Government faces oil and gas royalties conundrum

Newsroom 23/09/2013 | 09:58

As the government plans to roll out a new royalty regime for the oil and gas sector next year, experts say that higher production taxes could stifle investment, increasing Romania’s dependency on energy imports in the coming decades.

By  Ovidiu Posirca

The country has pioneered onshore oil drilling and attracted foreign companies of the likes of US-based Chevron and ExxonMobil to seek offshore and shale gas resources, which experts say could strengthen Romania’s energy security.

According to data published by the professional services firm PwC, Romania came fifth in Europe in 2012 for oil and gas production, with a total output of 102 millions barrels of oil equivalent.

Vasile Iuga, country managing partner at PwC Romania, says the country is currently able to cover between 75 and 78 percent of its primary energy demand from domestic sources, against the EU average of 50 percent. He added that the country needs to invest roughly EUR 15-18 billion in conventional oil and gas fields to maintain its current energy position.

“The production of shale gas and gas from the Black Sea could start as early as 2020. From our calculations, if we don’t improve our energy efficiency by 20 percent by 2030, Romania could be dependent on imports for up to 80 percent of its energy by 2030,” said Iuga.

Challenging fields

Against the backdrop of falling production and in search of new investors in a capital-intensive sector, the government wants to bring more funds into the state coffers from renegotiated royalties.

“The government has said the level of royalties has to be hiked. We don’t know the ideal level for the government and investors,” Sorin David, managing partner at law firm D&B David si Baias, told BR. He added that the current royalties regime is “right, not disastrous” from the vantage point of the state.

According to daily Ziarul Financiar, Romania collected EUR 315 million in royalties from oil and gas companies last year. The largest share was paid by Austria’s OMV Petrom and the state-owned gas producer Romgaz.

Petrom is particularly interested in any potential changes to production taxes, as a 10-year deal keeping royalties unchanged is set to expire next year. This was one of the provisions in the privatization contract of Petrom, signed in 2004.

Under the current regulations, companies have to pay royalties ranging from 3.5 percent to 13 percent or 13.5 percent for oil and gas, respectively. Companies are taxed more for productive fields.

PwC representatives said the royalties system was one of the factors taken into consideration by players in the oil and gas system. Drilling for oil and gas in Romania is particularly tricky due to the high maturity of the fields, of around 87 percent, and the fragmentation of deposits.

Romania’s daily production of 21 barrels of oil equivalent per day is one of the lowest in the world. The biggest output is reported by members of OPEC, the oil cartel, such as Saudi Arabia and Iran, with production of 2,866 boe and 1,765 boe, respectively.

“Companies need to increase the recovery rate in current deposits, because otherwise the extracted quantity will become unprofitable,” said David.

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