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06 November 2018

The Oil & Gas Offshore Law: A Romanian Odyssey

Debate is raging about the Romanian "offshore" law setting out the legal framework for oil & gas exploration and production in the Black Sea offshore perimeters (the "Offshore Law" or the "Law"), fuelling political turmoil and deterring investment. After a failed attempt to pass the Offshore Law in summer, there are signs of much needed stability.

In July 2018, the Romanian Parliament approved the Offshore Law and sent it to the president for promulgation. The president asked Parliament to reassess the Law, pointing to the lack of long-term stability and predictability. On 24 October 2018, after reaching political consensus, the amended Offshore Law was approved by the Parliament and sent to promulgation.

The Offshore Law aims to fill a legislative gap, the existing legal framework being tailored mainly for oil & gas onshore operations. The complexity of offshore exploration and production requires a specific licensing and development regime as well as a stable fiscal policy, one that strikes a balance between the interests of the host state and the investments and risks undertaken by the investor.

Here is a brief outline of the main provisions of the Offshore Law:

Stabilisation provision

A key item in the debate, the stabilisation provision, was included in the Law as a last-minute negotiation item. It takes the form of a "freezing" clause, providing that titleholders of ongoing offshore concessions benefit throughout the lifespan of the concession from the royalty regime set out by the Law.

Progressive windfall tax

In addition to royalties ranging from 3.5% to 13% of the production value, offshore concession holders will pay a progressive windfall tax on additional revenues generated from the sale of offshore gas, ranging from to 15% to 70% depending on the gas price (i.e. the higher the sale price, the higher the percentage). The additional revenue is calculated as the difference between the average weighted offshore gas price, which shall not be lower than the reference price set by the National Agency for Mineral Resources, and RON 45.71/MWH, representing the 2012 regulated acquisition gas price, multiplied by the volumes sold. 
The value of investments in the upstream segment will be deducted from the windfall tax up to 30%, but will be "non-deductible" for profit tax purposes.
The funds collected from the windfall tax will be dedicated to investments in the gas distribution and transmission network, as well as other government investments.

Sourcing requirements

Concession holders will procure goods and services from Romanian or other EU economic operators at similar technical and financial conditions. At least 25% of the average annual headcount involved in the offshore operations will be Romanian citizens with local Romanian fiscal residency.
These restrictions apply not only to offshore investors, but also to their contractors and subcontractors involved in the design, execution and operation of the offshore facilities.

Increased turnover fine

Like onshore producers, offshore producers are obliged to sell at least 50% of their production on a centralised market (i.e. on OPCOM – the Romanian power exchange, and the Romanian Commodities Exchange) and in a transparent, public and non-discriminatory manner.
Failure to comply with this obligation will trigger a turnover fine amounting to 10% of the turnover during the year when the breach is acknowledged. It remains to be seen how this fine may be effectively applied, as a company's turnover is determined at the end of the financial year, meaning fines may not be applied until the financial statements for that year have been approved and audited.

Construction authorisation

Construction works and well drilling are subject to special authorisation by the Ministry of Energy and the National Agency for Mineral Resources. Special derogatory rules are set out for zoning and for historical monuments and archaeological sites.

Offshore concession holders enjoy a statutory right of passage over public property for the full life of the offshore operations, in exchange for a consideration determined by an independent valuator and subject to authorisation by the Ministry of Energy.

Labour regime

Derogatory rules are laid down with respect to the working schedule of the employees and the level of the overtime bonus.

Although much has been said and written about the Offshore Law, it remains to be seen to what extent it will boost the offshore sector. In the meantime, big market players have announced delays in passing investment decisions regarding Black Sea offshore investments.


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Further reading:

Romania to Introduce New Oil & Gas Royalties Regime