Friday, May 5, 2017

Global Shale Law Compendium: Shale Governance in Poland

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:
·        France (March 30, 2017)
·        England (April 6, 2017)

·        Germany (April 28, 2017)

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