The Romanian Parliament adopted the Offshore Law, the text of the document being amended so that the Romanian state has the right of first refusal in relation to the fields to be exploited.
After several years of dithering, in full energy crisis triggered by the military conflict between the Russian Federation and Ukraine, the Romanian Parliament has finally managed to unlock Black Sea investments by amending the Offshore Law. Parliamentarians have decided to keep the initial provisions of the draft assumed by the ruling coalition. They include an almost doubling of the threshold of the selling price above which Black Sea gas producers will be overcharged, increasing the maximum limit for the deduction of their investment in exploration and production, eliminating the obligation to sell a minimum percentage of production on the centralized markets in Romania.
The old law on the exploitation of offshore oil and gas fields was adopted in 2018, but it was harshly criticized by investors, especially to the high taxation it imposed. The provisions challenged by the business environment in the field included the obligation to ensure domestic gas supplies at a rate of 50% of production and the requirement that 25% of employees be Romanian citizens.
An important amendment of the adopted draft refers to the elimination of the provision from the version in force of the Offshore Law, which mentioned that “the tax on offshore windfall revenues shall be related to the reference price set by the National Agency for Mineral Resources for the calculation of royalties (currently the one on the Central-European gas exchange in Baumgarten, Austria, in the future the average price on the Romanian Commodities Exchange and OPCOM – Ed.)” and that “transactions carried out below the reference price shall be taxed at the reference price”. Another adopted amendment provides for the elimination of the limit for the deduction of offshore gas producers’ investments for the calculation of the corporate tax. Also, the amended law repeals the article from the current law providing for a fine applied to gas producers in the amount of 10% of the annual turnover in case of breaching the provisions newly introduced in the law according to which “in order to protect Romania’s energy security, bilateral contracts for trading the gas quantities exploited from the blocks governed by this law shall be notified for endorsement to the National Regulatory Authority for Energy” and for such contracts “the Romanian State, through the National Administration of State Reserves and Special Issues – ANRSPS will have the right of first refusal for the acquisition of the gas quantities to be traded, under the contractual conditions negotiated by the two economic operators”. In the initial version of the law, the fine was applied for breaching the obligation of offshore gas producers to sell on the centralized markets in Romania 50% of the annual production, an obligation reduced in 2020 to 40% and from the current version of the law it was eliminated altogether.
The provisions, extended to deep onshore blocks
The new draft adopted provides that the provisions of the law also apply to deep onshore petroleum blocks. Such a block is defined as “petroleum block located on land, whose area corresponding to the projection at the surface of the contour of the portion of the Earth’s crust within which, along a determined depth interval greater than or equal to 3000m isobath, exploration, development, exploitation or storage operations are conducted, and also the surfaces needed for the conduct of petroleum exploration, development, exploitation, storage and transmission operations, including located outside this area”.
Amendments to the new Offshore Law
The old law established that investors owed a (progressive) windfall tax on windfall revenues obtained from the increase in gas prices, when gas prices exceeded RON 45.71/MWh. Given the accelerated increase in prices, the new ceiling for the payment of the windfall tax is RON 85/MWh.
The tax rates applied to windfall revenues will increase from 15% to 70%, depending on the price at which natural gas is sold, as follows:
- →15% of the windfall revenues obtained from prices higher than RON 85/MWh and lower than or equal to RON 100/MWh;
- →30% of the windfall revenues obtained from prices higher than RON 100/MWh and lower than or equal to RON 115/MWh;
- →35% of the windfall revenues obtained from prices higher than RON 115/MWh and lower than or equal to RON 130/MWh;
- →40% of the windfall revenues obtained from prices higher than RON 130/MWh and lower than or equal to RON 145/MWh;
- →50% of the windfall revenues obtained from prices higher than RON 145/MWh and lower than or equal to RON 160/MWh;
- →55% of the windfall revenues obtained from prices higher than RON 160/MWh and lower than or equal to RON 175/MWh;
- →60% of the windfall revenues obtained from prices higher than RON 175/MWh and lower than or equal to RON 190/MWh;
- →70% of the windfall revenues obtained from prices exceeding RON 190/MWh.
While in the old law the deduction level was set at a maximum of 30% of the tax on windfall revenues, the new law increases the rate to 40%. Also, it was decided to eliminate the limitation of investment deduction for the calculation of the corporate tax, in order to ensure compliance with the principle of the Tax Code providing that all sectors of activity must be treated uniformly. “At the moment, this limitation prevents offshore operators from deducting the amortization of all investments made, owing corporate tax at a tax base artificially increased, therefore being discriminated compared to the rest of economic operators”, it is mentioned in the new law.
Free gas sales
Another restriction eliminated by the new law is that on investors’ obligation to sell on the Romanian market 50% of the natural gas obtained from the offshore blocks (in the Black Sea).
According to the new law, the investors “are entitled to trade freely the hydrocarbons produced from the respective petroleum blocks, at the prices and in the amounts determined by them, in line with the national law and the principles of the European Union on the free market”.
These rights cannot be modified in the future, as the law provides that they are granted to investors “throughout the performance of the petroleum agreements on offshore and deep onshore petroleum blocks”. However, in the situation of energy crisis or distortion of Romania’s gas supply, the Government will be able to take measures to sell with priority in Romania the quantities of gas extracted from the respective blocks.
Taxes remain stable
Last but not least, the new law provides that the royalty regime and the specific tax regime will not change, irrespective of the form, in favour or to the detriment of investors, for the entire duration of the agreements.
No restrictions in terms of employees and services
The provisions on the imposition of a 25% share of the total number of employees that had to be Romanian and that on investors’ obligation to purchase goods and services in Romania and the EU spaces were also eliminated from the current law.
Government hopes that investments will begin
According to the Romanian Energy Minister Virgil Popescu, with the adoption of the Offshore Law, investments for the exploitation of Black Sea gas are expected to begin. “Both the state and investors benefit, and we expect the investment decisions to be made. Romania gains from royalty, gains from the corporate tax, from the jobs to be created, from VAT, from the workforce tax. Romania becomes energy independent, and we will no longer have gas supply problems. […] I believe that with this better, improved draft, Black Sea investments will begin,” Virgil Popescu noted.
The first gas that could be extracted from the Black Sea in the middle of this year, according to Romanian officials, is gas coming from Ana and Doina fields, operated by Black Sea Oil & Gas. The estimated production capacity will be 1bcm of gas per year, the equivalent of 10% of Romania’s gas consumption.
We recall that Romgaz has signed the agreement for taking over for over USD 1bn the Romanian subsidiary of the US giant ExxonMobil, which owns 50% of the rights over the offshore gas concession Neptun Deep. Its partner in this project, OMV Petrom, which has taken over the operatorship in the Neptun Deep Block from ExxonMobil, estimates that it could make a final investment decision in the first half of next year, considering as “being crucial for the final version of the Offshore Law to ensure a strong stability, to guarantee mechanisms for a free market and a stable fiscal and regulatory framework”.
Black Sea gas reserves are estimated at over 200 billion cubic meters, and a Deloitte study quoted in the draft prepared by the Government shows that exploitation will bring to the budget about USD 26 billion by 2040, from corporate taxes, royalties, social contributions and other taxes. Moreover, they would generate over USD 71 billion to Romania’s GDP and create or maintain over 30,000 jobs.