Written by Chloe Marie
– Research Fellow
The Global Shale
Law Compendium series addresses legal developments and other issues related to
the governance of shale oil and gas activities in various countries and regions
of the world. In this article, we will highlight governance actions taken by
the Republic of Poland to develop policies specific to shale gas development.
After
a 2011 report from the U.S. Energy Information Agency (EIA) estimated shale gas
reserves in the amount of approximately 187 Tcf, the Republic of Poland
nourished high expectations of securing their energy independence from Russia. In
the last few years, however, shale development has not taken off as anticipated
based upon this level of reserves. Subsequent test drilling results have
demonstrated geological conditions to be less suitable than expected. EIA
downgraded its estimation of the reserves in a June 2013 report, declaring that “the shale gas
resource estimate was reduced from 187 [Tcf] in the 2011 report to 148 [Tcf] in
this report.” The Polish Geological Institute-National Research Institute
(PGI-NRI) has conducted its own assessment of the Baltic-Podlasie-Lublin Basin
in a report dated March 2012, finding that this
basin contains a maximum of 1.92 Tcm shale gas recoverable resources with a
likely amount of shale gas recoverable resources between 346 Bcm and 768 Bcm.
While
several companies have shown an interest in Poland’s shale resources, early
results from exploration have not been encouraging. As a result, the potential
for local and foreign investment has been diminished as demonstrated by a
significant decrease in the number of granted concessions. For instance, in May
2013, Marathon Oil Corporation announced its intention to drop shale gas
exploration in Poland due to unsatisfactory drilling results, just as Exxon
Mobil did in June 2012. Likewise, in April 2014, French energy giant Total did
not renew its license for shale gas exploration due to the project’s poor
economic viability based upon test results. In the same vein, Chevron
Corporation and ConocoPhillips respectively withdrew from shale gas projects in
Poland in January and June 2015. While the withdrawal of these companies was
motivated largely by poor well production, a decline in natural gas prices in
2014 also contributed.
In
addition to these geologic and economic difficulties, the lack of a legal
framework specifically addressing shale gas development also posed a problem
for investment in Poland prior to 2015. At the present date, the Hydrocarbon
Act of 2014, which amended the Geological and Mining Law (GML)
Act of June 9,
2011, and the related executive regulations constitute the regulatory framework
governing shale development in Poland. The previous legislation – the GML Act –
was criticized by some for being too protectionist in the process of granting concessions
and thus hindering the involvement of foreign investment. For instance, in June
27, 2013, the European Court of Justice agreed with the European Commission
that the Polish regulatory framework contained discriminatory provisions
relating to the protection, exploration, and extraction of hydrocarbons against
overseas concession applicants. Furthermore, many critics pointed out that
clarity was needed concerning certain provisions relating to the impact of
shale development on the environment, especially regarding the scope and
procedure of Environment Impact Assessments (EIAs) in Poland. On this basis, in
April 2014, the Polish Government pursued amendment of the GML Act through the
enactment of the Hydrocarbon Act. The Act was signed into law on August 3,
2014, and became effective on January 1, 2015.
The
Hydrocarbon Act provides for the granting of a single license for hydrocarbon
exploration with a production period ranging from 10 to 30 years. The time
period for prospecting and exploration activities must not exceed five years.
Interestingly, geological prospecting only does not require a license. The
applicants must apply for a license from the Polish Ministry for the
Environment and go through a three-stage tender procedure: 1) the Ministry is
responsible to first evaluate the credibility of all applicants; 2) then the
Ministry assesses the viability of the eligible exploration and/or production
projects; and finally 3) the winner of the tender has the possibility to enter
into a cooperation agreement with other investors to share in costs and in
profits.
All
prospecting, exploration, and production licenses issued prior to January 1,
2015, remain in full force. These production licenses, however, will be
enforced within the meaning of the Hydrocarbon Act. For those holding a
prospecting and exploration license before January 1, 2015, the new Act
provides that they have priority to obtain a production license for the same
area under the following condition: the license holder must produce geological
documentation related to the explored area and such documentation must have
been approved by the Ministry prior to January 1, 2015.
While
the Act authorizes appraisal drilling at depths of up to 5,000 meters without
assessing the potential environmental impacts, this provision has been called
into question by the European Commission. In June 2014, while the Polish
Parliament debated its legislative amendments, the European Commission took further
steps against Poland to ensure compliance with the Environmental Impact
Assessment (EIA) directive by sending a letter of formal notice to trigger an
infringement procedure.
Together
with the enactment of the Hydrocarbon Act, the Polish government established a
new tax regime with the goal of attracting foreign investors. In March 2013, the
Polish Ministry of Finance issued a draft proposal regarding hydrocarbon
taxation. On August 25, 2014, the President of Poland signed into law the Act
on Special Hydrocarbon Tax providing for a hydrocarbon tax amounting to 0-25%
of profits from the extracting business and an extraction tax amounting to
1.5-3% of the extraction value. The aggregate tax burden, however, will not
exceed 40% of total income generated from the hydrocarbon extraction. The Act
of Special Hydrocarbon Tax became effective on January 1, 2016, but the extraction
tax will not take effect until January 1, 2020.
Despite
efforts to make shale development more attractive to local and foreign investors,
the ongoing legal dispute between Poland and the European Commission over the
substance of Poland’s hydrocarbon legislation together with the poor geologic
results to date have clouded the future of shale gas development in Poland. Some
companies, however, remain involved in shale gas exploration efforts, such as
the Irish-based San Leon Energy Company and the national companies PGNiG and
PKN Ore.
Prior articles in the Global
Shale Law Compendium series:
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