Scepticism remains as Poland finally approves tax regime for shale gas

By bne IntelliNews July 31, 2014

Wojciech Kosc in Warsaw -

 

Poland's infant shale gas industry can sit down and work with some solid numbers, after the Polish parliament finally passed new taxation rules for hydrocarbon production on July 25. 

In practical terms, the law will apply to companies hoping to find gas along Poland's "shale gas belt," which stretches from Gdansk in the north to Lublin in the east. The new law introduces a special tax on hydrocarbons production that will have a flexible rate of anything between zero and 25%, depending on costs such as drilling and production revenue.

The law will also have shale gas companies pay a new royalty rate of 1.5% of the value of extracted resources. Altogether, including corporate tax, real estate tax, and local fees, etc., shale gas producers will bear an overall tax burden of around 40%, according to the ministry of finance, which conceived the new regulations.

The legislation now passes to the Senate, after which the president will sign it into law. The new rules will officially enter into force from 2016, but in practice they will be delayed until 2020 so as to give companies an incentive to invest and intensify exploratory drilling.

Sceptics

The industry, however, remains sceptical. "It's much too early for introduction of a new taxation regime," insists Marcin Zieba at Polish oil and gas industry lobbyist OPPPW. "The exploration phase is still going on and will for the next few years before we will be able to say that there's enough gas in Polish shales to justify commercial production." 

OPPPW claims that the overall tax burden will not be 40% as the government claims, but much higher, at 60-70%. 

However, Grzegorz Kus, attorney-at-law and tax expert at consulting firm PWC, says neither the government nor the industry is particularly credible in terms of how much tax they claim will be levied. Neither side has made the models on which they calculated their results public. 

"It's true, though, that the finance ministry disregarded some burdens in their model, such as mining usufruct [a permit authorizing the use of mining deposits] fees, which may not be taxes technically, but are still paid to the treasury," says Kus.

The consultant also suggests the introduction of the new regime could produce unexpected and unwelcome results for a government hoping to speed up shale gas exploration and production. "Companies will certainly start modelling their revenue based on the new law, and if they see that the tax burden is unacceptable, they will quit, even if the calculations might prove inaccurate eventually," he says.

Help or hindrance?

That risks further hindering a drilling rate that's already slow. The government has been widely criticised for its failure to put regulatory and tax regimes in place, despite insisting that shale gas is a potential alternative to gas imports from Russia, as well as a means to create jobs and develop oil and gas knowhow.

Around 64 exploration wells have been drilled in Poland, despite suggestions from Warsaw that they're set to mushroom. The most promising are set in northern Poland, west of Gdansk, where companies like ConocoPhillips, BNK Petroleum and San Leon Energy have been drilling. The latter pair claim they could even see commercial flows by the end of 2014.

However, Warsaw's failures to tempt more investors into the drive for shale gas appear manifold, and continuous. On July 30, the European Commission sent Poland a formal notice in connection to the relaxation of environmental impact assessment (EIA) rules for drilling. As part of its regulatory push, Poland lifted EIA requirements for exploratory wells of up to 5000 meters in depth. In practical terms, that excuses all such drilling, because Polish shales almost never plumb deeper depths.

 

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