Friday, April 09, 2010

Shale dreams

Dreams are important. For many they grant one the only chance to meet Claudia Schiffer and, say, walk along the beach and, perhaps, frolic in the sand before retiring to . . . .er, nevermind.

Poland also has a dream. It wants to be the new Norway, that Nordic oil and gas giant that makes all other European countries not named Russia green with energy envy. Poland wants to go from being an energy bum to a natural gas mogul able to ship gas left, right and centre and finally pull itself out from under the Big Bad Russian Bear's paw.

This gaseous dream (no fart jokes from us) could come true all thanks to unconventional gas resources, a.k.a., shale gas, a.k.a., dream factory.

Indeed, Poland has potential unconventional gas resources. Depending on who is doing the estimating, the volume could range from 1,400 billion cubic meters to 3,400 billion. For a little context, Poland has some 92 billion cubic metres of conventional gas resources and annual gas consumption is somewhere around 14 billion cubic metres. It doesn't take a gas market expert to see why Poland's energy planners and politicians are salivating. The dream of being Norway without the salmon is not so crazy.

Poland's politicians are not the only dreamers here. What could be most convincing of the potential for many is the list of companies interested in gas exploration: ConocoPhillips, Exxon, Chevron, Marathon, to name some. We have a feeling these companies know a little bit more than we do about gas. If they are in Poland, we are not in the realm of total fantasy.

But though that may be, here is the reality check (as in this is your brain on drugs):

Not a single well has been drilled to verify the reports and potential volumes. Environmental concerns related to the technology have not even been considered, let alone addressed. No regulatory framework adjustments have been made. No pipelines were built. No servicing companies have been lined up. And so on and so on and so on. In the end, the politicians and the media also forget to say how much it will cost to get all that gas. No one has even bothered to look at what shale gas fields actually look like. A tutorial of sorts can be seen here:

Moreover, the production phase of the projects started now, if gas is found, should not be expected for 10-15 years. A Noble prize should go to anyone who can now accurately predict gas prices in 2020-2025.

Poland also has long-term gas import commitments running until 2037 (yes, 2037) that cover two-thirds of the country's gas usage needs. It likewise wants to boost imports from other sources via a planned Liquefied Natural Gas terminal. Domestic consumption levels are expected to rise significantly as Poland diversifies electricity generation away from coal toward less carbon-intensive fuels like gas. But this all implies Poland's shale gas extraction total would have to be some 11-20 billion cubic metres a year for Poland to be a net exporter. Our bet: unlikely.

Some politicians say that shale gas is the gold rush of the 21st century. But we prefer to recall Dodge City and Tombstone and the mad prospectors and the ghost towns left behind. Let shale gas not be fool's gold.

Monday, March 29, 2010

NBP-FinMin war: the first casualty is credibility

Poland's Finance Ministry and central bank endeavoured Monday to prove wrong the old adage that the first casualty of war is innocence. In Poland's case, it is clearly credibility.

The backdrop to the rumble is the fact the Finance Ministry is part of a government led by the Civic Platform whereas the National Bank of Poland is run by Slawomir Skrzypek, a man close to the main opposition, Law and Justice. Needless to say, little love is lost beyond the sides.

Enter International Monetary Fund managing director Dominique Strauss-Kahn, the debonair Frenchman who was in Warsaw to lecture Polish economics students on how to do it these days (which is slightly different from the IMF's old view; just ask Finance Minister Jacek Rostowski about that).

The NBP deemed the visit a good time to say Poland doesn't need further access to the IMF's Flexible Credit Line (FCL), a sort of insurance policy allowing Poland to tap over USD 20bn in case of speculative attack and its own foreign-currency reserves are depleted.

Cue the Finance Ministry, which published its own statement saying Poland should extend the FCL, which expires on May 6 and which is credited as having helped save the zloty from further depreciation to the euro and other currencies in an early 2009. The ministry said the FCL provided a prudent "insurance policy" considering still uncertain global economic winds.

Strauss-Kahn ducked the issue, but could not have been too pleased to have been caught up in a very messy domestic dispute. That is not how to impress the big wigs from the West. One would have thought such missteps were a thing of the past, at least until one recalls that Law and Justice, the party that did so much to embarrass Poland in 2005-07, is in a sense involved.

Who's right, you ask? Well, in this particular case, the Finance Ministry is right. Though it pains us to side with a ministry that increasingly looks like a Motivational Poster for "overconfidence," extending the FCL costs basically nothing (a paltry 50 million dollars or so) and does indeed provide insurance for a world in which black swans seem to be breeding at an incredible (dare I say an exponential) rate.

The National Bank of Poland's view is that the bad time are gone, the good times are here and Poland can even afford to give the IMF money, something the NBP proposed but the Finance Ministry later shot down. Yet, the NBP also continually chastises the Finance Ministry for a bloated budget deficit and expresses concern Poland could be Greece if it isn't careful. Which is it Mr. Skrzypek? Is Poland a pacesetting success story not in need of something as seemingly blase as the FCL? Or is it a fiscal dunce requiring continual rapping on its collective knuckles?

While we wait for an answer, we bring up another aspect of this sordid story. The Finance Ministry wants to get the six members it supported on the central bank's Monetary Policy Council (MPC) to vote for as high an NBP profit for 2009 as possible. Since 95% by law must flow to the budget as income and the 2010 budget didn't write in any profit as income, this windfall will directly cut the deficit and borrowing and debt and everything will be fine forever.

Skrzypek, who is quickly looking like the knave in this story, and three MPC members backed by Law and Justice-supported President Lech Kaczynski say the profit should be lower since money is needed for a special reserve that helps offset accounting losses that incur when the zloty appreciates, as all and sundry expect it to this year. This may be so, though the reserve already is said to total 16 billion zloty whereas the last time the zloty strengthened sharply in 2007 total accounting losses due to appreciation were 14 billion.

That makes the NBP look like its merely trying to trip up the government. Why would it do thus?

Should we recall here that presidential elections will be held this October and general elections in 2011. Running against the Civic Platform's candidate will almost surely be President Kaczynski, who we can just note has been responsible for Skrzypek's labour for the past 20 or so years.

The script starts looking like Skrzypek is jerked off that the NBP profit will be set as the government wants, thereby giving a victory of sorts to Civic Platform and a blow to his buddies. Skrzypek, who can stop the FCL from being extended, then spies his one chance of blackmail -- the FCL itself. Now, tricky talks will have to be held, or at least another layer of complication is added.

If you are still here, congratulations. I hope interest was not the first casualty of this blog post.

In light of all the above, one must start asking some basic questions. Why is a political battle being played out over these issues? Or, perhaps, who cares. The fact there is one is the problem. The fact neither side can resolve the situation is a problem, a big one. After all, voters aren't going to understand any of this. This is like fighting over who gets to give the booby prize. No one cares.

But it is still important. Poland's economy performed admirably in 2009 whether this was a bit fortuitous or not. The current ruling coalition is, by comparison with previous ones, solid, predictable and, dare we say, "normal." But whatever the economic crisis that still quakes the globe should have taught anyone is that credibility is key. As the Greeks know well, you lose that and it could be very costly (300 bp above mid-swap costly or even default costly). In the end, the Finance Ministry and the NBP will both be guilty if Poland's fiscal and monetary credibility is destroyed because of petty political squabbles.

Friday, March 26, 2010

Polish journalists lie, er, vie for Kapuscinski award

With impeccable timing, the Polish Press Agency recently announced the 2010 Ryszard Kapuscinski Award. The main criteria are lying, spying, sleeping around with sundry women, and lionising one's self, including by pretending to have met famous people.

Naturally, we jest.

Rather, the award will reward a Polish journalist with PLN 20,000 for "objectivity," "accuracy," "intellectual curiosity," and "the speed of information transmission."

Those are all fine things, but one can't help but wonder how tone deaf the Polish Press Agency can be to be announcing such an award considering the continued furore surrounding the publication of Artur Domoslawski's controversial biography, which is alleged to mention the less salubrious character traits mentioned above.

Domoslawski, a one-time Kapuscinski protege, is alternately being painted as a character assassin or bearer of truth for writing a book that . . . wait for it . . . portrays Kapuscinski as a human being with faults. We weep at such audacity. We wail at the hero-killing zeal. But we applaud anyone willing to take on a national hero, debunk myths but also celebrate an extraordinary writer.

Alicja Kapuscinska, the widow of the late Kapuscinski who tried to block the publication of Domoslawski's biography, is said to have pushed for the Polish Press Agency award. Perhaps, she should reconsider. After all, it is much better to mark the memory of amazing writer, whether of fiction or non, than award those in the name of something that never was.

Monday, March 22, 2010

Shapely legs win primary debate

The Polski internet was abuzz today with talk of the big winner of the Sunday debate between Radek Sikorski and Bronek Komorowski over who is the better candidate for the senior ruling Civic Platform in this autumn's presidential election. Pity the poor gentlemen since the consensus has formed that both candidates were trounced by the co-host Joanna Mucha's shapely legs: here (thanks to PAP).

Ms. Mucha, 33, is a Civic Platform MP and has a doctorate in economics specialising in health-care. We're thinking that if the Platform does the sensible thing and runs her shapely legs in the presidential election, those legs could "doctor" all us brave souls in oh so wonderful Polska.

Even though anyone and their dog ("irasiad jest bardzo zdenerwowany") would beat President Lech Kaczynski, the brawn to his twin brother Jaroslaw's brains, we would love to see a debate between Ms. Mucha's shapely legs and the portly, prickly Lech. He would be railing away about her legs' past connections to shady Communist-link, corporatist capitalist spy rings whereas everyone else would just enjoy the shapely legs' witty rebuttals and perhaps a Basic Instinct cross or two.

We may have been a tad stilted here and mean no disrespect to Ms. Mucha, who seems to be an eminently qualified up-and-comer in Civic Platform. But please let us say: cheers to your shapely legs. Thank god they enlivened up a rather dour debate.

Wednesday, March 17, 2010

The Neverending Story: Or an Introduction to Polish Style Privatisation

This is a topic volumes can be written about, especially since there is nothing more amazing, peculiar or hilarious than "Polish Style" privatisation.

For all of you who live in the nice perfect world of common private property, privatisation is this somewhat silly process when the state arrives at the conclusion that indeed private property is more efficient than state ownership and decides to sell its assets. At other times, cold hard money is needed to finance the budget deficit. All in all, it seems like quite a straightforward process, that is, until you mix in a little politics.

Let's then cover the basic concepts of "Polish Style" privatisation.

Privatisation in Poland only takes place when the finance ministry gets so worried about the state of public finances that it is willing to risk a potential political backlash and bangs on the door of the Treasury (which theoretically "manages" state-owned assets) asking/begging for money. If such money is not proffered forthwith, the ministry threatens eternal damnation, that is, tax controls for everyone. It gets its way.

We are at just such a point. Borrowing needs are going through the roof due to the ever widening budget deficit. To test our little theory, let's take a look at the privatisation receipts: gross revenues are 1.9 billion zloty in 2007, rising to 2.4 billion in 2008 and then to 6.97 billion in 2009. In just January-March, revenues are already 5.2 billion! For the year, the target is a massive PLN 25bn, though in this case the size of the target has nothing to do with its capacity to be hit.

When the Treasury decides to go through the traumatic privatisation process, it usually looks something like the following:

Foreign Nationalisation - the state takes a controlling stake in a state-owned company, preferably a monopoly, and sells it to a foreign state-controlled company. Yes, it is still called "privatisation" in Poland. After all, your badly run, bloated state-owned company must be better than our badly run bloated state-owned company. Surprisingly in this case they are often right.

Best examples: the sale of dominant telecom operator TP SA to France Telecom, takeovers by Sweden's Vattenfall or the Czech utility CEZ.

Domestic Nationalisation - if all else fails Polish state-controlled companies step up to save the day and buy what they are asked to. We suppose that if one's de facto boss comes and says "buy this crappy state-owned company or else", you have to, especially since you are also a crappy state-owned company and want to be bought yourself one day (the secret: employees get free shares). The funniest thing is how this is ultimately rationalised: "long-term investment, strategic cooperation opportunity."

Best example: the gas giant PGNiG and chemical producer Ciech (two smelly companies -- ouch) step up to buy overpriced shares of ZAT, a chemical maker.

Financial Investors
(a.k.a., Sucking Pensioners Dry) - the most recent innovation of sorts -- and the Treasury's "easy money" option -- is to sell minority or even majority stakes to financial institutions, but mostly to the OBLIGATORY Polish pension funds that basically are compelled to buy in. To be honest, at least most of these pension funds are privately owned and independently managed so it is not that bad of a deal, especially if compared with the above alternatives. Risks remain nonetheless.

The latest twist to the story: the same government that offloaded some 10 billion zlotys in state assets to financial institutions in the past several months is mulling "fixing" the pension system in order to, wait for it, decrease the total assets managed by pension funds. Now if this isn't potentially shooting yourself in the foot, privatisation-style, we don't know what is.

Best examples: PKO BP bank, Bogdanka coal mine, Lotos, KGHM transactions this year.

Getting it Right - well it happens, believe it or not. The state actually did sell companies to private investors, foreign non-state investors in a way that turned out to be profitable for those entities being sold, assuring their existence and development in the current day.

Best example: this will be controversial for some Poles, but the privatisation of the banking sector was probably the most successful transition from a state-owned monopoly to a market-oriented, competitive industry that held up very well in the crisis.

Frigging It Up Royally - this also happens, as it does indeed in life. Spectacular failures are not as common as they were once in the hey-day, but Frigging It Up Royally can take place anytime, anywhere, regardless of the method employed to carry out the privatisation task. Corporate lawyers based in Poland and elsewhere (can anyone say international arbitration) tend to like this option the best.

Best examples: the sales of stakes in Polish insurance giant PZU to the relatively unknown Dutch firm Eureko, triggering a roughly 10-year legal battle for control that saw Poland go to all sorts of courts across Europe until a deal was finally reached in late 2009. Populist politicians salivated over this for many years as well ('don't sell our national treasure!').

The sale of a 40% stake in the electricity generator Pątnów-Adamów-Konin and ceding all control over the company at the same time. This was just friggin' brilliant. Someone should get a prize. Needless to say, the state has been trying to sell its 50% stake (without controlling power) for over 10 years now.

Wednesday, March 10, 2010

Beethoven to drive zloty trade?

Ludwig van Beethoven could soon be driving foreign-exchange trade in the zloty, or so one specialist service would have it. No, no, no, he has not come back from the grave with a war chest built up with all the royalties made since his death way back in 1827. Rather, Warsaw will soon host the ever growing 14th Ludwig van Beethoven Easter Festival from March 21 to April 3 and Axia FX has it that FX trade could be "driven by Brits visiting Warsaw, if recent suggestions are anything to go by."

Now let's see here. Brits are going to take advantage of the excellent economic conditions in the UK at present and the ever-rising low-cost flight prices to flood Poland for a series of classical music concerts, buy tons of zloty in order to buy these tickets and splash money around left, right and centre (as we exist in such hedonistic times), and thereby drive the zloty stronger at the cost of a sterling that no one will want to own.


I don't think so.

Though these numbers aren't that easy to track down, the Bank of England reports that the zloty was involved in 1.1% of average daily turnover of USD 1.356bn reported in the UK in April 2009. That gives us the nice sum of around USD 150mn. Even assuming relatively high prices and lots of shows, the 14th Ludwig van Beethoven Easter Festival in Warsaw is likely to remain, unfortunately, a highlight of the year for classical music lovers in Warsaw, across Europe and indeed spread throughout this great big lovable world of ours.

I am no classical music aficionado, so I will defer to Alex from Clockwork Orange. Take it away Alex (definitely NSFW).

Poland enters major league sports

Well, there you have it. The first two Polish companies with a lot of local fanfare have entered the Formula 1 world as sponsors. Suspense nearly killed all the motor fans, especially those ones following Poland's economy and the corporate sector closely after it was announced a "major financial institution" declared it was sponsoring "one of the most successful Formula 1 teams."

Drum roll please. . . The major financial institution is. . . X-Trade Brokers! Wow! We can't believe. Not them? You can't be serious. This it too good to be . . . Wait, who?

Ahh, them. I see they shorten their name to the ever catchy XTB. Pretty cool. But though we happen to believe in stretching the definition of words and phrases to infinity and back (i.e., Skrzypek is a genius), we happen to believe "major financial institution" may not be quite the right description for XTB.

At least they were right about the second part. XTB, as it were, will be sponsoring McLaren, which indeed is one of the most successful teams in Formula 1. With two World Champions on board for the 2010 season, it is certainly aiming for the top.

A second corporate sponsorship deal related to F1 finds a local energy drink maker that competes with Red Bull sponsoring Robert Kubica, Poland's favourite F1 driver.

Although we can understand how the drink maker wants to ride Kubica's popularity among target clients, we don't really know what XTB, known for such smashing parties as this one in Frankfurt, can achieve by moving into F1. Wait, I get it! It's the babes upgrade and the machismo factor!

Though we hate to be spoilsports, we have one thing to point out. Considering the still not yet over Global Economic and Financial Crisis, is it really advisable to have a lot of macho brokers dealing with the world's money pumped up on F1 and proto-Red Bull?