October 2017 - The Romanian Ministry of Economy has published on its website a draft law regulating the royalty system for concessions of mineral, oil and gas, and hydro-mineral resources (the “Draft Law”) (available here). Following a period of public debate, the Draft Law will need to be adopted by the government before reaching parliament for approval, and certain amendments may be made along the way.

The Draft Law gathers, in a single legal instrument, provisions currently included in multiple legal acts, such as the Petroleum Law no. 238/2004 (the “Petroleum Law”) and the Mining Law no. 85/2003. It also introduces different royalty quotas for onshore and offshore oil and gas concessions.

Some of the most relevant changes introduced by the Draft Law are as follows:

  • royalty quotas for offshore oil and gas concessions – the Draft Law introduces specific royalty quotas for offshore oil and gas concessions. If the royalties to be paid by holders of onshore oil and gas concessions remain as currently provided by the Petroleum Law (i.e. between 3.5% and 13.5% for crude oil and 3.5% and 13% for gas, depending on gross production), the Draft Law redesigns the royalty quotas for offshore oil and gas concessions. Under the Draft Law, holders of offshore concessions would pay (i) a fixed quota of 8% and a volume-based variable quota between 4.5% and 5.5% for crude oil and (ii) a fixed quota of 10% together with a volume-based variable quota between 2% and 3% for gas;
  • updating the royalty quotas through government decision – amending the royalty quotas becomes easier as parliament would no longer be involved. The government would be able to update royalty quotas following a request from the competent authority (i.e. the National Agency for Mineral Resources (“NAMR”)) and based on analysis of economic opportunity;
  • royalty quotas applied when extending concession agreements through additional acts – according to the Draft Law, concession holders would pay the same royalties during the entire period of the concession agreements. However, it is further explained that when extending a concession agreement, NAMR would apply the royalty quotas in force at the time of signing the additional act. Therefore, as far as royalty quotas are concerned, it appears that the Draft Law considers the extension of a concession agreement as a different agreement altogether;
  • new reporting and payment terms – concession holders would have to send monthly reports to NAMR pertaining to their activities and operations. Moreover, royalties would be payable monthly and not quarterly, as currently provided by the Petroleum Law;
  • the reference price used for obtaining royalty amounts – according to the Draft Law, the president of NAMR would issue an order on the methodology for calculating the reference price. The reference prices communicated by NAMR would take into account the Brent crude oil price and the gas prices on the centralised wholesale market operated by the Romanian Power Exchange (OPCOM);
  • obligation to immediately terminate the concession agreement – the Petroleum Law already provides that NAMR will terminate a concession agreement where the concession holder has not paid royalties within 6 months from the due date. The change introduced by the Draft Law is apparently aimed at eliminating any uncertainty, as NAMR would be required to immediately terminate the concession agreement in such cases.

Concluding remarks

As the Draft Law must undergo public and parliamentary debate before coming into force, there is a chance that there may be amendments to various provisions, and we will continue to monitor the legislative process.

In particular, the contemplated changes to oil and gas royalty quotas, especially the newly designed royalty system for upstream offshore oil and gas concessions, could be subject to further changes, together with other sector-related legislative proposals.

This is the case of another draft law on measures for implementing petroleum operations by holders of offshore oil and gas concessions (see our article on the matter here), which was adopted by the Romanian government on 11 October 2017 and is currently before parliament. This draft law would introduce the freezing of royalties for the entire period of an offshore oil and gas concession agreement. More specifically, it provides that oil and gas concession holders would benefit from the royalty levels, quotas and related gross production thresholds in place at the signing date of the concession agreement until the end of such an agreement. However, this principle should be read in conjunction with the Draft Law provisions mentioned above, regarding the extension of concession agreements through additional acts (i.e. when extending concession agreements the royalty quotas in force when signing the additional acts will apply).

Moreover, as the Draft Law introduces differentiated royalty quotas for onshore and offshore oil and gas concessions, the compatibility of the proposed royalty framework with EU State aid and competition rules may also be of relevance and a point of view from at least the Romanian Competition Council should be expected.