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Long Awaited Amendments to the Offshore Law Approved and Published

Long Awaited Amendments to the Offshore Law Approved and Published

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On 25 May 2022, Law no. 157/2022 („Law 157/2022”) amending Law no. 256/2018 on certain measures necessary for the implementation of oil operations by offshore oil perimeter owners (“Offshore Law”) was published in the Official Gazette of Romania no. 516 and entered into force on the same date.

Law 157/2022 is aimed at launching strategic projects for the development and exploitation of natural gas in the Black Sea in order to increase energy security, reduce dependence on imported gas and ensure the transition to clean energy sources.

Although Law 157/2022 is intended to amend the Offshore Law, it is noteworthy to mention that it also introduces provisions applicable to onshore perimeters, as shown below. 

The key amendments brought by Law 157/2022 to the Offshore Law are briefly presented below.

Regulation of the tax regime for onshore oil perimeters deeper than 3000m

  • Law 157/2022 introduces the notion of "deep onshore oil perimeter" defined as "an oil perimeter located on land, whose area corresponds to the surface projection of the contour of the part of the earth's crust within which exploration, development, exploitation or storage works are carried out over a depth interval of more than 3000 m, as well as the areas necessary for the oil exploration, development, exploitation, storage and transportation".
  • The notion of “upstream investment”, “deep onshore deposit”, “oil agreement on deep onshore oil perimeters”, and “deep onshore works” have also been introduced and defined.
  • The production from the deep onshore oil perimeter will be subject to the same tax provisions as those set out in the Offshore Law, as amended, for the offshore perimeter production, different from those applicable to onshore production from deposits located at less than a 3000m-depth.

Amendments to the taxation of additional revenue 

  • Law 157/2022 redefines additional revenue as the difference between the weighted average price of natural gas sold from its own domestic production from offshore and/or deep onshore perimeters, from which transportation, distribution, storage and other logistical costs will be deducted to the extent they are borne by the oil agreement owner, and the minimum base price of the calculation range corresponding to the price grid, which is multiplied by the volumes of gas sold from own domestic production from offshore/ deep onshore perimeters.
  • The additional taxation below the price level of RON 85/MWh has been removed.
  • The provisions relating to the use of the reference price for determining the calculation basis of tax on additional revenue have also been repealed.
  • The maximum level for deducting upstream investments in order to determine the additional tax has been raised from 30% to 40%.
  • The tax on additional revenue is calculated on the basis of a tax rate established by the law in the form of a grid (g., 15% if the prices range between RON 85/MW and RON 100/MW) and a calculation formula described in the Annex to Law 157/2022.

Sale of hydrocarbons on the local market

  • Law 157/2022 repeals the restrictions on the sale of hydrocarbons, the agreement owners and their affiliated economic operators having the right to freely trade the hydrocarbons produced from oil perimeters at prices and in quantities established them.
  • Also, as of 1 January 2023, oil agreements covering offshore and deep onshore oil perimeters may not be subject to restrictions on price, trading, offering and/or sale of hydrocarbons, except for the national and European legislation.
  • Thus, Law 157/2022 allows for the possible temporary restriction by the Government of hydrocarbons prices and sales for the quantities necessary to ensure the consumption by household customers and producers of thermal energy for the population, as well as those necessary to meet the obligations assumed under the European solidarity mechanisms provided for under European regulations. Such a measure will be applied proportionally to the total quantities of domestically produced natural gas.
  • Bilateral contracts for the trading of gas exploited from offshore and deep onshore oil perimeters shall be notified to the Romanian Energy Regulatory Authority for monitoring purposes, in order to protect Romania’s energy security, at the latest before they take effect. The quantities shall first be offered to the Romanian state, and in case of refusal, they may be sold to third parties at a price at least equal to the price offered to the Romanian State. 

Maintaining taxes at the contracted level

  • The tax and royalty regime applicable to exploration, development, exploitation and abandonment activities shall remain unchanged, as provided under the oil agreements and for their entire duration and may not be amended.

The amendment of the royalty and tax regime presupposes:

  • the introduction of new royalties, contributions, taxes and duties, tariffs specifically or disproportionately applicable to the oil sector.
  • the increase in the percentage rates of oil royalties or the modification of the gross production thresholds related to these rates, set forth in each oil agreement on 1 January 2023, or the modification of the tax bases or the calculation method of oil royalties due on 1 January 2023 for oil exploitation from oil deposits, regulated by Law No 238/2004;
  • the increase in rates, modification of tax bases or of the calculation method of any of the taxes, duties and contributions applicable exclusively to the oil sector on 1 January 2023; and
  • the introduction of new taxes, duties, contributions or tariffs on assets specific to oil operations carried out by owners of oil agreements, such as: wells, offshore platforms, pipelines, oil treatment, measuring, reception and delivery stations.
  • Owners of oil agreements may conclude addenda to the oil agreements in force on 1 January 2022 in order to contractually reflect the amendments brought under Law 157/2022 to the royalty and the tax regime, as well as to the sale of hydrocarbons and bilateral contracts for the trading of gas exploited from offshore/deep onshore oil perimeters.

By Monica Iancu, Partner, and Alexandra Bunea, Junior Associate, Bondoc si Asociatii