The impact of shale gas extraction on the socio-economic development of regions an American success story and potential opportunities for Poland

Transcription

1 Report s Abstract The impact of shale gas extraction on the socio-economic development of regions an American success story and potential opportunities for Poland Izabela Albrycht, Rafał Garpiel, Piotr Kosowski, Anna Łaszczuk, Adam Łazarski, Marcin Matyka, Łukasz Pokrywka, Stanisław Rzyski, Piotr Stankiewicz, Marcin Tarnawski

2 The impact of shale gas extraction on the socio-economic development of regions an American success story and potential opportunities for Poland Izabela Albrycht, Rafał Garpiel, Piotr Kosowski, Anna Łaszczuk, Adam Łazarski, Marcin Matyka, Łukasz Pokrywka, Stanisław Rzyski, Piotr Stankiewicz, Marcin Tarnawski

3 If you appreciate the value of the presented Report as well as The Kosciuszko Institute s mission, we kindly encourage you to support our future publishing initiatives by making a financial contribution to the association. Contents The impact of shale gas extraction on the socio-economic development of regions an American success story and potential opportunities for Poland Izabela Albrycht, Rafał Garpiel, Piotr Kosowski, Anna Łaszczuk, Adam Łazarski, Marcin Matyka, Łukasz Pokrywka, Stanisław Rzyski, Piotr Stankiewicz, Marcin Tarnawski Editor: Izabela Albrycht Edition completed: July 2012 Editorial assistant: Maria Guzewska The Kosciuszko Institute All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted in the original language without explicit permission provided that the source is acknowledged. Translation: Adam Łazarski (Chapters 1, 3, 4), Zuzanna Łopacińska-Piędel (Introduction, Key Findings and Recommendations, Chapters 2, 3, 6, 7, 8, 9, 10, 11), Justyna Kruk (Chapter 5), DLA Piper (Chapter 12), Ben Koschalka (Chapter 13). Proofreading: Maria Guzewska, Zuzanna Łopacińska-Piędel Layout & typesetting: Małgorzata Kopecka Print: Dante Media The Kosciuszko Institute ul. Lenartowicza 7/ Kraków ik@ik.org.pl ISBN: Introduction Izabela Albrycht... 5 Key Findings and Recommendations for the Shale Gas Exploration and Production Sector in Poland from the Perspective of Local Governments Izabela Albrycht... 9 THE NORTH AMERICAN EXPERIENCES The History of the Shale Gas Sector Development in the U.S. Adam Łazarski Benefits Stemming from Basing the Energy Sector in the U.S. on Shale Gas Marcin Tarnawski Impact of Shale Gas on the U.S. Economy Adam Łazarski, Marcin Tarnawski Case Studies of the U.S. Regions with Shale Gas Plays Adam Łazarski Attitudes of the U.S. Society and Local Communities Towards Shale Gas Extraction Piotr Stankiewicz, Stanisław Rzyski Best Practice of the North American Shale Gas Sector in Enhancing Social and Cultural Potential and Relationship Building with Local Communities Piotr Stankiewicz, Stanisław Rzyski Benefits from the Shale Gas Sector Development in Canada Marcin Tarnawski...65 CHANCES FOR POLAND History and Tradition of Natural Gas Extraction in Poland Piotr Kosowski Conventional and Unconventional Gas Brief Description of Similarities and Differences Piotr Kosowski Risk Areas with Possible Impact on the Importance of the Shale Gas Sector in Poland and its Effect on Real Values in the Economy Piotr Kosowski The Current System of Taxation of Hydrocarbons in Poland from the Perspective of Local Governments Anna Łaszczuk, Marcin Matyka DLA Piper Wiater sp.k Impact Assessment of Potential Benefits of Unconventional Gas Extraction for Socio-Economic Development of Regions in Poland, Including Regions where Conventional Gas Mines are Operating Łukasz Pokrywka The Influence of the Natural Gas Extraction Sector on the Socio-Economic Development of Regions from the Point of View of Local Communities Rafał Garpiel Authors

4 Introduction Izabela Albrycht chairperson of the Kosciuszko Institute Examining the Unconventional Gas Revolution: From Global to Local The unconventional gas revolution, which originated in the U.S. and Canada, has spread across the world. It is now a global phenomenon. More and more countries are actively engaged in developing the shale gas sector, including the United Kingdom, China, Russia, India, Mexico and Argentina. These are just some of the countries that are likely to have a significant impact on the dynamics of regional and ultimately global energy markets. Albeit in each of these countries the shale gas sector s development is conditioned by different factors, unconventional technologies of resources extraction will first revolutionize regional gas markets and within several years the revolution will encompass global gas, and then oil markets. Only time will tell which of these resource revolutions will have a stronger effect on global economic development. For now, only one thing is clear: neither Poland, nor Europe should turn their backs on possible energy, economic, social and political benefits that have so far been enjoyed by beneficiaries of shale revolutions. The views expressed in this publication are those of the authors and do not necessarily reflect any views held by the Kosciuszko Institute and the publication partners. They are published as a contribution to public debate. Authors are responsible for their own opinions and contributions and the authors do not necessarily support all of the opinions made by others in the report. In the present report, which includes analysis of the history, market and socio-economic considerations of shale gas extraction in the U.S. and Canada, we also offer our readers the chance to move from global approaches to the unconventional gas sector, and to take a more local perspective. The shale success story started in U.S. states and Canadian provinces. Texas, Pennsylvania and British Columbia are where the revolution s positive footprint was felt first and felt the strongest. Pomerania or the region of Lublin in the south-west of Poland is now likely to play an important role in the history of development of the shale gas sector in Poland, and Europe. The present report, a subsequent publication of the Kosciuszko Institute on unconventional gas, focuses above all on presenting the history of shale gas extraction in the U.S. and Canada, as well as the scale and types of social, economic and energy benefits stemming from its development, from both a national and regional perspective. The analysis of the benefits will be

5 based on the most recent economic data and results of social surveys of the positive perceptions resulting from the shale gas sector s operations on the American economy and society. The analysis of the U.S. shale gas sector will be the starting point for presenting the differences and similarities between the conventional and the unconventional gas sectors, and providing a list of risk areas that might significantly affect the development of the shale gas sector in Poland, and its broader impact on the economy. A substantial part of the publication is devoted to the analysis of the experiences of the Polish regions where conventional gas mines and underground gas storage facilities are located. The impact assessment demonstrates that there are significant socio-economic benefits for the regions stemming from the operations of the oil and gas extraction sector. This part of the report also includes a preliminary projection of the impact of shale gas development on the job market. Moreover, it includes a list of other probable socio-economic benefits resulting from the shale gas sector s development in Poland, as well as a set of recommendations for Polish decision makers, aimed at generating added value from shale gas extraction for local governments, and achieving a maximal multiplier effect for the Polish economy. The final part of the present publication is devoted to a unique qualitative sociological research undertaken to examine the perception of benefits and benefits/losses stemming from conventional gas exploitation in Poland among local communities. The examination includes not only positive North American experiences, but also an analysis of economic data from Polish extraction regions, coupled with results of interviews with members of local communities living in those regions show that operations of the natural gas sector may benefit socio-economic development of Polish regions in multiple ways. Results of studies and analyses undertaken by experts of the Kosciuszko Institute included in the present report provide substantial factual support for a positive view to be taken of current, early stage of the development of the shale gas sector in Poland. This factual assessment is well-worth reading and hopefully will impact upon the public debate. As the North American example shows, knowledge of benefits and consequences resulting from the shale gas exploration and production sector are likely to have a significant impact on the national debate. The Polish government, as well as NGOs and energy companies, bearing in mind the development of the unconventional gas sector, should make local communities and Polish citizens at large aware that they may become direct and indirect beneficiaries of the project, for example thanks to lower gas and energy prices, reduction of unemployment and higher revenues for local budgets. Engagement of Polish local communities in supporting the sector s development is of key importance, in order to ensure a Polish shale gas success story. Policy of Poland until 2030 there is not a single word about shale gas!); the need to intensify legislative work on establishing simple and sensible legal and tax regulations, as well as a clear and effective division of competences and responsibilities for supporting the shale sector s development at the level of central administration; the need to provide training and education for young engineers and technicians, and create a shale gas R&D sector supporting the extraction sector that might be financed by the EU and energy companies; the need to ensure development opportunities of the shale sector from the financial point of view through creation of a healthy investment climate. The contract signed on 4 th July 2012 by PGNiG SA, KGHM Polska Miedź SA, PGE SA, Tauron Polska Energia SA and Enea SA on exploration and production of shale gas (so-called KCT contract; the name stems from the names of the rig pads located in the Wejherowo concession area of PGNiG SA: Kochanowo, Częstkowo, Tępcz) is a significant milestone. The development of the shale gas sector in Poland is an unprecedented investment. It requires an approach that would make it possible to achieve both scale effect and synergy. Further steps should be undertaken promptly with the aim of creating the optimum conditions for long-term development of the shale gas exploration and production sector in Poland. The key role in this respect will be played by the necessary know-how acquired by national oil and gas companies, which can be fostered through partnerships with international oil and gas companies with a proven extraction track record in North America. From the point of view of the Polish companies, this can bring additional benefits including risk mitigation, if the cooperation entails exchanging shares in concessions. Only then will the Polish state be able to take on its shoulders the organizational and financial burden of the enormous investments required, including drilling hundreds of wells and the development of the transmission infrastructure. As the commendable history and tradition of natural gas extraction in Poland, also described in the present report, shows that our country can in some respects become the pioneer of shale gas development in Europe and within a few years may feel the positive effects of its shale success story. We should all be aware that we could all be winners in the global unconventional energy revolution. The benefits for the regions, as well as the whole economy at large, stemming from the shale gas sector s development, should be an additional stimulus for the Polish government to boost the long-term strength of the economy. I would like to take this opportunity to thank all the authors for their contribution. One of the foremost recommendations of the Kosciuszko Institute for the government is to prepare and implement a factual and not emotional information campaign on socioeconomic impact of the shale gas sector aimed at enhancing the development of this particular economy sector. Other key recommendations include: incorporating shale gas into Polish energy strategy as the second resource, after coal (in the present document entitled Energy 6 Izabela Albrycht Introduction 7

6 Key Findings and Recommendations for the Shale Gas Exploration and Production Sector in Poland from the Perspective of Local Governments * Izabela Albrycht The analysis of economic and social considerations related to exploration and exploitation of unconventional gas in Poland and its individual regions, performed for the purpose of the current report, shows that the shale gas exploration and production sector, currently in its infancy, may become a chance for development of the Polish economy and local governments. It is very probable that North American experiences and positive socio-economic and political effects of the shale gas revolution could be present, albeit on a smaller scale, in Poland. Not only the oil and gas companies, but also local communities, state authorities, small and mediumsized companies and individual customers benefited from the shale boom in the U.S.A s a result the whole U.S. economy benefited from that process. The U.S. situation may be best described by the term win-win, i.e. bilateral, or in that case multilateral, victory. The shale gas success, achieved thanks to the win-win strategy, can be repeated in Poland. It is even more probable, as Poland has a long tradition of hydrocarbon extraction, and thus gains benefits from conventional gas production, which should be emphasized to stakeholders and beneficiaries of the new unconventional exploration and production sector. Impact Assessment of the Natural Gas Sector in Poland, Including Conventional Gas Mines and Underground Gas Storage Facilities on the Local Economic Processes The impact assessment of the natural gas extraction sector on the local economic processes in Poland, prepared by the Kosciuszko Institute, included two Big Regions. The Northern Region encompassed mostly: the Greater Poland Voivodeship, the West Pomeranian Voivodeship and the Kuyavian- Pomeranian Voivodeship, while the Southern Region: mostly the Sub-Carpathian Voivodeship. Within the Big Regions, small regions (gminas and poviats, i.e. the two smallest administrative units in Poland) with gas mines or underground gas storage facilities were taken into consideration. Big Regions differ between each other not only as to their characteristics, but also the level of development, geopolitical location and historical conditions, which still impact their level of development. Moreover, the extent to which the extraction sector is developed is of major importance: its longstanding presence in the Southern Region and the dynamic growth in the Northern Region.

7 Revenues of Local Governments Gminas obtain their own revenues from their share in income taxes (PIT and CIT), as well as real estate tax, exploitation fee (on the basis of the Act on the Geological and Mining Law), and local taxes. In the majority of gminas included in the impact assessment, the presence of a gas mine or an underground gas storage facility increases the gmina s own revenues. The index representing own income per capita in such regions is approx. 5-15% higher than in comparable gminas in the given voivodeship. In Dębno (myśliborski poviat, West Pomeranian Voivodeship), where an oil and gas mine is located, gmina s own revenues are 18% higher and total revenues are 5% higher than in other gminas in the West Pomeranian Voivodeship. An average share of exploitation fee in gminas revenues in Poland reaches approx. 0.4%. For comparison, in: Dębno, the share exceeds 12% (8.3 million PLN in 2010), Kościan (kościański poviat, the Greater Poland Voivodeship) the share equals 3.3% (1.2 million PLN in 2010), Mogilno (mogileński poviat, Kuyavian-Pomeranian Voivodeship) the share equals 1.7% (1.1 million PLN in 2010). High tax revenues for local budgets, however, start a mechanism of revenue redistribution, commonly known as the Robin Hood fee (Polish: janosikowe ). Gminas where gas mines and underground gas storage facilities are located obtain relatively low sums in subsidies. Moreover, they are a net payer for the inter-regional redistribution system. Only Dębno, where the biggest oil and gas mine in Poland is operating, has revenues approx. 5% higher than other similar regions in the voivodeship. On the basis of available data it is not possible to analyze solely the impact of natural gas extraction (without oil extraction) on local governments budgets. Expenses of Local Governments From the point of view of mid- and long-term regional development, it is important for the local governments to allocate more to investments that foster development, i.e. ones that can improve the quality of life and attract big companies to local markets. In the Southern Region, gminas where gas mines or underground gas storage facilities are located earmark 22.1% of their total expenses to investments, whereas the remaining comparable gminas in the Region only 17.5%. In the Northern Region, activities of local governments which benefit from the presence of gas mines or underground gas storage facilities are noticeable. In the Greater Poland Voivodship, such gminas allocate on average 15% of their expenditures to investments, whereas other similar local governments 14%. Attention should be drawn to great variability of the index: the values in individual gminas vary from 1% to 42%. In Mogilno (underground gas storage facility), investment activity of the local government is even more noticeable: investment expenditures account for 21.5% of total expenses, with the average in the Kuyavian-Pomeranian Voivodeship being 18%. Wealth of the Society Revenues of local governments from income taxes, apart from their fiscal function, are also a source of information about the pay grades. In the Southern Region, an average pay in gminas where gas mines or underground gas storage facilities are located is approx. 12% higher than in similar gminas in the Sub-Carpathian Voivodeship. Local payrolls in gminas where the extraction sector is operating are similar to comparable gminas without gas mines. Only in Mogilno (underground gas storage facility) is the average pay approx. 7% higher than in the case of similar gminas in the Kuyavian-Pomeranian Voivodeship. Labor Market The impact assessment conducted shows that the functioning of a gas mine and an underground gas storage facility does not necessarily translate into a significant improvement on the local labor market. Undoubtedly, it can increase the likelihood of job creation. In the Southern Region, in poviats where gas mines or underground gas storage facilities are located, average unemployment rate (in the years ) was approx. 18%, whereas in the remaining poviats (without operations of PGNiG SA) it equaled 15%. In the Northern Region, in the Greater Poland Voivodeship, the situation on local job markets improves significantly when oil and gas companies intensify their operations: average unemployment rate in such regions equaled 8.5% versus 10.3% in other poviats. In the West Pomeranian Voivodeship, in myśliborski poviat (BMB gas field), average unemployment rate was 18.2%, while in other poviats of the voivodeship it equaled 22.3%. In other regions, the presence of a gas mine or underground gas storage facilities does not translate into a considerable improvement on the labor market: in mogileński poviat, the average unemployment rate was insignificantly higher than the voivodeship average. The situation is similar in milicki and górowski poviats (Lower Silesian Voivodeship). Economic Entities The condition on the local labor market is profoundly impacted by the number of economic entities who are potential employers in the region. In 2010, in the Sub-Carpathian Voivodeship, in poviats where gas mines or underground gas storage facilities operate, the number of economic entities per 10,000 inhabitants equaled 619, whereas in other poviats 724. The index of newly registered entities was similar: 65 versus 79 per 10,000 inhabitants respectively. The correlations prove that in the Southern Region, despite the presence of gas deposits, there are no stimuli for setting up companies. Such a low level of economic activization has a negative impact on the local labor markets. Therefore, high unemployment rates in the region should be linked to the shortage of companies. The situation in Greater Poland is totally different: poviats where the extraction sector is present have a higher number of economic entities than other. Voivodeship-wise, in 2010, the number of entities per 10,000 inhabitants equaled 875, and in regions with an existing extraction sector 965. The dynamism of establishing new companies is also higher: 96 versus 97 newly created entities per 10,000 inhabitants. 10 Izabela Albrycht Key Findings and Recommendations 11

8 Mogilno deserves special attention. Though the number of registered economic entities in that poviat is approx. 5% lower than the average for the Kuyavian-Pomeranian Voivodeship at large, in the recent years, as the underground gas storage facility was developed, the dynamism of economic activity grew significantly. In the years , the number of newly established entities grew by 82%, and is now higher than the voivodeship average. Public Utilities The presence of a natural gas mine or underground gas storage facilities gives hope for improvement of local public utilities infrastructure, in particular gas pipelines. The highest percentage of people use gas installations in the Sub-Carpathian Voivodeship over 72%, with the national average of about 47%. Unfortunately, in the case of other installations, the region performs much worse. The share of people using the water supply system is the second lowest in the country (75.7%), and the sewage system fourth lowest in the country (56.9%). It may be assumed that the lack of properly developed public utilities network (except for gas) is one of the reasons why employers are not overtly interested in investing in the south-west of Poland. This result, when juxtaposed with results of the analyses concerning investment expenditures of local governments, draws the attention to the fact that local authorities should focus their activities on improving the quality of life of local people. Development of public utilities is one example of activities aimed at improving the quality of living and investment attractiveness of the region. In the Greater Poland Voivodeship, the share of people using public utilities (sewage, gas, water supply infrastructure) is in each case above the national average. The region performs much better economically than most other areas included in the research. Preliminary Impact Assessment of the Shale Gas Extraction Sector in Poland on Socio-Economic Development of Regions According to data as per 1st June 2012, 1 the number of concessions issued to companies exploring shale gas in Poland equaled 110. Geographically, they stretch from the central-eastern part of the Baltic Sea coast, through central Poland, down to the Lublin area. Geologists delineated three basins: The Baltic Basin stetches from the Koszalin and Gdansk Coast (Polish: Pobrzeże Koszalińskie, Pobrzeże Gdańskie), through Bytow and Chełmno Lake District (Pojezierze Bytowskie, Pojezierze Chełmińskie), Zulawy, northern part of the Masurian Lake District, down to a narrow section going through the centre of Masovia (in the vicinity of Warsaw), towards the south-east. The Podlasie Basin, located west of Warsaw, covering the area of the Northern and Southern Podlasie Lowland (Nizina Północnopodlaska and Nizina Południowopodlaska). The Lublin Basin in turn is the southernmost one and spans the Lubelska Highland (Wyżyna Lubelska), Wołyńska Highland (Wyżyna Wołyńska), Roztocze and Polesie Wołyńskie. Furthermore, concessions were also issued in the south-western parts of Poland: the Silesian Lowland and the Opole region. Thus, concession areas cover a vast part of our country. 1 (access: ). In the context of development of the unconventional gas exploration and production sector in Poland, it needs to be mentioned that huge industrial investments cause certain social costs, which is why participants in the investment process should be aware of them and take steps aimed at minimizing them. In the case of the shale gas sector, following the U.S. regions experience, we may presume that such social costs could include destruction of roads due to heavy loads transported on trucks, noise or dropping property prices in areas neighboring industrial or extraction infrastructure. Local communities should know their rights vis-à-vis investors and the state and be guaranteed compensation for possible damages. Inhabitants of extraction areas must be aware that thanks to the rule of redistribution of revenues from taxation of hydrocarbons (both the hydrocarbon tax, as well as the exploitation fee), adopted by the legislator, they all participate in the profits from natural gas extraction. They can also negotiate possible additional benefits and compensations for their region with the investor. The minimum compensation should entail the repair of damaged infrastructure, and the U.S. experiences also include other activities, e.g. revitalization of urban space, creation of new parks, libraries, repaving sidewalks, or renovation of public buildings. Above all, local communities should also be informed about future and probable benefits stemming from the development of the shale gas exploration and production sector, both for their regions and the country at large. In the opinion of the Kosciuszko Institute, socio-economic benefits in the concession areas can be considerably higher than the costs incurred and inconveniences, which, what needs to be emphasized, appear above all at the early investment stage, i.e. development of the concession area and drilling the wells. At the production stage, i.e. for the next several to more than a dozen years, only wellheads are present on the surface, which do not spoil the landscape and do not hinder the inhabitants of the region. Socio-Economic Benefits for Regions Applying general data from the impact assessment of natural gas mines and underground gas storage facilities on local economic processes in Poland and juxtaposing them with the North American experiences, may allow us to formulate preliminary estimates of probable impact of the shale gas exploration and production sector on socio-economic development of Polish regions. It needs to be remarked, however, that the scale of all benefits enumerated in the preliminary impact assessment will depend on the intensity of investments of national and foreign concession holders, and above all on the success of exploration activities. Gas Prices For an average Pole, the most probable and perceptible consequence of shale gas production in Poland can be the reduction of natural gas prices. The natural gas price, one of the highest in Europe, is currently the outcome of the price of conventional gas produced in Poland and the price of gas imported from Russia. Poland pays $420 per 1,000 m 3 of Russian gas. It is the highest price in the whole EU. Countries of the Western Europe pay approx. $100 less for the same amount of the resource. However, the profound price gap becomes visible when we compare natural gas prices in Poland and in the U.S. Currently, the Americans pay $60-70 per 1,000 m 3 of natural gas. They source more and more gas from their domestic conventional and unconventional resources. 12 Izabela Albrycht Key Findings and Recommendations 13

9 Moreover, it needs to be mentioned that the demand for gas in Poland is growing in the energy and chemical sectors, as well as in households. Therefore, thanks to cheaper domestic natural gas, the dynamism of economic growth may increase and consequently translate into higher economic value (GDP). The impact on the economy can have direct, indirect and induced dimension. Thanks to higher production of domestic unconventional gas, it will be possible to build gas power plants in Polish regions, for which the investment process is shorter and cheaper than e.g. in the case of nuclear power plants. It will also be possible to construct many local combined heat and power plants, based on co-generation, which would increase the energy efficiency, as the electricity does not need to be sent far away but can be used locally and regionally, together with the heat. Furthermore, electricity prices can decrease, which in turn could boost the competitiveness of Polish companies and open new production capacities. The shale gas revolution led to a drop of natural gas prices in the U.S. from approx. $12/mmBtu in 2008 to approx. $3/mmBtu in 2012, which translated to the current price of $60-70 per 1,000 m 3. Lower gas prices allowed economic entities to increase their production and take on new employees. In the last decade, an observable onset of a downward trend in electricity prices is also present. It needs to be mentioned that the prices analyzed are average prices for the U.S. market. Electricity prices peaked in 2008, in the period they stabilized at a relatively high level and since the turn of a price decrease has been apparent. Average prices per 1 kwh range from (March 2012) 6.51 cents for industrial customers, through 9.94 cents for commercial customers (remaining economic activity) to cents (individual households). It can be observed that in regions with the highest natural gas extraction, electricity prices are the lowest, whereas in regions with the lowest gas extraction, the price of energy is the highest. This fact is particularly important for energy-intensive businesses, e.g. companies from the chemical sector. Own Revenues of Gminas Gminas where shale gas extraction will take place, will obtain additional budget revenues: share of income taxes (PIT and CIT), real estate taxes and exploitation fee. Depending on the regulations of the law on taxation of hydrocarbons extraction, which the Polish government has been working on for the last several months, both the amount and the type of national duties for local governments may change (revenues from income taxes, or from special tax on extraction). The U.S. example shows that irrespective of adopted fiscal solutions, activity in the shale gas sector increased tax revenues of federal, state and local authorities and revenues from lease payments for land belonging to federal authorities. In the U.S. at large, fiscal revenues related to shale gas exploitation amounted in 2010 to $18.6 billion. Forecasts for 2035 talk about $57.2 billion, and in total, in the years , the increase of tax revenues is estimated at $933 billion. The key forms of taxation in the U.S., related directly or indirectly to the extraction industry, include the following taxes: (1) property tax; (2) severance or production taxes; (3) corporate income tax; (4) sales tax, and (5) environmental fees and payments. Investment Expenditures In gminas where gas mines or other gas installations are located, including underground gas storage facilities, due to higher own revenues it will be possible to allocate more to investments. Right investments of local governments can improve the quality of living of the inhabitants and be a stimulus attracting investors to these regions. It can be predicted that extraction regions will be attractive for energy-intensive industries, including the chemical sector. Companies established on or near concession areas will be able to benefit from the proximity to gas production. Direct gas pipelines would make it possible to transport gas without the burden of additional transmission fees. Assuming that the Polish gas market is freed, i.e. is free from any gas tariffs, it will be possible to independently negotiate gas prices between the distributor and the end user. Similar correlation is present in the U.S., where energy-intensive industry settles in places where natural gas, including unconventional gas, is produced. Labor Market The functioning of shale gas production facilities will increase the probability of job creation in the extraction sector and the sectors providing services for the gas industry. The dynamisms of establishing new economic entities will also surge. Despite the fact that the shale gas sector in Poland is only in the initial stage of development, attempts were made at estimating its impact on the national labor market. The analysis encompassed the period of 10 years, and the following numbers of new jobs in the Polish economy, resulting from shale gas extraction, were obtained: The base scenario assumes that within the next 10 years, employment in the shale gas sector and related sectors will amount to approx. 155,000. The pessimistic scenario assumes that after 10 years the employment equals 120,000. The optimistic scenario shows that within a decade, employment can increase by approx. 190,000. Sectors where the increase of employment resulting from shale gas extraction will be the highest include: metallurgy, retail and wholesale, energy supply and production of tools and machines. As of the end of 2010, the number of people employed in the shale gas sector in the U.S. amounted to approx. 600,000 and it is forecasted to increase to 870,000 within the next five years and to 1.6 million within 25 years. The total potential of the unconventional gas sector is estimated at approx. 1.5 million new jobs by 2015, and approx. 2.4 million by An analysis of the U.S. experiences shows that the high employment multiplier (each directly created new job in the sector induces three jobs in sectors indirectly connected with shale gas and other sectors of the economy) results from the fact that almost all supply chains for the gas industry end within the country and there is no need to import any products necessary for unconventional gas extraction, such as machinery, steel constructions, software for computer modeling of deposits or chemicals for hydraulic fracturing. 14 Izabela Albrycht Key Findings and Recommendations 15

10 Public Utilities Infrastructure The presence of natural gas mines, or other large installations related to extraction of that resources gives hope for improvement of the public utilities infrastructure in the region, in particular of gas pipelines. When enumerating benefits stemming from the development of the unconventional gas exploration and production sector, it needs to be remarked that whenever we are dealing with new economic processes, there are winners and losers. The perspective of liberalization of the EU gas market coupled with the development of national, alternative to the existing gas suppliers for Europe, sources of gas (including development of the unconventional gas extraction sector in Poland) is perceived as an obstacle and a threat to the existing business model of the Russian gas industry. Therefore, Moscow may wish to negatively impact the dynamics of the development of the shale gas sector in Europe, including, with all likelihood, in Poland. The best and most efficient way to do this, as can be seen e.g. in Romania and Bulgaria, is to fuel national and local social protests. France has a similar, unfavorable attitude to shale gas extraction technology. It should be mentioned that this country also has own business interests in the EU energy policy. In terms of energy security, France relies above all on 58 nuclear reactors in 19 nuclear power plants and the nuclear technology is one of the key exports of France. Due to the plans of developing nuclear energy in Poland, our country is on the list of potential buyers of the French nuclear technology, for which greater dynamics of the natural gas sector is a rival. The French moratorium on hydraulic fracturing imposed after vehement social protests, was the first explicit red light for the unconventional gas sector in Europe. In needs to be emphasized that in France there was no serious and fact-based public debate about it. Therefore, information about socio-economic benefits, combined with reliable knowledge of possible environmental impacts should be applied to local communities as a vaccine against the epidemics of social protests aimed against the technology of unconventional gas extraction that is currently spreading across Europe. Recommendations for Central and Local Authorities (1) From the point of view of development of the regions where shale gas will be extracted, it is important to secure the benefits that they might get from it. Above all, it will be crucial to secure their revenues from hydrocarbon extraction. The manner in which shale gas taxation model is formulated will thus be of key importance. In every potential model, local governments can be significant beneficiaries, or have a weaker position. It is thus vital to answer the question of how the revenues from hydrocarbon tax will be redistributed to local governments. The basic exemplary options include: firstly, retaining the present solution, i.e. exploitation fee which will be fully allocated to local governments and secondly, redistributing to local governments a part of the severance taxes which would first go to the central budget, and subsequently be transferred to local governments. extraction process impacts also the neighboring gminas (e.g. destruction of roads due to heavy transportation). Therefore, it is recommended to take into consideration a solidarity mechanism of sharing revenues from hydrocarbon taxes with neighboring gminas. Such a solution would not only be fair, but would also mitigate the threat of social protests in the areas adjacent to extraction. (3) The analysis of the unconventional gas exploration and extraction sector in the U.S. and Canada led to the conclusion that from the point of view of the national economy (increase of value added and level of employment), the key role is played by the links between the exploration and production sector and other sectors of the economy, and the effect of synergy. Replaying the same scenario in Poland may make every single zloty invested in the exploration and production sector bring several zlotys for the economy (multiplier effect). Achievement of this effect can be facilitated by infrastructural investments or creating good climate for research and development and stimulating its growth, in particular in terms of services necessary for the functioning of the exploration and production sector (e.g. drilling services, maintenance, analysis of geological data) and manufacturing equipment for this sector (e.g. drilling tools). (4) The threat of the anti-shale hysteria spreading into more European states requires the Polish government to conduct, within the next few months, a wide-ranging information campaign, addressed mostly to local communities, but also to all Polish citizens. Polish society should be given reliable information about the environmental impact of shale gas extraction and socioeconomic benefits for Poland and its regions. Attention needs to be drawn to the fact that the American society appreciates to a large extent the increase of the U.S. energy security resulting from higher energy self-sufficiency. In Poland, dependent on natural gas from Russia, the argument of increasing energy security thanks to the shale gas sector development is also worth emphasizing. The information campaign should also make reference to the Polish history and tradition of the extraction of hydrocarbons. Therefore, it is recommended to produce information spots and a series of scientific films for the general public, resembling for instance the recently released film Truthland, a response to the film Gasland, which was highly critical of shale gas. As part of creating a positive climate surrounding shale gas, it is also necessary to undertake social consultations prior to and during the investment process, i.e. constant social dialogue in the concession areas. The Kosciuszko Institute is currently at an advanced stage of discussions with the Pennsylvania State University, aimed at organizing study visits for Polish mayors and heads of rural gminas (Polish: wojt), which would be a chance for them to see with their own eyes the benefits stemming from extraction of unconventional gas for local communities and forms of cooperation between local governments and the industry. No report will substitute the chance of direct evaluation of such benefits. (2) According to the currently binding legal regulations, a percentage of the exploitation fee goes to the gmina where the extraction is taking place. Attention needs to be drawn to the fact that the 16 Izabela Albrycht Key Findings and Recommendations 17

11 Authors Izabela Albrycht is the Chairperson of the Board of the Kosciuszko Institute. A political scientist, she graduated from the Faculty of International and Political Studies at the Jagiellonian University and completed post- -graduate studies in Public Relations at the Tischner European University in Cracow. She has completed a half-year internship in the European Parliament. She is an author and editor of numerous publications focusing on the EU institutional system and EU policies, including the energy policy. She is the editor of many publications prepared by the Kosciuszko Institute and has organized numerous press and scientific conferences in Poland and abroad. Rafał Garpiel is a sociologist and the Managing Director of Codework, senior trainer (5 European Qualification Framework), consultant, lecturer and researcher at the Jagiellonian Univeristy and an expert of the Kosciuszko Institute. The author of the concept, and the implementer of local and national qualitative research and social consultations. He is a member of the Jagiellonian University research team conducting ( ) the project entitled Media as a space for deliberations presented on the example of key energy issues: nuclear power plant construction, shale gas exploitation and wind energy in Poland. Piotr Kosowski MSc, PhD, he is an assistant professor at the Faculty of Drilling, Oil and Gas at the AGH University of Science and Technology in Cracow. In 2002, he graduated from finance management at the Management Faculty at the AGH. In 2008, he obtained a PhD degree in mining and engineering geology. He is the author of 48 articles and over 50 scientific and research publications commissioned by the oil industry. Since 2004 he has been the President of the Board of the Foundation Drilling Oil Gas, Science & Traditions. Anna Łaszczuk is a lawyer and economist specializing in tax and excise law. She participated in tax audits and settlement reviews in companies related to excise tax. She gains her experience from assisting in ongoing matters and participating in numerous seminars and trainings. She took part in the works on the DLA Piper report related to taxation of hydrocarbons extraction in the world. She won the national tax competition for students. Currently, she holds the position of Junior Associate at DLA Piper Wiater sp.k. 126

12 Adam Łazarski is an expert of the Kosciuszko Institute and the coordinator of the project entitled Ranking of Polish MEPs. He graduated with honors from MSc Politics and Government in the European Union at the London School of Economics and Political Science and from administration at the Jagiellonian University, as well as international relations at the Tischner European University in Cracow. He was a trainee at the Embassy of the Republic of Poland in Singapore, Consulate General of the Republic of Poland in Toronto, and the United States House of Representatives. Marcin Matyka is the head of the Tax Advisory department at DLA Piper. He is a lawyer and a licensed tax advisor with more than a dozen years of professional experience. He assists his clients in creating strategic and complex solutions to tax issues, ensuring optimization of economic processes and business value added. He advised in many greenfield projects in Poland. Moreover, he is the author of numerous publications concerning taxes, e.g. in Rzeczpospolita, Gazeta Wyborcza, Przegląd Podatkowy and Monitor Podatkowy. In 2012, he became Co-President of the Tax and Financial Services Committee of the American Chamber of Commerce in Poland. Łukasz Pokrywka graduated from the Cracow University of Economics, he is the research coordinator at the Kosciuszko Institute responsible for economic and financial matters. He was the originator and the author of the first Monitoring of the Debt of Provincial Cities in Poland, including debts hidden in community partnerships. He is the author of numerous publications on fiscal policy, labor market and macroeconomics. He deals with company restructuring. Stanisław Rzyski holds an MA degree and is a junior lecturer at the Department of Economic Geography at the University of Gdansk. His scientific interests encompass the quality of life in urban areas and regional considerations and consequences of energy investments, including renewable energy sources, nuclear installations and smart grids. He completed i.a. the Energy Security in the Baltic Sea Region in the 21st Century Summer School at the Humboldt-Universität zu Berlin. PUBLISHER The Kosciuszko Institute a think-tank creating new ideas for Poland and Europe is an independent and non-governmental research institute founded in 2000 as a nonprofit organization. Based on in-depth, interdisciplinary analysis, the Kosciuszko Institute promotes solutions published in the form of recommendations and expert reports. Its publications are addressed to EU institutions, government and local-government bodies, members of national and European parliaments, the media, non-governmental organisations, entrepreneurs and advocates of the idea of independent thought and open debate. Since 2010, the Institute has been working on its expert project entitled Unconventional gas a chance for Poland and Europe? The project is the first undertaking of that kind in Poland executed by a think tank. The project aims at a complex analysis of potential opportunities stemming from unconventional gas production and chances that result from it for Poland and for Europe. Practical recommendations developed during the project are a valuable source of knowledge about unconventional gas, as well as an important reference point in the public debate. As part of the project, the Institute published its report entitled Unconventional gas a chance for Poland and Europe? Analysis and recommendations and policy briefs analyzing development of the shale gas sector in Poland on an ongoing basis. Moreover, discussion panels and conferences are organized as part of the project. Piotr Stankiewicz holds a PhD in sociology, and currently lectures at the Institute of Sociology at the Nicolaus Copernicus University in Torun. He deals with social communication, management of social conflicts and risk perception in controversial energy investments. He cooperated with public authorities and local governments in preparing communication strategies and conducting social dialogue in the field of shale gas, renewable energy sources and nuclear energy. Marcin Tarnawski holds a PhD degree in political studies and currently lectures at the Institute of Political Studies and International Relations of the Jagiellonian University. He is the author of works and publications focused on the issues of international security, international economics, and the foreign and security policy of the Russian Federation. He is an expert of the Kosciuszko Institute.

13 The report is an attempt at a comprehensive analysis of economic and social considerations related to unconventional gas exploration and production in Poland and its individual regions. The report encompasses an impact assessment of the conventional gas production sector in Poland on local economic processes. Its findings, juxtaposed with experiences of the North American shale gas revolution, resulted in a list of possible benefits to socioeconomic development of Polish regions stemming from the impact of the shale gas exploration and production sector. The present publication is a source of factual arguments which in the current, early stage of development of the shale gas sector in Poland, can be crucial for establishing a true, and thus positive, climate surrounding shale gas. The publication was created within the project undertaken by the Kosciuszko Institute Unconventional gas a chance for Poland and Europe? Honorary Patronage The Minister of Treasury The Kosciuszko Institute 2012 ISBN: