Exxon Shale Failure in Poland May Lengthen Gazprom’s Shadow

By Joe Carroll

Exxon Mobil Corp. (XOM)’s failed shale-gas wells in Poland may hobble the nation’s effort to become one of the world’s major energy sources and dismantle Russian dominance of Eastern European natural-gas markets.

Exxon, the world’s largest energy company by market value, said two exploratory wells drilled in a Polish shale formation last year weren’t commercially viable. The gas discovered in the wells, Exxon’s first in Poland, failed to flow in sufficient quantities to justify bringing them into production, David Rosenthal, vice president for investor relations, said during a conference call yesterday.

International energy prospectors, including Marathon Oil Corp. (MRO), Chevron Corp. (CVX) and Talisman Energy Inc. (TLM), are probing Poland’s shale deposits to see if drilling techniques that revolutionized U.S. gas production can unleash reserves big enough to supply Polish demand for more than three centuries. Exxon’s setbacks suggest Poland’s shale poses unique challenges that may increase costs and delay output, said Gianna Bern, founder of Brookshire Advisory & Research in Chicago.

“Shale exploration is a very high-cost and high-risk business and the Polish shale market is still in its infancy,” Bern, who advises major oil companies on risk management and strategy, said in a telephone interview yesterday. “It’s early in the game for Poland, and they have significant potential reserves over there.”

Reduce Imports

Poland’s shale formations hold 187 trillion cubic feet of recoverable gas, according to an April 2011 assessment by the U.S. Energy Department. Those resources are 32 times larger than the country’s conventional gas reserves and enough to supply domestic consumption for 322 years.

For Poland, successfully unlocking gas from shale would be a boon to domestic manufacturers and power producers by diminishing the need for Russian imports that now supply two- thirds of demand, said Benjamin Schlesinger, president of Benjamin Schlesinger and Associates Inc., a Bethesda, Maryland- based adviser to gas producers, utilities, regulators and financial-services firms.

Poland’s dominant gas company, Polskie Gornictwo Naftowe i Gazownictwo, pays Russia’s state gas company Gazprom OAO (GAZP) $500 for 1,000 cubic meters ($14.16 per million British thermal units) of gas. That’s six times the benchmark U.S. price for the fuel.

Poor Wells

“Poland’s shale resources are enormous,” said Schlesinger, a Stanford University-trained engineer who helped the New York Mercantile Exchange design its gas futures contract. “Poland should be able to capture a good deal of those resources and reduce reliance on the Russian Federation.”

Gazprom’s depositary receipts rose 2.5 percent to $12.40, the highest closing price since Oct. 28. The London-listed receipts each are worth two ordinary shares in the Moscow-based company.

Exxon’s failures followed disappointing results at Polish wells drilled last year by 3Legs Resources Plc and BNK Petroleum Inc. (BKX) London-based 3Legs’s Lebien well and BNK’s Lebork well flowed at lower rates than similar prospects in the Barnett and Fayetteville shale regions in the U.S., Sanford C. Bernstein & Co. said in a Nov. 10 note to clients.

“Poland is cited among Europe’s best shale prospects, but Exxon’s result supports our caution on achieving material near- term volumes,” Oswald Clint, a London-based analyst at Bernstein, said in a note today.

Even so, it may be too early to draw any firm conclusions from Exxon’s drilling failure, said Pawel Poprawa, who specializes in shale at the Polish Geological Institute in Warsaw.

‘Technological Problem’

“If we look at the experience from the U.S. or Canada, no single well can provide the answer if the basin has potential or not,” he said. “Low flows seem to be a technological problem.”

Marathon Oil said today that it’s evaluating data after finishing its first well in a Polish shale formation. The Houston-based company said in a statement that it intends to drill three more wells during the next few months and withdraw rock samples for testing. Marathon plans a total of six to seven Polish shale wells this year, according to the release.

The Polish shale results come after Exxon encountered a dry hole in Hungary in late 2009 drilled in a tight-sand deposit similar to shale. Exxon walked away from the $75 million project after striking more water than gas.

Exxon and other major North American energy producers have been lured to explore shale prospects from Germany to Argentina after largely missing out on the boom in shale extraction in the U.S. that began in the middle of the last decade.

Smaller Explorers

Smaller explorers such as EOG Resources Inc. (EOG), Chesapeake Energy Corp. (CHK) and Range Resources Corp. (RRC) came to dominate the U.S. shale industry by default as the biggest international companies focused on locating billion-barrel offshore crude fields in places like the Gulf of Mexico and West Africa.

Shale formations were ignored by much of the energy industry for most of the past century because the rocks were considered too hard to crack using traditional drilling techniques. That began to change in the late 1990s with the development of new horizontal drilling practices and more- intensive hydraulic fracturing that succeeded in unlocking gas and crude from shale and similarly dense geologic deposits.

‘Attractive Fiscal Terms’

Exxon sought to jump-start its shale program in June 2010 with the $34.9 billion acquisition of XTO Energy, a Fort Worth, Texas-based pioneer of shale development. In addition to shale wells and undrilled prospects that stretch from the Mexican border to Canada, Exxon wanted to transfer XTO’s in-house expertise to foreign shale fields.

Exxon hasn’t disclosed its plans for further drilling in Poland. The shares rose 0.3 percent to $83.97 at the close in New York.

Poland has led European shale exploration by virtue of its tempting geology and by offering “attractive fiscal terms” to prospectors, the Energy Department in Washington said in a September report.

Still, a “likely aggressive tax burden” to be imposed on shale-gas producers may damp investor enthusiasm, analysts at Bank Zachodni WBK SA, based in Wroclaw, Poland, said yesterday in a note to clients.

Polish drilling also has been hindered by a scarcity of rigs, water and specialized equipment needed for shale wells, Bern said.

“Getting the things you need to drill these wells is much more difficult in Poland than in the United States, where the shale industry is very well-developed,” Bern said.

Source

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UK: Talisman Selects Helix Well Ops for Subsea Works on Its Assets

Subsea well intervention specialist Helix Well Ops UK (Well Ops), has been awarded a multi-service contract by Talisman Energy (UK) Limited.

The contract will see the Aberdeen-based firm carry out a number of subsea workscopes that include well maintenance and production enhancement operations, and a number of well abandonments at various fields within Talisman’s portfolio of assets. The multi-service campaign is anticipated to last upwards of two months and will be undertaken from Well Ops’ mono-hull saturation diving and well intervention vessel MSV Seawell.

Launched in 1987, MSV Seawell was one of the pioneers of the light well intervention market in the North Sea and will soon be entering its 25th year of service across the UKCS, NCS and Danish sectors of the North Sea. During this period the vessel has performed well intervention work on more than 650 wells, as well as decommissioning over 150 live and suspended wells and 15 subsea fields.

The 114-metre (374ft) DP2 vessel features a purpose-built derrick for well intervention above a 7m x 5m moon-pool and a travelling block rated to 80-tonne lift capacity. MSV Seawell has a saturation diving capability of up to an 18-man team, and these services are supported by work-class and observation-class ROVs.

Steve Nairn, Well Ops’ regional vice president of Europe and Africa, said: “Well Ops has successfully carried out a number of well intervention projects for Talisman in recent years and we are very pleased to be continuing our long-standing relationship with the award of this two-month, multi-service project.”

The abandonment of wells is anticipated to make up a significant proportion of the estimated £30billion expenditure that will be spent decommissioning the UK’s oil and gas infrastructure. Industry body Oil & Gas UK has said that between 2012 and 2020, it is estimated that £1.6billion will be spent decommissioning wells.

Mr Nairn added: “Although well abandonment and decommissioning is being discussed more widely, there is still uncertainty as to the speed that such projects will come on stream. At the same time, due to the investments which are being made in the North Sea establishing new fields and rejuvenating existing ones, there will continue to be a demand for our broad range of well intervention, diving and light construction services.”

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Soros-Backed San Leon Says Polish Shale Gas Profits to Beat U.S.

By Marek Strzelecki

Sept. 20 (Bloomberg) — San Leon Energy Plc, the natural- gas explorer backed by billionaire George Soros and Blackrock Inc., expects its Polish shale licenses to be more profitable than U.S. deposits, the company’s exploration director said.

San Leon, which became one of the leading shale gas explorers in Poland after buying Realm Energy International Corp. for $142 million last month, seeks to profit either through so-called farm-outs with a cash component or asset sales once it develops its fields and proves they can produce gas, John Buggenhagen said in an interview in Warsaw.

Shale gas, unlocked from rocks by blasting them with sand, chemicals and water, has boosted U.S. production and delivered the lowest prices in almost a decade. Companies including Exxon Mobil Corp. and Chevron Corp. seek to emulate the U.S. boom in Poland, Europe’s biggest holder of shale.

“If you’re getting $4 for your gas in the U.S., here you’re getting $8, meaning I can produce half as much gas for the same profit,” Buggenhagen said.

Dublin-based San Leon has 14 licenses and 1.7 million acres of land in the eastern European country to explore for shale gas and conventional hydrocarbons, according to a presentation on its website. Poland has granted 101 licenses, with eight wells completed out of a mandatory 124. Test production has started on two wells.

U.S. Example

“If you look at what’s going on in North America, I mean that people are paying $10, $20, $30 an acre, and selling it for $10,000, $20,000, $30,000 an acre, that’s the kind of return that we’re looking for.” Buggenhagen said. “We would like to use our existing capital to start exploring those Realm concessions on our own, as opposed to giving away acreage through farm-outs.”

Last year, the company signed a farm-out agreement with Talisman Energy Inc., under which the Canadian gas explorer will drill one well on each of San Leon’s concessions in the Baltic basin in northern Poland in exchange for 30 percent stakes in the licenses. Talisman has an option to increase its holdings to 60 percent if it drills an additional well on each license.

San Leon was approached by three “significant oil and gas companies” and may consider more farm-outs after upcoming drillings, Buggenhagen said.

“If I come and drill the well that costs me $4 million to $5 million and if I’ve increased the value of that block 10- fold, then the value of my farm-out is that much more” he said.

Production Start

Poland may sit atop about 5.2 trillion cubic meters of shale gas, according to the U.S. Energy Information Administration. Commercial production can start in three to five years, helped by the relatively high price of Russian gas, Buggenhagen said.

The country buys some 60 percent of its gas under a long- term contract from Russia. In the second quarter the country was paying more than $400 a 1,000 cubic meters of Russian gas, according to Polish Deputy Prime Minister Waldemar Pawlak. That’s about three times today’s gas price for October delivery on the New York Mercantile Exchange.

While Poland’s almost complete reliance on coal as fuel for power generation may help boost shale production given the European Union’s push to lower carbon-dioxide emissions, the country should be cautious in increasing royalties for oil and gas producers, Buggenhagen said.

“What we’re struggling to know is how is the Polish government going to respond to success, in terms of changing royalties and income taxes,” he said. “You see that everywhere in the world — the greed factor — how much greed we will see over the next three to five years.”

Production Fees

Last month, Poland’s largest opposition Law and Justice party presented a draft law calling for output fees to be at least 40 percent of the value of the deposit. While the government argues mining fees should not be set before gas deposits are proven, in June Pawlak said the country saw Norway and its sovereign wealth fund as a model to benefit from shale gas production.

“Royalties are less than 1 percent now, so very low,” Buggenhagen said. “They will go up, for sure, But if you raise it to 40 percent you’re going to discourage the investment.”

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Norwegian giant in it for the long haul with Texas shale venture

Helge Lund (left), CEO of Norwegian energy company Statoil, speaks with Statoil Joint Venture Manager Cesar Alvarez (facing away) and Talisman Energy Frac Specialist Nabila Larsen (right) at a Talisman Energy fracking site near Cotulla, Texas. Statoil is working with Talisman energy to develop oil and gas ventures in the Eagle Ford shale formation in south central Texas. (Photo: JOHN DAVENPORT/SAN ANTONIO EXPRESS-NEWS)

LA SALLE COUNTY – Helge Lund, CEO of Norway’s Statoil, likes to say his company is more than just a financial investor in shale gas fields in the U.S., and he made that abundantly clear one morning last week.

Up before dawn, the tall, soft-spoken Norwegian ate breakfast tacos and endured a long drive on bumpy dirt roads before arriving at a remote well site, about 100 miles south of San Antonio, where mesquite and prickly pear blanket the dusty landscape and deer, jackrabbits and rattlesnakes are the primary residents.

His mission was to get an up-close look at an operation in the Eagle Ford shale formation, where the company launched a joint venture last year, and he spent several hours in the sweltering South Texas sun doing just that.

“The key point for us is we do not look at this as a short-term investment,” said Lund, 48, wearing thick red coveralls, steel-toe boots and a hard hat. Rather, he said, it is an important part of the company’s future.

Last fall, Statoil announced it would pay $1.3 billion for properties in the Eagle Ford shale formation and team up with Canada’s Talisman Energy to develop them. Two years earlier, the Norwegian oil giant paid roughly the same amount for a stake in Marcellus shale properties in the Northeast U.S. operated by Chesapeake Energy.

Statoil is among a number of foreign oil companies including France’s Total, China’s Cnooc and Australia’s BHP Billiton that are paying huge sums to enter U.S. shale rock formations, where recent breakthroughs in drilling and extraction technology – pioneered by small U.S. producers – have put massive quantities of natural gas within reach.

A push to diversify

But Statoil, two-thirds owned by the Norwegian government, faces special pressure to diversify its production beyond Norway, where mature offshore fields in the North Sea are in decline and taxes are high.

As such, it has focused on North America, where it also is a major leaseholder in the Gulf of Mexico, has exploration acreage in Alaska, operates an oil sands project in Canada and is drilling off the Canadian eastern coast.

“The next 10 years, we will probably have steeper growth in North America than in any other region of the world,” said Lund, who expects a fivefold increase by the end of the decade in Statoil’s North American production, now roughly 100,000 barrels of oil equivalent per day.

Sharp increase is goal

The company has a broader goal over the same period to boost global output to 2.5 million barrels per day from about 1.9 million barrels today, as fields also come online in Brazil and elsewhere.

Statoil also might consider partnerships to explore in the Arctic, like one announced late last month by Exxon Mobil Corp. and Russia’s Rosneft.

“I cannot rule that out,” said Lund, noting that the Arctic will be another focus area for the company moving forward.

But he is the first to acknowledge that while Statoil is a skilled offshore operator, particularly in harsh climates, it still has much to learn in the onshore unconventional gas business. That’s why Talisman is taking the lead in operating wells in the Eagle Ford, while Statoil serves as understudy.

Statoil will begin operating wells under the joint venture by as early as the end of next year, though details of how the two companies will divide things up remain in discussion, Lund said.

The Eagle Ford shale, which is 450 miles long and 50 miles wide and runs in a crescent-shaped band below San Antonio, has been attractive to oil companies because, in addition to gas, it contains more valuable supplies of oil, condensate and natural gas liquids.

Houston’s Marathon Oil Corp., for instance, inked a $3.5 billion deal in June to acquire 285,000 acres in the formation, while Shell, ConocoPhillips and others also have positions.

But it can be challenging to develop the Eagle Ford’s deep high-pressure wells, and the mix of gas or liquids can vary widely from zone to zone.

Scales and fangs

Then there’s the matter of the neighbors.

“Rattlesnakes are really bad out here,” said David Peterson, a safety consultant to Talisman at the well site.

Sven del Pozzo, an industry analyst with IHS-Herold in Stamford, Conn., said such challenges will be difficult to navigate for companies like Statoil with little experience in shale plays.

“This is new for them,” he said. “It’s going to take some time to get it right.”

Since December, Talisman has drilled 22 wells under the joint venture, said Chris Jeske, manager of Talisman’s Eagle Ford unit. It’s run from The Woodlands, where half a dozen Statoil employees are working and more are coming.

The joint venture now has eight rigs in the formation, will increase that to 14 by the end of next year and then has plans to drill up to 200 wells a year, Jeske said.

The partnership controls roughly 170,000 acres across La Salle, McMullen, Live Oak, Bee, Karnes and DeWitt counties.

While Statoil is focused first on becoming an operator in the Eagle Ford and sees more opportunity for shale acquisitions in the U.S., “we are looking at opportunities outside North America as we mature our approach,” Lund said.

Possible areas for expansion could include Asia, South America and Europe.

He said Statoil also has had talks with China National Petroleum Co. on a possible joint venture to develop shale acreage in China, though he declined to discuss specifics.

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