Rules and Regulations of Shale Gas Development in Poland

How things used to be.

Tomasz Chmal, Partner at White & Case, showed the audience at Shale Gas Eastern Europe 2011 a map of licenses for prospecting and exploration of oil and natural gas deposits in Poland from 2004.

He noted PGNiG’s 4 BCM of annual natural gas production, and another state owned entity’s offshore drilling.

That was about it.  How thing have changed.

With that in mind and looking towards the future, Chmal began his presentation of the Legal Aspects of Exploration and Exploitation of Shale Gas in Poland

“Apache and a few others took acreage and were pioneers,” he explained. “That’s how the joint operating agreement started. This map was not much different in 2007.”

But then Chmal showed a map of Poland, dating from March of this year. “This is how it looks now, a much more colorful map,” he said, showing the patchwork of drilling concessions for oil, natural gas and coal bed methane deposits; then he showed how shale gas deposits made up a big part of that. “We have this whole play of 20 something companies in 19 concessions.”

He said the acreage in Poland was around 19,000 square kilometers, comprising approximately one fourth of the country.

According to Chmal, there were two stages of the process: prospecting and exploration phase; and the exploitation phase. Both involved concessions and a mining usufruct agreement and gave the right to geological information for those who had been granted the former.

He said, “The concession is divided into phases, and the applicant decides to shoot 2D or 3D, and in what time frame - you define the scope of your activity.”

Companies could decide to quit, he said. “The only sanction for non-fulfillment is that your concession may be withdrawn.”

He pointed out that among the key legal issues was the transition from the exploration to the exploitation phase.

Chmal continued: “You’ve made some discoveries and apply for exploitation, which can be fore 25 years. Is it sure that I will be granted the exploitation concession while I was prospecting and exploring first?”

Yes, he said, according to Article 12 of Poland’s Mining Act. “Whoever proved the deposits and provided sufficient geological information has exclusive right and may apply for the exploitation phase. There is the assumption or prediction that the production concession will be granted as well,” he said.

A concession, he explained, entailed the right to run a certain type of business activity.

“Only one company may have a concession, which has connotations for farm outs,” said Chmal. “This is the formal requirement from the ministry, which doesn’t care who the shareholders are. One company controls the concession.”

In terms of the Mining Usufruct Agreement, he said: “The Ministry wants to deal with one entity, which has the right to collect benefits from deposits being owned by the State Treasury.

Geological information was another major part of the upstream process, according to Chmal.

“Geological information is state owned regardless of who produces it. The Ministry has a right to this information. You might have seen what has been collected from the archive. The law says that who bore costs of carrying out the geological works has a right to free use of geological information for a period of five years following the validity of the decision.”

But he said the situation was unclear regarding the sale of geological information. “It’s possible to ‘make it available’ but there’s an unclear legal framework. We have seen that this is transferable for remuneration. You have the right to allow someone else to re process it,” said Chmal.

He spoke of contentious issues like dealing with overlaps, which occurred when the shale rush started in Poland. “Companies overlapped each other, whether intentional or not. The ministry did not want to decide [who was at fault]. There are no regulations at all for dealing with these.

“They encouraged companies to come to the ministry and discuss how to solve the issue,” Chmal explained. “They used their authority to urge parties to sort these things out. Companies went through their headquarters and came up with some agreement. There has been no precedent that someone would pursue this in the courts.”

He said that through the changing of the coordinate system of concessions, the acreage could slightly change.

Chmall also touched on environmental issues.

“An information campaign is needed,” he explained. “When you’re dealing with the regional directorates, you have to give them a lot of attention so it’s an information campaign that’s needed. It must also address the decision makers, not just the general public.”

Chmal discussed joint operations on shale concessions, things like joint operating agreements, special purpose companies and special purpose partnerships.

He said questions remained like “Who owned the assets?” for such cooperation. Liability and risk issues were also touched upon.

“Sole risk operations simply don’t work. You cannot say someone else will drill this well and it will be his/her sole risk operation,” he explained. “You may agree whatever you want under a joint operating agreement, but for the Ministry it’s a clear line of liability.”

For prospecting and mining activities in Poland, he said there were fees per square kilometer and a license fee whose level was not defined.

Chmal said: “So the parties have to agree, if one party is the state and the other the applicant for the concession, you need to have a mining usufruct agreement, which is calculated based on the concession fee, say $100,000.”

He said that the Ministry of Environment now required a higher fee for the mining usufruct agreement, and that this was new for the industry. “But since there’s no limit you can see multiplying this by 10, 50, 100. The bargaining position of the applicant is not that high,” he explained, saying this was to counter the idea that the country was not getting enough, so it was a way for the budget to receive more.

The Mining Usufruct, Chmal said, gave a legal right to benefit from an asset that one did not own.

“It’s the right to collect the benefits. On top of this you need to have an agreement with the landowner – you need to have both. This has been working for years on the Polish market.”

A conference participant from the audience asked Mr. Chmal about gossip regarding whether Poland would be forced to call a tender on acreage in shale gas concessions for the production phase of the shale plays.

“As we see from the older maps of 2004-07, there was no interest in the shale play. There was no high interest,” he recalled. “Once there are some discoveries by the companies that have the prospecting rights, I see no risk that they would like to open the tender for production – I don’t think the Commission has the right to force Poland to adopt the tender process in the wake of the concessions process.”

Chmal said the new law in the Polish Parliament addressed this concern.

“If the concession were withdrawn, it could be tendered in the next round,” he explained. “But I wouldn’t see real justification to say ‘you have a right to exploration but we’ll have a tender in the production phase."