The National Agency for Mineral Resources (NAMR) has decided to increase the reference price of natural gas extracted in Romania, setting a new calculation formula. The new reference price will represent the minimum value below which the price used to calculate royalties cannot be lowered.
The Order approving the Methodology for determining the reference price mentions that it will includes the average price of transactions performed in the month prior to the period for which the reference price is calculated at the Central European Gas Hub (CEGH) AG, operator of Baumgarten hub, whose majority shareholder is OMV, expressed in EUR/MWh.
It will be multiplied with the value of the average annual gross calorific value of natural gas in Romania in the year prior to the one in which the evaluations are made, expressed in KWh/Smc, and with the average RON/EUR exchange rate, expressed in RON, in the month prior to the period for which the reference price is calculated.
The new reference price will be calculated monthly. The current reference price has not been changed since 2008, being set at RON 495/thousand cubic meters, i.e. RON 45.71/MWh, although the market price has reached RON 89-90/MWh.
We recall that in March 2017 a working group was established, which proposed two versions: version I – the method of Platts price, respectively an evaluation based on the closing price of a foreign exchange published by Platts magazine and version II – the hub price method, i.e. an evaluation based on prices and volumes traded on a foreign exchange.
Under the Order approving the Methodology for determining the reference price for natural gas extracted in Romania, NAMR fulfils the decisions of the Court of Auditors of 2010 and 2015, maintained by the judgment of the High Court of Cassation and Justice no. 972 of 4 March 2015. The Court of Auditors found that, by failure to update the reference price of natural gas since 2008, the Romanian state lost, during 2008 – 2015, around RON 7bn. The Court of Auditors has also requested to update the reference price for natural gas extracted in Romania,” a press release of the agency reads.
NAMR President Gigi Dragomir said the new reference price did not mean doubling the price of gas for end-consumers, but fair conditions for both producers and the Romanian state, in conditions in which the price of gas has been liberalized, but a reference price is maintained at the level of 2008. “Given that, according to the calculation formula, the new reference price is close to the one at which transactions have been carried out on the gas market in the recent months, we see no reason for an increase in the price of gas for end-consumers,” NAMR President added.
According to NAMR, the state budget annually collects petroleum royalties worth approximately RN 1bn, calculated at the reference price from 2008. Domestic gas producers have requested that the price either be related to trading prices on the Romanian Commodities Exchange or give up the introduction of an administrative price, in the context of a liberalized market.
ROPEPCA’s public position
The Romanian Petroleum Exploration and Production Companies Association (ROPEPCA) stands against the National Agency for Mineral Resources (NAMR) Order approving the Methodology for establishing the reference price for natural gas extracted in Romania. According to this Order, the reference price for natural gas extracted in Romania will be calculated according to the trading prices of the hub from CEGH Vienna, based on a calculation formula made together with the Petroleum-Gas University of Ploiesti.
The Romanian natural gas producers have so far paid the royalty for the gas produced at the level of the revenue generated, a basic principle for any tax applied to income. It is to be understood that the so-called ‘reference price’ is nothing but a minimal value for the royalties’ base, which cannot be undercut.
Other public institutions, including ANAF, take into account the income generated from the sale of gas for calculating various other taxes. Why does NAMR disregard the same basis for calculating the royalty? The proposal to relate the royalty for the gas produced in Romania to a virtual figure from abroad, a figure much higher than the domestic prices, shows a lack of sovereignty and a total indifference regarding the way the natural gas market in Romania functions.
ROPEPCA considers that the National Agency for Mineral Resources decided to issue this Order without taking into account the positions expressed by the main indigenous natural gas producers during the public consultation held on February 7, 2018 but basing this order exclusively on the conclusions of a study signed by a university professor belonging to the Petroleum-Gas University of Ploiesti. ROPEPCA requests the University to communicate whether the opinion expressed by the author of the study is also the point of view of the prestigious educational institution and whether it is relevant in the context in which it does not take into account the expertise of the natural gas domestic producers.
During the public debate organized by NAMR, natural gas producers expressed a unitary position, supported also by independent persons such as university professors or journalists in the field who were present.
The reference price must be represented by the market price in Romania. We believe that an external market does not represent the Romanian market, we have nothing to do with the Baumgarten hub in Austria where the gas is sold several times and is not correct for paying royalties in Romania,” President of ROPEPCA Harald Kraft said. “A fair approach would be to pay royalties at the market price realized by the producer in Romania, not from outside,” Harald Kraft added.
According to the press release issued by ROPEPCA, the Association reiterates the main arguments presented at the public consultations, at the invitation of NAMR, arguments to be taken into account when drawing up the new methodology for establishing the reference price for natural gas.
“In order to be effective and enforceable, we believe it is important that the reference price for natural gas is established based on a relevant market calculation for Romania and reflecting the effective prices realized in the upstream sector in Romania. In this regard, we would like to draw attention to the fact that the variable referring to the external HUBs, proposed in the draft order, is not applicable to the current market conditions in Romania. We believe that, as is the case in international practice when the reference price is based on exchange indices, the chosen index must be representative for the domestic sales of gas.
Considering that at present (i) Romania does not export gas, so it is not really related to the European market, and that (ii) compared to other markets, the Romanian market is not liquid enough, it cannot report, for the moment, to the external HUBs for gas trading, including CEGH. Also, prices from HUBs outside Romania do not reflect the actual value achieved by natural gas producers in Romania, which is significantly lower due to the costs of delivering natural gas from the reference points to external HUBs. As an example, the temporary fluctuations on the Romanian market reported to the European HUBs can be of EUR 4-5/MWh or even higher.
Moreover, natural gas producers have a legal obligation to sell part of their domestic production on the centralized market in Romania, which makes the reference to an external hub even less relevant.
We consider that determining the reference price based on a market index that does not reflect the prices for the natural gas extracted from Romania, such as the price at the CEGH hub, is inconsistent with the Petroleum Law no. 238/2004, which stipulates in art. 49 para. (2), that ‘the petroleum royalty is fixed as a percentage of the value of the gross production extracted’.
It is worth mentioning that, in general, transactions at a HUB are predominantly made through intermediaries who, most often, sell the product bought before from a producer.
In such cases, the quotations used include also the profit of intermediaries, as well as the transport expenses. We believe that it is not fair for this element to be a part of the calculation of the reference price.
Secondly, we consider that the use of the reference price of the Day Ahead Natural Gas Market (‘DAM’) is not applicable to long-term contracts.
Thirdly, we believe that mentioning, as a calculation element for the reference price, the country average gross calorific value at the value of the year preceding for establishing the reference price can be discriminatory for producers who sell lean gases and have an income based on the reduced calorific value of their product.
Last but not least, we would like to draw attention to the fact that by communicating a reference price which is related to an external market and which surpasses the level of the domestic market, NAMR is issuing an alarm signal, which cannot be in the interest of consumers.”
ROPEPCA brings together 17 of the most important holders of oil concession agreements concluded with the Romanian state. The members of the association hold most of the oil concession agreements for Romania’s onshore exploration, development and production blocks, representing cumulated investments of 650 million euros in 2016, a turnover of almost 2.9 billion euros, contributions to the state budget of 300 million, and are responsible for creating and maintaining 14,800 jobs.
“A reference price that does not reflect Romania’s market realities”
The Oil and Gas Employers’ Federation (FPPG) also disapproves NAMR’s decision to determine the reference price of natural gas calculated depending on trading prices on CEGH hub in Vienna, based on a study conducted by the Petroleum-Gas University of Ploiesti, which does not reflect Romania’s market realities.
“In conditions in which Romania does not export natural gas and no molecule reaches the Baumgarten hub, determining the reference price based on CEGH index does not properly reflect the value of natural gas extracted in Romania and consequently is against the Petroleum Law no. 238/2004, which stipulates in art. 49 paragraph (2) that ‘the petroleum royalty is determined as a percentage rate of the value of gross production extracted’.
The economic theory and professional standards applicable in Romania and internationally require the determination of the market value based on sale-purchase transactions relating to the respective goods. Thus, the value of natural gas in Romania is the one obtained through transactions performed by producers, not an artificially established price.
Romania thus becomes an isolated case worldwide, where the reference gas price is calculated on the basis of transactions made in another country where there are no deliveries of natural gas extracted in Romania. Hub price indices are not used even in European countries where there are important gas trading hubs (e.g. the UK, the Netherlands) to calculate the specific royalties/taxes, such countries taking into account prices actually realized by gas producers.
The same happens in producing countries without hubs (e.g. Norway, Denmark). Alternatively, in other European countries (e.g. Germany, Austria) a reference price is calculated based on transactions actually realized in the respective countries. Moreover, using the benchmark of the Day-Ahead Market (‘DAM’) is not relevant for contracts concluded for a long term, which are subject to other terms and a different pricing mechanism.
The current formula uses the CEGH index without deducing the transmission costs. Even if in the future there will be deliveries of gas extracted in Romania to Baumgarten hub, the value of gas sales made by producers will be the CEGH price minus the cost of transmission from Romania to Austria. Thus, producers pay royalties reported to an incorrect value, formula which contradicts the international practice and even regulations previously issued by NAMR to determine the reference price for crude oil, which take into account the transmission costs (e.g., Order 98/1998).
Producers in Romania will thus pay royalties reported to a price not realized, to an administrative price without any connection to realities of the value of gas traded on the domestic market.”
FPPG firmly rejects NAMR’s statements on the absence of data from titleholders. All data requested by NAMR has been provided and, moreover, producers provide ANRE monthly with reports on gas transactions performed. These reports could provide credible information to determine the value of gas in Romania, as weighted average. Prices realized based on sale-purchase contracts are also those admitted by the tax authority to determine taxes and fees.
FPPG mentions that producers have so far paid royalties at the maximum between the price realized and the reference price, the State thus collecting the fair contribution in relation to the value of resources exploited, in accordance with the applicable legal provisions. Producers in the oil and gas industry are among the largest taxpayers to the state budget, with a significant positive impact in the economy through investments made and through the number of direct and indirect jobs created and maintained over time.
All these points of view have been expressed by the entire industry within the public consultation organized by NAMR on 7 February 2018, the Agency having no solid counterarguments against fundamental economic principles.
The Oil and Gas Employers’ Federation remains available for a real dialogue with NAMR, other authorities involved and specialists in the field for the analysis and amendment of this new methodology for determining the reference price, so that royalties are calculated correctly based on the value realized by producers from the sale of natural gas.
The Oil and Gas Employers’ Federation (FPPG) is a Romanian legal entity of private law, non-lucrative, non-governmental, autonomous, independent from the public authorities, without a political nature; it is representative at the level of the activity sector ‘Energy, Oil & Gas and Energy Mining’. FPPG has constantly supported the principles of stability, predictability and competitiveness of the legislative framework applicable to the energy sector in Romania, as well as the responsibility of companies in the field in terms of safety, health and security of operations and staff. FPPG is a founding member of the Concordia Employers’ Confederation, the only Romanian employers’ confederation affiliated to IOE (International Organization of Employers).
“The gas exchange in Romania is entirely immature”
Regarding the statement of a NAMR official, according to which “the gas exchange in Romania is completely immature”, Dumitru Chisalita, Judicial Technical Expert in Oil & Gas, has the following opinion.
“We believe that a signal has been given on the refusal to develop the gas exchange in Romania, as the normative act, recently published in the Official Journal, does not mention the reference on the Vienna Gas Exchange as being temporary, period in which the evolution of gas exchanges in Romania and the analysis of a potential review of this decision could be monitored.
Romania, country with the third largest gas production in the European Union, accepts indefinitely that the most important reference price on the gas market in Romania be the one determined in a country that does not exploit any cubic meter of gas, where all gas, in a physical form, is from the same source, and the exchange is owned 50% by the one supplying most of the gas traded there.
Given the need for a unitary approach of principles in the same market, we believe that if the Romanian gas exchange is fully immature to determine the price at which around 10% of the country’s production is sold (i.e. gas owed to the State as petroleum royalty), for the other 90% of the gas sold from domestic production, using the gas exchange in Romania for trading a quota of the production sold is not ‘fair’ either. Thus, maybe gas producers should request the amendment of the Gas Law, which forces them to trade gas on a fully immature exchange. The same situation is valid for gas suppliers required by law to purchase/sell gas on a fully immature Exchange. The price of gas determined on the Vienna exchange, according to contracts for Q1 – 2018, are by around 1.4% higher than the weighted average price of gas set on the Romanian Commodities Exchange, which apparently gives the opportunity to say that the respective exchange was chosen because it is more expensive, to bring more money to the State budget.”
In expert’s opinion, there are several potential consequences of this decision:
1. The reference price determined in this way will be a strong reference for the price at which gas will be sold in Romania, which may determine higher gas prices than those determined exclusively based on supply and demand, outside any official reference.
2. This reference price, which does not have a correspondence in the country, will bring numerous suspicions at the level of audit bodies, in the event where a producer sells gas even through transparent methods, at a price lower than the official price set as reference.
3. Choosing the Vienna exchange for determining the reference price for natural gas extracted in Romania, underlying the calculation of the gross production of natural gas and the equivalent value of the petroleum royalty, will produce money for this exchange; the Romanian institutions/companies will be forced to purchase from the Vienna Exchange Price Reports, Analyses, Forecasts etc. (this money could have stayed in the country and contribute to the development of Romanian exchanges).
“In my opinion, the material gain that Romania could obtain resorting to price references on the Vienna Exchange is clearly lower than the great losses, given by the signal of lack of interest for achieving in Romania a Functional and Free Gas Market and a performing Gas Exchange,” Dumitru Chisalita concluded.
BRM requests support for a fair and balanced development
The Romanian Commodities Exchange (BRM) considers that the gas market in Romania deserves support in its development process from Romanian state institutions and official regulators.
BRM management took note with surprise and concern of the NAMR decision to use as reference price the trading prices on the CEGH Vienna hub, in conditions in which the domestic market has managed, in less than one year, to register consistent and significant volumes in gas trading.
As a result, BRM requires the support of decision-makers for the domestic gas market, in order to ensure a fair market balance and to offer a real chance that the Romanian market can develop rapidly into an important one, corresponding to the volumes following to be traded in the coming years.
“The Romanian Commodities Exchange has entered the 26th year of operation in the Romanian market and we have developed the necessary mechanisms to provide the transparency and professionalism required from us by market players. We are not the only player in this category and we believe a reference price imposed from a foreign market only affects the local capacity to further develop the exchange products necessary for a market important for the entire area. We are also affected by the fact that the Romanian market has been characterized as immature at the level of public authorities and we find it difficult to understand why there are no investments in the local capacities, either public or private. We don’t request authorities to favour us, but their permission to use the local experience and the capacity existing in the market to be able to develop fairly and in a balanced manner, according to regulations in force and national interest. We hope the decision to relate to prices in Vienna will be changed and the entire market in Romania will receive a fair chance, for which we have all worked over the recent years. If we don’t give to ourselves the opportunity to develop transparent and functional markets, it means we admit and accept that we lack at national level the necessary knowledge for such a thing, but the reality flagrantly contradicts such an assumption,” Gabriel Purice, President – General Manager of the Romanian Commodities Exchange, pointed out.
The representatives of the Petroleum-Gas University (UPG) of Ploiesti have stated that the institution had not taken any official action and had not conducted any study on the methodology for calculating the reference price of natural gas, denying the allegations. They have also specified that UPG had not recommended to NAMR a methodology for determining the reference price depending on trading prices at the CEGH hub in Vienna.