Some foreign operators and industry experts involved in Poland’s nascent shale natural gas exploration sector are becoming concerned about the politicization of the industry and a tendency to favor domestic state-controlled companies.

Although Poland remains at the forefront of shale gas exploration in Europe there has been a noticeable politicization of the public debate about the industry since last October’s parliamentary elections. During the campaign, politicians appeared to be competing to reassure the public that their party could extract the most from potential shale gas production.

Firstly, the main opposition party, the nationalist and populist Law and Justice, proposed introducing a minimum 40% royalty fee on future production and new legislation outlawing “undesired investors” from acquiring companies engaged in shale gas activities.

The pro-shale gas and economically liberal Civic Platform party, which won re-election, is now drafting legislation to regulate the industry in the light of that debate.

“One political party was saying to the government, ‘you’re giving away everything to foreigners.’ Politicians don’t want to do the wrong thing but they lack experience and this makes it difficult for them to be a partner with a strong industry,” Pawel Poprawa, until recently a shale gas expert at the Polish Geological Institute, said in an interview.

“It would be much better if this were an industry like the coal industry or food industry. There’s too much politics involved and the industry pays the price, Poprawa said.

Before Christmas, the country’s new Treasury Minister, Mikolaj Budzanowski, gave an indication of the government’s thinking when he wrote to the country’s largest state-controlled companies — natural gas company PGNiG; refiners PKN Orlen and Grupa Lotos; utilities PGE and Tauron; and copper miner KGHM –urging them to enter into partnerships for shale gas exploration. Some of those companies are now finalizing the details of a partnership to develop PGNiG’s Wejherowo shale gas license area in Pomerania, in northern Poland.

PGNiG has 15 shale gas concessions in the country’s Ordovician and Silurian shales, the highest number held by a single company. PKN Orlen has six, while the remainder have none.

No Polish company has the resources to fund the intensive exploration campaign shale gas requires. In Poland, each vertical exploration well costs around $10 million and each horizontal well $15 million, up to three times the cost in the US.

In January, it was reported that months of talks about a partnership between PKN and Canada’s Encana, which would see PKN gain access to Encana’s North American acreage in return for investment in its Polish shale gas concessions, were halted because of an alleged decision by Warsaw to prioritize domestic tie-ups.

One official from a non-Polish shale gas operator in Poland said the division into “them and us” was extremely damaging and was driven by politics.

“In the beginning, foreign companies were made to feel extremely welcome — now there’s a lot of talk about foreign companies coming to exploit us,” the official said.

“The issue here is not about money, it’s skill and know-how. Companies like PGNiG have no experience in shale gas and it was madness to stop the tie-up between Encana and PKN. The signal seems to be that Polish companies should start producing shale gas by the next election [scheduled for 2015]. I can understand it as political propaganda and as a signal to the Russians, but it makes no business nor technological sense.”

Mostly foreign operators have drilled 23 exploration wells since 2010 and are contracted to drill 49 new wells this year. None has yet proved economic, but operators are optimistic that it is only a matter of time.

Although exploration costs are high, a huge incentive is the fact that gas prices are up to seven times higher in Poland than in the US.

So far each operator has adopted a step-by-step approach. They drill a vertical well, analyze the data and then decide whether to fracture the well.

If the results are promising, they may drill a horizontal well, So far, just two horizontal wells have been drilled, both by the Isle of Man-registered independent 3Legs Resources.

PGNiG appears to be considering a different approach. There’s talk it is planning to build a wellpad for 12 wells in its Wejhorowo license area.

“This is a political decision motivated by getting production going as quickly as possible. The problem is PGNiG lacks experience, it doesn’t know how to do shale gas. They had people queuing up to go into partnership with them. But a decision has been taken to try to do it with Polish companies. I’m sure they will learn from their failures,” one industry participant said in an interview.

Piotr Wozniak, the country’s Chief Geologist and deputy environment minister, denies any such decision has been made.

“There is scope for everyone. The Treasury Minister will probably try to incentivize the two or three Polish companies that have the strength to invest because this requires a lot of money. There is not enough money to be leveraged by a Polish company. They are too weak. If we really want to develop these resources we need foreign investors. I don’t think it is a decision by the minister to repel investors from PGNiG. Sooner or later we will see partners with PGNiG, Lotos and PKN Orlen,” Wozniak said.

An atmosphere of uncertainty has arisen just as Wozniak and other ministers are about to announce the first details of new regulations for the industry, including a new hydrocarbons tax set to take effect when first production starts in 2015-16.

Currently Poland has no specific fiscal regime for shale gas. The tax rate for conventional oil and gas production is less than 21% and consists of a corporate income tax, an exploitation fee and a property tax.

“The level of government take in Poland is extremely low and everybody, including investors, expects it to rise. In my opinion, the rise should be very, very moderate because we need those investors here. There are not enough companies; we don’t have an oil industry in Poland at all. It’s in our interest to incentivise rather than dis-incentivise,” Wozniak said.

Although the taxation rate is not yet known, the new fiscal regime will likely include a combination of an exploitation fee, CIT, and the new tax, Maciej Grabowski, deputy finance minister, told Platts.

Grabowski said a total government take of around 50% would be fair, without giving details. But that figure has already caused jitters among operators — head offices have been calling Warsaw asking whether such a tax rate is economical for them.

It’s too early to be talking figures, said Kamlesh Parmar, country manager for 3Legs Resources.

“We now need to look at whether or not any of these areas can be made commercial and that involves a lot more work, a lot more drilling, a lot more testing. That costs money in a global environment where money is difficult to come by. What I would really like to see is the authorities making an effort to encourage investment in this industry so that this potential can be made a reality,” Parmar said in an interview.

Source: Platts