Romania to Strengthen Royalties Payments for Oil and Gas Operations

May 15, 2014

Romania’s upstream oil and gas industry currently benefits from an attractive fiscal regime; however, significant changes are expected in the medium term as royalty-stability agreements and temporary taxes expire, says a new report from research and consulting firm GlobalData.

The company’s report* states that one important change due to occur in Romania’s fiscal regime is an increase in royalties. The country’s current royalty rates of between 3.5% and 13% 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.

According to GlobalData, Romania’s royalty system results in an average rate of approximately 7% to 8%, which is expected to climb to at least 10% in a new framework that will be introduced at the start of 2015.

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.

Scargill continues: “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.”

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.

Source: Global Data, 2014.