THE NATIONAL MINERAL RESOURCES AGENCY, IN A NOTIFICATION TO THE PRIME-MINISTER:The failure to update the natural gas royalties has caused a loss of 8 billion lei to the state budget

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The failure to update the natural gas royalties has caused a loss of 8 billion lei to the state budget

The Romanian government has lost over 8 billion lei, between 2006-2018, following the failure to update the royalties paid by the oil and gas companies, says Gigi Dragomir, the president of the National Mineral Resources Agency (ANRM), in a report sent to the prime-minister.

The document was posted on Facebook by Darius Vâlcov, former finance minister, who said: "This is what a 2 billion dollar theft looks like. What would all that money have meant for Romania? Children allowances for 2 years. Or the construction of 10 big, fully equipped hospitals, with 600 beds each. Or the construction and outfitting of 3 kindergartens in each locality in Romania. Or the completion o the Ploieşti-Braşov highway".

In the quoted notification, Gigi Dragomir mentions: "According to art. 2 letter e) of the Government Decision no. 1419/2009 concerning the organization and functioning of the ANRM, one of the main functions of the agency is the setting, under the conditions of the law, of the reference price for the oil (crude + natural gas) extracted from Romania, in order to calculate the oil royalty.

The reference price for natural gas is the minimum price allowed in the natural gas trades which the Romanian government takes into consideration in order to apply the royalty and the exploitation of that resource to the benefit of the citizens.

The last order of the president of the ANRM for the approval of the reference price for natural gas extracted in Romania was issued in 2008 (O.P. ANRM nr. 21/2018) which established the level of 495 RON/1000 cubic meters.

That order was never updated afterwards.

The Romanian Court of Auditors, in analyzing the activity of the ANRM between 2006-2010, has established in 2010 that by failing to update the reference price the royalty owed to the state budget was reduced by 2,407,470,702 RON.

The ANRM has challenged that claim in court, a dispute which was rejected by the Bucharest Court of Appeal in 2012 (civil ruling no. 6717/26.11.2012) and then by the High Court of Cassation and Justice in 2015 through a definitive ruling (Ruling no. 972/04.03.2015). In 2015, the Court of Auditors, in inspecting the activity of the ANRM in 2011-2015, has found that the aforementioned problems had not been resolved, the lack of strength in the implementation of the measures which it had deemed the management of the ANRM as being required to take had led to an increase in the losses suffered by the Romanian state, with the difference in royalties owed to the state budget for the 2011-2015 period amounting to 4,671,501,106.70 RON.

For the 2015-2018 period, according to the ANRM analysis, the difference in the royalties owed to the state amounts to 975,985,491.84 RON (...).

In February 2018, the ANRM updated the reference price for natural gas. Following the application of the new reference price, in H1 2018, we had an increase in the collection of royalties by 117,031.16 RON".

Dorin Ursărescu, advisor to the president of the ANRM, has said, this spring, that it is a mistake to look at royalties only in terms of numbers, because they are part of a complex taxation system: "Countries tax their operators that exploit the resources through several taxation systems - royalties are just one of them, there is also the income tax, profit sharing, overtaxation of profits. Looking at royalties distinctly is like comparing apples and oranges. It is not fair to compare Romania, which has reduced the tax rate from 16% to 10% and which has an oil royalty of let's say 13%, to a country which afforded to charge a very low royalty, of 2-3%, but which has an overtaxation level of 40-50%. This is how things should be viewed".

Mr. Ursărescu added that the ANRM needs the Parliament's help to reorganize itself into an Authority, possibly subordinated to the Parliament, which would manage the resources of the state, to control what is exploited at each individual deposit: "The change of the structure of the ANRM is primordial. The salary in the Agency is approximately 2,000 lei and as a result, it is very difficult to keep specialists, and expect them to draw up strategies to boot".

In February, the management of the ANRM talked to deputy Iulian Iancu, the president of the Industries Commission, about the new framework law for the organization and functioning of the ANRM in the context generated by the exploitation of the natural gas in the Black Sea, as well as the passing of a new legislative framework concerning the Offshore law, the Mining law and the Royalties law.

Earlier this month, president Klaus Iohannis has asked the parliament to reexamine the law concerning Oil Operations.

The formula for the calculation of royalties in the case of oil royalties will be amended by the end of the year, and a new reference price will be used for calculations on the domestic market (the OPCOM and BRM exchanges), Dorin Ursărescu was saying one month ago.

In December 2017, the Ministry of the Economy withdrew the proposal for the new royalties and announced it would conduct a thorough study, after it had put up for debate a draft law in October last year.

According to a study recently conducted by Deloitte România, ordered by the Romanian Association for Oil Exploration and Production Companies (ROPEPCA), the level of royalties and other similar taxes (the tax on additional revenues obtained as a result of the deregulation of prices in the natural gas sector, the tax on special constructions, the tax applied to the revenues resulting from the exploitation of crude) has increased between 2014-2016, from 15% to 17.4%, and starting with 2017, amid the elimination of the special constructions tax, the median rate in Romania decreased to 13.9%.

The average tax rate specific to the sector, on a European level, has decreased from 10%, in 2015, to 8.8%, in 2016, according to the study.

Vlad Boeriu, a Partner at Deloitte România, said a few months ago: "In Romania, we have a royalty, depending on the output, that ranges between 3.5% and 13% of the extracted volume. Furthermore, we have an additional tax of 60% on the incomes made following the deregulation of the natural gas market (there is a difference - we have 60% of the prices below 85 lei/MWh and 80% for the difference in price that surpasses 85 lei/MWh). Furthermore, we also have an additional tax of 0.5% for the crude exploitations. It would be applicable by the end of 2018".

Vlad Boeriu said that the European average of 8.8% is also taking into account the Groeningen special area: "This area is special, especially because of the deposit, as well as that of taxation. Holland wants to keep the deposit in question and encourages extraction from other areas, through differential taxation. If we rule out the deposit, the European average is 6.9%".

After the drafting of the reports on the activity of the ANRM, the Court of Auditors has requested the updating of the reference price for the natural gas extracted from Romania. On the other hand, ROPEPCA emphasizes that the gas producers do not support the idea of the reference price being pegged to the Austrian reference prices.

So far, the Romanian natural gas producers have paid the royalty calculated based on their realized income, a basic principle which applies to any income tax, ROPEPCA recently stated.

The Federation of Gas and Oil Professional Associations (FPPG) said, in turn, that it disapproves the decision of the ANRM to set the reference price for natural gas based on the trading prices of the CEGH hub of Vienna, based on a study made by the Oil and Gas University (FPPG) of Ploieşti , which does not reflect the realities of the Romanian market.

The FPPG was saying, at the time: "As Romania does not export natural gas and not even one molecule reaches the Baumgarten gas hub, determining the reference price based on the CEGH index does not correctly reflect the price of natural gas extracted in Romania and therefore goes against the Law of Oil no. 238/2004, which stipulates in art. 49 paragraph (2), that "the oil royalty is set as a percentage quota of the value of the gross extracted output". Economic theory and professional standards applicable in Romania and internationally require the setting of the market value based on the sale transactions concerning the goods in question".

Thus, the value of the natural gas produced in Romania is the one derived from the transactions concluded by the producers, not an artificially set price, the Federation further states, and it added: "Thus, Romania becomes an isolated global case, where the reference price for natural gas is calculated based on transactions made in another country in which there are no natural deliveries of natural gas extracted from Romania. Not even in European countries where there are important hubs for the trading of natural gas (e.g. Great Britain, Holland) are the hub indexes used for calculating the specific royalties/taxes, but the actual prices charged by the natural gas producers are used instead. The same things happen in countries that do not have hubs (ex. Norway, Denmark). Alternatively in European countries (ex. Germany, Austria) a reference price is calculated based on the actual transactions made in the countries in question".

The Federation states that producers are paying royalties based on an incorrect formula, a formula which goes against international practices and even regulations previously issued by the ANRM to determine the reference price for crude, which were taking into consideration the transport costs. The quoted source also mentions that in this manner, Romanian producers will end up paying royalties calculated based on an unrealistic price, administratively imposed, without any connection to the realities of the price of gas traded locally.

EMILIA OLESCU

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