The voice of the entire
Upstream sector in Romania

Proposed changes to the onshore taxation regime hit the industry but also the prices on the Romanian market

imagineThe Romanian Petroleum Exploration and Production Companies Association (ROPEPCA) expresses its deep concern regarding the recent discussions held within the debates of the specialized committees of the Chamber of Deputies, regarding the tax on supplementary incomes obtained due to the deregulation of prices in the natural gas sector. Namely, on 27.11.2018, members of the Industries and Services Committee, together with those of the Budget, Finance and Banks Committee proposed to eliminate the possibility of deducting royalty from the above described tax and apply the tax to the unrealized reference price.

ROPEPCA believes that these possible decisions hit in the same time the Romanian natural gas extraction and processing industry and the pockets of energy consumers.

“Today, Romania's entire natural gas production, which ensures energy independence of more than 90% of imported gas, comes from the onshore deposits. Changes in the tax and regulatory framework of the onshore, upstream industry, unexpected and excessive in recent years, only endanger the indigenous petroleum industry as well as the investment climate, sending negative signals to the entire business environment on the lack of stability and predictability. ROPEPCA kindly requests the authors of the proposal modifying the mechanism of taxation applied to supplementary incomes to analyze the impact that it would have on the Romanian petroleum industry and remain at disposal, as a partner for dialogue as well as a representative platform of the actors that ensure Romania's energy security of supply, for information, analysis or discussions on the topic”, declares the President of the Association, Ms. Saniya Melnicenco.

The analysis carried out by ROPEPCA members briefly outlines the direct effects of the proposals to increase the tax burden on domestic gas producers:

  1. Material negative impact on Romanian gas industry and the wider economy: This new tax regime will negatively affect the viability of a major part of the gas industry in Romania, endangering future investments and therefore domestic gas production. It is important to note that investments in the oil and gas upstream industry in the past 5 years amounted to approx. EUR 6 bn. 
  2. Discouraging investments: Government takes a maximum of 80% of the supplementary income and companies should retain 20%. With the proposed change, the Government will take up to 18% as royalty and 80% as supplementary tax, leaving the companies with no incentive to further invest.  
  3. Taxing an arbitrary supplementary income considering a reference price set by reference to a sales price NOT realized by the Romanian producers of natural gas, is fundamentally wrong. Adversely affecting the private investment potential will generate lower revenues to the State Budget and will negatively affect the overall social and economic conditions, as the impact will cascade into the wider economy, leading to losses of jobs and a negative impact on GDP. 
  4. Price increase of natural gas: There is a high risk of natural gas price increases on the Romanian market as a consequence of the proposed taxation amendments. As further investments are discouraged, natural production decline will accelerate, and lower domestic production volumes will, in an expected stable demand environment, lead to price inflation and lower purchasing power.  The impact on vulnerable customers will be significant, since this category is already affected by an increased share of heating expenses within the total household budget.
  5. Security of supply negatively affected: By the envisaged changes, which increase the fiscal burden further, Romania becomes clearly the least competitive onshore gas regime in Europe. Such uncompetitive fiscal regime will lead to a significant reduction of investments in Romania.  Without massive investments, domestic gas production will decline further and Romania will have to rely more on gas imports, thus reducing energy security and weakening the balance of payments.
  6. Breach of the Romanian Constitution: The taxation of any unrealized income, on a discriminatory basis, is against fundamental principles of the Romanian Constitution. The proposed amendments to the onshore tax regime further worsen the obvious negative discrimination between Romanian producers of natural gas and other entities selling gas on the Romanian market, entities not subject to such taxation, hence breaching the provisions of art. 16, para. (1) of the Romanian Constitution, which ensures equality of rights. The imposition of a tax treatment that disregards entirely the economic and market conditions under which an economic agent carries out its activity is in breach of Art. 56 (2) of the Romanian Constitution, regarding the fairness of tax burdens.
  7. Conclusion: Any changes to the taxation system applicable to onshore Romanian gas production must consider the significant impact it has on the economic development of the country, the number of workplaces and the horizontal impact in supporting industries, as well as aspects of energy security in Romania and the impact on the final consumer of energy.

Background: Taxation of supplementary incomes was introduced in 2013 as a temporary tax aimed at protecting vulnerable consumers to the effects of the deregulation of natural gas prices. Initially, this additional tax applies to the price of more than RON 45.71 / MWh, in a rate of 60% applied to the difference between the selling price and that threshold. Earlier this year, the tax was increased to 80% for the price difference of over RON 85 / MWh, the initial difference up to this price being further taxed by 60%, the producers being able to deduct from this tax the value of royalties and that of the investments made. Extended from one year to another, the tax became permanent this year through Law no. 73/2018. Now, legislators came back on the tax, bringing it into the discussions held by the specialized committees.

 

About ROPEPCA

The Romanian Petroleum Exploration and Production Companies Association (ROPEPCA) was founded in November 2012, with the purpose of consolidating the image of the onshore upstream sector in Romania and of improving its relationship and communication with Government, regional and local authorities, with national agencies and with the general public. ROPEPCA is composed of 15 concession agreements titleholders. These agreements were signed by member companies with the Romanian state, based on the Petroleum Law in force. At present, ROPEPCA members hold the majority of the petroleum concession agreements for the onshore development and production blocks in Romania, representing for the years 2014-2017 cumulated investments of more than EUR 4 billion, contributions to the state budget of EUR 5.5 billion, and the creation and maintenance of 14,000 jobs.

 

Contact:

Daniel Apostol, Secretary-General

Tel: +40 372 160 137; Mobile: +40 732 999 353 Email: daniel.apostol@ropepca.ro

Anca Budu, Executive Administrator

Tel: +40 747 617 657 Email: anca.budu@ropepca.ro

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