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    [NGW Magazine] Political risk rocks Romania’s Black Sea dream


This article is featured in NGW Magazine Volume 3, Issue 16 - Romania’s rich offshore deposits could make it a major gas producer but investors in the Black Sea are liable to continue kicking the can down the road.

by: Tim Gosling

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Top Stories, Europe, Premium, NGW Magazine Articles, Volume 3, Issue 16, Political, Romania

[NGW Magazine] Political risk rocks Romania’s Black Sea dream

Potential output of 170bn m³ over the next two decades has tempted oil and gas giants to the Romanian seaside. A report by Deloitte forecasts that investments of over $22bn are likely by 2040. 

The state should also enjoy the Black Sea bonanza. The budget is likely to see an extra $26bn in revenue, the consultants suggest; gross domestic product will get a $40bn boost.

However, final investment decisions (FID) on the major Black Sea projects have been delayed for years, as Bucharest has struggled to prepare a regulatory framework setting out conditions and tax rates for mining the seabed. A legislative bill was suddenly approved by parliament in July, but it is unlikely to speed things up.

Romania’s upper and lower houses of parliament both approved an offshore law that will apply the same progressive royalty regime of 3-13.5% – depending on yield – to Black Sea production as operates for onshore. A progressive windfall tax of 30-50% linked to the Austria-based Central European Gas Hub benchmark prices is also included.

The last-minute addition of that windfall tax, as well as several other conditions, was a shock to investors that have been locked in negotiations in Bucharest for years. President Klaus Iohannis swiftly sent the draft bill back to parliament for review.

“Iohannis warned that the legislation may present a risk to the fiscal stability of investors in offshore projects,“ says Eugenia Gusilov at the Romania Energy Center.


Those investors have expressed fury, insisting they were not consulted over the additions. The Romanian Black Sea Titleholders Association (RBSTA) complains that the higher infrastructure needs of offshore projects means they need a lower tax rate than onshore. In fact, the Offshore Law does also omits the 60% capex deduction offered to onshore investors, points out Tamas Pletser, an oil & gas analyst at Erste Bank’s Hungarian unit.

RBSTA adds that a stipulation that at least half of the gas produced offshore must be traded on Romania’s centralised platform makes financing difficult by limiting bilateral contracts. The lobby group insists on reopening negotiations with Bucharest, warning that the bill could “negatively impact” investment plans in the Black Sea.

Neptun, a joint project of ExxonMobil and Austria’s OMV, is the furthest forward of the major developments off the Romanian coast. The investors have previously said they hope to announced the long-awaited FID by the end of 2018, but that now looks unlikely.

OMV’s CEO Rainer Seele has fought a bitter battle with Romania as negotiations have dragged on. He recently told shareholders that he is "not happy" with the new law, and that OMV and Exxon would need "closer co-operation" with the Romanian authorities if they are to take an FID on Neptun.

That is the key point, according to analysts. Despite RBSTA’s obligation to complain about the tax rates, the real issue is the lack of transparency and consultation, and the huge risk posed by Romania’s policy instability. 

Just a month before the law was approved by parliament, Liviu Dragnea, head of the ruling Social Democratic party (PSD), was handed a jail sentence for corruption. While banned from holding an official government role, Dragnea has ridden the populist bandwagon to make himself the most powerful man in Romania, and the conviction has provoked a bitter twist in an already long and vicious political fight in Bucharest.

The years of political tussle have hamstrung Romania’s economic development and landed numerous political figures in jail. Demonstrations both for and against the current government have brought tens of thousands of protestors to the streets in recent weeks.

One of Dragnea’s biggest foes is the ethnically-German president Iohannis, whom he accuses of being tied to a secret “deep state”: a shadowy cabal made up of the political elite and the intelligence services. Their mission, he insists, is to undermine the PSD via claims of corruption, in order to protect a strategy allowing Western multinationals to loot Romanian natural resources.


It is an ongoing saga that haunts investment in the country. The confidence of foreign investors in Romania has plummeted. The Foreign Investors Council (FIC) Business Sentiment Index, published in April, showed that around 90% of companies surveyed find fiscal and regulatory policy unclear and non-transparent. Little wonder, the FIC says, that Romania is lagging the rest of the central and eastern European (CEE) region for foreign direct investment. 

The law is perhaps the highest profile symptom of this political crisis. While the conveyer belt shipping political figures to jail has made many voters happy it also hampers policy-making. Politicians have been wary of signing off on such a vital piece of legislation, which will be central to the country’s economic fortunes over the coming decades.

Without an official title, it will not be Dragnea’s signature on the bill. However, what better way to boost his populist support than slapping a steep bill down in front of international oil and gas majors? 

There was significant criticism from both onshore producers and the wider population of earlier drafts of the law, which would have exempted Black Sea producers from the windfall tax. The PSD government clearly hoped to score points to help it in its ongoing political scrap by overturning those conditions, as well as insisting half of the gas should be sold in Romania. 

After the revised legislation was pushed through parliament, Dragnea was quick to point out the benefits. The legislation will make Romania “one of the few countries in the world that is energy independent,” he pronounced. “We could not accept that Romania continue to be dependent on the Russians.” 

“The main concern for the offshore producers is the lack of sophistication and transparency,” suggests Gusilov.

The political tension continues to build. Over 450 people were injured during anti-government demonstrations in Bucharest in early August. Dragnea has responded with claims that “four foreigners” attempted to assassinate him last year, and that the demonstrations were sponsored by multinational corporations. Unsurprisingly, in the midst of such building chaos, there is little clarity on what will happen with the law now.

“It’s the twelfth hour for this legislation,” states Gusilov. “It will oversee investment and taxation of these huge resources in the Black Sea for years to come.” 

Upper hand 

Analysts suggest, however, that the investors hold most of the cards. The negotiation process is very “asymmetrical” says Gusilov. The titleholders in the Black Sea are powerful and organised, she says, while Romania’s authorities are way behind in terms of expertise and resources.

“These companies make sure they have significant lobby power before they spend anything,” notes Pletser. “That’s in full swing now. Neptun is worth around $6bn. The likes of Lukoil and others will potentially push total investment to $15bn. Romania has to consult them.”

The advantage Romania holds is that it is unique in the CEE region in holding large gas reserves, and investors are keen to grab a slice of the pie as European demand and prices are on the rise, and the EU encourages the development of alternative sources to Russia’s dominance of CEE energy markets. Next door in Bulgaria for instance, the potential is small, with deposits mostly oil. 

So will the offshore law wreck Romanian dreams of becoming Europe’s third largest gas producer, and the region’s only homegrown alternative to heavy dependence on geopolitically-charged Russian supply? 

“That’s the million dollar question,” says Gusilov. “Neptun has threatened they may not take an FID if the offshore law goes through.”

“I don’t think we’ll see an FID from Neptun this year,” says Pletser. “The investors have no time constraints and may wait to see if they can get better conditions.

A company the size of ExxonMobil could even simply decide to sell, unless Neptun’s potential yield is truly massive. “The details regarding how promising the field is have never been released,” the Erste analyst notes. 

How the upstream reacted to the new law

The CEO of Black Sea Oil & Gas, Mark Beacom, said: “We’ve seen words today that we’ve never seen before. There have been many successive governments that we have been working with, we’ve been given assurances, and those [assurances] are now being broken…. I can say very clearly that what we have on the table today puts us in a much worse situation to the possibility of taking an FID than we were two years ago. I am sure that was never the intention in this parliamentary meeting.”

Last November, the European Bank for Reconstruction and Development bought a minority stake in BSOG for an undisclosed sum; it did not provide a comment to NGW.

OMV Petrom CEO Cristina Verchere, said: “I think that my colleagues have commented on the fundamentals of what we have seen today, that I want to come back to the fundamentals of this: Romania sits on a huge opportunity and ability to develop its gas resources in the Black Sea…  One of the key aspects of legislation to enable that is the offshore law. As my colleagues mentioned, what we have seen today is more detrimental to the ability to move investment forward in Romania."

The head of ExxonMobil Romania Richard Tasker said: “The assessment we have made is that this constitutes a significant increase in the level of taxation…. If my understanding is correct, the current form of the provisions will make it more difficult for the investors to make a positive FID.”

One company told NGW July 13 that there was no restriction on the subsequent export of half the gas as long as it had first been sold within Romania. While the law seems to go against the European Union's desire for energy security, countries are free to set their own taxes.