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Shale-gas boom to prompt Polish tax rethink

Poland may revise its favourable upstream tax regime when shale-gas production takes off

“NOW that Poland is facing increased production, it will rethink tax regimes to be more beneficial to the country and hopefully investors,” said Alexey Kondrashov, Ernst & Young’s global oil and gas tax leader.

The country set “fairly low levels” of corporation tax and royalty rates to encourage development of its unconventional-gas resources. “Any regime that doesn’t have large output is (keener) to get production started than to extract revenues,” said Kondrashov.

But with a host of international operators flocking to Poland’s shale plays, the government should consider revising its generous terms, he said. Corporation tax in Poland is just 19%, compared with 26% in the UK and 35% in the US. Debate in Poland about whether to lift the tax has been triggered by the arrival of foreign companies hoping to exploit the country’s shale-gas resources.

A host of foreign operators has descended on Poland, including Canada’s Talisman Energy, which will begin exploration drilling in August, with the aim of producing gas in 2013. ConocoPhillips and Lane Energy have already drilled pilot wells and 3Legs Resources announced on 21 June that it had drilled the country’s first horizontal shale-gas well, in the Baltic basin.

Reaping the benefits

The government and state-owned oil and gas company PGNiG will not want foreign companies to reap all the benefits of Poland’s unconventional resources. The US Energy Information Administration reckons the country could have 187 trillion cubic feet of technically recoverable reserves in place. If these figures materialise into commercially viable gas, it could have profound implications for Poland, Russia – the country’s main source of gas supply – and the whole of Europe.

Poland imported over 63% of 2010 gas consumption direct from Russia through the Yamal pipeline, which crosses Belarus. Disputes in recent years between Russia and gas-transit countries, most spectacularly Ukraine, saw exports to Europe disrupted, exposing the EU’s dependency on imports.

Europe-wide

Developers are also analysing unconventional-gas’s potential elsewhere in Europe. Chevron was awarded a large shale-gas concession in Bulgaria last week, estimated to contain 35 trillion cf. Germany’s government awarded 10 exploration licences in November to international companies to explore North Rhine-Westphalia, in the west of the country. Meanwhile, TNK-BP, Russia’s third-largest oil firm, signed a memorandum of understanding with Ukraine in October to assess potential resources in the eastern Donetsk region.

“Smart governments take a longer-term approach, giving companies the ability to increase their production level and explore for new reserves,” said Kondrashov. “Fiscal legislation should change to shift the tax burden to the cash-flow, or profit-generating stage,” he added.

Related article:

Shale gas in Poland: more than just energy - By Jaroslaw Gowin, deputy leader of Poland’s ruling Civic Party

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