Member Article

Key principles approved by the Polish Council of Ministers - On 16 October 2012, the Polish Council of Ministers approved key assumptions for the long-awaited shale gas production and taxation legislation. The assumptions, which impact both conventional and unconventional oil and gas production, have in particular, been awaited by the developing shale gas sector and investors interested in joining this brand new market..

Final assumptions for the new law are based on Norwegian, Danish, Dutch, Canadian, American and Australian regulations and experience in this area.

Taxation

The assumptions foresee introduction of special taxation on oil and shale gas extraction and distribution of profits to investors, the state budget and local municipalities.

The tax model encompasses introduction of four categories of public duties:

1.    tax on the extraction of hydrocarbons – that is to be based on income (royalty tax), amounting to 5 and 10 per cent, respectively with regard to extracted gas and oil;

2.    tax on positive cash flow – based on capital gains (cash flow tax), in the amount of 25 per cent;

3.    extraction fee – currently from PLN 4.90 (approx. $1.56) for high-methane gas to PLN 5.89 (approx.. $1.87) for nitrified gas per 1,000 m³ of gas is to be raised:

-     for extracted high-methane gas – to PLN 24.00 per 1000 m³;

-     for nitrified gas – to PLN 20.00 per 1000 m³;

-     for oil – PLN 50.00 per 1 ton;

4.    mining usufruct fees – that will remain unchanged.

The new taxes are intended to enter into force in 2015 at the earliest, provided that the gas market is freed.

A fee of 40% of anticipated gross profit from produced shale gas is to be paid by a shale gas producing company (the so-called government take).

Unsettled tax loss in corporate income tax will be settled in the hydrocarbons extraction tax. The depreciation rates for the mining industry will change.

New hydrocarbon entity

The government also plans to establish the National Operator of Energy Minerals – NOKE S.A. (“NOKE”), a 100% state-owned company overseen by the Treasury Ministry that will have the right of first refusal during secondary trade in exploration licences on market terms.

NOKE will pay out its net profits to the Polish state budget and to the Hydrocarbon
Generation Fund, which will make long-term investments.

Changes to the licencing process

The government document specifies rights and obligations that  licences for exploration and extraction of hydrocarbons will cover, including the issue of State supervision of secondary trade in licences on the market (right of first refusal of a licence, right to sell a licence only to pre-qualified entities).

A.    Licencing process in relation to current licence holders

Holders of exploration licences will retain their right of priority to obtain extraction
licences after correctly preparing relevant geological documentation.

When applying for an extraction licence, holders of exploration licences will be able to
voluntarily invite the State to participate in an extracting consortium. The State will participate in such a consortium via NOKE.

The licence holder will have three years to decide whether to invite NOKE to participate or to operate alone. During that time the licence holder not interested in NOKE's participation will have to apply for an extraction concession. The absence of an application for an extraction concession will imply NOKE's accession to a future consortium. NOKE will be entitled to participate (as a shareholder) in the extraction consortium created by the owner of the exploration licence. The exact role, share and powers of NOKE in the extraction consortium is not known at this stage of the legislative process.

The government plans to facilitate exploration and exploitation of hydrocarbon deposits (both conventional and non-conventional). 

B.    Licencing process in relation to future licence holders

The planned act will introduce deregulation at the exploration stage – licences will not be required for surface work without drilling. Moreover, exploration and extraction licences will be merged (there will only be one licence). A prequalification procedure will take place for entities admitted to tender for licences.

The assumptions provide no priority right for an extraction licence for companies holding exploration licences.

Exploration and extraction licences (once they are merged) will be granted in a tender
procedure. Entities obtaining licences will form extraction consortiums in which NOKE will have its share. The minimum NOKE share will be specified in a notice of a licence tender.

Other assumptions

Other key elements of the new legislation are not precisely specified in the currently available version of the released document, but they include:

-       precise and simplified environmental laws;

-       supervision of licences by the State Mining Authority and Polish Geological Institute in particular: meeting licence obligations;

-       support of the Minister of Environment by the State Mining Authority and Polish Geological Institute in prequalification procedures, evaluation of geological documentation and approval of a land deposit development plan.

Timing

The Minister of Environment will present a shale gas production and taxation law in November 2012 for public consultation. By the end of the year, the draft legislation will be submitted to the Council of Ministers committee and will subsequently be proceeded with
by the Council of Ministers and the Parliament.

The newly enacted law is intended to be periodically reviewed. The first review is intended to take place no later than five years from the date of the act entering into force.

It is expected that regulations will provide for a stable investment framework and attract continued investment in development of shale gas reserves in Poland.