Publication of Poland's New Energy Sector Tax Regulation Proposals is Delayed

Details on taxation of Poland's energy resource sector, including unconventional sources, are unlikely to be announced until after the summer break, following the government's failure to unveil a proposal on the regulation and taxation of hydrocarbons on 13 June. Although the delay adds to uncertainty surrounding regulatory provisions for investors looking to enter Poland's fledgling shale gas sector, an incomplete picture of estimated commercially viable shale deposits, in addition to internal divisions within government, acts to postpone any definite strategy.

The Polish Environment Ministry on 13 June cancelled the publication of the much-anticipated proposal on the regulation and taxation on hydrocarbons, which will cover Poland's shale gas industry. The new law was expected to introduce new taxes to increase the share of revenues for the government and regional coffers. It was also expected to provide details for the establishment of a national fund that would reinvest a portion of tax proceeds to support education, science research and development and social spending. While the Ministry of Environment did not provide details on the reason for the delay, internal discrepancies between respective ministries as to the details contained in the regulation were likely the cause of postponement. Announcement of the proposal, which is now not expected until after the summer break, will further delay the regulations enactment and, in turn, an already unrealistic commercial production date for shale gas of 2014.

Significance

While the government stresses its commitment to shoring up the parameters and streamline the regulatory framework for the extractives sector, particularly for nonconventional energy resources, failure to solidify regulation regarding the tax regime provides ongoing uncertainty for prospective investors. While industry leaders were already sceptical as to the government's intentions to efficiently and effectively install a new regulatory regime which includes legislation to govern shale gas production, such a set-back is likely to further compound existing concerns. The cause of the delay is thought to be related to establishment of a mining and hydrocarbon regulator, Narodowy Operator Kopalin Energetycznych (NOKE), which is to oversee companies involved in exploration and production of fossil fuels. The Treasury Ministry previously had reservations over who would head the regulator. In this context, internal divisions within government, as well as high levels of obstructive bureaucracy, feature as the most cited limitation for potential investors. Oil and gas exploration is currently regulated by the Geological and Mining Law, which was amended in January 2012. However, the Ministry of Environment argues that the legislation is already outdated and that it is not tailored to the needs of nonconventional resource extraction.

Absence of Europe-wide legislation provides additional uncertainties

The uncertain regulatory framework surrounding unconventional gas extraction in Europe also remains a primary risk for investors, which, combined with the ongoing eurozone crisis, may ultimately deter energy companies from venturing into new unconventional European gas markets such as Poland. The EU has so far failed to clarify what new legislation might apply to shale development, although it has indicated that more stringent laws are likely to be drafted. Changes in the supply and demand landscape for energy in Europe, which is currently dependent on costly external conventional gas from Russia for approximately a third of supplies, hinder Europe's ability to make definite policy decisions. Clarifying the EU's position on shale is unlikely in the short term as the EU's complex and largely bureaucratic structure delays policymaking while the politicised nature of Europe's institutions, such as the European Parliament, has increased tensions regarding the issue. Companies currently involved in the exploration of unconventional gas in Europe face the prospect of incurring additional expenses to adapt to a changing regulatory environment.

Unknown territory

Certainty over Poland's reserves will not only provide PGNiG and foreign investors a more complete picture of potential shale gas production, but will allow the government to shore up the regulatory framework. Latest shale reserve estimates from the Polish Geological Institute, in March 2012, were revised downwards significantly – from 5.3tr cubic metres in April 2011 to 346-768bn cubic metres– necessitating a revision of prospects for providing cheaper alternatives to Russian conventional gas. However, the Institute, on 11 May, said it would not be publishing an updated version of shale reserves until late 2013, although it did suggest that future estimates may be higher. Poland's state-controlled oil and natural gas company, PGNiG, on 4 April said that it will be crucial for Poland to be clear on its shale gas potential by 2019 in order for it to gauge terms of negotiation for Russian gas imports.

Furthermore, there are concerns from investors that the introduction of regulations to the hydrocarbons sector could be premature and fail to address important aspects of a largely unknown sector. On 16 June, energy major ExxonMobil said it is to stop exploring for shale gas in Poland following failure to yield commercial quantities at two of its wells in the Lublin and Podlaisie basins, suggesting the parameters for production remain fluid. Other companies so far remain undeterred, however, and are committed to sitting tight through a protracted period of uncertain development of the extractive industry's regulatory framework. Ireland-based San Leon Energy, on 26 June 2012, relayed positive results from its exploration activities on its Siciny-2 well following technical evaluation, leading the company to identify five prospective zones for commercial extraction.

Forecast

The postponement will prolong the current regulatory uncertainty, which is the main factor dampening enthusiasm for unconventional gas extraction in Poland. However, a regulatory framework which covers shale gas extraction will benefit from more certainty as to Poland's commercially viable reserves. Despite ExxonMobil's departure, foreign operators and the government have yet to be deterred by the news and continue with exploration efforts. Nevertheless, investors should remain cautious with regards to navigating Poland's yet undetermined regulatory framework for the extractives sector in the coming months.

The author is Jamie Scudder is a Senior Analyst at Maplecroft, a leading source of global risks analysis.