013) is located near Lubiatów, Gorzów Wielkopolski Region, while the Barnówko-Mostno-Buszewo field, discovered in the 1990's, has the largest reserves. In 2012, these two fields accounted for 75% of Poland's total oil production. Lotos Petrobaltic is producing oil from offshore B3 and B8 fields located in the Polish Exclusive Economic Zone of the Baltic Sea. In 2012, these fields produced approx. 188,000 tonnes of oil shipped with tankers to the Northern Port in Gdansk. Domestic production, however, merely covers some 3% of Poland's demand for oil. This situation is unlikely to change in the future considering that total proven crude oil reserves of Poland are estimated at only 25 million tonnes.
The structure of gas production is similar to that of crude oil. PGNiG S.A. is the key player, but the reserves are much bigger. In 2012, Poland produced approx. 5.6 Bcm or about 1/3 of the total demand. Gas fields located in the Polish Lowland and Carpathian Foothills provided the bulk of that volume. Small amounts of gas (approx. 20 Mcm) are produced offshore with crude oil in the Baltic (and then transported with a gas pipeline to the heat and power plant in Władysławowo) and elsewhere in onshore locations. US-based FX Energy Poland is the only independent conventional gas producing company: since December 2013 they have produced approx. 31,100 cm of gas daily (approx. 11 Mcm per year) from Pyzdry Concession in the Wielkopolska Region (FX Energy holds 49% shares in the concession, while PGNiG S.A. 51%). The above information clearly indicates that natural gas production is a monopoly in Poland.
The upstream sector has much grown in Poland following the Energy Information Administration report of 2011 on huge shale gas resources (5.3 Tcm). Several international companies, including ConocoPhillips (as Lane Energy Poland), ExxonMobil or Chevron, started operations in Poland. A joint venture of San Leon Energy and LNG Energy holds the largest number of concessions. Polish companies, PGNiG S.A., Orlen Upstream S.A., Lotos Group and Petrolinvest hold about 1/3 of all concessions.
As of end July 2014, 64 exploratory wells have been drilled, much less that required to assess the resources. Moreover, investors tend to withdraw from Poland and transfer their operations to other countries.
More than concession holders
Due to the complexity of exploration, operators do not focus on specific operations but contract them out to external service companies. It should be emphasized that in a vast majority of cases operators do not own nor operate drilling equipment: drilling rig, pumps or transmission pipelines. On the other hand, service companies do not hold any shares in concessions and are not entitled to any profits on oil or gas produced from the well. Their role is limited to offering specific services that required for oil and gas production, including:
- Seismic surveying: identification of the most prospective drilling locations and data interpretation. These services are offered by Geofizyka Kraków, Geofizyka Toruń (of PGNiG Group), United Oilfield Services and other providers.
- Well drilling and completion:
- casing service (placement),
- cementing service,
- mud service,
- specialty jobs in existing wells (e.g. coiled tubing, stimulation jobs), and
- several other services.
ExaloDrilling S.A., established in 2013 from consolidation of five companies from the PGNiG Group (NiG Kraków S.A., PNiG JASŁO S.A., PNiG NAFTA S.A., PN „Diament” sp. z o.o. and ZRG Krosno sp. z o.o.) holds the largest market share. Specific services are provided by global and international companies, such as: Halliburton, KC Deutag, MND, Schlumberger, Weatherford and United Oilfield Services.
Moreover, several other auxiliary service providers operate in any mining area. They include, but are not limited to the following: mud quality inspection service, water and material transport services, reservoir fluid recovery, geological data analysis, downhole logging, field pump service, etc. Hundreds of specialists from several tens of different companies must do their jobs before natural gas begins to flow to the transmission pipeline.
The future of the upstream sector in Poland is contingent on a number of factors that include: legislative/fiscal framework, geopolitical situation, geological conditions and may other factors. In the case of unconventional resources, the companies have to rely increasingly on mutual cooperation. This is particularly true for domestic companies which, having no previous experience, attempted to operate on their own but failed to achieve the expected results. A cooperation agreement of March 2014 between PGNiG S.A. and Chevron is an example of efforts that are aimed at bringing together the domestic potential and foreign expertise. The Act on legislative framework of gas and oil production, as adopted by the Parliament in July 2014, is of key importance to the industry. Should investors come to the conclusion that the fiscal charges are set on a prohibitively high level, they may withdraw from investing in Poland. New capital projects may not materialize. It may well appear than the “shale bloom” had only lasted for a short while.
Poland's upstream sector has a long history that began with the onset of crude oil production in the world. Today, however, conventional resources are scarce, while unconventional ones are still to be appraised in Poland. PGNiG S.A. is a dominant market player and this is not expected to change in the near future, unless a “shale revolution” happens in Poland...
author: Wojciech Labuda - WDrilling, Oil and Gas Faculty, AGH University of Science and Technology in Krakow, Law and Administration Faculty, Warsaw University, Warsaw School of Economics