Wednesday, June 20, 2012

Exxon Giving up on Polish Shale

One of the big stories this week is the fact that Exxon has ceased its exploration efforts for shale gas in Poland because its first two wells are not commercially successful. Instead, the company will focus on its projects in Russia.  While this is a bad thing for Poland, it may not be as bad as it sounds.  In Poland, producers were allocated regional concessions, so the quality of Exxon's concession might not reflect negatively on that of Chevron or other producers.But Exxon's decision shows that shale gas development in countries other than the U.S. will be difficult.

One of the biggest differences is that U.S. shale was developed by independents with a taste for risk that were willing to "bet the company" on shale.  Independents battled similar companies for leases and necessary resources to develop the shale.  The competition and scarcity of resources (physical and financial) led to rapid innovation of technology and technique.

Exxon is great at tackling monumental engineering challenges that involve planning, logistics and capital, but they won't be successful as a wildcatter.  They would be better suited to come in after shale has been proven by the little guys and then "blow it out," although the market is still anxiously waiting for this to happen after the XTO acquisition.

Also missing in other countries is the infrastructure present in the U.S. that creates a conducive environment for energy development.  Our physical infrastructure (pipelines, drilling and producing equipment, etc.), financial resources and experienced personnel is incomparable.  But it is our free market economy that truly sets the U.S. apart. We have a system of private land ownership, which creates financial incentives for the landowner and allows producers to work directly with property owners, avoiding having to get concessions from the government.  We also have significant capital resources that allow a small producer with a good idea to get financed.  Additionally, we have a liquid (no pun intended) end market for the product that allows for market-based pricing and financial tools to mitigate production risk.  Oh yeah, and we have a stable government. Our system is hardly perfect, but it is better than anything else out there.

 Poland has none of that.  The shale development model will have to be different there and in other nations.  It won't be impossible to achieve but it might be a long slog to get there.

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