Gas Markets: Examining Poland and Serbia

March 24, 2011

This article was first published by the Infrastructure Journal on Feb 21st, 2011.

In 2009, the Eastern European crude oil market generated total revenues of US$90.5 billion, and the oil and gas market generated total revenues of US$331.7 billion combined. Contrary to what such healthy figures may otherwise indicate, the area's overall energy demand actually fell by around 6.4 per cent for the year.

Consumption of hydrocarbons has dropped in many of the region's markets with Bulgaria, Estonia, Hungary, Lithuania, Latvia, Romania and Slovakia all recording a depression in demand. While this decline is not confined to Eastern Europe, demand for utilities has as of yet not returned to levels seen before the economic downturn, running contrary to many predictions.

However, there is a whiff of optimism are in the air. The downcast figures may suggest that demand for natural resources is not as high as many energy and utility companies would like, but industry activity is on the up. In line with a series of articles written by Fox Williams LLP for Infrastructure Journal examining the natural resources industries around the globe, this column focuses on Poland and Serbia and how both these countries exemplify and contribute to the surge in regional infrastructure related activity.

Poland

New expertise is burrowing its way into the Eastern European energy market. Russia has traditionally been the region's dominant player over energy supplies, pipelines and the politics that govern them. However, with new drilling and exploration and infrastructure initiatives in countries such as Poland, the region's dynamics are beginning to change. While we have some distance to travel, Russia's historical energy dominance over the region could become a thing of the past over the long term.

A continued programme of horizontal drilling is tapping into wide and unexplored subterranean gas reservoirs and hydraulic fracturing to open up low-permeability rocks. The sole aim of this is to exploit promising, gas-rich deposits. Hungary, Austria and Bulgaria have already attracted interested parties but it is Poland which is alluring the vast majority of prospectors.

In August 2010, the US oil services firm Halliburton carried out a hydraulic fracture on behalf of Poland's state company PGNiG. It is PGNiG's involvement and contribution, a historic partner of Russia's GazProm, which is indicative of progress in the region and of a shift in traditional dynamics. Smaller firms drilling for Polish shale gas have been joined by some of the largest gas producers such as ExxonMobil and Chevron, whilst Canada's Talisman Energy's drilling programme in Poland is set to bring production onstream by 2013.

Furthermore Polish oil firm PKN recently announced revenue figures of US$28.8 billion for 2010 placing its earning capacity ahead of any other company in central Europe, particularly so when comparing it to its Hungarian and Czech counterparts.

Serbia

By way of background, Serbia as part of the former Yugoslavia, has been producing its own natural gas since 1952, but has largely remained an importer. Gas consumption had shown a tendency for continuous growth until 1989 when it peaked. Since then there has been a continuous decline largely as a result of sanctions, blockades and economic embargos during the last decade of the 20th century.

Due to the embargos, energy consumption was limited to that of local production, amounting to 60 per cent of normal consumption. It has since been rising gradually but has not exceeded the levels seen before 1990. Demand generally exceeds domestic production of natural gas in Serbia, with any shortfall largely covered by gas imported from Russia.

Serbia's history of high dependence on imports of natural gas is due to scarce domestic resources and more importantly insufficient level of research. Although the exploitation and maintenance of its energy systems and resources has worsened in recent years coupled with project development of plans for the construction and refurbishment of existing plants and pipelines not receiving the attention and finances they deserve, we believe Serbia is now encountering its own energy renaissance.

Serbian gas monopoly Srbijagas and Russia's Gazprom recently signed a deal formally creating a joint venture to build the Serbian arm of the South Stream pipeline. This joint venture is part of a wider energy pact and an initiative that put Serbia's oil monopoly under the control of Russia's Gazpom.

Further cementing of political and economic ties between Russia and Serbia was an energy pact and approval of a major loan to Belgrade, sealed during an official visit by Russian President Dmitry Medvedev. The Gazprom South Stream project is designed to bypass Ukraine to transport Russian gas under the Black Sea to Bulgaria and onwards to Serbia, and the rest of southern mainland Europe. An agreement has also been signed between the parties to form a joint venture with the aim of modernising Serbia's first gas storage facility.

New investments in the Serbian energy industry are necessary for the industry's future viability. The Serbian Energy Corporation has commenced preparing for the country's new energy policy with the purpose of expanding current capacities and capabilities. The policy focuses on the exploration and production of gas, transport and the distribution of natural gas, and considers amongst other things the necessity for conducting new research works on both a domestic and international level. It highlights and appreciates the dependence on a single gas supplier, which detracts away from the required reliability of supply.

Conclusion

Highlighting these two countries as examples, we believe that Eastern Europe is undergoing a renaissance of its energy industries. Even though current demand for energy and natural resources is low, contrary to many predictions, these levels will not remain so. Poland and Serbia, in particular, are representatives of the region as hubs of new production and exploration activity and capability. Interesting projects are in the pipeline and currently some are underway, which will only strengthen the finances of the countries' main players and thus contribute to the respective nation's financial and commercial viability, as well as that of the entire region.


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