Poland: a shale tie up

Photo: Bloomberg

Two of the larger unconventional gas prospectors in Poland are joining up, hoping that their combined heft will deliver a long-awaited breakthrough and finally make money in an industry that has been longer on promises than profits.

On Monday, San Leon Energy said it was merging with Aurelian Oil & Gas in a $98m all-share transaction that creates the largest foreign holder of unconventional gas concessions in Poland.

However, shareholders appeared doubtful. San Leon’s shares fell as much as 16.5 per cent to 8.02 pence on the London’s AIM on Monday before recovering somewhat. Aurelian’s shares lost 13.2 per cent to 9.55 pence before they too recovered a bit.

The deal has to be approved by Aurelian shareholders but San Leon has already received assurances from Aurelian’s largest shareholders, with a combined 47 per cent stake in the company. If the deal goes forward, Aurelian shareholders will have a 34 per cent stake in the new company and San Leon shareholders will hold the rest.

“A merger with Aurelian makes perfect sense for the shareholders of both companies. The combination of cash resources and the Polish asset base alone creates an obvious and exciting opportunity to realise substantial growth,” Oisin Fanning, San Leon’s executive chairman and proposed head of the merged company, said in a statement.

The merger links companies which had focussed on different aspects of the unconventional gas market. Aurelian has both conventional gas and so-called tight gas assets, where the extraction techniques are slightly better understood than for shale. However, Aurelian’s unconventional wells have been tainted with brine, making them costly to exploit.

San Leon is aggressively hunting for shale gas, with 17 concessions in the country. However, like other companies boring test wells, it has yet to find gas in commercial quantities.

“I think this could benefit both companies,” says Pawel Poprawa of Warsaw’s Energy Studies Institute. “This allows both companies to diversify their exploration risks and increases the chance that at least some of their projects will work out.”

Just how much shale gas is lurking underground is still in question. Last year the US Energy Information Administration said Poland might have 5.3tn cubic metres of shale gas – the largest reserves in Europe. A newer estimate by Poland’s government geological institute cut about 90 per cent off that, suggesting reserves of 346bcm to 768bcm.

ExxonMobil has backed out of hunting for shale in Poland but other companies including Chevron and ConocoPhillips say they remain committed to exploring in the country.

3Legs resources, another gas explorer, reported last week it had noted a “significant improvement” in gas flow from a test well.

“The well is showing a significantly improved performance as compared to 2011, in that the well now flows without the assistance of a nitrogen lift, and it flows at a better rate than it did in 2011. We will continue to monitor the encouraging data from this further testing and will issue a further announcement in due course,” said Kamlesh Parmar, chief executive of 3Legs, in a statement.

Related reading:
Shale gas will have its day in Europe – but not just yet, FT
Poland’s shale: enter the state, beyondbrics
Poland: the gas deal and the billion-dollar tweet, beyondbrics