Polish energy sector offers a wide range of business opportunities for foreign capital. The Polish Government is keen to foster privatization of the state-owned companies such as Grupa LOTOS S.A. (the second biggest Polish oil company) or ENERGA S.A. (one of the four vertically integrated Polish electricity groups). Polish generation fleet is ageing and needs replacement. There is a massive program of development of new facilities (coal fired, gas fired and nuclear). Most of the developers will look for partnering opportunities to attract much needed capital and know-how. Also, there will be many acquisition and partnering opportunities in the upstream sector (shale gas and hard coal). Shale gas prospection has entered a critical phase while growing demand for coal warrants necessity of development of new mine fields. Finally, local municipalities tackled the issue of municipal waste disposal and some of them will be launching waste-to-energy public-private partnership schemes.
With this view, the Polish Parliament adopted the new 2011 Geological and Mining Law which entered into force as of 1 January 2012 and repealed previous 1994 Geological and Mining Law. The new law redefines mining ownership of the subsurface deposits and brings changes to the prospection and production licensing procedures. Further, on December 22, 2011, the Polish Government announced 3 draft bills: the Energy Law, the Gas Law and the Law on Renewable Energy Sources. The foregoing bills are envisaged to replace the 1997 Energy Law which currently governs Polish energy sector, including electricity and heating businesses as well as midstream and downstream gas sector. The foregoing pieces of legislation are aimed to i.a. implement the EU Third Energy Package.
I. Upstream Gas Sector
The Polish Parliament adopted the new 2011 Geological and Mining Law ("2011 GML") which entered into force as of 1 January 2012 and repealed previous 1994 Geological and Mining Law.
In accordance with Art. 205 of the 2011 GML, the licenses granted under the 1994 Geological and Mining Law shall remain in force. Nevertheless, there are couple of changes which shall affect hydrocarbon licenses issued before 1 January 2012. The 2011 GML shall also affect development of new geological/mining projects in Poland. The most significant changes are, inter alia:
1. The State Treasury's ownership right to space located below the real estates shall be limited to most significant deposits, including hydrocarbons, hard coal, lignite, methane as accompanying deposit, metal ores, radioactive metal ores, brimstone, salt, potassium salt, potassium-magnesium salt, gypsum, anhydrite, gems, healing water, thermal water and brine (under the 1994 GML, the State Treasury owned entire space located below the real estates).
2. The Minister of Environment shall have to publicly announce information that a given entrepreneur applies for hydrocarbon license and set at least 90-day period to enable other entities to apply for the license within the same area. All the applications filed within such procedure shall be assessed in accordance with rules applicable to common tender procedure envisaged for granting the hydrocarbon licenses which means that each bid must be evaluated on the basis of the following criteria: (i) the technical and financial capacity of the bidder, (ii) the proposed technology to be utilised in the licensed operations, and (iii) the best remuneration for the usufruct right offered by the bidder within the tender process.
3. The entrepreneur winning the tender procedure for hydrocarbon license shall obtain simultaneously both: the respective license and the decision on environmental conditions of the undertaking (the environmental decision originally granted upon application of the licensing body organizing the tender procedure).
4. The 2011 GML limits the maximum period to annul geological/mining licenses based on defects occurred within the licensing procedure (more certainty as to validity of the license).
5. The 2011 GML also provides for:
(i) new requirements applicable to application for granting a license;
(ii) new claim for transfer of the real property granted to entrepreneurs that obtained the production license;
(iii) changes in administrative instruments giving access to third party's property (i.a. the licensee's right to use third party's property upon the administrative decision shall not be limited to 12 months and may be established for a period of the license's validity);
(iv) more precise obligations imposed on licensees with respect to timeframes, forms and delivery of geological information to the licensing bodies;
(v) licensee's obligation to cover costs related to execution of local zoning plans for mining areas, such zoning plans to be adopted in case the mining activity has significant impact on the environment;
(vi) new and more harsh administrative penalties for entities which carry on geological/mining activities without license or in breach of the license provisions;
(vii) licensee's obligation to remove objects, structures and installations from the space covered by the mining usufruct right before such right expires (unless otherwise specified in the agreement on establishment of the mining usufruct right);
(viii) extended 5-year priority right to obtain production license once the exploration stage has been successfully finalized with duly executed geological documentation.
II. Draft bills envisaged to regulate energy sector
Further, on December 22, 2011, the Polish Government announced 3 draft bills: the Energy Law ("New EL"), the Gas Law ("New GL") and the Law on Renewable Energy Sources ("RES Law"). The foregoing bills are envisaged to replace the 1997 Energy Law ("1997 EL") which currently governs Polish energy sector, including electricity and heating businesses as well as midstream and downstream gas sector. The foregoing pieces of legislation are designed to i.a. implement the Third Energy Package.
1. New GL from the perspective of Polish upstream gas sector
The proposed New GL shall have significant impact on the Polish upstream gas sector which is currently, in principle, outside the scope of the 1997 EL.
(i) Concessions (licenses) for sale of natural gas
Under the 1997 EL, gas producers are not subject to energy concessions or tariff requirements unless they are engaged in gas trading (i.e. both buy and sell natural gas at the same time). Therefore, if any given entity sells on the market exclusively its own gas production, it is not required to have energy concession under the 1997 EL and the sale price is not subject to approval by the President of the Energy Regulatory Office ("ERO") in a form of tariff's approval. New GL shall extend strict gas market regulation on all gas producers selling their production which is to be delivered to the final customers with gas system (gas transmission/distribution system and/or infrastructure used for liquefaction of natural gas/re-gasification of LNG). In particular, such producers shall be obliged to obtain concession authorizing to sell natural gas in Poland. Besides, such producers shall have to sell their production at the price set forth in the tariff approved by the ERO or - in case of sale of the gas to non-household customers - at the price calculated in accordance with methodology approved by the ERO. Gas producer shall be released from the foregoing tariff requirement exclusively if ERO determines that it conducts its activity on the competitive market.
(ii) Accounting and records
Under the New GL, gas producers shall be obliged to maintain their accounts so as to ensure that costs and revenues as well as profits and losses might be calculated separately for each of activities: production (extraction), distribution, liquefaction, sale of natural gas, re-gasification of LNG. There will also be an obligation to keep and reveal to the regulator specific information relating to sale contracts concluded with wholesale customers.
(iii). Securing gas supplies
Under the New GL, gas producers shall be burdened with certain obligations related to security of gas supplies, i.e.: reporting obligations, obligations to prepare and periodically review contingency procedures. Entities selling gas to protected customers (households, hospitals, schools, pre-schools and other similar customers as well as heating companies supplying heat to those customers) shall be also obliged to keep gas reserves.
(iv) Special regulatory powers
ERO shall be also granted certain extraordinary regulatory
powers with respect to entrepreneurs which, in ERO's opinion,
have "market power which may pose threat to proper functioning
of market mechanisms". ERO shall be authorized to burden such
entrepreneurs, for the period not exceeding 2 years, with the
a) to sell: specified quantity of natural gas and/or transmission services and/or storage capacity – upon the conditions set forth by ERO;
b) to sell natural gas at the price not exceeding price set forth by ERO;
c) to sell natural gas at the price set forth by ERO.
Breach of the above obligations shall be subject to severe financial penalties (up to 10% of income generated in the preceding fiscal year) and withdrawal of concession.
2. RES Law
The proposed provisions of the RES Law are envisaged to reconstruct the support schemes aimed at development of the renewable energy sources in Poland. The government is planning to decrease the aid designated for RES with lower costs of functioning (i.e. wind power, biomass, old amortized hydropower plants) and focus on other renewable energy sources as solar, biogas and new hydropower plants.
3. Final remark
All the three new draft bills (New EL, New GL and New RES Law) shall be now subject to public consultation which enables market participants to rise their opinion and proposal of changes in the bills.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.