OIL & GAS ROYALTIES, AN ISSUE POSTPONED SINE DIE
- Written by Daniel Lazar
The issue of the Romanian state royalties collected from operators in the oil or gas exploitation sector is again in the focus of the media and not only. That’s because until now no one knows when the concrete discussions on this issue, between the Bucharest authorities, the international partners and the market players will begin. Not to mention the way the companies will be charged, because until the discussions are legislated... discussions that did not occur there is a very long way.
So far, we’ve witnessed the generous forwarding of certain deadlines for setting up the percentages to be charged from the companies. The state intends to collect more money, while the companies want to pay less than before as, taking into account the crisis, they remain with low amounts for investments, while profit margins are falling. The total amount of oil and mining royalties collected by the State last year was of RON 1.64 billion, of which only the oil royalties represented RON 1.36 billion. At the end of this year the additional taxes extended by the Ponta government late in 2014, i.e. 0.5% tax on mining and the 60% income tax on additional incomes from natural gas liberalization. Simultaneously, the government provided the removal of the tax on special constructions as of January 1, 2016, but according to the agreement with the parliamentary parties about the new Tax Code, the tax removal will be carried out as of January 1, 2017, except for agriculture. The new way of charging hydrocarbons, the National Agency for Mineral Resources (NAMR) is working on together with the Ministry of Finance, should have been completed in August and was due to enter debates in Parliament in the autumn session, but things are stalling. The new system will include royalties and an overcharge on profits for companies in the oil and gas extraction sector, as well as a series of deductions for investments carried out in this field. Why? Simple: because the state wants more money.
Lower fees for offshore perimeters?
The new calculation formula could include a provision that the companies carrying out deepwater offshore exploration/exploitation and the companies taking under lease depleted perimeters will benefit from fee cuts. “We have to make a distinction between onshore and offshore exploitations, especially on depleted fields. The latter require higher costs relative to the amount of oil extracted. These operations should be stimulated through fiscal levers, for example, with deductions for investments. We are talking about reducing taxes depending on the ore’s quality, otherwise these deposits are not tempting for the operators. The perimeters have potential, but the oil extraction costs are relatively high. As regards the offshore deep sea blocks, they require sophisticated technology, it is very hard work,” said Gheorghe Dutu.
Authorities said, more than once, that in 2019 Romania will become energy independent and that once the deposits in the Black Sea are exploited, our country could supply Republic of Moldova as well. It should not be forgotten the fact that NAMR has announced it will bring to lease 30 oil blocks for exploration in the Round XI, but the operation is to take place only after the approval of the new ways of setting the fees for hydrocarbons. “We are about to finalize Round XI exploration for oil agreements in both onshore and offshore blocks. We also expect to finalize the tax law related to petroleum activities. The round will be launched immediately after the approval of the new level of royalties. We bring to lease 30 blocks, each having an area of approximately 1,000 square kilometres. They are available to operators for the exploration phase,” said the NAMR President, Gheorghe Dutu. Large oil companies from the US, Canada and the UK have already expressed interest in the blocks.
ROPEPCA’s point of view
On the other side of the barricade, the Romanian Association of Petroleum Exploration and Production Companies (ROPEPCA) has a different point of view: the fees should remain unchanged or even decrease. ROPEPCA President Artur Stratan believes that in this way the oil and gas industry would benefit a breath of oxygen and, otherwise, a contrary measure would be ‘catastrophic’ for the industry. “We estimate that the new law on royalties could come into force on January 1, 2017. By the end of this year, we believe nothing could happen, because there are only a few months left and we do not see how it would be technically possible for the ministry to carry out a public consultation with the business environment, with the industry and with our association, to circulate a draft for public consultation posted on the ministry’s website for 30 days, after which to get the feedback from the businesses environment and draw up a final draft for the Parliament to approve it. Ideally, the royalties’ change should be introduced as of January 1 of any year, because it is very difficult to change the method of calculation and all accounting records of a company in the oil and gas field during the year,” said Artur Stratan. He added he is not aware how the final proposal will look like, so that simulations at each company become possible. “During the dialogue, we were against increasing those royalties. We suggested that these fees remain at the current level to provide a breath of oxygen to the oil and gas industry. Moreover, I even campaigned for lowering the royalties, especially for marginal fields to allow longer operating life for another few years,” ROPEPCA President also mentioned.
“There will be catastrophic consequences for the industry as an increased level of royalties only means shortening of the deposit’s operating life. Royalties are not calculated at company level, so operations are not cumulative, the royalty is calculated and paid according to the deposit. If, based on increased royalties the economic efficiency falls to zero or goes into the red, the deposit will be closed. The closing down of an oil deposit should be a disaster for the government, because when a deposit is no longer producing, it no longer produces taxes to the state budget. The state also loses the profit tax and the cash flow coming with the VAT, the royalties, plus other additional fees,” concluded the ROPEPCA President.