The Black Sea is deemed by geologists to have significant resources of natural gas, with a theoretical potential of becoming a new North Sea. However, the exploration works have been limited so far, with significant finds made only in Romanian waters.
In March 2012, OMV Petrom and ExxonMobil discovered a large gas field of 42-84 bcm in the Neptun Deep perimeter. Later, in October 2015, Lukoil, PanAtlantic and Romgaz announced discoveries estimated at about 30 bcm in the Trident perimeter. Two other important gas fields were discovered in the Midia block, namely: Doina (in 1995), and Ana (in 2008), totaling about 10 bcm.
The sole Final Investment Decision (FID) that has been made so far belongs to BSOG (Black Sea Oil & Gas) for the Midia Gas Development (MGD) project. Unlike Neptun Deep fields, which lie in the deep waters of the Romanian Exclusive Economic Zone (EEZ), the Midia perimeter is in shallow waters. BSOG has also signed a 10-year gas sale contract with Engie Global Energy Management, one of the two major gas distribution and supply companies in Romania.
Mark Beacom, the CEO of BSOG, announced that the FID was taken under the assumption that the provisions of GEO 114/2018, in terms of new taxes and financial contributions, as well as trade restrictions would be rescinded. This, in effect, comes as a suspensive clause which may well delay the effective beginning of field development works.
As a matter of fact, GEO 114/2018 came on top of other legislative and regulatory changes that had the aggregated effect of a deteriorating regulatory environment – seen from offshore investors’ vantage point. Thus, the newly approved Offshore Law of November 2018 has established a new fiscal approach by which a new progressive tax on the ”supplementary revenue” was introduced. These price levels are to be adjusted on a yearly basis, starting with January 1st, 2019, with the annual consumption price index.
“Make no mistake – BSOG is not an example that should be used to insinuate that everything is alright. We firmly believe that these issues need to be resolved if there is a desire to keep attracting investors. Our belief is that it will be fixed by 2021, one way or another.” Mark Beacom, CEO, BSOG (Black Sea Oil & Gas)
Supplementary Tax and Other Challenges for the Industry
The Offshore Law also sets a maximum limit for the deductibility of investments in the upstream segment of 30% of the total taxes on the supplementary revenue, for the reference price of RON 45.71/MWh. At the same me, the royalties – calculated by reference to the Day-Ahead price index on the Central European Gas Hub, which is consistently higher than the average index of the BRM (Romanian Commodities Exchange) gas market – are also not deductible from the calculation basis of the supplementary tax, which effectively translates into double taxation: royalty, on the one hand, and taxation of royalty, on the other hand.
The emphatic progressive element in the fiscal framework brought by the Offshore Law can be seen as a means for the state to stave off the price increases, thus protecting the domestic end consumers. However, incentivizing the gas producers to stay in a zone of low prices can only result in significantly extended time frames for the capital recovery. This, in turn, is a disincentive to investment.
Now, the changes in the fiscal regime of the offshore oil & gas segment must be understood against the background of a generalized political rhetoric, which has expanded in the past few years, favoring an increased ”government’s take” in the overall distribution of gains between the offshore investors and the state. Indeed, comparisons were often made with jurisdictions such as Norway or Saudi Arabia by some politicians and journalists in support of the notion that for Romania to take anything less would be unpatriotic or even treasonous.
Nevertheless, it must be well understood that the government’s take is always dependent on the specific circumstances and prospects of any particular project, and that a complex risk assessment influences the level of profitability expected by investors over the project’s life time. As shown in a 2019 report by Vasile Iuga and Radu Dudau on the risks affecting the investment in the Black Sea offshore oil & gas sector, there is a wide array of risk factors that weigh in the making of FIDs.
Risk Factors that Weigh In the Final Investment Decisions (FIDs)
Firstly, investors face a set of general risks, such as geological uncertainty about actual available resources or infrastructural and logistical challenges. Secondly, region specific risks are added - the Black Sea Basin presents high commercial risk on account of poor interconnectivity with Western European energy markets. Nonetheless, several projects are underway to address these limitations.
Further to this the Black Sea is virtually a closed body of water. The Bosphorus Strait has depths of less than 50m, while the bridges linking Europe to Asia in Istanbul are merely 64m high. Drilling platforms must be taken apart for undercrossing and then built up again, which raises overall operational costs. At depths surpassing 200m, the Black Sea contains hydrogen sulfur in high concentration, which is highly corrosive for pipelines and equipment.
All in all, reaching a long-term win-win deal requires a professional negotiation between investors and representatives of the government, with relevant benchmarking of practices from other jurisdictions and companies worldwide. For Romania, it is especially the OMV Petrom – ExxonMobil project of the Neptun Deep perimeter that has a strategic value, with high economic, energy security and political impact. Seven years from the major find at Neptun-1, in 2012, the titleholding consortium has not made a final investment decision; and also OMV Petrom has repeatedly expressed its reservations regarding the impact of the current regulatory framework over the project’s profitability.
“Neptun Deep project is a huge opportunity for Romania: to increase revenues to the state budget, create new jobs, secure Romania’s gas needs. Usually, for such large-scale projects, many pieces of the puzzle need to be aligned: such as regulatory framework, fiscal stability, competitive terms, liberalized gas market and key infrastructure. Deepwater projects are large scale investment, billions of dollars have to be invested upfront. That’s why stability and predictability are of crucial importance.” Franck Albert NEEL, Member of the Executive Board Responsible for Downstream Gas, OMV Petrom
The current state of uncertainty serves neither Romania’s strategic interests and its reputation as an attractive jurisdiction for international investors, nor the companies that have already invested billions of dollars in exploration. There is another factor that penalizes stalling the development of the Black Sea projects: at EU level, the long-term future of the natural gas industry is facing a major challenge, given Brussels’ ambition of net-zero carbon emissions by 2050 and the already manifesting aversion against continued investment in fossil fuels in Europe. As such, the window of opportunity for FIDs is narrowing month by month.
Decisive action is very much needed on the state’s side, in order to obtain clarity as soon as possible. The same point is made by foreign diplomats, underscoring the positive perception that Romania enjoys: “Romania has the great opportunity to become self-sufficient in oil & gas and also add to the stability in the region, especially if we consider the Neptun Deep project. Time is critical, however, so Romania needs to move a little faster. The back and forth that we have been witnessing in terms of legislation is counter productive and is decreasing the chances of achieving this desired outcome,” stated Gerd Bommer, Commercial Counselor, Advantage Austria.
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