2018 was a year dominated by discussions as to the operation and taxation of the offshore petroleum and natural gas sector. At the same time, there are certain decisions that influenced the activity of onshore operators, as such measures are to be applied in the close future. The Petroleum Exploration and Production Companies Association, ROPEPCA, is the main dialogue partner with the authorities and the main voice of the onshore segment in Romania. We talked to Saniya Melnicenco, acting president of the association, about the hot topics for ROPEPCA.
Among the most important legal amendments that had major influence on the business plans of onshore companies in Romania this year, it is worth mentioning the changes in Electricity and Natural Gas Law (through Law 167/2018), which are to become effective as of January 2019. Through this change, Upstream companies must sell 50% from the gas production on the wholesale centralized market. Non-compliance with this law may result into severe penalties. We consider that this is a legislative approach that does not comply with the principles of a functional market economy. To avoid misunderstandings, we must mention that we are not questioning the reasoning or the benefits of the existence of a centralized market, but we consider that adhering to it should be voluntary . A basic aspect of a free market is the freedom of choice.
In reference to a ensuring the framework for a functional market economy, this should be a priority for political bodies. Unfortunately, we are disappointed to see how the stimulation of budgetary revenues is done from a purely accounting perspective, all is analyzed rather from one year to another than based upon a medium- and long-term development vision. For example, we can mention the temporary introduction of the tax on additional revenues obtained as result of the liberalization of natural gas market, which, as of this year, is permanent, according to the law (Law 73/2018).
This approach has already discouraged many companies in the industry and made them leave Romania, while others consider that entering on this market is not advisable. Two thirds of the crude oil consumption continue to come from import, with country’s own onshore potential remaining unexploited due to the lack of investment opportunities and to obstacles met by current economic operators during their activity.
At the same time, the Offshore Law, recently adopted by the Parliament, has an impact on the entire petroleum industry, regardless of the operating area. I will not discuss the law itself, but I want to make an observation: the fact that this draft law was, during the entire legislative process, in the center of the public attention and generated so many discussions, this only shows us that the petroleum industry is of a major, strategic importance for Romania, of great interest both to the legislator and to the public.
The recent comeback of the oil price opens an opportunity window, which must not be missed. This is a beneficial context, in which investors’ interest, both in Romania and abroad, increased for the launch, as soon as possible, of the next licensing round for O&G concessions.
The success of this round mostly depends on taking measures to stimulate the exploration and development of new reserves: modernizing the Petroleum Law, clearly regulating land access, reducing bureaucracy and optimizing authorization processes. The regime of secret information places Romanian projects in the unfavorable situation of underfinancing and isolation in comparison with the globalized world, which is digitally connected.
Without such measures, Romania will remain non-competitive from investing attractiveness standpoint, compared to other countries in the region, such as Hungary, Croatia or Poland, which, despite the lower geological potential, succeed in successfully organizing tenders for exploration perimeters. There are no secret formulas, it is only transparency in the decision-making, legislative stability, efficiency of the regulatory bodies and awareness of the importance of this industry as a strategic part of the national economy.
Thus, results of the last round (organized in 2009) proved a very low success rate: out of the 19 onshore perimeters, only 6 undergo active exploration operations.
I can say that, from the practice of recent years, among the most obvious problems faced by producers is that of access to land, which has made it difficult to carry out petroleum operations and has blocked important investments in the exploration of mineral resources.
Results of the last round (organized in 2009) proved a very low success rate: out of the 19 onshore perimeters, only 6 undergo active exploration operations.
This is due to the relevant legislation, mainly to the governing law for the petroleum field, namely the Petroleum Law (238/2004). As it has not been considerably amended since 2004, we may say, for sure, that the law does not answer the current challenges of petroleum activities and does not offer a functional legal mechanism.
Operators informed authorities on numerous occasions about this, in order to point out the impossibility to timely fulfil works provided in the concession agreements.
The ROPEPCA, in close collaboration with the ANRM, has conceived a balanced proposal to amend the Petroleum Law, in a manner that could update it to today’s reality. At this moment, the amendment of the law is undergoing discussions and we are actively participating to constructive debates in this respect.
Some of the most important aspects treated by the project we proposed is acknowledging a basic principle, namely that petroleum operations are of public national interest. I would like to refer to other European jurisdictions, as well: in Norway, the relevant law provides that the management of country’s resources should be done to the benefit of the Norwegian society, as a whole; in Italy, the exploration of hydrocarbons is considered of public interest, by law; in the Netherlands, the exploitation of underground resources is of national interest from the spatial planning standpoint (Spatial Planning Act). Moreover, back at home, according to the draft of the National Energy Strategy currently in public debate, since September this year, the stimulation of long-term investments in the petroleum production field is intended, the document pointing out the importance of hydrocarbons in the entire energetic landscape for the next 30 years.
The project I was talking about earlier also addresses the land access issue. This balances the interests of owners and the interests of land users, by finally setting a fair payment of compensations mechanism in case of possible damages to crops, in case of exploration operations through seismic prospecting.
For us, active players in this industry, the absence of firmness and of a strong governmental initiative to promote this project is difficult to understand, as it might bring a net economic advantage to the entire country, both to the state budget through the increase of revenues from petroleum operations and to local budgets.
I must confess that, despite the joint efforts of industry representatives, as well as of competent authorities in the field, which proved to be open to proposals raised by experts in the field, we are witnessing the occurrence of legislative initiatives coming from a group of members of the Parliament that neither members of ROPEPCA association, nor representatives of relevant authorities were aware of their existence, not having been previously consulted. I am referring to a draft for the amendment of Petroleum Law which is now under legislative process in the Chamber of Deputies (PL-x 438/2018).
Based on my background on legal issues, please allow me to express my opinion on this draft law: it proposes a series of inexistent legal concepts which, after having analyzed them with several colleagues from other petroleum companies, we reached the conclusion that they bring more ambiguity and lack of clarity in the application of the Law, thus creating even more difficulties to the petroleum agreements titleholders. Whose interests are supported by such proposals? Clearly not the national interest of knowing and capitalizing the existent energetic potential to the benefit of the country and to support an industry sector with long tradition in Romania.
Among other operational issues that companies have, I may mention the lack of cadastral documents, of infrastructure for easy access, the absence of clear provisions as to the issue of permits, resulting into non-unitary interpretations and ungrounded requests. The permitting process for an exploration well may last from 6 to 18 months, and 18 to 25 endorsements are necessary, depending on the area and on the (in)existence of town plans. The long-term legal procedure (for example, compliance with the right of pre-emption according to Law no. 17/2014, of proper registration of the land) and the difficulty in obtaining from owners the real right to use the land necessary for the well and additional constructions result into well digging delays. By amending the Land Law (no. 18/1991), the obligation to remove the land from agricultural circuit was inserted, to allow building any constructions. This legislative amendment, effective as of 26 August 2017, extended the well digging authorization term by up to 6 months.
All these result into the non-compliance with project terms, delay in cash flow generation, significant increase of administrative costs (for cadaster, topography, dispute settlement etc.), which renders the economic model less attractive.
In spite of these operational difficulties, companies choose to come closer to communities where they carry out their activities through social responsibility projects: renovation and endowment of schools and kindergartens, systemizing playgrounds and sports facilities, medical offices, also, reorganizing green spaces and repairing roads. Our association’s members have invested over 14 million Euros in such campaigns with a positive social impact for the benefit of communities.
A high oil price at international level is not enough to attract investors to the Upstream sector. Investments need a stable and predictable legislative and fiscal framework. In this context we can see a high improvement potential. A recent study of the National Council of Small and Medium Sized Private Enterprises in Romania points out that 2,500 normative acts were issued during the first 100 days of this year, of which 217 have an impact on the Fiscal Code. Under these circumstances, any investment seems to be an adventure, especially in our industry.
Projects in the exploration and production industry take 10 years to be explored, and then development and production operations take place for 15 or even 30 more years, with huge investments. For example, the cost for drilling a well can reach up to 8 million dollars. The risk is huge, considering that on average only one well in four proves to be productive.
As we all know, risks in petroleum industry are high and even higher than those in other industries, because we can only assume what is found in the underground. In addition to such, let’s say, “subsurface” uncertainties, there is also the “surface” risk, respectively the legislative, fiscal, administrative system in each jurisdiction. In Romania’s case, the second category is of greater concern than the first.
The absence of a clear procedure to obtain the right to use the land to carry out petroleum operations resulted into hundreds of disputes pending before courts of law; this fact became notorious among investors, who must face legal issues for years, instead of working more on developing their business.
BRUA is, for sure, an important step in connecting the Romanian market to Western European markets. This project is essential for the future of Romanian Upstream industry and especially for the development of Black Sea resources.