The amendment of the Geological and Mining Law of July 2014 introduced certain significant changes to the rules of awarding and implementing concessions concerning hydrocarbons.
The majority of changes, with some exceptions mentioned in the amendment, will not affect the execution of the concessions for prospecting or exploration of hydrocarbon deposits which have already been awarded. As a rule, they will be executed on the existing terms.
However, as regards entrepreneurs holding a concession for prospecting and exploration (or just exploration) of hydrocarbons, Article 9 of the amendment stipulates the possibility of transfer to the new system through the transformation of the concession into the so-called joint concession covering prospecting, exploration and exploitation.
Before taking the decision, an entrepreneur must carefully analyse the consequences of transforming their concession, although they do not have too much time to do it.
First of all, according to Article 9 of the amendment, an entrepreneur "over a period of 2 years from the entry into force of the Act, shall have the right to transform this concession into a concession for prospecting for and exploration of a hydrocarbon deposit and for the exploration of hydrocarbons from the deposit”. The first question which comes to mind is whether the period of 2 years should be counted as the period in which a business operator should already obtain a decision on the transformation, or is it the time to submit an application?
Indications in this respect can be found in the rationale for the amendment, which says that Article 9 of the amendment "ensures to all entrepreneurs currently holding concessions for prospecting for or exploration of hydrocarbon deposits (…) the possibility for such entities to submit an application for transformation within 2 years from the date of entry into force of the planned changes”. The content of rationale indicates that the legislator has adopted the option with 2 years for submitting the application.
As concerns the requirements regarding the application, Articles 24 and 25 of GML will be applied already in the amended form. Due to the construction of the joint concession, there are certain new elements including the proposed time period for which the concession is to be awarded, including the duration of the prospecting for and exploration phase as well as the exploitation phase, and the definition of the schedule for the execution of geological works and operations.
It is also necessary to provide a description of all geological works, including geological operations, conducted so far and to present their results. The description will serve as a basis for the evaluation of the concession implementation so far achieved and it will be helpful while assessing the suggested duration of the prospecting and exploration phase.
In order to align the rights of entrepreneurs performing activities in the new system with those who wish to move to the new system, in the case of transformation, the new provisions stipulate the possibility to apply for a concession together with other entities based on a cooperation agreement. This involves both the necessity to indication the parties to the cooperation agreement in an application (the operator shall always be the entrepreneur to whom the concession was awarded) and to specify the shares in the costs of geological works to be born by the parties.
Conditions for concession transformation
The condition for transforming a concession is a positive result of verification process to which the provisions concerning qualification procedure are applied. All entities which have submitted applications are subject to assessment, in cooperation with relevant authorities, whether such entities are dependent on a third country, and in the case of stating such dependence it is assessed whether or not it poses a threat to the State security.
In addition, the operator is also assessed in terms of conducting operations pursuant to a concession mentioned in the application for transformation, according to the terms determined in concession or in terms of proving experience based on the exploration and documentation of at least one hydrocarbons deposit.
In the case of issuing a decision to grant a positive result of the qualification procedure, no additional assessment is undertaken with respect to the necessary experience and national security.
If the concession is to be transferred for several entities, then the draft cooperation agreement shall also be the subject of assessment and verification. Only after it is accepted will it be possible to award a concession to the parties of the cooperation agreement. The consequence of not submitting an agreement is the termination of a proceeding to transform the concession. There are no obstacles, however, for a business operator to modify the application in such case and to apply for a transformation of concession on their own. Nonetheless, the procedure itself will be extended.
It needs to be mentioned that a concession will not expire in the case of an extended proceeding. It results from the wording of the amendment which stipulates in Article 9 paragraph 14 that if a term of concession validity expires during a proceeding aimed at transforming the concession, it shall not expire until the proceeding is completed.
Before transforming the concession, it is also necessary to obtain relevant opinions and consents.
The grounds for refusal to conduct the transformation are, apart from cases mentioned in Article 29 of GML, lack of positive verification concerning the control of a third-party state, the security of State and in the case of operators – also the required experience.
In the case of refusal to conduct the transformation, an entrepreneur may continue to execute the concession on the existing terms, taking into account the changes resulting from transitional provisions.
Our opinion
Moving to the phase of exploitation for entrepreneurs holding the concessions for prospecting or exploration may take place in two ways:
-
completing the execution of concession (with the possibility to extend the concession restricted by transitional provisions) and subsequently submitting an application for an exploitation concession;
-
or through a transformation of concession.
Issues concerning the first option will be described in next entries.
As regards the transformation, the most important elements which need to be taken into account by an entrepreneur are as follows:
-
not being subject to transitional provisions concerning the right of priority right to established mining usufruct;
-
necessity to conclude a new agreement establishing a mining usufruct;
-
possibility to extend the prospecting and exploration period to 5 years – the new geological works plan and information about the works conducted so far will be decisive factors here;
-
in the case of refusal to conduct transformation – the possibility to execute the concession on the existing terms (even if the entrepreneur did not undergo verification);
-
possibility to award a concession with other entities – it is necessary to take into account the issue of specifying the right to geological information obtained on the basis of geological operations conducted so far.
Moreover, certain aspects of executing the right of transformation should be confirmed by a concession granting authority. They include, among other things:
-
the deadline for executing the right to transform a concession – does the period of 2 years mean the time available for obtaining a decision allowing the transformation, or is it a term for submitting an application?
-
the issue of securing claims resulting from an unimplemented concession. The act stipulates that new provisions should be applied, without observing Article 49x of GML, which says that an entrepreneur should establish mandatory security. At the same time, the act makes a reference to the provisions concerning the content of concession, which should also contain information about the terms of security specified in accordance with Article 49x paragraph 1 of GML. The above doubt should be eliminated before taking the decision to transform a concession, as the amount of security is determined by the amount of costs of geological works and operations, and it cannot be higher than 20% of such amount.