04 May 2017, Sweetcrude, Houston — Romania’s multi-year delay in introducing new royalty legislation, combined with annual extensions to hydrocarbon windfall taxes implemented alongside price liberalization, has contributed to ongoing uncertainty in the country’s upstream sector.
Although successive governments have attempted to introduce legislation on a new royalty framework since 2014, when a 10-year stability agreement linked to the privatization of Petrom expired, no legislation has moved forward. The Finance Ministry, under the previous government in power until the end of 2016, announced in November 2016 that it had completed draft legislation drawn up with the International Monetary Fund (IMF).
In January 2017, Finance Minister of the new government, Viorel Stefan, announced that a finalized version of the new government’s legislation would be released in Q1 2017. This deadline was missed, and there is no guarantee that the government will meet its new target for the end of Q2.
The windfall taxes, including a 60% additional profit tax on gas production and 0.5% tax on non-gas hydrocarbon production, were originally set as temporary measures for 2013 and 2014, but have been renewed annually since 2015.
2014 legislative amendments that set the minimum calculation price at which producers’ revenue for non-household gas is sold on the competitive market to RON72/MWh effectively set a floor on the deemed sales price for tax purposes, and have imposed a significant fiscal burden on gas producers. Existing legislation implements the taxes up to the end of 2017, but given that price liberalisation is set to last until 2021, their future is unclear.
Details of the proposed royalty legislation under the previous government included maintaining a range of royalty rates similar to the existing regime, of between 3.5-13.5% on gross production, while offering reduced rates for offshore projects. Stefan similarly cited that reduced rates for offshore production would be included under the current government’s plan, and stated that a 20% additional tax would be imposed only on hydrocarbons not processed in Romania.
With Romanian refinery capacity covering just over 90% of estimated 2017 domestic Romanian production, some projects could see a significant tax increase if this measure is included. However, comments by Stefan in April 2017 suggested that the tax would be applied to profits from all projects, and that the rate would be higher for exported hydrocarbons and lower for those processed and consumed in Romania. The structure and magnitude of any future additional profit tax is therefore uncertain.