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Resource discoveries and estimates

  Poland
  Norway

The main risk inherent in exploration activities is the risk of failure to discover hydrocarbons, i.e. exploration risk. This means that not all identified leads and prospects actually have deposits of hydrocarbons which can qualify as an accumulation. The existence of hydrocarbon accumulation depends on the occurrence of a number of geological conditions. In addition, the actual quantity and quality of accumulated hydrocarbons may differ from the estimates. If the results of successful exploration in the form of new proven reserves do not balance production from existing fields, the proven recoverable reserves in PGNiG’s fields will gradually decrease as the production continues.

Reserves estimates and production projections may be erroneous due to imperfections inherent in the applied equipment and technology, which affect the quality of the acquired geological information. Irrespective of the methods applied, data on the volume and quality of commercial reserves of crude oil and natural gas is always an estimate. Actual production, income and expenses relating to a given deposit may significantly differ from the estimates. The weight of this risk is further increased by the fact that in the full business cycle the period from start of exploration to the launch of production from a developed field takes six to eight years, while the production lasts from 10 to 40 years. Formation characteristics determined at the stage of preparing the relevant documentation are reviewed after production launch. Each downgrade of the size of reserves or production quantities may lead to lower revenue and adversely affect PGNiG’s financial performance.

Exploration for unconventional deposits of gas

 

A risk associated with exploration for unconventional gas in Poland relates to the lack of proved reserves of tight gas and reserves in unconventional Miocene formations. Exploration for shale gas has now been closed, and the experience gained from such projects will allow PGNiG to minimise risks associated with exploration for tight gas. Even if the existence of in-place tight gas resources is confirmed, production may prove uneconomic due to insufficient recovery rates and high investment expenditure necessary to drill wells and construct production facilities. Another material factor is the difficulty of accessing unconventional gas plays given the environmental regulations and the requirement to obtain the landowners’ consent for access to the area.

Competition

  Poland
  Norway

Both in Poland and abroad there is a risk of competition from other companies seeking licences for exploration and appraisal of hydrocarbon deposits, although it should be noted that this risk has significantly diminished in the Polish market over the past year. Certain competitors of PGNiG, especially those active globally, enjoy strong market positions and have greater financial resources than those available to the Group. Thus, it is probable that such companies would submit their bids in tender procedures and be able to acquire promising licences, offering better terms than PGNiG could offer given its financial and human resources. This competitive advantage of oil majors is particularly important on the international market. On the Norwegian market, there have emerged numerous new players in recent years, interested in buying oil and gas deposits and supported by international investment funds. Consequently, it may be difficult for the company to implement its plans of further acquisitions in Norway.

Delayed work

  Poland
  Norway

Under the applicable Polish laws and regulations, the process of obtaining a licence for exploration and appraisal of crude oil and natural gas reserves lasts from one to one and a half years. In foreign markets such procedures may even take up to two years from the time the winning bid is awarded until the actual contract is ratified. Prior to the commencement of field work, the Company is also required to make a number of arrangements, for instance to obtain legal permits and approvals for entering the area, and to meet the environmental protection requirements and, in some cases, requirements related to the protection of archaeological sites. It is also required to hold tenders to select a contractor. All this delays the execution of an agreement with a contractor by another few months. Frequently the waiting time for customs clearance of imported equipment is very long. All these factors create the risk of delays in the start of exploration work. The formal and legal obstacles, independent of PGNiG, include those related to:

  • local governments’ failure to approve local zoning plans or amendments to those already approved;
  • obstacles in having investment projects incorporated into the local zoning plans;
  • requirement to obtain and comply with administrative or other formal and legal decisions, including environmental decisions or building permits;
  • changes in the current concept of an investment project;
  • difficulties in obtaining the landowners’ consent for access to the area.

These factors materially delay investment activities and entering the area to commence construction work. Further, PGNiG’s obligation to comply with the Public Procurement Law frequently protracts tender procedures. Notices of appeal and complaints submitted by bidders lead to lengthy court proceedings and, consequently, to delays in implementing an entire project. A protracting project exacerbates the risk related to estimation of capital expenditure.

Safety, environmental protection and health regulations

  Poland
  Norway

The need to ensure compliance with environmental laws in Poland and abroad may significantly increase PGNiG’s operating expenses. Currently, PGNiG incurs significant capital expenditure and costs to ensure compliance of its operations with the ever more complex and stringent regulations concerning safety and health at work, and environmental protection.

The Act of May 18th 2005 Amending the Natural Environment Protection Law and Certain Other Acts (Dz.U. No. 113, item 954 of June 27th 2005) introduced more stringent regulations governing projects which might affect Natura 2000 sites and imposed more stringent obligations with regard to operations in habitats of protected species of plants and animals. Also in countries where the PGNiG Group is engaged in exploration activities, a trend towards tightening environmental regulations is observed.

Cost of exploration

 

Capital intensity of an exploration project depends on prices of energy and materials. Cost of exploratory work is especially sensitive to steel prices, which are passed onto prices of casing pipes and production tubing used in drilling. An increase in prices of energy and materials translates into higher costs of exploratory work. Profitability of foreign exploration projects also depends to a significant extent on prices of oil derivative products and on exchange rates. To reduce drilling costs, in 2011 PGNiG introduced the daily rate system into its procedure for selecting drilling contractors and paying for their work.

Unforeseen events

 

Hydrocarbon deposits developed by PGNiG are usually located at great depths, which involves extremely high pressures and, in many cases, the presence of hydrogen sulfide. Consequently, the risk of hydrocarbon blowout or leakage is very high, which in turn may pose a threat to people (employees and local population), natural environment and production equipment.

Other changes in laws and regulations

 

In some countries, exploration and production activities may be hindered by frequent and unexpected changes in legislation, which may create particularly serious risks in countries with authoritarian regimes.

Political and economic situation − PGNiG Group

 

Some countries where the PGNiG Group is conducting exploration are threatened by armed conflicts and terrorist attacks, which may lead to limitation, suspension or even discontinuation of such activities.

The PGNiG Group’s operations are also exposed to the risk of social or political unrest in some regions. Changes of governments may result in withholding issuance of petroleum licences. Those countries are also at risk of internal conflicts and civil unrest due to poverty and demographic issues. If these risks materialise, the Company’s operations may be limited, suspended or withheld.

In certain countries, operations of exploration companies may be hindered by the absence of adequate infrastructure, which may be an obstacle in transporting equipment, personnel and materials to the sites. Problems may also arise in providing supplies and ensuring appropriate health care. These risks may lead to limitation or suspension of the Company’s exploration activities.