Poland's lack of consistent law, planned high taxes discourage shale gas

By bne IntelliNews May 20, 2013

Bogdan Turek in Warsaw -

Poland wants to monopolize future profits from shale gas production and is discouraging major US investors by planning taxes that are too high, experts said during a May 14-16 economic conference.

The withdrawal of two major US companies from prospecting in Poland dominated the conference, held in southern city of Katowice, and followed last year's exit by ExxonMobil, the world's largest company by profits and market capitalization, from prospecting in Poland.

"The withdrawal from prospecting by the American companies [Marathon Oil and Talisman USA] has not helped the issue of Polish shale gas," admitted Piotr Wozniak, the chief government strategist on shale gas and deputy environment minister. "The negative economic impact of the withdrawal is small, but I would prefer not to see such decisions."

Marathon sold its 11 drilling licenses to San Leon Poland for $10m, which made the latter the largest foreign prospector in Poland. "Our Polish acreage now spreads across three basins, targeting multiple conventional plays and two significant gas plays in the Baltic Basin," exploration director John Buggenhaggen said, adding that Poland is still attractive for San Leon.

The independent newspaper Rzeczpospolita said on May 14 that Wozniak is playing a risky game with foreign investors, and is especially unfriendly to US shale prospectors who might reap higher benefits than the government if they find rich deposits,

The paper disclosed that a confidential meeting of 130 businessmen was held in Warsaw on March 8 with Wozniak on the issue of tax rates on Polish shale gas. "It was a declaration of war on North America (business)," the paper cited one of the participants as saying about Wozniak's speech to the meeting. "Wozniak said that US equipment is not proper for gas prospecting in Poland."

Wozniak has not commented on the report by Rzeczpospolita.

"The people in charge of the power sector are promoting the idea that it should be fully owned by the Polish government," said another participant quoted by the paper, who asked for anonymity.

The issue of taxes, which was discussed at the March meeting in Warsaw, remains a contentious issue. Many experts have criticized a draft hydrocarbons law that proposes a tax of less than 40% of gross profits as insufficient, pointing out that Norway set its tax at a level of 70%. However, others say that investors will have to spend more money for drilling in Poland, where geological conditions are difficult. "A tax of 40% is too high and it should be around 20% or less," former Minister of Economy Waldemar Pawlak said. "We have not even started shale gas production yet and we are arguing about taxes."

Pawlak said that the latest withdrawals should not discourage other companies from drilling: "There is gas for sure." He noted that although forecasts for shale gas deposits of 5bn cubic metres were an overestimation by US experts, Poland still has one of the richest shale gas deposits in Europe. A recent report by the Polish Geological Institute says that about 340bn cm, enough for the country's needs for 60 years, are likely to be underground.

Experts say that a two-year delay in enacting a stable law on hydrocarbons is also dampening interest among investors. "Companies involved in shale gas prospecting are waiting for the final shape of the law on hydrocarbons to accelerate their work," Izabela Albrycht, chairman of the board of the Kosciuszko Institute told the conference. "The companies are encountering many bureaucratic obstacles and the climate around prospecting has deteriorated.".

Piotr Truszkowski, CEO of Exalo Drilling, which is affiliated with Poland's largest gas distributor PGNiG, referred to the sometimes insurmountable bureaucracy that plagues investors. "A company which wants to start drilling needs to get about 30 permits of all kinds," he said.

Environment Minister Marcin Korolec told the conference that changes in the draft are being prepared. "The government is expected to approve the draft by the end of June and the parliament may pass it by the end of 2013," he said.

The critical chorus of participants has had an impact on government officials, which promised to reduce the tax proposed in the draft law. "Tax rates will go down," Deputy Finance Minister Maciej Grabowski told the meeting, without giving details.

Poles have been disappointed by the dwindling prospects that shale gas could be a godsend, as promised by Prime Minister Donald Tusk two years ago. "The money earned from shale gas can be a security warranty for Polish pensioners," he said.

The Environment Ministry issued 113 licenses for prospecting, but only 45 boreholes have been made so far. More than 100 boreholes are needed to roughly determine how much gas is underground.

Bertrand Le Guern, CEO of Petrolinvest, called on the experts and investors not to panic following the withdrawals. "The decision should not be interpreted as a collapse of shale gas expectations," he said. "We should not panic, nor surrender."

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