PLN 100 million for local governments from shale gas extraction

The Ministry of the Environment has prepared assumptions for the draft Act on hydrocarbons, that have already been approved by the government. Commenting on the assumptions, Minister Marcin Korolec declared introduction of a tax on hydrocarbons extraction (royalty) of 5% of the value of gas and of 25% of positive cumulated financial flows, or on profit in short.

The Ministry plans a fourfold increase in the gas extraction fee – from the current PLN 4.9 to PLN 20 for 1,000 cubic metres of nitrogen-rich gas and from PLN 5.89 today to PLN 24.00 for 1,000 cubic metres of methane-rich gas. The fee is to constitute direct revenues of budgets of gminas, poviats and voivodeships located over the deposits, without passing though the state budget. At present, the fees go directly to gminas. According to the draft Act, a part of revenues from the extraction fee is also to make a contribution to poviat and voivodeship budgets.

The Ministry estimated annual revenues of local governments from the exploitation fee (after the planned changes) on gas extraction at the annual volume of natural gas extraction from shale formations to be:

2 billion of m3 – PLN 29 million for gminas, PLN 7 million for poviats: and the same amount for voivodeships,

4.4 billion of m3 – PLN 63 million for gminas, PLN 16 million for poviats: and the same amount for voivodeships,

6 billion of m3 – PLN 86 million for gminas, PLN 22 million for poviats: and the same amount for voivodeships.

The voit is not scared, the voit is hopeful

At the beginning of October, Marathon Oil Polska started exploratory drilling in the fields near Nowy Dwór village in Nowe Miasto Lubawskie gmina, Warmińsko-Mazurskie Voivodeship. Preparatory works lasted slightly over two months. The well is already 3,200 m deep, and only about 300 m are left to complete it. Samples from the well will be soon analysed by a laboratory and results are expected in spring next year.

“Gmina authorities were glad that exploratory drilling would be carried out here. Earlier on, we investigated the threats, we inquired with the Mining Supervision Authority and the Office of the Marshal where Marshal’s plenipotentiary for shale gas was appointed. Of course, we keep possible threats in mind and listen to the opposite opinions, but we know that the tests performed by the Mining Supervision Authority at the first Polish well showed there were no negative effects. So, we hope for the best. The company that drills here attaches a great deal of importance to dialogue with the society and complies with safety procedures and environmental protection rules,” said Tomasz Waruszewski, voit of Nowe Miasto Lubawskie gmina.

At present, direct benefits of the gmina come from the tax on the land used for economic activity. The well is located on private land, on less than 4 hectares. The profits go to the land’s owner (the amount is, however, trade secret) and the gmina.

“Unfortunately, there are no legal grounds to charge tax on structures as the well surface installation is not attached to the land on a permanent basis. We examined the issue, we prepared legal analyses. It is a pity, as the money would be much higher than the PLN 40,000 from the land tax we receive now,” complained voit Waruszewski.

In the case of Nowe Miasto Lubawskie gmina, PLN 40,000  constitute only a direct benefit, but there are also indirect benefits. Local businesses, such as restaurants, shops and hotels, profit from the presence of well employees in the gmina. Companies selling aggregate also benefitted as a lot of aggregate was used to harden the access road. The Gmina’s Municipal Utility Company earned a considerable amount of money for earthworks and the assembling water supply connection, and still earn money  charging for water supply.

Marathon’s well employs about a hundred people, but only a few live in the gmina. The majority are specialists whom it is impossible to find in Nowe Miasto Lubawskie. Even security guards must know English and undergo special trainings.

“If Marathon finds gas and there will be enough to start extraction, the gmina’s benefits will be much higher, of course. For now, we do not know the government’s calculations, we do not know what kind of money would the gmina earn from extraction fees,” said voit Waruszewski.

Let us make some calculations together.

“We are to receive 60% of the extraction fee. If we add to that  tax on  structures, because at the stage of extraction they will  already be lasting buildings, the gmina will have considerable revenues: 2% of the buildings’ value, maybe a million zlotys a year, maybe two million, from the tax alone,” calculated the voit.

With a gmina budget of PLN 24-25 million, this is a considerable amount of money that may for example be used to build an additional kilometre or two of a tarmac road a year. In addition, the gmina can count on benefits connected with more jobs, reduced unemployment and higher PIT revenues. People will spend most of the money they make in the gmina, shops and service providers will see their turnover increase, etc. The gmina will enjoy economic revival.

As the benefits may be considerable, gmina inhabitants do not oppose the project.

There was a protest of gmina inhabitants against exploitation of shale gas deposits, but only a symbolic one. Out of the 8,500 gmina’s inhabitants, only 6 or 8 people protested against setting up the well. Some remnants of the protest in form of three placards still standing in the field next to the road from Nowy Dwór to Skarlin  may be seen, but it seems the protesters themselves did not believe they could be successful as the placards are small and barely visible. The gmina organised a trip to the well in Prabuty for the protesters.

Ministry lists our benefits

According to the Ministry of the Environment, gminas received about PLN 7 million this year from prospecting and identification of shale gas deposits. The revenues come from the so-called concession fee paid by enterprises once they are granted concessions for prospecting and/or identification of deposits. 60% of the fee goes to gminas.

Similar to the voit of Nowe Miasto Lubawskie gmina, also the Ministry of the Environment estimates its future profits. It listed the benefits for the inhabitants of gminas where exploratory drillings will be performed:

Improvement or extension of the road infrastructure that will serve all the inhabitants once prospecting is over;

Economic revival of the region and creating new jobs in the prospecting industry: for geologists, drillers and geophysicists, and in service sectors: for security companies, transport companies, etc.;

Renovations or construction of public utility buildings (kindergartens, sport halls, etc.);

Revenues from a number of fees (lease, rental of premises, damages for early tree felling, etc.).

When gas is found, and in quantities that allow exploitation, the list of benefits is expanded to include the following:

Revenues from taxes (real estate taxes, etc.);

Revenues from the extraction fee, of which 60% now goes to gminas, and when the new Act on the extraction of hydrocarbons enters into force, additional money will go to poviat and voivodeship budgets (15% each);

Lower gas prices that will result not only in lower bills paid by inhabitants, but it will also constitute an incentive to invest in the region and develop energy-intensive industry.

When to expect the manna from below ground?

So far, 31 wells have been set up in Poland, of which hydraulic fracturing was performed in ten. Eight wells are being drilled now. The numbers are not high considering the 111 concessions granted to 19 companies. So far, no decisions have been made on where and when exploitation would start.

The planned amendments to regulations that increase the share of gminas in the exploitation fee and ensure the share of poviats and voivodeships would enter into force in 2015 at the earliest, together with other changes in taxation of hydrocarbons extraction (i.e. the royalty on the extracted oil and gas and the cash flow tax). Before the regulations enter into force, there is the obstacle course of social and sectoral consultations.

Thus, voit Tomasz Waruszewski will have to wait patiently to see how much the gmina he is the head of would earn from gas if Marathon Oil finds it. And  information on how much the company extracts or would extract will  not be sufficient for him. The legislative process may take more time than the drilling, which is a time-consuming venture. Yet assuming that thanks to the exploitation of shale gas domestic extraction of gas would double from 4.4 billion cubic metres to over 8 billion cubic metres a year by 2020, the revenues of local governments from exploitation may increase to PLN 100 million.

OF