Shale gas exploration in Poland: Foreign investors need a better regulatory framework

The Economist has an interesting analysis of the state of shale gas exploration in Poland. Apparently there is an urgent need for the Polish government to adjust the regulatory framework in order to make it possible for investors to continue drilling: 

ExxonMobil quit Poland in June last year after drilling just two wells. In May of this year Canada’s Talisman and Marathon Oil, an American firm, also withdrew from Polish exploration citing unsatisfactory results. Operators admit the technology of extracting gas from Polish shale has proved harder to crack than they anticipated.

Even so, Pawel Poprawa, a geologist from the Energy Studies Institute, who authored the Polish Geological Institute’s estimate of the country’s shale gas reserves, says far too few wells have been drilled to draw conclusions about the rocks. Only four horizontal wells have undergone multi-stage hydraulic fracturing, the best indicator of a field’s reserves. The government’s proposed fiscal and regulatory framework is the main reason why companies slowed the pace of their exploration in recent months, says Mr Poprawa says. It was variously described to our correspondent as “mad” and “a mess” by industry executives.

The current regulations are inadequate. It can take over a year for companies to obtain the permits to change their work programme and drill a well deeper for example. The government wants to increase its take from a commercial shale gas industry. It has proposed new taxation capping the government take at 40% of an operator’s profits. Companies acknowledge new taxes will be introduced but argue that talk of figures is premature given no one knows yet if shale gas will prove to be commercially viable in Poland. The ministry of finance has eased matters by saying it will postpone the collection of any new taxes from 2015 to 2020.

More controversial are the draft regulations proposed by the environment ministry that will create the state-owned company, NOKE, to take stakes in all future production concessions as a way of guaranteeing the state’s interest in future production. Operators are concerned they are being forced to take on a partner in NOKE that, unlike the Norwegian state company it is based on, will be staffed by public administrators with no experience of unconventional hydrocarbons.

Companies that have already invested millions of dollars drilling wells are also worried the proposals do not give them a legal guarantee to transfer their existing exploration licenses into production licenses without taking part in a competitive tender.  “If there is a change in the government’s approach then it is not too late for this industry to patiently work its way through the problems with some realistic prospect of success. If we continue on the road we’re on at the moment, this industry will be very modest and will not fulfil its potential,” said Tomasz Maj, until recently Talisman’s Poland manager.

Read the entire article here