Poland: New Draft Rules for Hydrocarbon Exploration and Production

Author: Ewa Rutkowska-Subocz

Dentons, Warsaw, Poland

Published:  May 14, 2013

How will the new hydrocarbons licensing system be structured?

Will it be possible to team up with other enterprises?

Will concessions be automatically transferred following M&A transactions?

What will happen with concessions granted before the amended law enters in force?

Will anything change as regards EIA laws?

What happens next?

On 15 February 2013 the Polish government published a Bill to amend the Act on Mining and Geological Law and other laws governing the process of mineral exploration and production (the “Bill”). The Bill introduces special solutions with respect to hydrocarbon exploration and production and hence is of particular importance for the shale gas industry.

Earlier, the Polish government actually considered preparing a special act concerning hydrocarbons only, but it is now believed this will not happen. Regulations concerning hydrocarbons will be introduced to already existing laws.

Key features of the Bill are presented below.

How will the new hydrocarbons licensing system be structured?

There will be material changes to hydrocarbons licensing. The new system will be structured as follows:

• No concession will be needed to prospect for hydrocarbons.
• There will be no need to obtain a special decision approving performance of geophysical surveys (except for offshore prospecting). Geophysical surveys are understood as geological works using geophysical methods combined with geological methods to investigate geological structures associated with the occurrence of hydrocarbons, with the exception of wells of depth greater than 100 meters and works using blasting agents. Removing the requirement for a special approval decision should allow greater flexibility and competition in the geophysical sector.
• There will be only one concession for both hydrocarbon exploration and production. The concession will be divided into two stages: exploration stage and production stage. The exploration stage will last a maximum 5 years, whereas the production stage will last about 25 years. Only minimal extension of these stages will be possible. An ‘investment decision’ will be required to move from the exploration to the production phase.
• Hydrocarbon exploration and production concessions will be issued in a 3-stage tender: (i) qualification, (ii) tender, (iii) compulsory signing of a cooperation agreement with the National Operator of Energy Fossil Fuels (Polish: Narodowy Operator Kopalin Energetycznych, “NOKE”).
• The tender procedure may be initiated by a motion from an enterprise. The authority will be entitled to assess whether the motion is justified and to deny initiation of the tender procedure if it finds the motion unjustified.
• During the qualification procedure applicants will be assessed on qualification criteria concerning: knowledge and experience, technical capacity, financial capacity. It is particularly important that an applicant controlled by state authorities or nationals of third countries will have to prove it is independent from the controlling entity to an extent that assures public safety.
• Only qualifying applicants are eligible to take part in tenders. Tender criteria include: (i) management methods, system of organization and mode of operating, (ii) the scope and timing of the proposed exploratory and extracting works, and (iii) NOKE’s share in the costs and profits of the works.
• NOKE and the tender winner then sign a cooperation agreement. The model cooperation agreement shall be contained in an executive regulation. An informal draft executive regulation has already been made public, but has not been subject to public consultation to date.
• NOKE is a state-owned company overseen by the Treasury Ministry, which will participate in shale gas projects and hold a share in concessions to “strengthen administrative oversight of proper execution of concession obligations and a safe secondary market of concessions”. NOKE will receive profits from mining activity, but will bear only minimal costs (only up to 5% of the costs of the mining activity or the sum stated in the tender notice). It will be entitled to take decisions concerning the mining activity, but will be free of almost all related civil and public responsibility. Moreover, NOKE is not subject to liability insurance and will not participate in related costs.
• The concession is granted after the cooperation agreement is signed.

Will it be possible to team up with other enterprises?

Cooperation agreements will provide the only framework for inviting other enterprises to cooperate in shale gas activities. This means that NOKE will be involved. While every enterprise has to undergo the qualification process separately, a collective motion during the tender stage will be possible.

The possibility of teaming up for the purpose of activities under currently held concessions may be limited or even excluded.

Will concessions be automatically transferred following M&A transactions?

Contrary to the currently binding provisions, under the amended law concessions will not be automatically transferred after an M&A transaction such as: a division, merger or a business acquisition. A decision on transfer of the concession will be needed in each of these three situations. This will be time-consuming and risky, as the new concession-holder will have to go through the qualification procedure.

What will happen with concessions granted before the amended law enters in force?

The Bill contains a set of transition provisions addressing a range of cases. Most importantly, shale gas prospecting and exploration concessions granted before the entry into force of the amendment will remain valid until the expiry of the concession term. However, it will be possible to change the geological works project concerning such activity only once.

A shale gas prospecting and exploration concession granted before the amendment takes effect may be converted into a hydrocarbon exploration and production concession. To this end the concession-holder needs to file a motion within 2 years after the time the amendment took effect. In order to have the concession converted, the applicant will have to meet the qualification conditions (see above) and sign a cooperation agreement with NOKE. Conversion of the concession is an attractive option, as it enables the concession-holder to team up with other enterprises (under the amended law it will only be possible when a cooperation agreement has been signed). On the other hand, it will require the participation of NOKE.

The Bill also envisages a special procedure for granting a hydrocarbon production concession, if the applicant: (i) obtained a concession for prospecting or exploration of hydrocarbons prior to the effective date of the amendment, (ii) explored and documented a hydrocarbon deposit forming the mining ownership and drew up geological documentation to the level of accuracy required to obtain a concession to extract hydrocarbons, and (iii) meets the qualification criteria (see above). In such a case no fully-fledged tender procedure will be necessary.

Will anything change as regards EIA laws?

The Bill contains amendments to environmental impact assessment laws aimed in particular at facilitating shale gas projects. For example, according to the planned amendment the description of the natural elements in the EIA report will be limited to a radius of 500 meters from the outer boundary of the project. This will allow shale gas operators to reduce the scope of tests and costs of the EIA report.

After the amendment comes into force, the decision on environmental conditions will not have to be obtained upfront before the hydrocarbons prospecting and exploration concession is granted, but will be obligatory at a later stage i.e. before issuing the hydrocarbons exploration and production concession.

Furthermore, there will be no obligation to obtain the decision on environmental conditions for the hydrocarbons exploration drilling to a depth of 5000 m. Consequently, the decision on environmental conditions will have to be obtained only if the depth of hydrocarbons exploration drilling will exceed 5 000 m.There new draft law introduces also an amendment to EIA laws in respect to NGOs activity. The Bill contains the obligation for ecological organizations that want to take part in the proceedings to be registered by at least 1 year before the procedure pertaining issuing the decision on environmental conditions requiring public participation has started. This amendment aims at elimination of a risk of appealing against the decision on environmental conditions by NGOs formed on ad-hoc basis to block a specific investment.

What happens next?

The Bill undergoes public and intergovernmental consultations until 18 March 2013. Then, the government will have to consider the comments made and initiate the legislative procedure with parliament and the president. A binding law is not expected before September 2013.

It is worth mentioning in passing that a separate Bill amending the Tax Act saw light of day on 1 March 2013 and is subject to public consultation.