Exploration & Production

2013 was a record-breaking year for the PGNiG Group in terms of crude oil and condensate production, with a growth of 124% on 2012, as a result of the production launch at the Lubiatów, Międzychód and Grotów (LMG) fields, as well as the field on the Norwegian Continental Shelf. Exploration work was carried out in Poland, and also abroad in Norway, Pakistan, Denmark, Egypt and Libya.

Key achievements

The PGNiG Group’s activities in the Exploration and Production segment include geophysical and geological surveys, drilling of wells and production of natural gas and crude oil. Currently, the PGNiG Group produces natural gas and crude oil from fields in Poland and Norway, and natural gas in Pakistan. The segment also utilises the capacities of the Bonikowo, Brzeźnica, Daszewo, Strachocina and Swarzów storage sites.

Financial performance in 2013

The Exploration and Production segment derives its revenue mainly from non-regulated sale of natural gas and crude oil, and also from geological and geophysical, drilling and well services.

In 2013, the Exploration and Production segment posted PLN 2,331 m in operating profit, up by PLN 977 m on 2012. This improvement was achieved on the back of completion of some major investment projects, including construction of the Lubiatów–Międzychód–Grotów (LMG) oil and gas production facility and launch of oil and gas production from the Skarv field on the Norwegian Continental Shelf. As a result, the volume of crude oil sales grew by 128%, or 621 ths tonnes, relative to 2012. The expansion of the segment’s business resulted in a 32% increase in operating expenses, mainly due to higher amortisation and depreciation. The growth in expenses was also attributable to the recognition of an impairment loss on the Group’s exploration assets in Libya of PLN 292 m and the recognition of a provision to meet outstanding licence obligations in the region in the amount of PLN 137 m, which followed analysis of the project’s economics and uncertainty concerning the extension of the licence.

Geological, geophysical, drilling and well services

Exploration for natural gas and crude oil is carried out both in Poland and abroad. The exploration work involves the analysis of historical data sets and geological data, seismic reflection surveys and drilling campaigns.

As at the end of 2013, PGNiG held 85 licences for gas and oil exploration and appraisal covering a total area of 58,800 km², 227 licences for gas and oil production in Poland, nine licences for underground storage of gas (one discontinued, one granted), and three licences for storage of waste. One licence for salt deposit appraisal expired on September 16th 2013.

In 2013, the Ministry of Environment carried out licence amendment procedures for 38 licence areas (exploration and appraisal). PGNiG applied for relinquishment of the following licences: one licence for exploration, one for appraisal, and eight for exploration, appraisal and production of crude oil and natural gas. Additionally, four production licences were amended, three new licences granted, and one expired. 26 production licencing procedures were conducted in total, 11 of which were concluded (one concluded with the execution of an agreement establishing mineral extraction rights without a decision to grant the licence).

Work was carried out by the PGNiG Group on 27 wells in the Carpathian Mountains, Carpathian Foothills and Polish Lowlands. Out of 12 wells with known test results, seven were classified as positive and the remaining five as dry. Test results were also obtained in the reporting period from two wells, drilled in 2012 and tested in 2013. One of them was classified as positive and the other one as dry.

In 2013, geophysical survey work was conducted within PGNiG licence areas in the Carpathian Mountains, Carpathian Foothills and Polish Lowlands, as part of which 535.1 km of 2D seismic data and 969.0 km² of 3D seismic data were acquired.

Poszukiwanie i wydobycie

Consolidation of the exploration and service companies

In December 2012, PGNiG consolidated its exploration and service companies within the Group’s Exploration and Production segment. PGNiG Poszukiwania SA was merged with PNiG Kraków SA, PNiG NAFTA SA, PNiG Jasło SA, PN Diament Sp. z o.o. and ZRG Krosno Sp. z o.o. The companies’ assets were transferred to PGNiG Poszukiwania SA, which was renamed Exalo Drilling SA on February 6th 2013.

Natural gas from unconventional deposits

There has been growing interest in shale gas in Poland, which, according to estimates, is buried at depths ranging from 3,000 m to 4,500 m, within a sidelong belt stretching from central Pomerania to the Lublin province, and within the forelands of the Sudeten Mountains. In recent years, the Ministry of Environment has awarded more than 100 licences for unconventional gas exploration to over 40 entities, including 15 licences to PGNiG.

In 2011, the Lubocino-1 borehole was drilled. Preliminary fracturing and test results from that well indicated the presence of shale gas in Pomerania. In 2012, Silurian formation fracturing was performed in the same well. Also in 2012, the Lubocino 2-H horizontal well was drilled, where hydraulic fracturing of Ordovician formations started in December 2012 and continued into 2013. Another well, the Lubycza Królewska-1, was drilled in the Tomaszów Lubelski licence area in 2012, as the first well exploring for shale gas within PGNiG’s licence areas in the southern part of the Lublin province.

Also in 2012, the Opalino-2 well was drilled in the Wejherowo licence area in pursuit of two exploration goals: to find shale gas in lower Palaeozoic (Silurian and Ordovician) strata and to find conventional gas in upper Cambrian Sandstone. The well encountered gas in Cambrian Sandstone and has also been used to collect material to assess the shale gas potential of the overlying Silurian and Ordovician rocks.

Shale gas and oil exploration efforts continued in the Pomeranian licence areas in 2013 with the drilling of subsequent wells: Opalino-3, Lubocino-3H, Borcz-1, Wysin-1, and the commencement of drilling of the Opalino-4 well. 3D seismic acquisition planning and execution also continued (Opalino-Lubocino, Kochanowo-Tępcz-Częstkowo, Hopowo-Borcz, Wysin).

In the Lublin province licences, the Wojcieszków-1 and Kościaszyn-1 wells commenced drilling in 2013. Comprehensive geological studies were conducted for the Warmia region licences, based on which an exploration campaign will be planned for the coming years. 2D seismic acquisition commenced over the licence areas in Central Poland. In addition to projects carried out on its own, on July 4th 2012 PGNiG signed a framework agreement on the exploration for and production of shale gas and oil within the Wejherowo licence area with four other Polish companies: Tauron Polska Energia SA, KGHM Polska Miedź SA, PGE Polska Grupa Energetyczna SA and Enea SA. Pursuant to the agreement, the joint operations were to focus mainly around the villages of Kochanowo, Częstkowo and Tępcz, on the part of PGNiG’s Wejherowo licence area where preliminary surveys and analyses confirmed the presence of unconventional gas. The joint effort was to cover about 160 km2 in the Wejherowo licence area. Expenditure on the Kochanowo-Częstkowo-Tępcz (KCT) project was estimated at up to PLN 1.7 bn, and PGNiG was to be the licence operator throughout the exploration and appraisal phase. The cooperation with the power companies and KGHM SA was discontinued towards the end of 2013, but PGNiG is continuing the work previously covered by the KTC project on its own.

Resources/reserves

Poland’s resources and reserves are evaluated by the Mineral Resources Commission, and the evaluation is approved by the Ministry of Environment. As at the end of 2013, the combined reserves of natural gas and crude oil (recoverable reserves) amounted to 688 m boe, including 548 m boe (85 bn m³) of gas and 140 m boe (19.2 m tonnes) of oil and condensate. In 2013, the total reserves to production ratio (R/P) stood at 20.6.

Production

In 2013, there was a substantial increase in the PGNiG Group’s hydrocarbon production relative to previous years. The rise in natural gas output, up to 4.6 bn m³, followed from the launch of production from the Norwegian Continental Shelf. Also, the Group’s crude oil production went up strongly, by around 124%, chiefly on the launch of the Lubiatów, Międzychód and Grotów (LMG) fields, as well as the field on the Norwegian Continental Shelf.

In 2013, the aggregate production of natural gas and crude oil with condensate from Polish deposits was 33.10 m boe, of which gas accounted for 82%, and oil with condensate for 18% of the total output. The production volumes were, respectively, 4.21 bn m³ of natural gas − 27.83 m boe (converted into high-methane gas with calorific value 39.5 MJ/cm), and 815.42 ths tonnes of crude oil with condensate (5.95 m boe). The Group’s domestic hydrocarbon production, concentrated in north-western and south-eastern Poland, is carried out by two PGNiG Branches in Zielona Góra and Sanok.

PGNiG produces two types of gas with different calorific values − high-methane gas and nitrogen-rich gas – at 60 production sites located throughout Poland. In 2013, the Sanok Branch produced high-methane and nitrogen-rich gas and crude oil from 38 production sites − 20 gas production facilities and 18 oil and gas production facilities. The Zielona Góra Branch produces crude oil and nitrogen-rich gas from 22 production sites − 13 gas production facilities and nine oil and gas production facilities. A portion of nitrogen-rich gas is further processed at the nitrogen rejection units in Odolanów and Grodzisk Wielkopolski. Once nitrogen is removed, natural gas is pumped into the high-methane gas system. In 2013, the process of conversion of nitrogen-rich gas into high-methane gas yielded 1.2 bn m³ of the product. The process also yields byproducts, including liquefied natural gas (LNG), liquid and gaseous helium and liquid nitrogen.

With a view to maintaining the current levels of hydrocarbon production or limiting its natural decline, in 2013 major well workovers were performed on a total of 22 wells (four of which were carried over from 2012), whose technical condition made further production impossible. Commercial flows were obtained from 21 wells, and one well was worked over for UGS purposes. In 2013, various treatments were carried out on a total of 68 wells to maintain or improve the recovery rates of producing wells or to restore downhole equipment to a working condition. Treatments were also performed on wells supporting underground gas storage and on injectors.

Crude oil production is concentrated in western Poland, on the three largest of the currently producing fields – BMB (Barnówko-Mostno-Buszewo), Lubiatów and Grotów, which in 2013 accounted for 87% of Poland’s total oil production (676.7 ths tonnes). In 2013, the volume of crude oil and condensate production from Polish fields totalled 815.4 ths tonnes, which represented a year-on-year increase of 323.8 ths tonnes (65%), up from 491.6 ths tonnes.

One of the key projects undertaken in Poland in the last few years to increase crude oil production was the development of the Lubiatów-Międzychód-Grotów (LMG) field in the vicinity of Gorzów Wielkopolski, where production started in late 2012/early 2013 (the LMG facility was officially launched in mid-2013). The project involved PGNiG’s construction of the LMG Central Facility, which is the hub for collecting, distributing and conditioning of reservoir fluids, as well as the construction of a shipping terminal for crude oil collection and dispatch in the locality of Wierzbno. The crude oil is transported by rail tankers and injected into the Druzhba pipeline, through which it flows to Germany. Additionally, any surplus gas produced is transmitted via the pipeline running from the production site to the nitrogen rejection unit in Grodzisk Wielkopolski.

Outside of Poland, PGNiG also produces hydrocarbons in Norway and Pakistan.

The PGNiG Group’s foreign expansion began in 2007 with the acquisition of an interest in the Skarv/Snadd/Idun exploration and production licence on the Norwegian Continental Shelf. Production from the field was launched in December 2012. The production volume in 2013 was approximately 340 m m³ of gas and approximately 283 ths tonnes of oil with other fractions. Natural gas will be transported to mainland Europe, whereas crude oil will be sold straight ‘from the wellhead’.

In 2013, PGNiG commenced (test) production from the Rehman field in Pakistan. As at the end of 2013, 31.1 m m³ of gas was obtained from the test production (converted into high-methane gas with calorific value of 39.5 mJ/m³). Test production from the Rehman field at a level of 50 m m³ (converted into high-methane gas) is scheduled to continue in 2014. The gas produced in the test is sold to the Pakistani transmission system.

Sale

Natural gas is sold by PGNiG’s Exploration and Production segment directly from the fields (outside the transmission system), from which it is supplied to specific customers via dedicated pipelines, while crude oil is shipped by sea tankers.

Direct sales of the PGNiG Group in 2013 amounted to a total of 748.6 m m³ of gas (including 717.8 m m³ on the domestic market and 30.8 m m³ in Pakistan). Direct sales from the fields are made both in the case of high-methane and nitrogen-rich gas – in 2013, 72.1 m m³ of high-methane gas and 676.5 m m³ of nitrogen-rich gas (measured as high-methane gas equivalent) were sold in this way.

Direct sales of natural gas are transacted on the free market, with delivery terms (including pricing) agreed with customers on a case-by-case basis, depending on the characteristics of a given project.

The key group of customers buying natural gas directly from the fields are industrial users (Elektrociepłownia Zielona Góra SA, PGE Górnictwo i Energetyka Konwencjonalna SA, Zakłady Azotowe w Tarnowie-Mościcach SA, Arctic Paper Kostrzyn SA, and others), who accounted for 80% of the sales volume in 2013. This form of purchase is preferred by customers located in close proximity to gas production sites. Sales of natural gas directly from the fields enable commercially viable development of gas reserves with quality deviating from network standards and attract customers in whose case gas deliveries from the transmission system are not feasible for technical or economic reasons.

In 2013, direct sales of gas accounted for approximately 5% of PGNiG’s total sales and amounted to 754.6 m m³, up by 4.3% on 2012. Direct sales from the fields are made both in the case of high-methane and nitrogen-rich gas – in 2013, 72.2 m m³ of high-methane gas and 682.4 m m³ of nitrogen-rich gas (measured as high-methane gas equivalent) were sold in this way.

PGNiG sells crude oil on free market terms, pricing it with reference to crude prices quoted on international markets. In 2013, crude oil was sold through the following channels:

In 2013, 49.7% of the total volume of crude sold was transported to German refineries through the PERN Druzhba pipeline.

Apart from non-tariff sales of gas directly from the fields and crude oil sales, PGNiG’s portfolio comprises a number of other products such as helium, nitrogen, sulfur, condensate and propane/butane mix.

The launch of the Lubiatów-Międzychód-Grotów (LMG) project brought an increase of around 360 ths tonnes in PGNiG’s 2013 crude oil production.

This increase in crude oil production was the reason for extension of existing sale contracts or the signing of new ones. In 2013, PGNiG continued its pipeline supplies to TOTSA TOTAL, including crude oil from the new facility in Lubiatów. The relevant contract extension annex was signed in November 2013. Also in November 2013, PGNiG commenced oil supplies to BP Europa SE through Przedsiębiorstwo Eksploatacji Rurociągów Naftowych Przyjaźń SA. This new contract with BP will run to the end of 2014. In December 2013, an agreement was executed with Grupa LOTOS SA for the purchase of PGNiG-produced crude oil. The crude oil will be supplied to the Grupa LOTOS refinery in Gdańsk starting January 1st 2015. The contract covers supplies from 2015 to 2019, but may be extended for an indefinite period. The crude oil will be collected by rail from PGNiG’s railway terminals located at the PGNiG Zielona Góra Branch. The rail transport will be handled by LOTOS Kolej.

In 2013, PGNiG Upstream International AS commenced crude oil sales from the Skarv field on the Norwegian Continental Shelf. The crude oil is sold directly from the platform to Shell International Trading and Shipping Company Ltd and shipped by the customer by means of a shuttle tanker fleet.

Following the launch of production from the Lubiatów, Międzychód and Grotów (LMG) fields and the field on the Norwegian Continental Shelf, sales of crude oil were up 128% in 2013.

Capex projects

Capital expenditure incurred in the Exploration and Production segment in 2013 amounted to PLN 1.45 bn.

In Poland it was incurred primarily on geophysical surveys and drilling work, as part of which 28 wells were drilled, and the drilling of five more commenced, to continue into 2014. Outside Poland, the PGNiG Group was active in its licence areas in Pakistan, Libya, Egypt and Norway.

The key undertaking in Poland was the LMG project, the goal of which was to develop and bring onstream the Lubiatów, Międzychód and Grotów oil and gas fields. The LMG project involves:

In 2013, the LMG Central Facility was placed in service and construction of the high-pressure gas pipeline from the Wierzbno terminal to the Paproć gas production facility was completed. With this, all stages of the project were finally complete.

The key overseas work was the Skarv project, managed by PGNiG Upstream International. The project involves development and production work on the Norwegian Continental Shelf, using a floating production, storage and offloading (FPSO) vessel. In 2013, work was ongoing to finalise the last stage of development of the Skarv field. It mainly involved the continuation of the drilling campaign and technical acceptance of the floating production, storage and offloading (FPSO) vessel. Production from the Skarv field was launched in late 2012/early 2013.

Other investment projects involved the development of proved gas reserves or ones in production, maintenance and restoration of hydrocarbon recovery rates and the operation of the upstream area. Key 2013 projects included: