The lack of clarity and predictability of the regulatory environment in the gas field persists

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The lack of clarity and predictability of the regulatory framework for natural gas persists, with negative impact on both the investment and production, and national energy security, said Artur Stratan, member of the Board of ROPEPCA – the Romanian Petroleum Exploration and Production Companies Association, at 2017 Energy Strategy Summit, held in Bucharest.

Here it is the full transcript of Mr. Artur Stratan’s intervention at 2017 Energy Strategy Summit.

Good afternoon, I will try to paint a picture of the challenges and latest developments in the Romanian Upstream sector. I would like to start with NAMR’s new methodology for calculating the benchmark price of gas in order to determine the royalty value. From our point of view there is no need for a reference price in the calculation of the royalty as this should be charged just like anywhere else in the world, as a percentage of the sold gas’ price value. Basically, imposing a reference price makes us question whether the Romanian gas market was deregulated or not.

Reference price for gas

Two years ago, NAMR commissioned two studies at the University of Oil and Gas, because they needed academic support in developing these new methodologies. Studies have been received, there was an embedded analysis at the NAMR and afterwards they consulted us, at ROPEPCA. We expressed our point of view and issued a letter to emphasize our position on the subject. In short, the study recommends three methods of calculation. One would be to calculate an average of three or four European gas hubs, the latter would be using a Platts quote, which is an international quote, and the third solution would be to let ANRM itself establish a calculation formula. This would be similar to what has been done until now – a basket proportionally composed of a domestic production share and an imported gas share. Our recommendation was for the third solution, because we believe it would be the most appropriate. We cannot accept international quotations in the calculation of the reference prices of gas, because Romania is a disconnected market. Despite all the goodwill and all the normative acts at national and European level, and even though everyone wants to integrate and interconnect Romania, this still remains a goal. For now, we are not connected with no countries. Moreover, we are connected more for gas imports rather than for exports. As long as we are an atypical country, we can talk about a national sale price of gas that is totally disconnected from the European international price.

Rewriting the Oil Law

Another initiative of the Association is the rewriting of the oil law. We had a very good collaboration last year with both NAMR and the Ministry of Energy. We took big steps that year and had an unexpectedly great progress. The problem that we as an association and as an industry have every year in Romania is that the institutional memory is not necessarily zero, but it is very-very limited. The moment the government is changed we basically have to start all over again. And that happens once a year if we are fortunate, twice a year if we are less fortunate and, as a consequence, we have to take it from scratch and to resume dialogue with all the ministries, all associations, all organizations and agencies. We have to explain them again who we are, what we do and what we want to do in this country, and why the industry must survive. Mark Wagley has already presented the impact that the investment has on the maintenance and creation of new jobs, the direct impact on the industry, but also the huge impact on support and side industries. If you are interested you can go on ROPEPCA’s website where you will find an interesting study conducted by KPMG. You will be surprised by the results mentioned in that study.

Concerning the oil law, we were 100% on board with the proposals made by NAMR, and NAMR agreed 100% with the proposals put forward by the association. Both us and NAMR forwarded this proposal to amend the Petroleum Law to higher forums, namely the Ministry of Energy, which alone has the right to propose legislation. Meanwhile, the government has changed and, as you have read in the press about the oil law, so have we.

Fiscal regime

As for the tax system, there is a study made by Deloitte 3 years ago, a study that we have updated this spring, in March. What are the three important elements?

First, in time of crisis, when oil prices fell worldwide, all EU economies have adjusted their policies and their level of taxation to enable the industry to survive, take a breath, in order to continue with the investments as planned, even at a lower level. The investments in this industry are huge, we are talking about hundreds of million or even billions or tens of billions of euros, if the projects are more complex. I kept saying it over the last five years and I will carry forth: all these are long-term projects, 20-25-30 or even 40 years. Everyone must understand and respect the sanctity of the concession agreement in this country. The moment you as a country invited me as an investor to come and invest here, you propose a tax regime that is mentioned in the concession agreement and everyone should respect it, the concessionaire as well as the Romanian state. Everyone makes economic calculations related to the quotation of oil, the price of crude oil, natural gas and so on. No one can break this pattern or ignore the constraints of economic calculation. The state cannot come later to increase the tax burden by changing the tax regime for that project, or that project will die! The state reserves will remain unexploited, and the investor, in turn, will record a huge loss and will have to stop the project and leave the country with a huge loss.

The first thing you have to note in this regard is that the EU countries have adjusted their level of taxation to allow the industry of oil and gas to survive. What did Romania do? It raised it! The level of taxation in Romania reached 17.5% in 2016. It may seem little, but it is huge compared to Europe, leaving aside Groningen, the giant gas reserve in the Netherlands. In 2015, the level of taxation in Europe was 7.9%, as you can notice there is a huge difference.

DOWNLOAD THE PRESENTATION OF ARTUR STRATAN

The second thing you need to keep in mind. We have in the presentation a slide where you can see, in light green, the level of royalties which were paid, and in dark green the famous additional tax price for natural gas. In blue, we have the special constructions tax, which disappeared on January 1st 2017. But, in the meantime, the Industry and Services Commission from the Chamber of Deputies recommended the increase of this tax – the windfall profit tax – from 60% to 80% of the quantities of gas which are sold at a price higher than 85 lei MWh. You probably have never seen this chart and you may not have ever thought this was possible. Currently, in Romania, the “windfall profits tax” is greater than the royalties we paz. It sounds like a paradox, but it is not. This is real and it is sad that this is happening in Romania.

In the analysis conducted by Deloitte three years ago, experts found it appropriate to divide producers in the EU in two categories: countries with an average production of less than 40 barrels per well per day, and countries that have higher production. Romania was included in the category of production under 40 barrels per day, and the report was made comparing the countries within the same production category. Now, in order to make our arguments even more obvious you can see on this slide the EU countries and their level of taxation. It shows very clearly how countries have reduced the level of taxation and Romania, on the antepenultimate position, has raised it. As you see, Romania is at the right end of the scale, so we have one of the highest taxation rate in the EU. It is normal? Certainly not. As Ms. Florina Sora from NAMR previously said, we need a healthy and favorable investment framework. We need to attract new investors in Romania and the capital will certainly not come if we continue to impose this huge level of taxation.

Amendment of the Gas Law 123

We have come to the Government Emergency Ordinance 64, amending the Gas Law 123 in order to establish the famously windfall profits tax on gas as permanent. This was done against good recommendations issued by the NAMR and ANRE, and the Ministry of Energy and our association. We have sent a very elaborate letter of position which presented many arguments why this should not happen. Despite the current negative opinion, the Commission for Industry and Services, together with the Commission for Budget and Finance of the Chamber of Deputies signed the report which led to the promulgation of the legislative amendment. Was there any deliberate consultation with the industry? Of course not. We have tried and still do, to understand what were the reasons, why the Commission of Industry and Services chose to raise this additional tax, moreover, to make it permanent.

Parliament called to discuss again the taxation of additional revenues in the natural gas sector

At the beginning of the economic crisis in 2008-2009, we have tacitly accepted the 60% tax for gas and the 0.5% monopoly tax for oil, because the economic situation was very difficult. But all of these were temporary measures which were supposed to be taken for a year. They were, however, extended for another year and another year. The numerous governments that have been at the helm of the country have promised us that this tax is temporary, and that it will – naturally! – disappear. Not only did it not disappear, it was made permanent! We perceive it as a penalty, although many people are reluctant to pronounce this word. We feel punished by the introduction of this completely abnormal tax.

I will not talk about offshore because our organization only handles onshore. However, we begin to have serious doubts that the famous Black Sea gas reserves will be produced in the coming years, given the recent legislative changes. No one can accept such brutal state intervention in the formation of gas prices and in the mechanism from which an oil company can benefit and get the real or international price of gas. This is agreed in the concession agreement. There, a very clear clause shows, in black and white, that every producer, every license holder has the right to use the total quantity of oil and gas it produces. This does not happen in Romania. Certainly, in the coming months we will clarify the legal aspects. Not to mention that these measures are a masked way of preventing gas exports from Romania. These exports will certainly not physically happen in the coming years.

The State commits to respecting the fiscal stability in Romania, but it always fails to do so. Our perception, given the dialogues we had with various entities and authorities of the Romanian state is that there is a lack of focused effort to establish a tax system.

Everyone talks about a potential change related to royalty level. This is 100% in ANRM’s jurisdiction. Could there be an increase in the future? Yes. The 40% oil tax, proposed last year by the Ministry of Finance is 100% in its jurisdiction. Could they propose it further and impose it on the oil industry? Surely. The windfall profit tax was promoted and proposed by the Committees of Budget and Finance, respectively of Industry and Services, in the Chamber of Deputies. We therefore have a third entity in charge of increasing the tax burden for the oil and gas sector. What is surprising is that none of these entities talk to at least one of the other two, to align and to calculate which is the “total government take” – the total amount that an oil company contributes to the state budget, under any form. There was a pale initiative from the Ministry of Economy in February this year. We were asked through a formal letter to provide a “spread sheet” which has to contain absolutely all the fees that an oil company pays to the central budget and to the NAMR, ANRE – absolutely all the fees paid: for permits, for authorization, for licenses, for any operation. We delivered it. To our knowledge, three large companies in Romania supplied this information. We have no idea as to what happened next. Perhaps there was a good intention from the Ministry of Energy to establish the exact level of taxation and which is overall tax burden of a company in Romania. We cannot say whether the royalty taxes will increase in the future or if the Ministry of Finance will further promote that oil tax. For now, we live with the reality of windfall profit tax, which does not favor us at all.

Trading natural gas on centralized markets

The obligation to trade full quantities of natural gas produced on the centralized market was already discussed. In this regard, the people does not want to understand that trading on an exchange market is a right, not an obligation. It cannot be an obligation. As long as there is an European Directive which explicitly allows all bilateral agreements between the parties for selling natural gas, there can be no restrictions in Romania. How is Romania special compared to any other EU country? It is very difficult to understand. Companies that have gas marketing departments know very well how hard it is to create and how many years it takes to build a sustainable portfolio of customers who purchase gas through bilateral contracts. Moreover, as the President of the Romanian Commodities Exchange said, they think that if the Romanian state will license a single operator, namely OPCOM, to be the natural gas trading operator of the exchange, this is nationalization. And so it is. The moment you enter the courtyard of a private entity and you ignore the fact that over 90% of the gas is traded on RCE, the moment you impose this obligation and move everything from the RCE to OPCOM, indeed, it could be called nationalization. Moreover, the Competition Council and DG Energy have decided against licensing a single trading platform and the Regulation 1227/2011 of the European Parliament on wholesale markets stipulates the same. In February, when they began to discuss the introduction of these changes about trading on the stock exchange, OPCOM said that it has a functional trading platform of electricity, but it is not operational enough given the high volumes of gas expected to be sold. They promised that in six months they might be able to come to grips with all these mechanisms and trading tools. Our position is that they will need at least one year, and that six months will certainly not be sufficient to put in place all the necessary mechanisms.

Finally, the lack of clarity and predictability of the regulatory framework for natural gas persists, with negative impact on both the investment and production and national energy security.

There are no market opportunities. Everyone is looking forward to NAMR’s 11th bidding round for exploration blocks to be launched and then another round for marginal fields. We have expected this to happen for years. It has not yet happened, and the main argument was that they were waiting for the completion of the fiscal regime for the oil and gas industry. This was not done. The PSD government program forecasted that by the end of the first trimester this year the fiscal regime will be completed. It did not happen. So, with apologies and explanations another year goes by and the round is not released. ROPEPCA has been proposing for the past 3-4 years to launch this round even under the old tax regime, as time passes and the state loses investments, jobs and possibly an early production of oil and natural gas.

ROPEPCA was an active participant in drafting the national energy strategy and, sadly, we see that the document was placed in an endless round of internal reviews by various ministries. Meanwhile, the government crumbled to dust, and the same will happen to the national energy strategy, given that, as I said earlier, there is no institutional memory in this country. We wanted this national strategy, in the form it was proposed and developed, to be released because an imperfect law is much better than no law at all. This strategy is a perfectible document, which can be further improved.

We, in the oil and gas industry, stress on the same points we have emphasized for years: transparency, stability and predictability. We may add, this year, the need for existing of real consultation and dialogue.

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