BMI View : A shale gas law will certainly provide greater clarity for investors looking into upstream opportunities in Poland. However, immediate results from its introduction are not likely, as recent withdrawals from international oil companies (IOCs) are also caused by disappointing early exploration outcomes. While these pull-outs are not definitive condemnations of Poland's shale gas potential, they do highlight that the realisation of shale gas hopes for Poland could take longer than it desires.
In face of recent high profile pull-outs by prominent international oil companies (IOCs) from Poland's shale plays, the country is seeking to convince oil and gas companies that Poland is still an ideal destination for investment. On May 14, Environment Minister Marcin Korelec told an audience that he expects a shale gas law to be adopted by the end of June 2013 and be passed by the parliament by the end of the year. He also assured the public that bureaucratic hurdles to exploration will be reduced in ongoing amendments to the country's geological and mining law .
Bill In The Works
A hydrocarbons tax (informally known as Poland's shale gas tax) draft bill was first unveiled in October 2012 and consisted of the following:
5% royalty rate on gas production;
10% royalty rate on crude oil production;
25% tax on the surplus of revenue over expenses (also known as a cash flow tax).
These are in addition to corporate income taxes and real estate taxes on properties that firms have to pay separately. Applicable to both private and state-owned firms, proceeds will be channelled into a hydrocarbon generation fund to be re-invested into the industry.
Under the October 2012 draft, total taxation could make up about 40% of extraction costs according to the Treasury Ministry. The government had justified this level of taxation on the basis of its positive impact of budgetary inflows, which could be used to address local concerns particularly about the impact of shale gas extraction. However, the industry did not react well to the draft law presented in October 2012. The Polish Exploration and Production Industry Organisation (OPPPW) expressed in a statement that 'investors are under the impression that someone is trying to reach deeply into their empty pockets, when it is not even certain there will be anything there to take'.
Given that initial exploration has proved Poland's geology to be more challenging than expected, the fiscal terms proposed raised fears that it could further discourage entry into Poland's nascent shale gas market. In a bid to address these concerns, an updated hydrocarbons tax draft bill was released by the Finance Ministry in March 2013. It lowered the royalty rate for unconventional gas extraction to 1.5% and unconventional oil to 3%, but kept the cash flow tax at 25%.
In addition, Poland has also been working to revise its geological and mining law. Changes or additions to the existing law include:
All new licences to be issued via tenders;
Concession types to be standardised;
Existing exploration licence holders to be given priority to production licences;
Greater ease of farm-out deals;
Less paperwork and greater clarity on requirements for environmental approval;
Faster regulatory approvals;
More stringent requirements for environmental groups to meet before they can participate in environmental impact assessments;
A state-owned operator - the National Energy Minerals Operator (NOKE) - to oversee the industry. NOKE will take a 5% equity stake in each concession and will have priority access to exploration licences offered in the secondary market.
Above-Ground Certainty, But Below-Ground Woes
Oil and gas firms will not be fully appeased with the lowering of royalty rates for unconventional extraction, as they still view a maximum tax obligation of 40% as burden for Poland as compared to tried and established plays in offshore UK and Norway. The involvement of a state-owned firm in all projects could also decrease the profitability of operations.
However, efforts to clarify taxation and other regulatory issues relating to shale gas and oil exploration and production (E&P) are certainly encouraging. This clarification will help firms better assess the risks of entering or continuing operations in Poland. Promise of a smoother process to obtaining licences and environmental permits will also raise the appeal of Poland's operating environment.
Greater regulatory certainty could give Poland an advantage in attracting smaller but equally specialised firms into its shale plays, relative to regional competitors such as Ukraine where an opaque business environment ap pears to have limited access to large IOCs with stronger negotiating power vis-à-vis the government. The entry of smaller players with greater risk appetites could be particularly crucial for Poland, following the exit of prominent IOCs such as ExxonMobil , Talisman and Marathon Oil .
Nonetheless, the clarification of its shale gas and mining laws, even if achieved by the end of 2013, will not have an immediate impact on boosting Poland's immediate shale gas production prospects. It should be recognised that the withdrawal of Exxon, Talisman and Marathon appears to be primarily motivated by below-ground and not above-ground factors ( see our online service, May 9 2013, 'Shale Licence Reshuffle Raises Stake For San Leon' ) . Despite its touted shale gas potential - estimates for technically recoverable resources range between 364 and 768bn cubic metres (bcm) according to the Polish Geological Institute -, no large-scale discoveries have been announced to date. Therefore, an industry rush into Poland is not likely to be seen even if these laws are implemented by 2014 unless promising exploration results from existing players are announced in the interim.
|Shale Gas Hopes To Be Realised Later Than Desired|
|Poland Gas Production & Consumption, 2012-2022 (bcm)|
Once again, we reiterate our view that Poland's ambitious target to produce shale gas in commercial quantities by 2015 - a goal that the Treasury Ministry was sticking to as of April 2013 - will be missed in view of exploration results to date. However, it is not a dismissal of Poland's potential. Many of the early exploration problems lie in an inadequate understanding of Poland's geology and the lack of support services to meet the industry's needs. To address the latter, a greater move of oilfield services into the country to provide more available to help strengthen the foundation for future growth. This is a development that we are starting to witness, as exemplified by Halliburton's cooperation with San Leon Energy and state-owned gas firm PGNiG's creation of Exalo Drilling to relieve the country's shortage of rigs ( see 'Halliburton Move Gives Credibility To Shale Exploration', March 19; and our shale gas special report 'CEE Shale Potential: Promise Awaiting Fulfilment', February 16). Our current forecast is for large-scale shale gas production to only take-off from 2019.