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Marathon Oil, Talisman End Shale Exploration in Poland

Poland on Wednesday suffered a double dose of bad news regarding its prospective shale plays after Marathon Oil Corp. and Talisman Energy Inc. issued separate statements indicating that they were pulling out of the country.

During a conference call Wednesday with financial analysts to discuss 1Q2013 earnings, Marathon Oil CEO Clarence Cazalot confirmed that the company anticipating leaving Poland by the second half of 2014 after drilling and testing six wells in the 11 concessions over its 1.2 million net-acre leasehold.

"Basically what we found was [a] thinner section than we anticipated and lower pressures. For the most part, high pressures are pretty important in these unconventional plays," Cazalot said. He added that while the company recognizes it is only in the "initial stage of exploration...costs are pretty high. And so we have come to a conclusion that while there may be some potential here ultimately, it certainly doesn't fit our criteria. We are mobilizing to move out of our Poland concessions."

The Houston operator is "evaluating disposition options" for the concessions, which it valued at $12 million. Of its 11 concessions, the producer holds a 51% working interest in nine concessions, a 85% stake in one and a 100% stake in another. Marathon said it anticipates being out of Poland by the second half of 2014.

Calgary-based Talisman on Wednesday said it is transferring its Polish stakes to San Leon Energy plc. Under the terms of the agreement, San Leon will acquire 100% of the shares of Talisman Energy Polska Sp. z o.o, which is owned by Talisman Energy Poland B.V., including all of the assets and drilling equipment. The deal would allow Talisman to exit the country with no outstanding commitments or liability.

"Talisman's decision to exit Poland is driven by our strategic priority to focus on production within our two core areas: the Americas and Asia-Pacific," said Paul Warwick, vice president for operations in Europe and the Atlantic. "Although encouraged by the preliminary results of our drilling program, we need to focus on what is important to our shareholders."

Talisman officials hinted two months ago that the move was under consideration (see Shale Daily, March 14). ExxonMobil Corp. last year ended its exploration efforts in Poland after disappointing results from two test wells drilled into the country's shale plays (see Shale Daily, June 19, 2012). Chevron Corp. and ConocoPhillips also have operations in Poland (see Shale Daily, March 14, 2012; Oct. 27, 2011).

No financial details for the transaction were provided by Talisman but San Leon officials said Wednesday Talisman Polska was valued at an estimated $10 million.

"It became clear to us that we had to regain control of the drilling program as soon as possible to ensure the Baltic Basin work program continued," San Leon Executive Chairman Oisin Fanning said. "There is still significant and continued industry interest in the Baltic Basin shale gas play, and we expect the results of our fracking [hydraulic fracturing] program to attract further interest from potential farm-in partners."

Analysts with Raymond James & Associates Inc., in an industry brief on Monday, cautioned against jumping to conclusions about Poland, citing the small sample set of only 30 wells or so that have been drilled in the last three years, with only 10 wells hydraulically fractured.

"That said...amid the lack of infrastructure, lack of economies of scale and relatively deeper formations -- one and a half times deeper than the typical U.S. shale formation -- well costs are averaging between $10 million and $15 million," said analysts Pavel Molchanov, Bertrand Hodee and Alex Morris (see Shale Daily, May 7). "Compare that to $3 million to $4 million in the Barnett [Shale], $7 million in the Marcellus [Shale] and $9 million to $10 million in the Haynesville [Shale].

"Fiscal terms are also not ideal. Regulations from the finance and environment ministries are set to be formally adopted in the next several months. The industry anticipates that taxes and levies will total about 40% of gross profits -- closer to the levels of mature North Sea producers rather than other frontier exploration areas. These taxes will not prevent drilling activity from ramping up over time, but they certainly do not help."

In March 2012, Poland reported that its technically recoverable unconventional gas reserves totaled 346-768 billion cubic meters, or 12.2-27.1 Tcf. That projection is a fraction of the 187 Tcf the U.S. Energy Information Administration (EIA) estimated in April 2011 (see Shale Daily, March 26, 2012; April 7, 2011).

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