"Conflict of Priorities" in Poland

As part of a regulatory panel discussion at Shale Gas World in Warsaw, Poland, Greg Pytel, Senior Policy Expert at Poland's Sobieski Institute, said there was a conflict of priorities in Poland regarding development of shale gas, as resources were owned by the state and those looking to develop shales had opposing interests.

He said that, having done some analysis based on the risk profiles of the companies investing in Poland, he had come to the conclusion that the current licensing and distribution comprised an unsolvable situation.

"The Government and companies are looking for some solution, but that solution certainly doesn't exist," he added.

"Currently, practically all licenses in all areas of Poland are distributed amongst companies. Let's assume that all of them will look for shale gas or hydrocarbons.

"It is a very early stage of greenfield development, possibly the most risky: whether it's possible to extract, how much of it is underground, what the market will be, the logistics - these are all big question marks," he outlined.

Having reviewed number of licenses around the world, he said that companies were typically looking for a tax level of around 10% plus or minus 5%.

"The only way government can get this sort of maximum on tax is by doing a licensing round where basically companies are bidding to get the right fixed and they indicate in the process of that application how much they would be prepared to pay, but I wouldn't expect at this stage on any license in Poland for anybody to be prepared to pay more than 10% plus or minus 5%, because their project returns level would not add up if it's more than that."

That's why, he said, he believed the present situation to be unsolvable.

"As the licenses are distributed, if the government said 10% it would cause a massive outrage, because if companies were successful on that, making profits 15 years down the line, some future government would change it."

At the same time, according to Mr. Pytel, the government had to treat every company equally. But the maximum 40%, as is currently being floated by the Polish government, was entirely unacceptable.

"Let's say it's optimized at 30%, after expenses - it is way too high at this early stage of development. Typically, the way it is done," he explained, "is when the government awards a few licenses in the first licensing round, when the tax is extremely preferential, and then it is found to be successful and after de risking the area, then the taxes can slowly start going up, because the risk assessed by the company keeps going down."

He said it could turn out that, even with the high proposed rate of tax, tax revenues could be lower because the exploration is even more risky than anyone thought.

According to Mr. Pytel, the present proposed tax level would not be attractive to any company as long as they were in the initial stages of exploration, but he didn't see a change in the government's stance forthcoming, no matter how many conferences it was discussed at.

Kenneth Morgan, Director at Trinity Corporate Services, another speaker in the session, wanted some details.

"We are where we are, the concessionaires have spent a lot of money and recently there's been draft legislation. When you say 10%, my question would be 10% of what? That's something the new legislative draft, the overall government take is 40% of gross profit, but what's the definition of government take? Does it include all the local taxes, and does it allow for tax losses to be set against tax for profits? Does it allow for capitalized investment costs? And can that be indexed?

"Profits won't be until 2020, revenues maybe 2015-16, so there's lots of detail missing. Nobody knows what the revenues of the sector are going to be, nobody knows what the costs of extracting the gas are going to be - we know it's going to be high, so there's going to be a low margin, so it will be less profitable than some of the US plays because of the rock formation, etc."

Noting that the only developed shale gas sector was in North America, he continued, "There is a sector trying to start and the sector regulation should give the government a fair share of revenue, but it's got to encourage investment, because if it's too high we have to get into the details."

In other parts of the world, said Mr. Moore, they understood that investors needed to be encouraged.

"There is dialogue and it will all be ironed out somewhere in the middle so that there's revenue for the government and profits for the early explorers," he said of Poland.

The session moderator noted that there were no tax loss carry forward periods for hydrocarbon producing countries like Norway, while in Poland it was set at five years.

"Those places are producing conventional gas and oil, so it's not comparable," noted Moore. "In other countries tax losses can be carried forward way into the future. The five years in Poland in the shale gas sector is unworkable, because there will be no profits in the first five years - there will be a hell of a lot of costs and they'll have tax losses.

"These are the details that will need to be ironed out."

As for the next steps to drive the shale gas industry forward, Greg Pytel said that considering Poland's drilling of 34 wells and two horizontals, it was not prudent to compare it to Norway.

"It's about the process," he emphasized, "because Norway didn't get the current tax rate of 78% on hydrocarbons by proposing at the greenfield stage; they reached it through a process. It's a process of de risking."

He said his second point was engagement of local companies: operators and service companies, like Statoil's contribution to communities in Norway. "Local companies in Poland have to be engaged in partnerships with foreign companies like in the Norwegian model, but we don't see this and I don't expect it."