Poland Positions as European Shale Gas Pioneer as Tax Regulation Framework Unveiled
On 16 October 2012, the Polish government unveiled its long-awaited tax regulation framework for the oil and gas sector. The new regulations will provide Poland with the much-needed momentum to further develop its substantial shale gas reserves and represent a crucial step in creating a stable investment framework at a time when energy majors with investments in the country have been awaiting clarification. Oil and gas companies with interests in Poland’s exploration fields will now be expected to make strategic decisions regarding future operations over the coming months.
The regulation proposals, which will calculate the tax burden on the value of production volumes and profits, imply that the total tax burden will reach 40% of gross profits from 2015. The regulatory framework, which was postponed from its initial release date of 13 June 2012, will affect both conventional and unconventional oil and gas production. Natural gas and crude oil extraction will be subject to a royalty tax of 5% and 10% respectively. A new “special hydrocarbons tax” of 25% will be levied on the difference between revenues and costs. Extraction fees are also to be raised substantially under the new plans, from current levels of 4.90 zlotys to 5.89 zlotys (US$1.56-US$1.87) per 1,000 cubic metres of gas, to 20-24 zlotys (US$6.36-US$7.63).
The proposed tax burden is largely in line with the expectations of international investors as Poland clarifies the parameters of its oil and gas sector, including shale gas production. While a 40% tax burden significantly increases current levels of around 20%-21%, the new fiscal regime remains attractive for investors compared to other energy producing countries, such as the UK and Norway. The level of taxation is well placed to strike a balance between increasing interest in Polish shale and generating government revenue. A 40% tax burden is also in line with effective development of a planned Hydrocarbon Generations Fund, which will receive funds from a new state-owned operator the National Energy Minerals Operator or NOKE, aimed at contributing towards longer-term investments. NOKE will primarily take on a supervisory role, participating in shale gas projects with the right of first refusal on secondary trade of exploration licenses.
Poland potential test case for European shale gas market
Poland is now well positioned to lead shale gas development in Europe and to limit its dependence on conventional natural gas from Russia. The country has one of the largest reserve estimates for shale gas in Europe, despite uncertainty over the definite size of reserves. The latest shale reserve estimates from the Polish Geological Institute, in March 2012, were revised downwards – from 5.3tr cubic metres in April 2011 to 346-768bn cubic metres (bcm). The Institute on 11 May said that an updated version of shale reserves to be published in late 2013 is expected to be higher. Poland now constitutes the best prospect for providing cheaper alternatives to Russia’s Gazprom for conventional gas in Europe, with estimates for its European counterparts trailing. Estimates for the UK, for instance, are substantially lower at 150bcm.
Poland also retains the political impetus to press ahead with shale gas development under the governing Civic Platform (PO). Prime Minister Donald Tusk, who is facing a decline in support according to the latest opinion polls, looks committed to a plan of beginning commercial production by late 2014 or early 2015. This policy is in contrast to a more hesitant stance from elsewhere in Europe, where development of a framework for shale gas production is on hold, both at the Europe-wide level and at the national level. France and Bulgaria have halted shale exploration pending environmental investigations into the effects of hydraulic fracturing, or fracking – the process used to extract shale gas. While Poland’s timeline may prove to be overambitious, the government has begun to back development more rapidly. On 15 October 2012, Tusk included shale development in a number of multi-billion zloty investment programs for further exploration by state-controlled oil and gas companies including Poland’s state-controlled oil and natural gas company PGNiG.
Uncertain production parameters remain
While the regulations are a significant step in clarifying the platform in which Poland’s fledgling shale gas sector will operate, this is not to say all uncertainty is eliminated by the release of the regulations. An incomplete picture of estimated commercially viable shale deposits, as well as infrastructural weaknesses, may act as breaks on further development. At present Poland’s PGNiG lacks the resources to fund the intensive exploration required, or the technological know-how held by foreign companies. For this reason, it is important for the government to continue efforts to attract foreign expertise into the country. Further clarity of the regulatory framework for the shale gas sector is expected in the short term. Specific regulations for shale gas extraction are expected to be announced by the Ministries of Environment and Finance in late 2012, to take effect in early 2013, which will include the formation of a state-run entity to invest in shale gas extraction operations, and will allow investors to make preparations well in advance of the tax changes in 2015.
Potential investors are also concerned that the introduction of regulations to the hydrocarbons sector could be premature and fail to address important aspects of a largely unknown sector. However, the postponement of regulations does not seem to have dampened enthusiasm with many companies remaining committed to shale development through periods of uncertainty earlier in 2012.
Positive outlook for shale gas production
Energy majors with investments in Poland will be expected to press ahead with their strategic assessments in the coming months now that an element of certainty over regulatory details has been established. The terms of the regulation do not bring any unexpected elements into Europe’s unfolding shale gas trajectory, but place Poland in a more preferential position to attract those looking to enter the European shale market. The regulation will go a long way to assure investors that Poland is moving full-steam ahead in developing its domestic energy sector. However, the country will continue to face the same challenges; namely securing definite reserve estimates and attracting the resources and technology that foreign investors offer, suggesting the government’s timeline of late 2014 to early 2015 for commercial production may be over-optimistic.
The author is Jamie Scudder, a Senior Analyst at Maplecroft, a leading source of global risks analysis.