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Tax move 'will paralyse' Polish shale development

Thinktank speaks out over planned fiscal framework

Poland’s shale-gas industry is being paralysed by an unclear fiscal regime which is deterring companies from investing in the sector, a leading think-tank claimed.

“Companies are sitting back and saying we don't have a reliable regime and we can't start investing because they are not actually even guaranteed to have a production licence,” said Greg Pytel, an analyst at the Sobieskiego Institute. “What it comes down to is that neither PGNiG nor the government understand this risk process and they just think that putting a figure on tax will solve the problem for companies. It doesn't. Simply the situation is in limbo.”

Last month the Polish government announced a new fiscal regime which, it claimed, would spur unconventional gas development. From 2015, Poland’s upstream taxation framework will be based on a proportion of energy companies’ production volumes and their gross profits.

The new regime sought to clarify what industry operators have seen as an unclear regulatory framework which previously lacked a specific upstream tax regime or separate hydrocarbon tax.

“The tax budget changes every year so it's meaningless in terms of risky arrangement terms. When you've got a situation when you still don't know how (the volume of) reserves you have in place, how much it would cost and how the market would be, 40% could be too high or too low,” Pytel said. “On existing conventional reserves, which are far easier and cheaper to produce from and far better explored places, the (corporation) tax regime is 19%.”

Poland plans to impose a royalty tax of 5% on gas extraction and 10% on oil, plus what it calls a special hydrocarbons tax of 25%, which will be levied on the difference between revenues and costs. An extraction fee, currently charged at PLN4.90-5.89 ($1.60- 1.88) per 1,000 cubic metres (cm) of gas, will also be raised to PLN20-24 per ’000 cm, taking the total tax take, including Poland's standard 19% corporate tax, to 40% of gross profit. A new state-operated company, the National Energy Minerals Operator, will also be created to take part in shale-gas development.

Pytel said that because Poland’s shale gas regime is in its infancy and exploration licences carry five-year year terms, the financial risks for companies if they don’t find commercial shale resources remains daunting. And this new tax regime is a far cry from the sort of incentives companies will need to remain investing in Poland, he added.

So far only around 33 shale-gas test wells have been drilled in Poland with mixed results.

In 2011, Total farmed into ExxonMobil’s Chelm and Werbkowice concessions in eastern Poland. ExxonMobil operates the concessions with a 51% interest but said in June that it was exiting Poland after drilling a failing to find commercial volumes.

Total’s unconventional resources development manager, Philippe Charlez, told PEU that the initial test results for the one well drilled so far were disappointing.

"The results of this well were not very good. I don't think Total has taken the position yet to know if we're going to continue with this,” Charlez said. “The first two years of drilling were disappointing but that's not sufficient to conclude when you see how many wells there are in the (US)."

Following ExxonMobil’s departure from Poland’s unconventional play, ConocoPhillips recently said that it would not exercise its right to acquire a 70% interest in three eastern Baltic basin concessions it holds in a joint venture with 3Legs Resources.

Greg Pytel said this may have been as much to do with Poland’s fiscal regime as with the geological challenges.

ConocoPhillips pulled back from the 3Legs partnership recently where results were actually quite good. I think (it was) with uncertainty over the tax regime, the market, the service regime and over the industry,” Pytel said. “Companies were hoping the government would start restructuring the industry making it more feasible for them but nothing really changed. Companies starting thinking there are other countries who have started exploring (for shale gas) now.”

Total’s Charlez said that the company would be focusing on shale-gas exploration work in Denmark and Argentina next year. Total plans to drill two wells in Denmark’s Jutland region, in northern Denmark, next year.

Total operates two exploration licences, in Denmark’s Nordjylland and Nordsjælland regions, in partnership with the Danish North Sea Fund. The US Energy Information Administration said Denmark could hold 650 million cm of technically recoverable shale gas.

Total also has interests in four exploration licenses in Argentina’s Neuquén basin in partnership with YPF.

“Currently what is quite promising is Argentina, in the famous Vaca Muerta (formation). The potential (there) is important,” Charlez said. “Total has drilled two or three wells and the results were quite promising. We are planning to drill more wells in the next few years.”

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