Analysis. Massive Black Sea energy investments stumble into slow public decision-making process

Ovidiu Posirca 10/05/2017 | 07:00

Although Black Sea gas was touted as the main solution to help Romania reach energy sufficiency, the slow development of legislation to support risky offshore developments and protracted discussions over the new taxation framework for oil and gas deposits could hinder the country’s attractiveness to investors.

American oil major ExxonMobil and Austrian oil and gas producer OMV Petrom have invested more than EUR 1 billion in the Black Sea. The companies are jointly looking for gas off the Romanian coast, and although some gas deposits were discovered in the exploration stage, it is not clear if they will kick off commercial production in the coming years.

However, the minister of energy, Toma Petcu, suggested that the joint venture could start extracting gas from the Black Sea in 2020, by when the country should build the transport infrastructure.

Petcu said that the new BRUA gas pipeline (Bulgaria – Romania – Hungary – Austria) would bring Black Sea gas onshore, adding that this project must become operational by the end of this decade.

Although the authorities have been saying for years that they want new investments in the oil and gas sector, companies are still waiting for the updated taxation framework in this field in order to plan their next moves.

In the second quarter of this year, the Ministry of Economy should finish the new royalties’ law, which would also apply in the energy sector, according to the minister of finance, Viorel Stefan.

“The plan is to have a common regulation when we talk about the mechanism for establishing and collecting royalties, covering all natural resources, from gravel from the bottom of the water and natural spring water to, why not, petroleum, gas and mining exploitation,” Stefan told Mediafax newswire in April.

The minister hinted that there would be two taxation levels – one for companies that export raw natural resources from Romania and another for firms that exploit and process the resources inside the country.

Critical agency for offshore projects is missing

Although Romania has attracted companies willing to venture into the Black Sea in search of oil and gas, the National Authority for the Regulation of Offshore Petroleum Operations in the Black Sea is still not working, although it was set up through a special law last July.

Razvan Nicolescu, energy & resources industry leader at Deloitte, the professional services firm, says that this new agency must start operations swiftly so that Romania can attract more investments.

Aside from this, the current legislation does not provide incentives for companies willing to invest in offshore projects, where the costs are higher than with onshore development.

“When talking about the authorization of such projects, there isn’t a clear regulation or clarification of procedures for documents that could replace the construction permit for offshore facilities, on the right of operators to build pipelines under the beaches of the Black Sea, which are owned by the state, or to reserve capacity and connect to the National Transport System,” Miruna Suciu, managing partner and coordinator of the energy & natural resources department of law firm Suciu Popa, and Cleopatra Leahu, partner at Suciu Popa, told BR.

“The lack of predictability in the fiscal framework in this field is the main source of dissatisfaction for potential investors, as the new law on royalties and taxes in the oil and gas field has been on investors’ agenda since 2015,” they added.

Under the current rules, oil royalties stand at between 3.4 and 13.5 percent of the total production, while for gas they are in the 3.4-13 percent range. Additional taxes come on top of this, such as a tax on the additional revenues of gas companies stemming from the liberalization of the market.

Energy taxation rose over past three years

While companies have been struggling to make business plans for the coming years, given the unstable regulatory framework, they paid more in taxes over the 2014-2016 period.

According to a study by Deloitte, the effective rate of royalties and similar taxes in the oil and gas sector grew from 15 percent in 2014 to 17.5 percent in 2016, while the tax burden for such companies in other European markets was reduced.

The study revealed that the average effective rate of royalties and similar taxes fell in Europe (including the Groningen gas deposit) from 9.3 percent in 2014 to 7.9 percent the next year.

“The industry is the target of over-taxation, which discourages investments in the development of production,” Daniel Apostol, general secretary of the Romanian Petroleum Exploration and Production Companies Association (ROPEPCA), told BR.

According to Deloitte, state-owned gas producer Romgaz had an effective tax rate of 22.5 percent in 2015 and 21.8 percent in 2016. For OMV Petrom, it stood at 14.7 percent in 2015 and 15.9 percent in 2016.

“I think that the most important thing for Romania is to have a fiscal framework that is clarified fast and is stable on the long run, and that this clarification is made in full transparency. It would be better for the future rules and fiscal methodologies to be clear, understood and interpreted uniformly by all the institutions in Romania,” said Nicolescu of Deloitte.

Despite the potential development of new gas fields in the Black Sea, Romania’s production could come to a standstill close to 2050. The country’s oil output would also disappear in the same period, according to Romania’s new draft energy strategy. The analysts’ scenario is based on the reduced consumption of fossil fuels.

“The production of natural gas will fall, after reaching a new high of 132 TWh in 2025 as a result of the Black Sea production, to 96 TWh in 2030 and 65 TWh in 2050. As with oil, the low price scenario forecasts a decrease of gas production to close to zero by 2045,” states the strategy.

Meanwhile, the government has approved the start of the deregulation of gas prices for households in April. Individual consumers will be protected through price regulation by the National Energy Regulation Authority (ANRE) to June 2021, meaning that costs will go up gradually.

Analysts say that by liberalizing prices for households, companies extracting gas from the Black Sea could have a stronger business case to sell the majority of their production in Romania.

Discussions have shifted towards offshore investments, and the prospect of shale gas seems to have been abandoned for good. American oil major Chevron, which had started searching for shale gas in Romania back in 2013, exited the country two years later.

Recently, the US ambassador to Romania, Hans Klemm, said that the company’s move had economic reasons.

“Just when Chevron was closing its operations in Romania, in 2015, I was arriving here as ambassador. What they told me at that time was that the economic situation did not allow the continuation of exploration plans for shale gas. So it was an economic decision,” said Klemm in April.

Chevron faced massive protests in the areas where it was looking for shale gas, with many fearing that such developments would pose serious risks to the environment.

Klemm said that he does not currently know of any company interested in developing shale gas locally.

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