Poland`s shale-gas: A future Qatar on the Baltic?

At present, Poland imports around 70 % of gas for its energy needs, principally from Russia. For several years, Poland, amongst others, has watched with increasing concern the deployment of the gas weapon by Gazprom in furthering Russia`s foreign policy aims in the region. Cut offs of energy supplies to Ukraine and Belarus in 2006, 2007 and early 2009 as well as the Russian – German agreement in 2005 to build the “Nord Stream” – notoriously likened then by the current Foreign Minister and possible candidate for the next Presidential elections, Radoslaw Sikorski, to a new “Molotov – Ribbentrop pact”, has served to increase these fears of apparent dangerous overreliance on a longterm foe for keeping Poland`s lights on. Poland has sought to cooperate with its neighbours in the Baltics and its fellow Visegrad pact members (comprising Czech and Slovak Republics as well as Hungary) to enhance and integrate the countries` respective energy systems to mitigate the risks of a further cutoff and improve their energy security. An example of this is the gas interconnect project between Poland and the Czech Republic scheduled to be completed in 2011.

In addition, Poland is moving to exploit its own potential energy resources. Poland extracts about 4 billion cubic meters of gas a year, and has proved reserves of about 165 billion cubic meters. Its existing usage is just under 14 billion cubic meters per annum. In addition, Poland is believed to be located over a promising geological strata that could yield somewhere between 1.5 and 3 trillion cubic meters of gas. If efficiently extracted at an affordable cost, over five to ten years this could transform both Poland`s national security (as well as that of other regional neighbours) and its public finances.

Poland has recently awarded 44 concessions for exploring and exploiting shale-gas, among the lucky winners were some of the world`s leading multinationals such Chevron, ConocoPhilips, Exxon and Marathon. In August 2009, ConocoPhilips signed an agreement with Lane Energy to evaluate several promising shale gas licenses in Poland, which Lane Energy had obtained in October 2007 in respect of around 1 million acres in the Baltic Basin.

Based on existing usage, Poland could, in future, dramatically curb imports – around 11 % of Poland`s imports of circa US $ 210 billion constitute minerals, principally oil and gas, and Russia accounts for just under 10 % of total imports, and also seek to generate significant export earnings from sales to its regional neighbours. This would lead to a reversal of its current trade deficit. Providing there is clear and transparent legislation and a nonpunitive tax regime, Poland might be able to enjoy a nice little earner in the form of future royalties and corporate tax receipts. This could also positively benefit Poland`s public finances.

All to the good, but Poland is still at the early stages although initial signs are promising. To exploit the shale-gas requires a combination of hydraulic fracturing and horizontal digging – a technique that is in common use in the USA where exploration companies have moved quickly to exploit the huge resources there. According to the recent issue of “The Economist”, the US may well have passed Russia in becoming the largest gas producer in the world on the back of the country`s own shale-gas deposits. The cost of extraction is relatively high, there may well be significant costs arising from damage to the environment and of course the rate of development and exploitation could be affected by future gas prices. Of interest here is Gazprom`s decision recently, in the light of increased competition from Norway and spot-market supplies, to amend some of its longterm supply contracts in Europe to allow a portion of sales to be linked to the spot price.

It is expected that the results of well testing in Poland should be released during the course of this year. Given Russia`s own heavy reliance on Gazprom to support its economy, Russia will be paying close attention to what develops in Poland that might affect its own core business. In January of this year, Poland extended an agreement with Gazprom to supply upto 11 billion cubic meters of gas per year, depending on Polish market demand, upto 2037. Perhaps before too long, Poland itself may seek renegotiation of the longterm agreement?

No time to crack open the bottle of champagne yet!

In 2009, Poland, alone of all the EU and most of the industrialised world, managed to register an increase in GDP of 1.7 %. In addition, it is projecting further economic growth this year of 2 % or more. Furthermore at a time when many countries, in particular, Greece, have come under scrutiny for their level of indebtedness, Poland looks on the face of it to be safe - the "P" in the grouping of "PIGS" - those falling under chilly gaze of speculators, hedge funds and "Gnomes of Zurich" (relocating from London to enjoy a more favourable tax regime), is filled by Portugal not Poland - the others being Ireland, Greece and Spain. Poland`s current debt as a share of GDP is just 50.5 %. That is comfortably midrange - Spain is a little lower at 49.7% but that country has a raft of problems such as 19 % unemployment and other sundry problems, while Greece`s is 113.2 %. Just to round off the comparisons - the average of the EU 25 is 72.3% while the UK`s is 63.4%.

So far, so good and I think it would be churlish to deny the government a little pat on the back for not allowing the economy to "boom and bust" as others have. Poland`s Minister of Finance was in fine fettle earlier this week, as demonstrated by his interview for the "FT". He couldn`t, of course, pass up the opportunity of reminding others in the EU "to get their finances in order" and "buck up and cut out the fiscal stimuli and other "voodoo economics". But, as so often seen in life, such hubris can be followed by nemesis, although whether this a quick one-step or a more prolonged drawn out affair, only time will tell. For one statistic not so well known may give all of us some pause for thought.

According to data prepared by Jagadeesh Gokhale of the Cato Institute, the current and future pension obligations of Poland amount to an eyewatering 1,550.4% of GDP! Greece`s own figure is 875.2 % and the EU 25 average is 434.2%. The UK`s is 442.1%. Poland`s nearest rival is Slovakia with 1,149.1%. In other words, Poland is in a class of its own but not one many other countries would wish to imitate. On another level, it also suggests that looking alone at government debt, everyone may be missing the real threat to our future, and to our children and grandchildren`s standard of living - the cost to support us as we all retire.
Poland`s problem has been exacerbated by the relaxed treatment provided to people in the 1980s and 1990s in terms of taking early retirement and a full pension - a disguised form of unemployment not reflected in the then already reasonably high figures. Starting in January of this year, the Government started to reduce the pensions of tens of thousands of functionaries of the former regime by around a half. It has been reported that some were receiving pensions of around EUR 2,000 per month. One might say in passing that the government presented this as a delayed form of justice for those who were part of an illegal regime who declared martial law and cracked down on Solidarity etc etc although one suspects that economic motives were more than likely prominent in the decision.
Poland may yet still need to consider other drastic courses of action - a further increase in the pensionable age, reduced benefits etc if Poland is to escape the fate of "Greece on the Baltic"...