Background
Hydrocarbons Act


Since 2010 the mood in the Polish shale gas sector has deteriorated from early enthusiasm to utter pessimism. The government now intends to reinvigorate the sector with a new set of sector-friendly regulations.

Background

Initial US Department of Energy estimates in 2011 estimated that Polish shale reserves were the largest in Europe. According to the report, Poland had shale gas reserves of about 22.45 trillion cubic metres (m3), of which 5.30 trillion m3 were recoverable. Recent Polish estimates have been more conservative, in the range of 346 billion m3 to 768 billion m3. Poland uses 16 billion m3 of gas a year.

Most of the shale gas is located in the Baltic Sea Basin, the region of Lublin Voivodeship or Lublin Province and Podlaskie Voivodeship.

The total number of shale gas targeted licences has fallen from a peak of over 110 in 2012 to around 70 in the third quarter of 2014. Major companies - including ExxonMobil, Marathon Oil, Cuadrilla, Eni and Talisman Energy – have pulled out of the country. The largest number of licences is held by state-controlled PGNiG. Other state-controlled companies that are active in this field include Lotos Petrobalic and PKN Orlen.

The number of shale gas exploration drillings has also decreased, leaving PGNiG and PKN Orlen as leaders.

The reduced estimates, slow rate of exploration, legal and regulatory uncertainties and challenging geology are the main reasons for the slow progress in exploration activities.

Hence, the government has introduced new legislation aimed at promoting shale gas exploration and future exploitation.

Hydrocarbons Act

In April 2014 the government agreed on a draft act to amend Polish geological and mining law and other laws which are focused on hydrocarbon prospecting and production. The Hydrocarbons Act was adopted in July 2014 and will come into force on January 1 2015.

This update outlines the main features of the draft act.

Changes in licensing system
Under the act, the current system of separate prospecting, exploration and exploitation licences will be abandoned. A unified prospecting, exploration and exploitation licence system will be implemented. Such licences will be issued for a defined period from 10 to 30 years.

Prospecting and exploration activities can last for a maximum of five years. The prospecting period can be extended once if necessary to complete the prospecting phase, but for no longer than one year.

Commencement of the production phase will be subject to first obtaining an 'investment decision'. This in turn will require prior approval of the geological and investment documentation, as well as a decision on the environmental terms and conditions of the investment.

Any hydrocarbon licence transfer will be subject to prior consent from the minister of the environment. The act prohibits the transfer of any licences as a result of merger, acquisition of an enterprise (ongoing business) in a bankruptcy proceeding or other acquisition of such enterprise (ongoing business).

Tendering for hydrocarbons licences
New hydrocarbon licences will be granted through tenders to be announced by the Ministry of the Environment.

The act introduces a specific qualification procedure in relation to bidders for the exploration or exploitation of hydrocarbons. In addition to verifying that bidders have the necessary resources and experience to conduct exploration and exploitation activities, the qualification procedure is supposed to check whether a bidder is controlled by a 'third country' or a citizen of a third country. A 'third country' is a state that is:

  • outside the European Union, the European Free Trade Association or NATO;
  • not a party to the European Economic Area agreement; and
  • not a party to agreements with EU member states or an agreement with the European Union on free trade.

If a bidder is controlled by a third country, the qualification procedure must verify whether this may endanger the safety of the state.

Strengthening Ministry of the Environment's position
Under the act, the minister of the environment is obliged to commence a proceeding to withdraw a licence if the licensee does not fulfil the provisions of the licence, such as in the event of:

  • failure to conduct activities provided for in the concession;
  • permanent cessation of licence activities;
  • failure to observe the schedule for geological works;
  • failure to document geological works; or
  • failure to comply with the Ministry of the Environment Ordinance on Geological Sampling (still to be published).

The minister must request the licensee to remedy notified infringements and indicate the manner in which it will do so. If the licensee fails to do so, the minister may cancel the licence or – if the schedule is breached – withdraw a concession or limit its scope without compensation. The minister may terminate the cancellation or concession withdrawal proceeding only if:

  • no infringements have taken place; or
  • the relevant infringements are remedied .

Transitional provisions

The act contains several transitional provisions which are material for existing hydrocarbons licence holders and other interested parties:

  • Prospecting, exploration and exploitation licences issued before the act takes effect will remain in full force.
  • Exploitation licences issued before the act comes into force will become licences under the Mining Act.
  • Generally, a prospecting and exploration licence holder will be authorised to apply to the ministry to change its licence into a prospecting, exploration and exploitation licence under the terms and conditions of the act. This application must be filed within two years of the act coming into force. During the procedure to change the status of the licence, the ministry will check whether such holder is controlled by a third country.
  • A prospecting and exploration licence will not expire on the dates provided for specified in the licence if a procedure to change its status is pending.
  • The holder of a prospecting and exploration licence which has not changed into a prospecting, exploration and exploitation licence will be authorised to apply to the ministry to change the status of its licence where particular geological conditions and proper management of the resource so warrant. In such cases the licence's validity may be extended for a maximum of three years. The provisions regarding control by third countries apply to this procedure.
  • An exploration licensee may demand that a mining usufruct be established, with priority over others, within five years of delivery of the decision approving the geological documentation if it:
    • has documented a resource to a degree that enables it to prepare the pre-feasibility study for a deposit; and
    • obtains a decision approving the geological documentation of such deposit before the draft act comes into force.
  • An exploration licensee may demand that a mining usufruct be established, with priority over others, within three years of delivery of the decision approving the geological documentation if it:
    • has documented a resource to a degree that enables it to prepare the pre-feasibility study for a deposit; and
    • obtains a decision approving the geological documentation of such deposit after the draft act comes into force.
  • The holder of a prospecting and exploration licence issued before the act comes into force may be awarded a production licence without a tender pursuant to the terms and conditions of the act.

For further information on this topic please contact Adam Kozlowski at Norton Rose Piotr Strawa and Partners LP by telephone (+48 22 581 4900), fax (+48 22 581 4950) or email (adam.kozlowski@nortonrose.com). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.