The impact of the Offshore law on investments in Black Sea area

Aurel Dragan 17/07/2018 | 12:13

The changes made to the ”Offshore Law” will have a big impact on the oil industry activity and the main issue is that there were no prior consultation or impact assessments. And there are quite a few questions on the effects of the law, as we can see from the analysis made by Alex Milcev from EY Romania.

Petroleum agreements holders in offshore perimeters received important news from Parliament on July 9, 2018, which submitted to the promulgation, quickly and with some new changes, the draft law on some measures necessary for the implementation of oil operations by offshore oil perimeter owners (collectively referred to as the “Offshore Law”).

As a result, a wave of reactions from the representatives of the Romanian oil industry occurred, both because of the new taxation articles in the draft law (significantly modified compared to the variant proposed by the Senate), and from the perspective of the approval procedure of the draft Law (without prior consultation, impact assessments or transparent public debates).

The main issues raised are, as expected, about the tax changes brought about by the latest version of the Offshore Law. In summary, these changes relate to:

  • The tax credit provisions (which would have been a guarantee of the stability of the tax framework) have been eliminated;
  • Progressive taxation of additional revenues from the sale of natural gas extracted from offshore perimeters is introduced. Quotas range from 15 percent to 50 percent, depending on the level of the price per MWh practiced;
  • It is possible to deduct investments in the upstream segment, up to 60 percent of total additional revenues;
  • Offshore gas sales will have to be 50 percent on the Romanian market.

Regarding the elimination of the tax credit, it should be noted that it was conceived as a measure of fiscal stability and predictability for offshore perimeter oil offenders in operation at the date of entry into force of the Law. Its removal therefore hinders further discussions and decision-making to continue investing in gas offshore gas projects.

Last but not least are the issues raised by the representatives of the holders of agreements on deductions for investments within the limit of 60 percent. Although this deduction should, at the theoretical level, represent a tax advantage for the holders, the calculation formula detailed in Appendix 2 to the Offshore Law project seems to condition the deduction from the month in which the sale of natural gas actually took place – which is a restriction of the beneficial effects of this measure and a potential limitation of the related tax advantage. Given the high value of offshore upstream initial upstream investments, mechanisms should be sought to allow deductions during investment (and not just at the time of the sale itself).

In addition to the above changes, there remains controversy over the obligation to engage Romanian citizens with fiscal residence in Romania (as was the case with the obligation to use Romanian subcontractors), subject to the Ministry of Energy’s appeal in the addresses sent to the Chamber of Deputies. Can such provisions lead to a potential breach by the European Commission in terms of violation of free market principles? Remains to be seen.

All of the above questions and issues can be answered in the course of a proper offshore approval procedure, requiring, inter alia, a detailed impact analysis, with statistical data, comparisons with international markets, public debates, and close and transparent collaboration with the business environment of the Romanian oil industry.

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