Report: Romania could increase royalties for oil and gas to at least 10% on average next year

Royalties received by the Romanian state from companies that extract the country’s oil and gas resources are expected to go up from an average rate of 7 to 8 percent to at least 10 percent, starting 2015, according to a report from research and consulting firm GlobalData. The country’s current royalty rates of between 3.5 percent and 13 percent were introduced in 2004 and were covered by a 10-year stability agreement. Since this agreement ends at the end of 2014, the Romanian government is seeking to raise the royalties received from oil and gas production. The increase in royalties would impact mainly OMV Petrom, which is the largest integrated oil and gas company in Romania, but also state-owned gas producer Romgaz. Will Scargill, GlobalData’s Upstream Fiscal Analyst, says that despite this expected increase in royalty levels, it is likely that the Romanian government will set different rates for onshore and offshore fields. “This will allow the country to raise its take from onshore production, while at the same time offering an attractive climate for exploration in the Black Sea, where costs are high. This is particularly the case in deepwater areas. Different rates may also be set for unconventional operations in order to incentivize exploration of shale plays,” the analyst says. GlobalData believes that there is also potential for additional revenue-raising measures. Oil and gas windfall taxes that were put in place in 2013 will expire at the end of the year, reducing government revenue. This could in turn tempt policymakers to introduce permanent taxes on oil and gas production, particularly as the country is midway through a deficit-reduction program. “Consultations with oil and gas companies could lead to a compromise scenario, whereby royalties are raised to a smaller extent and an additional tax on profit from oil and gas production is introduced. Additionally, corporate income tax in Romania is significantly lower than in many other countries. Investors would much prefer an increased tax on profits, as opposed to an increase in royalties, because while costs and losses are deductible for the calculation of income tax, royalties are payable on gross production,” Scargill explains. While these changes will lessen the attractiveness of Romania’s upstream fiscal regime in the medium term, the negative impact on the sector’s investment climate is expected to be limited, according to GlobalData. Andrei Chirileasa, andrei@romania-insider.com