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ROYALTIES BACK IN THE SPOTLIGHT: Low oil prices and declining output to complicate debates

The Ministry of Economy has resumed in April the talks on the amendment of the oil royalties’ law with the dialogue partners. The tax system should have been changed since December 2014, at the expiry of the deadline set by the Petrom privatisation contract with the Austrian OMV Group. Although almost three years have passed since the deadline, no government has been able to carry out this task until now.

RedeventeAre the oil royalties collected by the Romanian state high or too low? Some say they are far too low and justify this by putting forward the royalty system in the Arab countries. Others, not few, claim that the current level of royalties should not be increased and have strong arguments to support this position. In the middle - the Romanian state, which would aim higher revenues from oil royalties, given that an actual tax revolution is being prepared, which would bring along a substantial increase of revenues in the public employees’ field. It remains to be seen what the future law would look like, currently the only certainty is that the royalties related to the offshore oil and gas exploration and production operations will be lower than those charged for onshore operations.

MEETINGS WITH THE INDUSTRY

Economy Minister Mihai Tudose has recently asked the oil companies to express their views on the new royalties’ law and has promised to maintain an open dialogue.
A first meeting with the representatives of the Romanian Petroleum Exploration and Production Companies Association (ROPEPCA) occurred already in early April, with the delegation headed by Harald Kraft.
The main topics discussed were the royalties in the oil field and the ways to approach the new law on royalties. The Ministry of Economy reiterated the principle by which the state grants exploration-exploitation rights, given that the level of royalty mirror the correct price for the exploitation of resources and the need to set a stability clause during the period in which it is enforced.
On this occasion, the ROPEPCA representatives presented the overview in Romania regarding the royalties’ system, against other European states, as well as a number of issues the oil companies face in conducting their operations.
“Given the important contribution of the oil sector to Romania’s economy, Minister Mihai Tudose expressed openness to working with ROPEPCA to find solutions to the issues presented by the delegation. In this context, it was agreed that during the elaboration of the royalties’ law there should be a dialogue within the inter-ministerial group established at the level of the Ministry of Economy, in this sense ROPEPCA being invited to submit its views,” a communiqué issued by the ministry after this meeting reads. Also, Prime Minister Sorin Grindeanu met a delegation of the consortium made up by ExxonMobil, the world’s largest oil company listed on the stock exchange, and OMV Petrom, the largest Romanian oil company.

STEADY DECLINE IN PRODUCTION

Over the past 30 years, the crude oil and natural gas output in Romania has been steadily declining due to the depletion of reserves in the exploited fields, many of them mature, in exploitation for several decades. As compared to the peak of oil exploitation in Romania, throughout 1975-1989, during 2011-2015 the quantities of oil and natural gas extracted dropped significantly, by over 70%, the evolution of crude oil and natural gas output being influenced by the deposits’ degree of maturity. During 2011-2015 the crude oil and condensate production fell by a relatively small share, by 5.4% in 2015 (to 3.86 million tons) against 2011 (4.08 million tons), the largest amount of oil and condensate being extracted by OMV Petrom (99.4%).

INCREASING TAXATION LEVEL

The oil and gas royalties, ranging from 3.5% to 13% of the output, were set for the period 2004 up until December 2014.
Despite the difficult operating conditions, the average effective rate of royalties and similar taxes rose from 15% in 2014 to 15.7% in the first half of 2015 and to 16.9% at the end of 2015, reaching 17.5% in 2016, according to a study conducted by a Deloitte team of experts for ROPEPCA. The actual tax rate was calculated as the average of fees and similar observable taxes paid (oil and gas royalties, additional taxes and tax on special constructions), in relation to the revenues collected by the main players on the Romanian market - SNGN Romgaz SA (22.5% - effective tax rate in 2015 and 21.8% in 2016) and OMV Petrom SA (14.7% - effective tax rate in 2015 and 15.9% in 2016).
“The Deloitte study shows a very worrying fact: the actual taxation regime of the industry has grown in Romania and, along with it, the pressure has also increased on the onshore oil exploration and production companies, hit in any case from unfavourable market conditions. Concomitantly, at European level, most states are trying to stimulate investments and the oil exploration and production. Once again, we draw attention on the fact that the upstream oil sector has an important contribution to public revenues and the sector’s sustainability depends directly on how the long-term investments are encouraged,” said Mark Wagley, ROPEPCA acting president.
ROPEPCA also notes that the Deloitte analysis, based on data from public sources, shows that the average effective rate of royalties and of similar taxes declined in 2015 as compared to 2014 in 10 European countries: the UK, Norway, Denmark, Hungary, Austria, Germany, the Netherlands, Italy, Bulgaria and Albania.
Another conclusion of the study is that the actual tax rate for the upstream gas activity in Romania is much higher than the one related to oil exploration and production, the difference resulting mainly from the additional tax on natural gas.
Currently, in Romania there are over 400 oil fields and more than 13,000 operational wells. In order to maintain a constant level of oil and gas output, significant and stable investments are needed, and a predictable and friendly fiscal framework, issues many times reported by the large oil and gas industry players on the domestic market.
According to ROPEPCA, production is ongoing through a 10% natural decline, whereas the level of depletion of current reserves is 87%, which raises the level of investments needed to EUR 1 billion/year to keep the output at the same level. Without these investments, Romania’s oil production will be depleted in 12 years, and natural gas output in nine years, the association’s representatives warned in September 2016. They also said that in Romania the production cost is quite high, somewhere between USD 16 and USD 18 per barrel for crude oil, so the final price cannot be lower.
According to the latest draft bill issued by the Ministry of Finance last year, the current level of royalties is preserved, claiming that the deposits are old, depleted. Moreover, they are deep deposits and have high costs of exploitation, whereas the discovery of other deposits requires consistent investments. Instead, the novelties aim, among other things, at introducing tax incentives to companies according to their exploitation methods, in the attempt to increase the deep-sea recovery factor. Another novelty is the introduction of tax incentives for offshore operations, currently not regulated, and a distinction is made between shallow sea water deposits and deep sea deposits, due to the different costs involved.

EXPANDING THE APPLICATION OF THE SPECIAL TAX

The government intends to keep the 60% tax on additional revenues from the deregulation of gas prices, although since April 1 the domestic gas price for households has been liberalized, as the calculation formula has excluded the regulated price. However, according to a normative document drawn up by the Ministry of Finance, the executive will modify the calculation formula by replacing the price established by government decision with the new weighted average price on the competitive market or on the centralized gas markets for household gas. Without this amendment, the Finance Ministry representatives say in the statement of reasons, the 60% tax on the additional revenues earned as a result of the deregulation of prices in the natural gas sector could not have been applied, which would have meant that the state revenues would have fallen by about RON 800 million. Thus, the Finance Ministry estimated for last year revenues of RON 872.93 million from the tax on the additional revenues collected by the producers following the price deregulation, slightly lower against 2015 when the estimated revenues amounted to RON 881.04 million.

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