Legal environment of shale gas extraction in Poland
According to the information provided by the Polish Geological Institute, Poland’s shale gas resources are estimated for ca 350-770 billion cubic meters (PGI report from March 2012). This is 2,5 to 5,5 times more than the documented conventional gas supplies (ibid.) Earlier American research had shown even bigger shal gas reserves in Poland, up to 5,300 billion cubic meters (PGI according to global report of the US Energy Information Agency from 2011). Possible revenues from shale gas exploitation excites interest of both Polish and foreign actors in the extractive industry. At the same time, this subject is a matter of concern that gives rise to a number of questions. This study is to present the legal foundations of and general information about shale gas extraction in Poland.
Prospection for and extraction of hydrocarbons in Poland
The legal foundations of Polish extractive industry are dispersed among several legal acts. The main regulations are contained in the The Freedom of Economic Activity Act and the Geological and Mining Law Act. Currently major legislative work is being performed in the field of energy and mining law that may have significant influence on the extractive sector and the situation of investors.
The Ministry of the Environment has been preparing a draft of a major amendment to the geological and mining law, which introduces changes inter alia into the regulations on the mining concession system. In the first quarter of 2013 the draft law was submitted to public and interministerial consultations. The Ministry of Economy has been working on three new complex legal acts in the field of gas law, energy law and green energy (so called the „Energy Three-Pack”). Since no compromise has been reached yet regarding the act on renewable energy sources, the adoption of the Energy Three-Pack isn’t expected soon. The legal status of the Polish extractive sector is also determined by the EU legislation. At the end of 2012 and beginning of 2013 the European Commission took up work on regulations on environmental aspects of shale gas development. New regulations might lead to restrictions in the EU environmental law concerning the unconventional shale gas extraction methods (hydraulic fracturing).
Concessions
Polish law requires an investor to obtain a concession for prospecting or identification of mineral resources deposits and for the extraction of minerals from deposits. The concession is an administrative act that entitles an entrepreneur to conduct a particular economic activity regulated by state. Under the geological and mining law three types of concessions are in force: concession for prospecting for, for prospecting for and identification of and concession for extraction of minerals. The draft amendment presented by the Ministry of the Environment reduces the number of concessions to one, i.e. non-drilling explorarion work will be exempted from the license, while indentification and extraction of mineral recources will fall under one concession.
According to the wording of the Geological and Mining Law Act, concessions are awarded on the basis of an application for a period no shorter than 3 years and not longer than 50 years, unless the entrepreneur submitted an application for granting concession for shorter period. Both national and foreign investors may apply for a concession as long as they carry out economic activity pursuant to the Freedom of Economic Activity Act. Requirements for concessions are stated in the Freedom of Economic Activity Act and in the Geological and Mining Law Act. To the application for a concession shall be attached inter alia the evidence of the right to use geological information and the right to the land within the boundaries of which the intended activity is to be conducted. Drawing up an application requires a comprehensive and detailed assessment of the deposit, as well as of the area where the mining or geological activity would be carried out. This also includes an analysis of the environmental background and the protection of the cultural heritage. Investors who have already applied for a concession in Poland complain about the excessive bureaucracy and quite a long waiting time for the decision (even 9 months).
A concession may be transferred from its current holder to another. This requires the acceptance of new concessionaire to assume the terms and conditions of the concession. Investor applying for a transfer should have the right to use geological information or mining usufruct and the right to the land. The concession authority issues a decision authorizing the transfer providing that it is not against the public interest, including the national security and environmental protection.
As on March 1, 2013 total 109 concessions are in force for prospecting for or identification of deposits of petroleum and natural gas, both conventional and unconventional (shale gas) in Poland. The major investors in the Polish extractive sector are: the State Treasury, including PGNiG S.A., with 16 concessions and the American concern Marathon Oil Company – with its 11 concessions (according to the Ministry of the Environment, Register of the concessions granted by Minister of the Environment for prospecting, exploration and exploitation of shale gas as on March, 1). Recently the Polish company PKN Orlen S.A. increased the number of its concessions after the transfer of 9 concessions from which ExxonMobil had withdrawn. In regard to some investors-concessionaires doubts have been raised over their ownership structure. At the end of 2011, Polish media revealed that one fifth of the concessions for prospecting for shale gas in Poland belongs to Russian investors. Although officially non of the concessions is associated with Russian capital, the ownership and organizational structure of some of the investors may suggest close links with the Russian Federation.
Right to use geological information
One of the essential elements of the application for a concession under the Polish law is the right to use geological information. The definition contained in the Geological and Mining Law Act describes geological information as the data and geological samples together with the results of their processing and interpretation, particularly given in the geological documentation and recorded on data carriers. The State Treasury has the exclusive right to the geological information, which arises in the very moment a geological information is produced. According to the geological and mining law, the use of the geological information is free of charge. However, if the geological information is going to be used for the purpose of conducting economic activity aiming at the exploitation of minerals from deposits, underground non-reservoir storage of substances, underground waste storage, the use of the geological information is subjected to a charge. Also, if its use would lead to damaging or destroying of a geological sample or to the sharing of geological data. In the above mentioned situations the use of geological information is performed under a contract which provides for a payment for the State Treasury.
Controversies surrounding shale gas
One of the investors’ major concerns is the question of the profitability of shale gas extraction in Poland. Mining activities related to the prospecting and exploration for natural gas require significant expenditures, and as a result they carry a high financial risk. Most of the costs are to be invested long before the drilling has begun and the deposit has been examined. First test drillings in Poland have shown that the Polish shales have less permeability than shales in the U.S.A. As a consequence, shale gas extraction in Poland will likely generate higher costs than expected by American investors. Both, the uncertainty about the costs of extraction and the adoption of new tax regulations do not encourage investments in the Polish gas and oil sector.
The extraction of shale gas and its methods have raised environmental concerns. It has been argued that hydraulic fracturing, which uses pressurized water with chemicals to propagation of fractures in a rock layer, may lead to the contamination of groundwater supplies. Other concerns have included risks to air quality and the health effects on humans. For this reason, hydraulic fracturing has been banned in France and Bulgaria. Currently research is being conducted on alternative methods of shale gas extraction, which would minimize the negative environmental impact of shale drilling. Such studies are also done by Polish scientist, who have suggested to replace the fracturing fluid and chemical additives with liquid carbon dioxide. This method appears to be more expensive, but safer for the environment, as it reduces the environmental degradation considerably.
Hydrocarbons tax
In March 2013 the Ministry of Finance published a draft on a special hydrocarbons tax, which is going to be paid on the company’s profits from the extraction of petroleum and natural gas (hydrocarbons). The tax burden for the gas and oil sector will include several elements. New tax structures are going to be introduced: i) a special hydrocarbons tax (worth 12,5% or 25% of the difference between companies’ sales and spending, rate depending on the overall profitability) and ii) a tax on the extraction of certain minerals (worth 1,5% or 3% for gas, tax rate depending on the conventional or unconventional character of the resource). According to the draft law, the planned total tax burden for the oil and gas sector is expected to reach even 40% of gross profit. The new tax regulations are supposed to enter into force on January 1, 2015.
March 2013,
Bisztrai Law Firm