Foreign investors threaten Poland again over shale gas regulation

By bne IntelliNews July 8, 2013

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Investors are continuing their battle for greater regulatory breaks for the Polish shale gas industry, complaining in a new lobbying report that the legislation currently being drawn up ignores many of their demands.

With yet another version of the proposed regulations with the cabinet, the Polish Exploration and Production Industry Organization (OPPPW) - the industry's main lobby group - says that much is lacking in the latest proposals, according to Reuters, and drags out several foreign investors to threaten that they could leave unless they get their way. However, just how enthusiastic Warsaw remains is also a question now.

Warsaw has been fighting with investors for at least a couple of years over regulatory and tax regimes for the exploration and production of shale gas reserves thought to be amongst the largest in Europe. On the one hand, the government says it's extremely keen to develop that potential to increase energy security. On the other, Poland is one of the few states in Europe to be ploughing full steam ahead with the controversial fracking technique used to extract shale gas.

At the same time, Warsaw has offered signals recently that the unconventional fuel has fallen down its list of priorities in an increasingly confused energy strategy.

Everyone is discouraged

The foreign investors behind OPPPW say there is plenty of shale gas in Poland, but that its exploitation is frustrated by difficult geology and onerous, unclear regulation. In a familiar scene, they invoke the decisions over the last 12 months of Marathon Oil, Talisman Energy and Exxon Mobil to pull out of the country, and threaten further exits.

"If the law is adopted in its current shape, plus two or three more unsuccessful wells, other investors will leave," an unnamed source at one foreign firm prospecting for shale gas told Reuters. The newswire reports that view is echoed by several other executives. "The situation is very bad, everyone is discouraged," a second source complained.

The target of the latest lobbying push is Piotr Wozniak, deputy environment minister and chief geologist, who has drafted proposals for new rules that are awaiting cabinet approval. These include allowing firms to extend exploration licenses by two years if needed, instead of the previous proposal of one year; letting them convert exploration permits into production permits without having to bid again; and making it easier to lease state-owned land on and around drilling sites.

The OPPPW report says that while some changes are positive, most reforms it had sought are still omitted. In particular, it says the government could still use loopholes to force firms to re-tender for production permits. The role of new Polish state-owned operator, NOKE, in all concessions also remains objectionable it says, and it wants exploration to be extendable beyond two years.

"The new proposal is better than the previous ones, but this is not a remedy to the sector's ailments," said Witold Weil, country manager at San Leon Energy. "There are many proposals which were not included in the draft".

Premature obituary

However, speculation persists that shale gas may now have fallen down the list of priorities in Warsaw. The government is struggling to keep a wide and expensive energy strategy - which envisages the development of nuclear power as well as large-scale new coal-fired capacity - on track. With foreign investment having dropped off in 2012, state-controlled companies have been drafted in to develop shale gas reserves. However, they complain that they can't keep up with the capital requirements.

At the same time, leading shale gas proponents have lost their jobs in government and at state companies this year, while unconfirmed reports said shale gas investors had left a private meeting with a government official in April at which they were left in no doubt that Warsaw does not welcome large foreign investment in the industry any longer. One investor told the local media that it felt like the government had declared war on US and Canadian investors.

When it comes down to it, both the threats of investors to exit, and the apparent confusion in Warsaw over its commitment, reflect the lack of commercial flows found so far at Poland's 50 or so test wells. With previous optimism continuing to flag, both sides are understandably nervously weighing up the next move.

"The funeral of shale gas in Poland is premature," Jerzy Nawrocki, the head of the Polish Geological Institute, told Reuters. "However, politicians' optimistic forecasts on fast exploitation of shale gas are fading away."

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