THE LEVEL OF ROYALTIES REMAINS NAILED: THE AMENDMENTS TO THE ROYALTIES LAW, HANDED OVER TO THE NEW EXECUTIVE
- Written by Adrian Stoica
The royalty system for hydrocarbons was not changed by the state for ten years, as a result of the agreement with the Austrian company OMV upon Petrom’s privatization. This provision was included in Law no. 555/2004 on certain measures for the privatization of the National Oil Company Petrom SA, which provided in Article 10 that “until December 31, 2014, except for the contrary provisions of the laws or regulations generally applicable in the European Union, which become applicable to Romania, the tax regime applicable to the exploration and production of the company and its subsidiaries will not become, whatever the form, more onerous for the company, including through increasing the applicable tax rates or by introducing new taxes on exploration and production.” This stability of contracts was included by the lawmakers in the Petroleum Law (Law no. 238/2004) which in Article 61 states that “the provisions of petroleum agreements approved by the Government remain valid, throughout their duration, in the same terms they were concluded.”
Upon the expiry date (December 31, 2014), the executive should have had prepared a new law, but found out, amid the significant fall of crude oil international prices, it has no idea how to amend the royalties that the Romanian state would collect from the companies operating oil perimeters. On the one hand, many politicians, unaware of the royalties system applied in this field, have begun to exert heavy media pressure by calling for their increase and accusing that the Romanian state loses large amounts of money by maintaining low taxes.
On the other hand, the executive had to face reality: the royalties were set at the average level practiced in the European Union and the investments in the field are increasingly higher. Thus the revision of the oil royalties’ law has been deferred for 2016 and now the deadline has been pushed to 2017, thus it is the task of the new government to solve this problem. If the current government will decide to support the version approved by the former cabinet, the new law should not lead to surprises, however, things are generally already known. The current system of royalties applied in our country is at the European market level and the new taxation takes into account the fact that Romania’s resources are close to depletion, the output has been for years on a downward trend, while the exploration and exploitation of new deposits involve very high investments.
Hence, the new draft law on royalties has remained unchanged, and Article 49 of the existing law was fully implemented in the new law, said Sorin Gal, Director General with the National Agency for Mineral Resources. Regarding the royalties, the draft has been finalized by the Ministry of Finance. The royalties have remained unchanged. The current system of royalties varies between 3.5% and 13.5% of the value of oil output and between 3.5% and 13% of the value of natural gas output, depending on the size of deposits. Instead, the amendments will focus, among others, on introducing tax incentives for companies, depending on the operating methods, thus counting on the increasing recovery factor for deep deposits.
Also, another novelty to be forwarded by the new law will aim the offshore operations, currently not regulated. Presently, in Romania 463 blocks are leased, of which OMV Petrom has 239, Romgaz has 140, while the remaining companies have 84. In the past 10 years, in order to stop the decline in output, EUR 1 billion was invested annually.
According to oil companies’ representatives, without further investment in the discovery of new deposits and the redevelopment of older ones, Romania risks running out of oil output, with a major impact on the economy. In the first half of this year the oil output has decreased by 0.7%, while imports have increased by 7%.