Indexation of oil royalties with inflation will generate a negative impact on national energy security, on the Romanian economy and on the revenues of the state budget, claims the Oil and Gas Employers’ Federation (FPPG).
“The Oil and Gas Employers’ Federation (FPPG) takes note with great concern of the draft Emergency Ordinance regarding some measures for public property of the state as well as for the efficient administration of state properties and which aims to index oil royalties to the inflation rate, which was published on the website of the Ministry of Finance. FPPG requests the removal from the draft GEO of the provisions relating to the indexation of oil royalties with the inflation rate, which are devoid of any legal basis and do not have an adequate economic basis and will also significantly discourage investments , which will generate a negative impact on national energy security, on the Romanian economy and on the revenues of the state budget,” the statement says.
The FPPG states that royalties for oil and gas are calculated by applying percentages to the value of gross oil and gas production. Since the royalty base is calculated based on realized prices, inflation is already reflected in the current formula for determining oil royalties. Consequently, such a measure would mean a double application of the inflation rate.
“We want to reiterate that the updating of percentages with the inflation rate is contrary to fundamental economic principles and is not applied anywhere in the world, according to our knowledge.
The increase in royalties will have a significant negative effect on investments and, consequently, on the future production of oil and natural gas,” says the cited source, according to Agerpres.
The federation warns that higher royalties increase the marginal cost of extracting mineral resources and also discourage the development of any marginal reserves that have been discovered and lead to the early abandonment of productive oil and natural gas wells.
“The effective taxation of oil and natural gas in Romania is far above the EU average and makes the country’s energy projects uncompetitive,” stresses FPPG.
At the same time, the representatives of the oil and gas industry also signal a problem “that requires reflection”: the violation of the stability clauses defined by the individual concession agreements and the Petroleum Law, according to which the holders will continue to pay royalties at the level established in their oil concession agreements respectively for the duration of these agreements, except for the adoption of more favorable rules for the holders of oil agreements. In addition, for deep offshore and onshore concessions, the additional stability provisions of Law 256/2018 apply.
“Arbitrary and unilateral changes to the concession agreements, by indexing the royalty rates, will have direct consequences on the ongoing projects and the title holders could seek a solution through legal proceedings. In conclusion, FPPG emphasizes that the potential implementation of such an indexation of oil royalty rates with inflation will not have an adequate legal and economic basis and will also significantly discourage investments, which will generate a negative impact on national energy security, on the Romanian economy and on the revenues of the state budget The Oil and Gas Employers’ Federation, as a representative of the oil and gas industry, i.e. over 98% of Romania’s producers, remains open to such a dialogue,” the press release states.