THE ROYALTIES’ ODYSSEY: A long debated taxation system

At the end of 2014, the major decision expected by all players on the oil and gas market in Romania and not only, the one concerning the royalties for oil and natural gas, was solved... by being postponed. Policy makers adopted the decision at the end of an electoral year, during which they took no chances, thus avoiding discussing a delicate issue before the presidential elections in November 2014. It’s interesting to note that the government is not going to give up the current royalties system for oil and natural gas extraction, yet it is to set up an extra-tax on hydrocarbons exploitation to replace the special tax of 0.5 percent on resources and the 60 percent tax on profit after the gas price liberalisation.

The royalties system for the oil field will not be amended for 2015 but maintained with the same taxes, so that another formula is to be considered subsequently, said the delegate minister for budget Darius Valcov. “The current system will be extended for 2015,” the official stated, the decision is to be adopted by emergency ordinance. In September 2014 PM Victor Ponta declared the draft on new royalties for the oil field will be debated at the beginning of 2015 and a new system capable of ensuring budgetary resources at the level of European average, however not to imperil the investments by setting too higher taxes.

The new royalties will not be applied to already existing concessions

The current legal framework is not differentiating the types of deposits, while the range of royalties is from 3 to 13 percent of the hydrocarbons output. The royalties were set in 2004 valid until December 2014, set up by the law for privatising Petrom, the company being acquired by the Austrian group OMV. The executive is contemplating the setting up of a tax on profit for oil and gas explorations to replace the special taxes that expired by the end of 2014. It is extremely important that the royalties system will be re-discussed but is to be applied only to future leases. The government intends to preserve its budgetary revenues, as the two taxes were scheduled to expire at the end of 2014. Concomitantly, the authorities are working on a project meant to regulate the level of royalties, yet it is to be applied only for future leases, with no effect whatsoever on the companies already having ongoing oil agreements such as OMV Petrom, Romgaz, ExxonMobil, Chevron, Lukoil, MOL or Gazprom Neft, as the level of royalties is specifically expressed within the leasing agreements.

The current situation

Currently, the royalties’ levels range between 3.5 and 13.5 percent of the oil output value, while for natural gas the range is from 3.5 to 13 percent, according to the deposits size. The level of royalties could not be amended for ten years, being specified by the Petrom privatisation contract in 2004 and becoming a constant political subject during the last decade because the state collects approximately EUR 200 million from oil and gas royalties and some companies have reported high profits by benefitting from the current level. The average level of collected royalties is seven percent of the output, while the European average level is 15 - 18 percent. The oil barrel price has fluctuated from USD 40 per barrel in 2004 to USD 147 per barrel in 2008 in order to fall just after the start of the economic crisis to minimum levels of USD 40 per barrel. Once the developed economies regained momentum the price of oil again reached levels of USD 110 per barrel only to fall again during H2 under USD 80 per barrel due to the poor results registered by Europe and to the massive US massive output from unconventional deposits.

In June 2014 PM Ponta announced that the philosophy of the new taxation system is “to collect little from much, not to collect more from little”. The Finance Ministry along with the National Agency for Mineral Resources (NAMR) are in charge with drawing up the new taxation system. NAMR President Gheorghe Dutu affirmed, in his turn, that the new royalties system will be differentiated for onshore, offshore small depths and offshore great depths. He hinted that some incentives might be set for depleting deposits. Furthermore, Ioana Petrescu, the former Finance Minister, announced the ‘pole tax’ will be cut down from 1.5 percent to 1 percent of the assets and the companies operating in the Black Sea continental platform will be exempted from the tax.

The price of petrol during the last five years

In Romania the petrol price doubled from 2009 to 2014, while the diesel fuel price increased by 72 percent during the same interval due to the international price of the barrel, but also due to the increase of taxes or due to newly set up taxes by the state. Hence, the petrol price grew from RON 2.9 per litre up to an average RON 5.9 per litre, according to the European Commission data, while the diesel fuel price grew from RON 3.3 per litre to an average RON 6.1 per litre. By the end of 2014 the price has fallen, however this evolution cannot change the general trend. The prices have climbed in Romania faster than in other countries in the region, the fuels being now more expensive in Romania than in Austria – OMV’s country of origin, owner of Petrom – and in Poland, Hungary or Bulgaria.

For comparison in Bulgaria the price of petrol increased by 61.3 percent and the price of diesel fuel by 55 percent. In Hungary the price of petrol grew by 54.3 per cent, the price of diesel fuel by 50 percent. In Poland prices registered lower growths: petrol prices went up by 50.7 percent, the diesel fuel prices by 47.3 percent. Starting with 2009 the Romanian state increased several taxes: the schedule for bringing in line the excises was brought forward to the European average, while in 2010 the VAT climbed from 19 to 24 percent. Moreover, last year the government changed the excises calculation system and imposed an artificial exchange rate made up by the exchange rate valid on October 1, 2013 indexed with the average annual inflation rate. Finally, in April 2014 the executive set up a special excise of seven eurocents (EUR 0.07) per litre of sold fuel.

Extra taxes for energy companies

The extra taxes for energy companies set up at the beginning of 2013 and expected to last until the end of 2014, will remain in place for another year, until December 31, 2015, as the new system of royalties has been postponed. At the beginning of 2013 the government set up several extra taxes for the companies acting in the energy field, taxes valid until December 31, 2014, during this interval a new system of royalties was expected to be approved, the current one being in place until January 2015. Thus, a tax on monopoly for electric power and natural gas transport and distribution companies was set up, ranging between RON 0.85 to RON 0.1 per MWh. Another 60 percent tax on extra revenues recorded by the companies following the deregulation of prices in the natural gas sector, as well as a 0.5 percent special tax on incomes recorded by the companies by exploiting natural resources, others than natural gas. For the monopoly activities the government argues, in a draft law, it is needed in order to supply funds for co-financing investments financed by European funds. On the background is the fact that monopoly activities in the electric power and natural gas fields, meaning transport and distribution of electric power and natural gas, are highly profitable due to lack of competition. The government estimates to collect in 2015 some RON 245.6 million as tax on natural monopoly in the fields of electric power and natural gas, RON 743.2 million as tax on extra revenues following price deregulation in the natural gas sector and RON 114.6 million as tax on incomes from exploiting natural resources.

Conflicting statements

“There are two more taxes, one is the extra-tax for natural gas due to the gas price liberalisation for the industry sector and the second one is the tax on mineral resources. Normally these two taxes should be off on January 1, 2015. The government explained it maintains the royalties. (...) These royalties can’t be changed without the agreement of all 44 licensees of perimeters. But it could change the extra-tax for gas and the tax for mineral resources. The government can keep their deadlines and increase them, as taxes are in the executive’s yard, they’re applicable to everyone without negotiations, or it can cancel the two taxes and set up a new tax to include both of them and to add something more in order to increase the budgetary revenues,” President Traian Basescu said one month before concluding his mandate.

In retort, PM Victor Ponta said that, in the Finance Ministry’s view, the taxes remain the same only during 2015. The new project on royalties will be submitted for public debate at the beginning of 2015, as political consensus is needed and not a decision adopted by a majority, royalties will partly be transferred to local authorities according to the future system.

“The new project will be submitted for public debate at the beginning of 2015, as political consensus is needed, not just a decision adopted by the majority. (...) It would have been irresponsible to bring up the draft during an electoral year,” the Prime Minister said. He further noted that, currently, there is in effect a solution for the state to collect more from the big companies, i.e. the special tax on extra profits of the companies in this sector, meaning two thirds of the extra-profit goes to the state budget. Victor Ponta said the current taxation system is agreed upon by the foreign partners and is to remain in place also for 2015.

How is the excise level calculated

The domestic natural gas output is supplied, in almost equal ratio, by Romgaz and OMV Petrom. OMV Petrom is the only company extracting oil, according to the Petrom privatisation contract in 2004. The excises level will be denominated in RON commencing by 2015 and is to be updated in 2016 and yearly with the inflation rate, according to the draft amending the Fiscal Code. “Starting January 1, 2015 the excises level is to be set in RON on the measurement unit, on the basis of the level in use in 2014. Starting with 2016 the level is to be calculated on yearly basis updated with the inflation rate during the last 12 months, calculated in September vs. the same month the previous year, as officially delivered by the National Statistics Institute,” Finance Ministry officials said.

The modification is proposed in order to prevent the fluctuation of budgetary revenues from excises depending on the RON/EUR exchange rate set by the European Central Bank on October 1 each year, as well as for preserving the real value of these revenues and for the predictability improvement for the state budget and for the business environment, the institution underscored. By the end of November 2014 PM Victor Ponta said the government is not going to make any changes of excises as they are to remain “exactly at the same level as in 2014, not a penny more” although the current excises system should lead to a decrease (of budgetary revenues).

The formula according to which the excises value in 2015 will be calculated is still under the analysis of a working group, Minister of Finance Ioana Petrescu was saying on October 1, 2014, without specifying if the excises would be set in accordance with the lower exchange rate announced by the European central Bank (ECB) which would lead to lower level for excises. Two weeks later the delegate minister for budget Darius Valcov said the formula was not agreed upon, but it was considered the variant of setting it in RON. The European Central Bank announced a reference exchange rate of RON 4.4093/EUR on October 1, 2014, this index used by the government to calculate the level of excises being 0.88 percent lower than the previous one – RON 4.4485/EUR. Should the excises be calculated on the basis of the exchange rate set by the ECB, then their level would be lower in 2015.

For 2014 the government used the ECB exchange rate in 2012 to calculate the excises, as it had been higher than the one in 2013, which should have been used nevertheless, and added the highest inflation rate, the one in September 2013. Hence, the excises were paid at an exchange rate of RON 4.73/EUR, i.e. RON 0.30 higher than the ECB level.

Reduced royalties for offshore exploitations?

Royalties should be reduced for offshore explorations and exploitations, as no one is going to invest billions of dollars without incentives to recoup the investment, in this regard a consensus with the opposition is needed so that the future system for royalties is not amended subsequently, Premier Victor Ponta said. He added that, besides combating fiscal evasion, the royalties are seen as the second magical solution to collect money to the state budget, but he reiterated the idea that predictability is needed for this field and a government issuing an emergency ordinance proves it is unpredictable. “Substantiation is needed to explain: why are we doubling them, why are we tripling them, why are we cutting them down. The World Bank study, discussed with the International Monetary Fund and with the Coalition for Romania’s Development is intended to set up such substantiation (...). For example, for the offshore explorations and exploitations we have to cut them down, because no one will invest billions of dollars without incentives to get back the money during the next 5 - 10 - 15 years,” the Premier underlined during a conference on economic issues. The official argued that, in the case of royalties, consensus with the opposition is needed so that the system adopted by the government is not changed subsequently. “We have to agree on how we are going to stimulate investments as well: do we want to stimulate investments especially in the energy and natural resources fields through the fiscal system, through royalties or do we want only to use the current depleting deposits,” Victor Ponta added.

Instead of conclusion

The decision to postpone the talks about the royalties’ level was received with mixed feelings by the actors involved. On one hand the large companies rejoice for the fact that royalties have not been increased, but on the other side of the barricade, the ones that envisaged collecting more money to the state budget, by increasing the ‘quotas’ collected from the operators on the market, are forced to look elsewhere for supplementary funds. For the time being, the royalties’ odyssey, on which a lot of ink was used for writing on paper, is going on...

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