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    Romania: How the Explorers & Producers See It

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Summary

There is uncertainty regarding the fiscal framework for oil and gas, says Alexandru Maximescu, Director of Corporate Affairs, OMV Petrom.

by: Drew S. Leifheit

Posted in:

Top Stories, Security of Supply, Romania

Romania: How the Explorers & Producers See It

Representatives from explorer and producer companies in Romania recently offered their views on natural gas extraction in the country at Interconnecting Europe: Natural Gas in Romania.

Alexandru Maximescu, Director of Corporate Affairs, OMV Petrom, said he agreed with the sentiment, expressed by MEP Norica Nicolai, that Romania's voice is too soft in Brussels.

He said, “In this respect, a first, decisive step was done last year when the potential of the Black Sea was mentioned in the Energy Security Strategy of the European Union. This is the first recognition of the potential of Romania.”

Fiscal frameworks, he said, are one of the success factors of the oil and gas industry, which he said finds itself at a turning point. “On the one hand, we have a very challenging market; on the other hand, there is uncertainty regarding the fiscal framework for oil and gas.”

According to Mr. Maximescu, there have previously been discussions regarding Romania's current royalty system in 2014, and about the need for a new taxation system. One clause, he explained, provided a 10-year period of tax regime stability for investors, applicable to exploration and exploitation of oil and gas.

Of that, he said: “This is just an additional stability clause to the already existing stability that is provided by the concessions agreement that all oil and gas companies have signed with the Romanian state."

The royalty system, he recalled, had not expired at the end of 2014, and companies continue to pay the royalties according to the provisions of their concession agreement. “This provision has to be understood as a legal guarantee, just like the stability clause whereby taxation must remain fixed throughout the period of the concession agreement.”

He said this is an international standard, nothing unusual, meant to safeguard the state's interest in attracting investors in a complex and capital intensive industry. “This also provides assurance to investors that they are covered in this challenging environment,” he added.

Mr. Maximescu said this stability has had positive results in the last 10 years, in contrast to Romania's high declines in production following the fall of the communist regime.

“Romania has stabilized the production, made small and medium discoveries, forged for new technologies, gone beyond normal exploration to frontier, onshore as well as offshore.”

New investors, he explained, had come to Romania; OMV Petrom has had fruitful partnership with Exxon-Mobil, Repsol, or Hunt Oil to name a few.

He continued, “Several international service providers had placed operations in Romania, like Schlumberger."

Mr. Maximescu cited a September 2015 study from international consultancy Deloitte that calculated the effective level of royalties and similar taxes applicable to the upstream sector in Europe. “It shows that the average effective royalties and similar taxes in Romania, including the special construction tax, the 60/40 tax on gas, and the 0.51 on crude oil, brings the taxation to roughly 15%, whilst the average in Europe is 9.3%.”

Moreover, he observed that the overall trend in Europe is downwards, while in Romania taxation may be going up.

“Some member states in the European Union have adopted measures in order to reduce the tax burden on companies in this very challenging environment,” he explained, citing Italy, UK and Germany.

The Romanian percentage, he said, is explained by the continuation of the 60/40 tax on additional income coming from gas liberalization.

The oil and gas sector, he noted, is crucial to the Romanian economy.

“It has enhanced the security of the energy supply in Romania, the economic multiplier effect on Romania's GDP, state revenues, national employment. The oil and gas industry is one of the main employers in Romania, providing up to 25,000 direct jobs in exploration and production–the largest in the sector in the European Union.”

Every euro invested in oil and gas in Romania, said Mr. Maximescu, generates €2.30 in the Romanian economy. “Every job in oil and gas is indirectly creating 4.3 other jobs. Indigenous production is improving Romania's balance of trade.”

Still, he said the prolonged uncertainty regarding the fiscal framework comes at a very challenging time.

“In this respect,” he said, “we consider that the approach of the government should be one of following a path of stability, which will allow for the continuity of domestic production and its associated benefits, as well as providing a balance between necessary state revenue–a fair share for the government, and on the other hand, creating incentives for companies to invest further.”

He concluded: “This crucial decision that we all have to take in the forthcoming months will bear consequences for the next decades.”

John L. Knapp, Managing Director, Exxon-Mobil, also weighed in on E&P in Romania.

On behalf of the Romanian Black Sea Titleholders' Association, which he chairs, he said there was opportunity to share the perspective of investors involved in exploration activities offshore Romania, regarding the potential development of new energy sources from the Black Sea.

The Romanian Black Sea Titleholders Association, he reported, holds that the Romanian part of the Black Sea is a “promising yet challenging area in terms of its potential energy resources.”

“Understanding the risk in its different forms is one of the most important parts of a successful development for new offshore fields,” Mr. Knapp said.

He also said it is important to note that projects related to offshore investments in Romania's Black Sea are complex and characterized by a number of specific challenges. “First, most of the ongoing projects are still in the start-up stage, still in the exploration phase as the Romanian Black Sea is virtually an unexplored basin.

“The investors take all the risk and cost of the exploration phase, which can last 10 years or more–this is the period required for seismic studies, drilling, evaluation and assessment. All of these activities are required before production can begin.”

Second, he said offshore investments require cutting-edge technology and are very costly; developments in the Romanian Black Sea have the extra complexity and cost of access and mobilization due to the challenge of transiting the Bosphorus and Dardanelles straits.

Third, he continued, the upstream transport infrastructure still needs to be built. “In this context, it is important to note that the development work undertaken in the event that commercial volumes are confirmed will not benefit from any existing upstream pipe and, on the contrary, will add additional costs required to provide transportation to shore via subsea pipelines that could be 200 kilometres or more.”

Fourth, according to Mr. Knapp, there is limited geologic knowledge of the area.

“Exploration drilling, especially in such frontier areas as the Romanian Black Sea, holds no guarantee of success, even with the significant investments that are involved,” he explained.

Even if there were successful exploration drilling results and discoveries, he said, there would be significant challenges to be overcome in order to develop a commercial project. “If exploration activity eventually proves the existence of sufficient hydrocarbon resources that can be developed economically, the technological demands of developing deepwater hydrocarbon production in the Black Sea will be as challenging as anywhere in the global oil and gas industry,” he said.

Now, he reported, investors are providing upfront capital and need to receive an acceptable return on their investment, consistent with the risks.

“Such investments require a stable regulatory and fiscal environment over the entire lifetime of the investment. Without regulatory stability, investment decisions can be significantly jeopardized. A regulatory framework to encourage development of such new resources will ensure additional revenues by bringing additional volumes to the market.

“It is our view,” Mr. Knapp continued, “that the magnitude of the investment specific to offshore projects will have a positive impact on the Romanian economy overall. Investors' appetite for a sector capitalized by high expenditures, high operational costs and long investment cycles is directly correlated with the overall attractiveness of the fiscal and regulatory regimes in place. Successfully unlocking the Black Sea's energy resources requires world-scale investments and the use of world-leading technologies–if we get it right, it could place Romania at the forefront of developments in the entire Black Sea area.”

The Black Sea Titleholders Association, he said, supports the strengthening of the Romanian energy sector and promotes strategic planning in the field. “The Association is committed to the Black Sea's success in terms of developing Romania's energy resources and we are once again expressing our hope that all of these aspects will be recognized and appropriately reflected in the Romanian legislative framework that is currently under discussion.”

According to Dan Stefanescu, E&P Director, Romgaz S.A., Romania is in need of additional gas storage to be able to deal with unforeseen circumstances. “While it is true that we have such storage facilities for oil, for natural gas we don't have such storage facilities,” he said.

“The role of a storage facility is to take over and equilibrate the national transport system, to provide, in the end, balance in our daily comfort, in industrial consumption as well, to allow us to have this strategic component to be able to supply natural gas in case of extraordinary events or force majeure,” he said, explaining that up to the present time, building such facilities had been the responsibility of the state.

-Drew Leifheit