Realising the potential of

unconventional gas in

Poland

Prof. Dr. hab. Eng. Andrzej W. Jasiński

Adviser to Deputy Prime Minister, Minister of Economy Adviser to Chief Inspector for Environmental Protection

Chairman of the State Commission of EIA

The European Unconventional Gas Summit 2013

Vienna, 29th January 2013 - 31st January 2013

Shale gas -Is it something new ?

Unconventional gas deposits have been known since the

nineteenth century; however, very small production

was often haphazard. Gas flows from vertical drillings

were obtained randomly and production was negligible.

The first ever drilling for shale gas extraction was

performed in 1821 in the Devonian shale rocks near the

U.S. town of Dunkirk. The well depth of 9.5 m supplied

gas for many years to illuminate the town of Fredonia,

New York.

Planned exploration and production of shale gas in fact

began on a large scale in the 90’s of the last century

and is rapidly developing. On a larger scale, extraction

of shale gas has lasted for 20 years.

Shale Gas Resources of the

world

It is estimated that the world's unconventional gas deposits are ten times larger than conventional resources. The actual quantities are difficult to define, because most of the world is still largely unexplored. Most is known about North America. It is estimated that in the future, shale gas will account for 50% of gas production in the U.S..

Why Poland ? • Special attention will be devoted to the Polish market,

where the situation seems to be most promising and Poland is often considered to be a “test case” for the rest of the Central Eastern Europe (CEE) –and indeed EU-region .

• There are reasons to assume that shale gas in Poland is in the coastal, Podlasie and Lublin basins. Certainty about the resources will be better defined after the planned drillings.

• Geological data on the possibility of extracting shale gas in Poland will be available after the completion of testing and drilling carried out by investors on the basis of licenses for exploration and prospecting of deposits of natural gas. Confirmed information should appear in the next 3-5 years. One will then determine the feasibility of extracting gas from shale - its profitability and investor’s interest.

Polish energy problems

-some of old-fashioned energy producing plants(CHP) are to be modernized ,rebuilt and supplemented with new plants, including nuclear units (forecasts of purchasing energy abroad or of reducing needs of the industry and society)

-reduction of carbon dioxide emissions ( treatment of emissions; switching fuel from coal to gas; „clean” coal technologies – e.g. IGCC, CCS; bigger input of energy from renewable sources, etc),

-the most suitable to Polish resources “energy mix”, The simple switch from coal to gas is a big step forward to meet Polish obligations to reduce carbon dioxide emissions

Natural gas in polish paleozoic shales of Poland- land based and

shelf (offshore) basin of the Baltic - Podlasie - Lublin

Two questions to be answered:

1.Do we have shale gas ?

2.How much shale gas do we have?

The answers:

Ad 1. shale gas was found in some places (e.g. by PGNiG in Lubocino)

Ad.2 There are some estimates based on rough approximations:

• 1,37 bln m3 (Wood Mackenzie, 2009),

• 1,87 bln m3 (EUCERS, 2011),

• 2,83 bln m3 (Advanced Resources International, 2009),

• 5,3 bln m3 (EIA, 2011),

and based on some drillings (39 exploratory boreholes made in the years 1950-1990 ):

• 0,35 – 0,77 bln m3 (PGI, 2012).

With the influx of data and the development of exploration drilling for gas in shale formations, estimates of hydrocarbons in unconventional reservoirs will be verified, and further reports will be published.

We need, at least 100 wells composed of both vertical and horizontal drillings, with perforation and fracking to have an initial answer to the second question.

Area of the Lower Paleozoic shales with the potential

occurence of shale gas

Map of licenses for exploration of shale gas

First drillings and

prospects • The first drilling began in June 2010 in the area

of Łebień (Pomerania).

• Exploration work carried out so far by PGNiG in Lubocino near Wejherowo confirm the existence of unconventional gas in Poland. At this stage of the analysis it is not possible to estimate the real gas resources from unconventional sources and to estimate the economic viability of production.

• In case of gas production profitability , production ,in significant quantities, might start in the horizon of 5-10 years.

Plans and their implementation

• Ministry of the Environment as the licensing authority for concessions ,among others, monitors the implementation of the various concession obligations, receives the investor annual reports, and complies the final results of the works (which gives the opportunity to the State Treasury, to acquire valuable geological data and the results of the work, the costs of which are estimated to be up to several million dollars for the performance of one borehole and cumulatively exceed the capacity of the state budget ).

• It is planned to perform over 300 exploration wells by 2021 (128 for sure, 181 optional extra, depending on the capabilities and performance of works by investors). Changes in given licenses and the scope of their geological works are possible .

• By November 5, 2012 there were performed 33 exploration boreholes .

What conditions must be met in order to

obtain a gas exploration license?

The requirements to be met on an application for a license

for prospecting and exploration of natural gas are

contained in the laws on freedom of economic activity

and the Geological and Mining Law (Pgig). The

application for a license for prospecting and

exploration of mineral deposits must be accompanied

by a draft of geological work. Specific requirements to

be met by projects of geological work are defined in the

Regulation of the Minister of Environment on

geological work.

Concession for the Extraction of Shale Gas

and other remarks

• Concessions granted for prospecting and exploration of unconventional natural gas are not equivalent to granting concessions for the extraction. To obtain a mining concession operator must first perform a series of steps in the exploration license and document them.

• New Geological and Mining Law came into force in 2012; however, as several issues still remain unsolved, it is planed that the Government will introduce a special act dedicated only to hydrocarbons in the future.

• Procedures delay the process of extracting raw materials, thus permitting regulations has to be simplified in the emerging hydrocarbon law.

A draft of the new hydrocarbon law

• In the end of the last year has been published a draft of a law on hydrocarbons mining, their tax and the Generations Fund (“Fundusz Pokolen”) which will invest some of the money raised from the tax on gas extraction. It will be strengthened supervision over implementation of concessions, including a tender for acquiring them , in which will be able to participate only verified company (so called pre-qualification).

• The Act is designed to ensure the safety of resale licenses - the right of first refusal is reserved for NOKE (National Operator of Energy Raw Materials), and the resale will be possible only to companies that have successfully passed the pre-qualification procedure.

• In addition, exploration concession is to be replaced by a permit exploration, and reconnaissance license (normally issued for 5 years) and mining license (issued at 20-30 years) is to be converted into reconnaissance-mining license (issued at about 30 years).

• Together with the permit will be approved timetable and list of investment commitments. They will be a basis of the conditions of the license fulfillment .

A draft of the new hydrocarbon

law (continued)

• NOKE (National Operator of Energy Raw Materials) is going to

be a company of the Treasury, in which the state will participate

in 100 percent. and which will be supervised by the Minister of

State Treasury. The company will have a right of first refusal in

the secondary market of concessions and gains of NOKE will be

transferred to the state budget and to the Hydrocarbon

Generations Fund. The funds accumulated in this fund will be

used for long-term investments.

• NOKE will have a low percentage of participation in the

projected investment. This might allow entrepreneurs to gain

creditworthiness growth of the project, and the state - control

over the economy of deposits.

• Regulations on unconventional gas will therefore be more like

the European system than the U.S. (where the emphasis is

placed on private enterprise and the direct involvement of

investors at their own risk).

Criteria for the Designation of Complexes

with Shale Gas Potential

(1) high TOC content - average more than 1-2% by weight,

(2) a large thickness of the complex rich in organic matter, more than 30-60 m (depending on TOC),

(3) high thermal maturity of shale - more than 1.1-1.3% Ro (vitrinite reflectance), but not higher than 3.5% Ro,

(4) rapid burial and heating, then uplift,

(5) Low depth of a complex - below 3500-4500 m, not shallower than 1000m,

(6) low degree of tectonic deformation - ~ flat arrangement of layers,

(7) the presence of abnormal pressures,

(8) the presence of symptoms of gas and conventional gas deposits in a basin,

(9) high silica content of shales and low content of hydrophilic clay minerals,

(10) complex and diverse reservoir conditions (eg, depth, reservoir pressure, the number of horizons, porosity, permeability etc.).

Exploration strategies of shale gas

Specificity of shale gas exploration is that the parent rock is the reservoir rock - no trap, no seal, and no gas migration. Therefore, there are differences in relation to conventional hydrocarbon exploration:

• An extensive analysis of petroleum systems for the identification and characterization of parent rocks,

• A key role is played by geochemical studies (Rock Eval, TOC, Ro, kerogen),

• Seismic surveys are not carried out to identify the deposit, but to design trajectory of boreholes ,avoiding tectonic disturbances,

• Obtaining sufficiently large concessions in order to identify the most promising areas ("sweet spots"),

• Different strategies to reduce the risk of exploration

Measures that should be taken to reduce the

Environmental Impact and improve the Safety of

shale gas operations (1)

• Safety of people, the community and the environment is the top priority for all responsible companies and authorities working on unconventional gas extraction. Recent developments in technology and the extraction process have made unconventional gas exploration and production not only economical, but safer and more efficient.

• Companies exploring for unconventional gas should work closely with local communities to ensure that the exploration and production activity does not negatively impact the community’s safety, economy or environment. Through transparency and a continuous dialogue, responsible operators aim to ensure that the community understands and is comfortable with the process.

• When a drilling site is selected, the economic and environmental concerns of the local community should be taken into account. The site management team should work closely with community leaders to assess the risks and benefits of the site and align the company’s goals with those of the local community. After these discussions, information is gathered regarding all applicable laws, regulations, permits and codes, and environmental impact assessments (EIAs) are conducted to identify and address any potential hazards.

• Improve public information about shale gas operations (e.g., create a portal for access to a wide range of public information on shale gas development, to include current data available from state and voivodship regulatory agencies. The portal should be open to the public for use to study and analyze shale gas operations and results ).

Measures that should be taken to reduce the

Environmental Impact and improve the Safety of

shale gas operations (2)

• The relevant public and private agencies, should discuss and agree on an appropriate mission and level of funding for unconventional natural gas R&D,

• The public should expect significant technical advance on shale gas exploration and production that will substantially improve the efficiency and reduce potential environmental impact of shale gas.

• The expectation of significant production in the future offers a tremendous incentive for companies to undertake R&D to improve efficiency and profitability. The history of the oil and gas industry supports such innovation, in particular greater extraction of the oil and gas in place and reduction in the unit cost of drilling and production.

• R&D projects where results could reduce safety risk and environmental damage for shale gas operations:

1. Basic research on the relationship of fracturing and micro-seismic signaling.

2. Determination of the chemical interactions between fracturing fluids and different

shale rocks – both experimental and predictive.

3. Understanding induced seismicity triggered by hydraulic fracturing and injection

well disposal.

4. Development of “green” drilling and fracturing fluids.

5. Development of improved cement evaluation and pressure testing wireline tools

assuring casing and cementing integrity.

Measures that should be taken to reduce the

Environmental Impact and improve the Safety of

shale gas operations (3)

• The public deserves assurance that the full economic, environmental and energy security benefits of shale gas development will be realized without sacrificing public health, environmental protection and safety. Nonetheless, accidents and incidents have occurred with shale gas development, and uncertainties about impacts need to be quantified and clarified.

• Important steps have to be undertaken for more thorough information, implementation of best practices that make use of technical innovation and field experience, regulatory enhancement, and focused R&D, to ensure that shale operations proceed in the safest way possible, with enhanced efficiency and minimized adverse impact.

• If implemented ,these measures will give the public reason to believe that the nation’s considerable shale gas resources are being developed in a way that is most beneficial to the nation.

Multi-Well Pad System

• Horizontal drilling has also led to the development of multi-well pad technology (instead of having single well pads spread throughout the community), which allows for one drill site to include a number of producing wells that can access reservoirs thousands of meters away.

• The multi-well pad system allows for enhanced efficiency because of repeating operations at the same site and a much smaller footprint (e.g. concentrated gas gathering systems; many fewer truck trips associated with drilling and completion, especially related to equipment transport; decreased needs for road and pipeline constructions, etc.). It is worth noting that these efficiencies may require pooling acreage into large blocks.

Main Research Objectives to investigate the Environmental

aspects of Hydraulic Fracturing operation

(example of the exploration well LE-2H )

The main objective of the research team coordinated by PIG-PIB was to investigate the environmental aspects of hydraulic fracturing operation, carried out in August 2011 in the exploration well LE-2H , belonging to a group 3Legs Resources company- Lane Energy Poland. Research was done in cooperation between the Ministry of Environment and the investor. The study included: - Seismic monitoring (determination of the level of seismic noise before and during the hydraulic fracturing, and recording live any seismic events - gas-emissions (sulfur dioxide, nitrogen oxides, benzene, methane, carbon monoxide and hydrogen sulfide), - measurement of noise (in order to follow changes related to the emission and propagation of sound waves in the environment), - examination of soil and air (radon and methane), - fluid fracturing (the amount of water used for the treatment, monitoring the quantity and quality of water collected in technological pools; laboratory, chemical and toxicological tests of samples from injected fluids - hydrochloric acid fracturing fluids) - surface water (pH, dissolved oxygen, BOD5, chlorides, sulfates, sodium, potassium, total nitrate and nitrite nitrogen, Kjeldahl nitrogen, total nitrogen, TOC, total hydrocarbons C10 - C40, boron, detergents (anionic and nonionic), and sulfides) ; - groundwater (developed mathematical model of groundwater flow in the vicinity of the exploration well; the simulation of water flow, determining the direction and speed).

Final conclusion from the LE-2H well’s

studies

• Fracturing did not affect the purity of the atmosphere.

• Increased levels of noise during fracturing has been observed.

• There was no effect of fracturing works on the quality of surface water and groundwater .

• Water intake alone did not lead to the reduction of groundwater resources in the area of drilling.

• The fracturing did not cause any vibration or paraseismic effects on the surface that may pose a threat to buildings or infrastructure.

What could the discovery of shale gas in Poland change in

terms of energy and climate policy ?

• Extraction of shale gas and its share in the energy balance of the country could mean help in achieving the strategic objective of both the Polish and EU energy and climate policy, which is primarily a change in the energy balance,and growth in energy sources greener than coal

• In case of shale gas production, it would mean, on the one hand, diversification of gas sources, which is a prerequisite for ensuring energy security and on the other hand, significant reduction of emissions from combustion. With the increased use of natural gas, Poland could obtain such reduction of greenhouse gas emissions, reduction of air pollution from the energy sector and energy efficiency

Additional Conclusions

1. Polish energy policy assumes a diversification in energy sources and their

coexistence. Thus, in the energy "mix„ there is a place for coal, conventional and

unconventional hydrocarbons, nuclear material and RES, balanced so as to provide

national energy security. The mentioned "mix" is qualitatively similar to that in

other EU countries, but with various accents put on some of its components.

2. It is necessary to analyze and assess the impact of the development of production

and consumption of natural gas from unconventional sources (mainly shale gas) on

the overall socio-economic issues in Poland , also taking into account environmental

concerns and energy security of the country.

3. The results of such studies could also provide an appropriate basis for

development of a legal, organizational, economic, political, environmental and

social model, to enable appropriate and socially acceptable incorporation of areas of

exploration and production of natural gas from unconventional sources in the legal,

economic and social framework, in force in Poland .

ADDITIONAL MACRO ISSUES AND QUESTIONS

• The Shale Gas Revolution in North America has led to the “Re-Industrialzation

of the USA”. Some major European companies are relocating their

European heavy chemical plants to the USA. Is this in our interest?

• China, South Africa , South America and soon Russia will

develop their shale gas deposits. What will this do to the economic

competiveness of Europe and the work opportunities for our children?

• Brussels and the EU companies do not yet have significant experience

in technical and regulatory issues related to shale gas. Perhaps both we

and Brussels should spend more time with North American jurisdictions

that have spent years developing shale gas policy and regulations.

Of course, we should supperimpose on this our European

environmental specificities. Should we treat shale gas as only an EU issue?

• Shale gas has already changed the world. Should we be part of this?

Thank you for your

attention