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OMV Petrom calls for Romanian fiscal stability

New deepwater gas play needs greater clarity on terms

OMV Petrom, the Romanian independent 51pc owned by Austria's OMV, believes Romania could develop into Europe's third-largest gas producer and a significant exporter into central and eastern Europe (CEE) and beyond.

But board member Franck Neel cautions that a stable fiscal regime is key to making progress on developing the Neptun Deep discovery in the country's deepwater offshore, in which OMV is an equal partner with operator ExxonMobil. "For such a big investment, you need to know what the tax level is," he told Petroleum Economist at the Flame gas conference in Amsterdam in May.

The recent signs have not been particularly promising. The country had been making progress towards a more liberalised market and greater tradability, only for the government in December to re-regulate household and district heating gas supply prices for three years. It also imposed a 2pc turnover tax for energy firms and imposed limits on the volumes of domestic production that can be exported.

Such U-turns do not inspire "strong confidence", says Neel, stressing that OMV wants to work in partnership with the government based on a stable, long-term relationship.

New legislation, the so-called Offshore Law, governing offshore production was approved by parliament in July. But, after the Law was sent to the president for promulgation, he asked parliament to reassess it, pointing to the lack of long-term stability and predictability, according to law firm Schoenherr.

A stabilisation provision was included in the amended Law passed in October as a last-minute negotiation item, the law firm says. It takes the form of a "freezing" clause, providing that titleholders of ongoing offshore concessions benefit throughout the lifespan of the concession from the royalty regime set out by the Law.

Windfall tax concern

The new clause is an important step towards "much needed stability", says Schoenherr. But it concedes that it "remains to be seen to what extent it will boost the offshore sector". Consultancy Research and Markets is particularly concerned with the progressive windfall tax element of the Law, which it says will lead to "reduced level of competitiveness for natural gas projects" while Romania's tinkering generally "mean[s] that investors face significant uncertainty".

Neel sees potential opportunities for increased production in both the Romanian deepwater offshore and also from deep deposits onshore. Aside from the Neptun Deep discovery, Russia's Lukoil, in partnership with state-controlled gas firm Romgaz, made an offshore discovery in 2015, while Black Sea Oil & Gas, backed by private equity firm Carlyle, is also looking to progress its offshore Midia project. Romgaz made its largest onshore discovery in three decades at the Caragele field in 2016.

Exploiting these new finds beyond Romania, which is unusual in the CEE region in being close to self-sufficient in gas, is important in "bringing a different source of gas to the region", says Neel. As such, cross-border interconnection is crucial. The first stage of the Brua project, which aims to increase capacity between Romania, Hungary and Austria by 1.75bn m³/yr is "in good shape", Laszlo Szabo, director of the regional centre for energy policy research, or Rekk, based in Hungary, told the Flame conference, although he cautions that the regulatory aspect of the new link "needs to catch up" with the construction.

The second stage of Brua, with a planned completion date of 2022 and bringing total capacity up to 4.4bn m³/yr, will be important in linking potential Romanian exports to the Seg pipeline. It will allow "better connection to liberalised markets and a market reference price" for Romanian gas, says Neel.

The Neptun Deep project is "technically ready to go", he says, with operator ExxonMobil waiting to select an EPC contractor and other work that can be done either in parallel with moving towards a final investment decision (FID), or post-FID. But, without fiscal stability, that FID threatens to remain elusive.

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