Poland: Shale gas momentum fuelled by nerves over Russian supplies
By unveiling amendments to its regulatory and fiscal regime, Poland is hoping to tempt shale-gas operators back to its upstream. The much-needed legislative amendments , if approved by parliament, would alter an upstream framework which prompted a number of international energy companies, including Total and Eni, to quit the country's unconventionals sector. The draft regulations before parliament provide much of the legal and fiscal framework needed to encourage exploration and production.
The government's efforts to build momentum for the country's shale-gas sector are, in part, prompted by the hope Polish unconventionals could replace some of the gas Europe imports from Russia. Indeed, prime minister Donald Tusk said in March that "gas security is a fundamental prerequisite of sovereignty of every European country, including Poland".
Poland positioned itself as a pioneer of shale-gas development in Europe, although uncertain estimates for technically recoverable reserves have weighed on confidence in the country's shale gas potential. In a June 2013 report, the US Energy Information Administration (EIA) revised down its estimates of Poland's shale-gas reserves from 5.3 trillion cubic metres (cm), a figure released in 2011, to 4.2 trillion cm. The change was primarily due to a downgrade of the estimated resources in the Lublin basin. In March 2012, however, the Polish Geological Institute (PGI) released a more conservative estimate of 346 billion to 768 billion cm. The PGI is due to publish updated estimates later this year.
To this end, the Polish government plans to speed up exploration and prove the viability of commercial production by the close of this year. However, with just 50 exploration wells drilled to date, of which about 40 were drilled in 2012, exploration remains in the early stages. The Ministry of Environment - which is responsible for preparing and implementing laws, regulations and policies for the energy sector - expects a further 40 wells to be drilled this year, bringing the total to about 90. The Ministry of Environment anticipates about 200 wells will be needed in total to assess the country's shale-gas potential. However, Poland's geology is not thought to be as favourable as that in the US, putting a damper on hopes that Poland could experience a North American style shale boom. Poland's geology could ultimately lead to higher costs, making an appropriate fiscal regime for exploration and development all the more important to spur investment in the sector. The government's decision to improve the business environment for shale-gas exploration follows strong criticism - some from industry itself - about the country's 'complex' and 'burdensome' shale-gas regulations.
Maciej Grabowski's appointment as Environment Minister in November last year has been interpreted as a sign that the government aims to address investors' concerns. A former deputy finance minister, Grabowski has expressed clear intentions to finalise laws guiding the industry and boost exploration. Consultations in late 2013 with the Polish Exploration and Production Industry Organization (OPPPW) - a body representing international and domestic companies including Chevron and PKN Orlen - has so far seen policy-making activity speed up somewhat.
On 11 March, the government announced a number of changes to the fiscal regime. The current total tax rate of 40%, including royalties and a special hydrocarbons levy, which was due to take effect in 2015, will now not apply to shale-gas production until 2020. The amendments in the draft Bill on Special Hydrocarbon Tax also give companies certainty about what to expect in the long term, and includes details of specific tax rates including royalties, hydrocarbons and corporate income taxes. However, the proposed draft law does not stipulate that total taxation levels will be capped at 40% - an assurance given to the industry by the Polish government.
Draft amendments to the Geology and Mining Law (the Amending Bill) that streamline the concession process should reduce the administrative burden placed on companies and encourage exploration. At present, companies must acquire three separate concessions, covering prospecting, exploration and extraction of hydrocarbons. Under the proposed changes, the number of concessions is reduced to one. New rules about the timescale of concessions will also increase transparency in the tender procedure. Five-year exploration licences have been granted to date, with a single option to extend the licence for two years. Under new rules, concessions will be awarded for 10 to 30 years instead of the current three to 50 years.
The proposed amendments also drop the government's earlier plans to establish a state-run fund that would hold a stake in shale gas concessions. Plans to establish a National Operator of Energy Fossils Fuels (Narodowy Operator Kopalin Energetycznych - NOKE) have been criticised by industry representatives as few details on its form or role were provided by the government. Reservations had also been expressed over NOKE's decision-making capacity and the technical expertise of those involved. Some investors viewed its establishment as premature given that the industry is still in its infancy. Acknowledging industry concerns, rather than creating a new agency, with the extra bureaucracy that would entail, existing government agencies will be granted greater monitoring rights. The decision to withdraw regulation concerning NOKE eliminates requirements for state involvement in all concessions, limits the government's direct involvement in the shale gas sector and will incentivise exploration.
Poland needs exploration success if it is to renew interest and investment in its unconventionals sector, especially in the wake of the departure of Total and Eni. In January, San Leon Energy announced positive results from flow testing at its Gdansk concession in the Baltic basin. The company is expected to spud a horizontal well in the near future. However, this is a small step. Tusk's hopes of seeing large-scale commercial shale gas production by late 2014 or early 2015 are, at best, optimistic. Nonetheless, if investors react positively to recent regulatory changes, shale gas is likely to have a real impact on Poland's energy mix by the end of the decade.
Given tension with Russia over events in Ukraine, Poland has an additional reason to establish a clear regulatory framework that encourages development of the sector. It is evident that the Polish government, following consultation with industry representatives, is taking steps to address concerns over the country's investment climate. The new draft amendments no doubt provide further clarity and signal to investors the government's commitment to develop reserves. The government will need to maintain this momentum throughout 2014 if Poland is to retain its position as a pioneer of European shale gas.