NEW CHALLENGES: WITHOUT AN ATTRACTIVE FISCAL FRAMEWORK, INVESTMENTS WILL BYPASS ROMANIA

According to the National Agency for Mineral Resources (NAMR), Romania’s geological resources of oil are estimated at 2,000 million tons (84,000 PJ or 23,300 TWh) and reserves (both proven, probable and possible) at approximately 60 mt (2,520 PJ or 700 TWh ). In the past 50 years, oil production in Romania was of about 470 mt (19,700 PJ or 5,470 TWh), so the degree of depletion of deposits is approaching 90%. The onshore geological resources of natural gas are lower than those of oil, estimated at 700 bn cubic meters (25,800 PJ or 7,165 TWh), but reserves (proven, probable and possible) are higher, estimated at 150 billion cubic meters (5,530 PJ or 1,535 TWh). The natural gas production in the past 50 years was about 1,100 bcm (40,500 PJ or 11,250 TWh), indicating also a deposit depletion degree of approximately 90%. Considering an average annual output at the current level (standard situation to calculate the ratio of reserves to production, the R/P ratio) of about 3.8 mt of crude oil, respectively 11 bn cubic meters of natural gas, the reserves would last for 15-20 years. In the absence of new discoveries or of the development of new deposits, of investments in increasing oil recovery degree from fields in operation, the average annual production will continue in fact to fall, say the members of the committee working for the Petroleum and Gas section participating to the development of Romania’s future energy strategy. The trend could be exacerbated by the low price of oil on the world market, which cuts the economic feasibility of investments in mature fields in Romania. In such a scenario, the probable and possible reserves may not be ever extracted, hastening the end of the hydrocarbons industry in Romania.

LOW DEGREE OF RESERVE REPLACEMENT

The production of oil and natural gas is supported by 432 deposits, by about 10,000 oil wells and 4,000 natural gas wells. The number of oil and natural gas deposits regarded as mature or depleted is growing. In the past five years, 32 mature oil fields considered economically unviable for exploitation were closed. Their number is expected to increase and the production to continue decline, both in the short and medium term. NAMR estimates an annual rate of decrease in natural gas production of 1.5-2% and a degree of reserve replacement related to the extracted volume of only 15-25%.
A change in trend could be marked by the start of production in the Black Sea, by 2020, but the oil and natural gas from domestic production are not cheap, are not easily able to compete on the international market. Exploitation of deposits in the Black Sea will have a relatively high cost, facing potential problems of competitiveness. Finally, an overwhelming role in making investment decisions will play the tax policies, which need to be guided by a correct understanding of both the national geological specificity and the mechanisms of the most successful international oil tax systems.
On short and medium term the oil and natural gas reserves can be increased by introducing new technologies to lead to an increased recovery degree in existing fields, and on the medium and long term by developing exploration projects to blocks deeper than 3,000 m, of the onshore ones with complicated geology and of offshore deposits in the Black sea. But for now, given the low oil prices, the investors’ interest in carrying out investments is diminished.

AN IMPERATIVE: ATTRACTIVE TAX POLICIES TO STIMULATE INVESTMENTS

As the projects in the hydrocarbon sector have long duration from the start of prospection, development and implementation, and operating periods counting decades, the optimisation of the fiscal framework involves the setting of levels and types of taxation, namely the operating clauses for the companies in the field. If Romania seeks to provide as higher share in domestic consumption of oil and gas from domestic production, the fiscal sector should encourage the companies to invest enough in order to maintain production at the appropriate level. Moreover, if the strategic option is to maximize the oil and natural gas domestic production, regardless of the level of domestic consumption, then the fiscal policies should be attractive worldwide in order to attract investments and to stimulate a high level of activity. The reference level and the volatility of oil prices, relative to the cost of production for different categories of deposits, are an important factor in the calculations that define the types and levels of taxation, namely their degree of flexibility.

In the past two years, the Romanian Government has initiated and repeatedly delayed the update of the fiscal framework for the hydrocarbons sector and instead has introduced unexpected fees and taxes (such as the ‘pole tax’), targeting the increase of budget revenues on short term . The new fiscal framework, which should enter into force as of January 1, 2017, is still in the draft law stage, but the Finance Minister vows it will join the list of priorities of the autumn parliamentary session. Currently, the Ministry of Finance analyzes the appropriateness of introducing an additional tax on profits for companies operating in the field of hydrocarbons production in Romania, offset somewhat by investment deductibility, without amending the royalties’ level. While the government has an interest to maximize on the long-term ‘the state’s share’, it is necessary to prevent the risk to the fiscal framework to become so burdensome that some operators may give up the operations in Romania, the working session’s report underlines.

In addition, the fiscal framework should stimulate investments in measures to increase the oil production, including for marginal fields, which could represent an opportunity for small companies. A different tax treatment is opportune for such deposits. Another proposal filed during the working session is defining the (ownership) title on an amount of natural gas that can be accepted and used by the bank as security. This practice would increase the indebtedness capacity of natural gas producers in Romania, in order to continue investing in the sector’s development. In the context of obligations to ensure the related infrastructure for alternative fuels, the participants to the working session suggested that this segment should be allowed to develop according to demand, without regulatory constraints.

TRANSPORT OVERCAPACITY DUE TO LOW DEMAND

The drastic cuts in consumption have made that the National System of Natural Gas Transportation (SNTGN) in Romania to be currently used only to a limited extent. As the system was sized for triple natural gas demand and consumption, it currently generates technical difficulties in operation and maintenance, which also translates into higher operational costs. This is partly due to the low level of the regulated price and of the levy on natural gas consumption, but also because of the high cost of infrastructure operations, Romania being the European country with the largest share of infrastructure charges in the final price of natural gas, say the authors of the analysis. On the other hand, the current situation is completely different against the one the infrastructure has been designed for about 50 years ago, and lots of equipment has reached the limit of their normative functioning, their replacement being required.

RETHINKING THE SYSTEMS OPERATION

The future energy strategy should take into account that profound rethinking is needed for the functioning of the natural gas transport and distribution systems. A key aspect of this transformation is adapting the technical parameters to ensure transport under high pressure, at a level close to the one the transmission systems of neighbouring countries work. Also, it is needed a market model structured on free market principles, on the protection of vulnerable consumers, as well as on the size of the European Energy Union. Another aspect that should be implemented is to ensure SNTGN daily balancing and, on medium term, even hourly balancing, say the participants at the working session.

UPDATING THE SNTGN DEVELOPMENT PLAN

In the SNTGN Development Plan for 2014-2023 (to be updated in 2016), Transgaz proposes major investment projects for the strategic and sustainable development of the natural gas transport infrastructure in Romania and its compliance with European regulations in the field. Types of investments envisaged:

- Modernization of the Transgaz measurement systems and equipment;
- Modernization of the metering and measuring stations and of technological hubs;
- Modernization and automation of the cathodic protection stations;
- Updating the odorant systems and replacing of used odorant;
- Endowment with automation and remote control equipments, according to the requirements of a modern SCADA system to manage the issues of safety and the use of intelligent devices, increasing the flexibility, integrity and the system’s operational safety.

THE BRUA PROJECT AND THE ENERGY COMPLEXES

If the potential of the new gas fields discovered in the Black Sea, estimated at 42-84 billion cubic metres, proves commercially viable, concessionaires ExxonMobil and OMV Petrom could begin operations around 2020, given that Transgaz will complete the development investments and the interconnection of SNTGN with similar transmission systems in the neighbouring countries. In this context, one of the strategic projects in progress consists of the construction of a 528 km long gas pipeline on Romanian territory to transport natural gas on the route Bulgaria-Romania-Hungary-Austria (BRUA). Due to the geostrategic importance regarding safety and energy security, this pipeline is a priority at European level and is funded with EUR 179 million from EU funds, through the Connecting Europe Facility (CEF) financial feature.

The BRUA route is located close to the electricity producing groups from coal within the Oltenia and Hunedoara energy complexes (Craiova, Isalnita, Turceni, Paroseni, Deva). By ensuring the supply of natural gas at suitable pressure, from various sources, both domestic and imported, BRUA could enhance the attractiveness of these energy complexes for investments in modern, efficient and flexible centres based on natural gas. Although it doesn’t provide a solution for the mining sector, such a project, implemented along with the increase of BRUA capacity and with the closing down of coal groups at the end of their life, would have the advantage of using the existing capacity to inject electricity into the national energy system.

CONSTRUCTION OF NEW DEPOSITS, BLOCKED

The participants to the working session consider that rethinking the role of the underground storages is necessary, configured for seasonal use and regulated operation, with an appropriate distinction between strategic, technological and multi-cycle stocks. By increasing the operational flexibility and the capacity of injection and extraction, in view of covering the hourly and daily consumption peaks, the role of natural gas stocks can increase on the competitive market. Given the low price of natural gas on the European market, in conjunction with the high cost of injection and extraction from deposits, any investment decision should be based on feasibility studies.

IN SEARCH OF NEW MARKETS

In order to open new markets, Romanian gas producers could promote both electricity generation capacities based on natural gas as well as the use of gas instead of fuel for transports. Also, many households in Romania have no access to natural gas, using biomass for heating and LPG for cooking, although there is ample potential for the expansion of the distribution networks. The feasibility studies for investments in such projects should aim the development of new markets on the long and very long term.

The establishment of a National Integrated Dispatch for all forms of energy was proposed, with the role in ensuring the security and operational safety of the transmission and distribution systems, with access to all data of forecasts.

A NATIONAL GEOLOGICAL SERVICE

Much of the Romanian territory has been explored geologically by using 1960-70s technology, although not at a sufficient level of detail. The good knowledge of geological structures and of the results of previous explorations can be a solid starting point for oil projects and a Romanian asset in attracting investments. On the other hand, geological reports in recent decades, in NAMR’s possession, are ‘secret’ by law. This unduly restricts the investors’ access to important information. Romania is among the few European countries in this situation, which is a competitive disadvantage. For this reason, it is recommended the establishment of a National Geological Service for further geologic explorations as well as for amending the legislation to allow easy access to the above mentioned information, according to the international best practices. The state’s interest to achieve and maintain a steady pace for exploration should be communicated unequivocally, with NAMR organising new rounds of auctions for the available blocks.

FUEL EXCISE AND THE EU AVERAGE

According to data presented by the European Commission, the minimum excise duty on fuels used in transport, set at European level (at an exchange rate of EUR 1 = RON 4.5), is: EUR 0.359/litre (RON 1.61/litre) for unleaded gasoline; EUR 0.330/litre (RON 1.48/litre) for diesel fuel; for use on commercial scale in the industry, the minimum excise rate is EUR 0.021/litre (RON 0.09 litre); EUR 0.064/litre (RON 0.28/litre) for LPG; for use on commercial scale in the industry, the minimum excise rate is EUR 0.021/litre (RON 0.09/litre). Although the purchasing power in Romania is below the European average, the Romanian excise duty is larger than the minimum required. Thus, for fuels sold at the pump, the excise duty on diesel fuel is RON 1.93/litre, for unleaded gasoline is RON 2.08/litre and for LPG is RON 0.31/litre. For diesel used in industry, namely by transporters of passenger and freight, the difference between the minimum excise duty and the one practiced in Romania is of RON 1.84/litre. The situation is similar for other destinations as well, such as heating and cooking.

The reason for a higher level of excise on fuel than the minimum imposed in Europe, practiced more or less by each EU Member State, it is to ensure budget revenues for road network maintenance. On the other hand, due to reduced GHG emissions, the bio fuels are not taxed in Romania. Some states include in the fuel taxation policy the socio-economic impact of congestions, road accidents, etc. Collecting the excise duty on fuel is much easier than for other taxes. Given the relatively low level of tax collecting in Romania against the European level, the state’s strategy to maximize revenues from taxation of fuel is understandable, although this is strongly reflected in access to mobility and generally in the citizens’ standard of living.

IS THE EXTENSION OF CONPET NETWORK NEEDED?

The National Oil Transport System (SNTT), operated by Conpet, includes more than 3,800 km of pipelines network, in good technical condition, capable to carry twice the quantities of crude oil currently transported. From the company’s perspective, an extension of the transmission network in Romania is not justified, as the use of the national transmission subsystems is below 60% for domestic crude oil and 10% for imported crude oil. There are areas where an adjustment of assets is needed, e.g. the pipeline connecting RAFO Oneşti is unused. From a strategic perspective, it is important for Romania to achieve the two-way flow interconnection of SNTT to the neighbouring countries systems, in view of oil transit coming from the Caspian Sea region or from the Middle East to Central and Western Europe, but also to ensure additional import capacity from west to east, for reasons of energy security.

THE REFINING SURPLUS OUGHT TO BE KEPT

Following the closure of several refineries, Romania currently has a refining operational capacity of approximately 12 million tonnes annually in four functional refineries, of which three have a high degree of utilization. As demand for oil products fell below nine million tonnes per year, the surplus from refineries in Romania (mainly gasoline and diesel fuel, but also kerosene, LPG, etc.) is exported to countries in the region. On medium and long term there is a risk that refineries in Romania become uncompetitive against those in the Middle East, so that crude oil import would be partially replaced by the petroleum products for domestic demand, while the refining capacity or its degree of use to be reduced, including partial loss of volume on foreign markets. This risk is systemic, at European level, experts say. The participants to the working session suggested the keeping of the refining overcapacity on medium term, considering it as necessary to develop the oil products export capacity through Oil Terminal.

Making Oil Terminal competitive regionally for transit and storage of petroleum products involves investments, especially in the developing of storage capacity. Moreover, technological and storage capacities in the north platform of the terminal should be moved, in stages, for reasons related to safety and environmental protection, being too close to the inhabited area of Constanta city. Such investment may qualify for financing from European funds. Proper functioning of the Oil Terminal requires also stable regulations on the regime on tax warehouses. Given that much of the Oil Terminal’s capacity is taken for storage by the customers in search for market, a recent ANAF order has reduced the period of 45 days during which goods can be stored in the free port without paying taxes.

WHAT POWERS WOULD THE STORAGE CENTRAL AUTHORITY HAVE?

Oil companies that sell significant volumes of oil are required to set up strategic fuel stocks by Law no. 360/2013 regarding the establishment and maintenance of minimum stocks of crude oil and petroleum products. Currently, these issues are managed by the National Administration of State Reserves and Special Problems (ANRSPS) and since December 2015, within the Ministry of Energy, it operates the Crude Oil and Petroleum Products Competent Authority. After discussions in the work committee, it was concluded that the drawing up of an opportunity study for the establishment of a central authority for storage is justified.
Hence, these are the main topics proposed for debate following the report of the Crude Oil, Petroleum Products and Natural Gas workshop. We look forward to Parliament’s autumn session, as the new tax system for the hydrocarbon sector is included on its agenda, in the category of priorities.

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