Romania: Energy – Oil & Gas

Romania has a petroleum history reaching back more than 150 years, as the country was the first crude oil producer in the world and the first to build an oil refinery.

On one side, more than 90% of Romania’s gas consumption is produced from internal sources, with an average natural gas production in recent years of about 11 bcm. Furthermore, it is expected that the country will soon become a gas exporter, mainly due to recent discoveries in the Black Sea. The related offshore reserves are estimated to amount to 200 bcm, creating the premises for the natural gas production to double in the upcoming years (i.e., to 20 bcm per year). The first offshore project is currently being developed by Black Sea Oil & Gas, an offshore venture of Carlyle International Energy Partners and EBRD, with first gas being expected to be produced in 2022.

On the other side, crude oil production in Romania is on a downward slope, with a sub unitary level of reserves replacement, due to the high degree of deposits depletion. According to the estimates of the National Commission for Strategy and Forecast, the oil production is estimated to be at 3.275 million toe in 2021 (minus 3.2% compared to 2020) and at 3.2 million toe in 2022 (minus 2.3%).

We note that the exact amounts of oil & gas reserves are not public, such being classified by the applicable legislation as work secret. Nevertheless, according to aggregate data reported by OMV Petrom (largest oil producer and second largest gas producer in Romania), the proved hydrocarbons (oil and gas) reserves managed by OMV Group in Romania in 2019 amounted at 477 million toe, meaning a 6% decrease compared to 2018.

According to the Romanian Constitution, natural resources (such as oil and gas) are in the public property of the State and can be exploited by private entities on the basis of a concession agreement.

As per applicable legislation, an oil and gas concession (also called licence) is granted for exploration, development and exploitation activities following a public competitive procedure organised by the National Agency for Mineral Resources. Any interested party may initiate the procedure. The term of the licence is of maximum 30 years, with an option to extend up to 15 years more.

Onshore and offshore licences are granted under almost identical terms and procedures. While minor differences may exist between licenses in terms of timing and scrutiny, the offshore and onshore project development processes are rather different, the offshore industry having its own special legislation.

As mentioned above, oil and gas concessions are granted for the various phases of the petroleum activities. However, the exploration activities are regulated rather distinctly (and may even be allowed as a separate single activity, based on a permit, only) from development and exploitation activities. In a nutshell, a licence has two main stages, i.e. the exploration stage and the development and exploitation stage.

The main terms and conditions of a petroleum concession are the following:

• The licence provides for an exploration area and an exploration term. During the exploration term, the titleholder must perform a mandatory minimum works programme within the concession area.
• Should the titleholder declare a commercial discovery during the exploration term, in accordance with applicable technical norms, a development and exploitation area is carved-out for the performance of development and exploitation operations.
• The royalties to be paid to the Romanian State are established by the petroleum law.

Unconventional resources are not currently exploited in Romania.

There was an attempt to develop shale gas projects in the country back in 2012-2014 but due to public backlash and a political reluctance to approve controversial projects (as the shale gas ones were viewed in Europe at the time), the investor abandoned its Romanian gas shale projects and no other shale gas projects were put into question.

Moreover, although the existing oil and gas legislation does not expressly prohibit shale gas, in the unlikely scenario in which the implementation of shale gas projects would be envisaged at a future point in time, the general view is that a new dedicated legislation would be necessary to implement such projects.

The key regulators in Romania are:

• The National Agency for Mineral Resources (NAMR).

NAMR is the representative of the State in relation to natural mineral resources, holding the country’s resources and reserves inventory. It is the organizer of the public tenders for granting of petroleum concessions, it confirms the technical and financial capabilities of titleholders to be, it approves and supervises the carry-out of petroleum operations and enacts secondary legislation related to the upstream industry.

• The National Energy Regulatory Authority (NERA).

NERA is the energy regulator in charge of issuance and monitoring of the implementation of secondary legislation required for the proper functioning of the country’s energy sector with the observance of equality, non-discrimination, fair competition, transparency and consumer protection principles. In the upstream petroleum sector, NERA also issues various permits and licenses, such as the set-up and operating licenses for up-stream pipelines and the production/supply licenses.

• The Competent Authority for Regulating Offshore Petroleum Operations (CAROPO).

CAROPO is the independent body in charge with offshore safety matters and among its attributions are the acceptances of the Reports on Major Hazards and the performance of related inspections.

Given the institutional and legislative background as well as the Government’s commitments undertaken for acceding to the European Union, the Romanian oil and gas industry was gradually privatized after 1989 (the year which marked the fall of the communist regime).

In what concerns the upstream oil and gas industry, as a result of the privatisation process, the former state-owned companies have been privatized but the Romanian State still holds shares within its major players, such as Romgaz (largest natural gas producer), where it holds a 70% stake and OMV Petrom (largest oil producer and second-largest natural gas producer), where it holds a stake of about 20%.

Until recently, foreign companies were almost equally treated as Romanian companies. The only restrictive requirement was to incorporate a Romanian subsidiary or a branch and to maintain it for the duration of the petroleum agreement.

However, in early 2020, an emergency government ordinance introduced several restrictions on grounds of national security regarding to the holding of petroleum concessions. According to the said enactment, (i) the granting a new petroleum concession may be refused to any entity which is effectively controlled by nationals or entities originating from outside of the EU, (ii) the Government was granted the right to terminate on-going petroleum agreements having as titleholder an entity which is effectively controlled by nationals or entities originating from outside of the EU, and (iii) any direct or indirect transfer of a participating interest in a petroleum concession may be performed only with the prior approval of the Government.

It is to be noted that the above restrictions have been enacted in order to implement the EU Directive 94/22/EC on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons. However, such directive only provided for the possibility of the Government to refuse issuance of new concession agreements on grounds of national security (point (i) above), while points (ii) and (iii) might be interpreted as adding to the EU Directive and could be further challenged on several Constitutional and/or European law grounds or even considering the right to property as established by the European Convention for Human Rights. Thus, it is expected for this legislation to be further amended.

Furthermore, the regulatory framework regarding offshore operations contain certain local content requirements, as detailed in our answer to question 10.

The carry-out of petroleum operations require the performance of specific environmental impact assessment, health and safety regulatory procedures under national laws transposing EU legislation (such as Directive 2014/52/UE and Directive 2013/30/EU) and with the observance of international industry practices. Depending on the type of the operations, their capacity and location, the transboundary impact may be incidental.

Furthermore, specific environmental obligations for all petroleum projects (e.g., environment restoration obligations in case of abandonment, reporting obligations, etc) are provided by the Petroleum Law, while Law no. 165/2016 on the safety of offshore petroleum operations provides environmental obligations relating to offshore projects.

Law no. 165/2016 transposes in the Romanian legislation the 2013 EU Directive on the safety of offshore oil and gas operations, enacting various obligations for operators of offshore petroleum operations and owners of installations with a view to prevent and mitigate major hazards (e.g., preparation of the Safety Case).

Romania has a royalty-based system, provided by law and stipulated in the individual petroleum agreements. The royalty percentage is computed against the quarterly production levels of the fields. Currently the percentage for natural gas ranges between 3.5% and 13%, the maximum threshold being for the quarterly production in excess of 200 106 cm while for crude oil and condensate the percentage ranges between 3.5% and 13.5%, the maximum threshold being for the quarterly production in excess of 100 toe.

In respect of the fiscal regime, the applicable legislation provides for some minimal tax deductions such as the exemption from excise duty for natural gas or the exemption from taxes for gas import, but no exemption for specific oil related activities.

Nonetheless, the word most frequently used recently by the oil and gas industry to describe taxation has been instability. Over the past 7 years, various pieces of legislation have added new taxes and/or amended existing ones. Many of such taxes have been highly challenged by the industry. By way of example, in 2018 alone a windfall tax on supplementary profits which was introduced in 2013 as a temporary tax and extended year by year afterwards was made permanent, a new windfall tax was enacted in relation to supplementary profits realized from offshore production and the annual fees payable by natural gas licence holders to NERA have been increased to 2% of the annual turnover (as compared to 0.1%). It is to be noted that the 2% fee mentioned at point (iii) above was repealed in 2019. The offshore windfall tax has been vividly contested by the offshore industry as being unfair, mainly because it establishes a fiscal regime more burdensome than the one applicable to onshore.

As EU member, Romania must observe the Third Energy Package which has as a philosophy the creation of a fully effective single energy market. This is in line with the Treaty on the Functioning of the European Union as well as with the core of EU law, the single market and its four freedoms: free movement of goods, capital, services, and labour. As such, except for limited exception such as the public service obligations, export restriction and/or domestic obligations should not be allowed.

Albeit, since 2007 (the year which marked Romania’s accession to the European Union), the applicable legislation has been continuously amended and many times some kind of export restrictions and/or domestic supply obligations have been enacted in relation to the natural gas sector. This matter has been a highly sensitive issue discussed over the last years between the Romanian Government and the European Commission.

The latest domestic supply obligation was enacted at the end of 2018 along with a series of highly controversial fiscal, budgetary and public investment measures in sectors of strategic national importance, such as energy, banking and telecom. For the natural gas sector, among others, the domestic priority of supply obligation at a price cap of 68 RON/MWh was introduced, which represented an effective export ban. As expected, the European Commission initiated the infringement process against Romania with the consequence of said obligations having been gradually repealed.

Furthermore, all gas market participants (including producers and suppliers) are obliged to offer to buy/sell minimum quantities on the Romanian centralised markets. The centralised offering obligations have been aimed officially at increasing the liquidity of the two Romanian centralised exchanges – OPCOM (state-controlled) and BRM (privately owned) but could also be qualified to some degree as representing restrictions to export.

As far as local content obligations are concerned, these were put forward only in respect of offshore concessions, such as: at least 20% of staff involved in the operations must have a fiscal residency in Romania, the non-resident subcontractor’s obligation to establish and maintain a local subsidiary for the entire duration of the agreement and the priority purchase of goods and services from local/EU-based providers (under equivalent technical and pricing conditions).

Abandonment and other decommissioning obligations aimed at reaching reinstatement to the situation prior to the performance of petroleum operations are provided for under various laws, such as environment protection regulations and the petroleum legislation. Such obligations entail going through strict regulatory procedures and obtaining necessary permits in relation thereto.

Romania has enacted in 2018 the special legislation governing the construction of offshore hydrocarbon infrastructure. Specifically, the development of infrastructure, including the laying of offshore pipelines is allowed on the basis of a construction permit to be issued by the Ministry of Energy pursuant to the performance of clear regulatory procedures, which at their turn entail the prior obtaining of a series of permits (such as and environmental permit, a water management permit, the archaeology clearance, etc.) provided by the general legal framework. A set-up permit issued by NERA is also required prior to the commencement of the pipe laying activities. The operation of these pipelines follows the general legal regime applicable to upstream pipelines, the upstream pipeline operating license to be issued by NERA being the most important regulatory document to be obtained by the operator, along the related environmental and water management authorizations. Depending on the features of the project, certain parts of the pipeline may be subject to the offshore safety regulatory regime, like the rest of the infrastructure.

Romania showed interest in developing LNG production, understanding that liquefied gas is an important factor to economic development and energy security.

Presently, the country has only OMV Petrom and another company licensed for LNG supply and no licensed operator for LNG receiving terminals although LNG operations are envisaged by the applicable legislation which provide for the general regime applicable to such operations, the minimal technical and permitting requirements and licensing terms and conditions.

According to the Development Plan of the Natural Gas National Transmission System (2020-2029), Romania will develop a LNG receiving terminal by 2026.The current draft Development Plan of the Natural Gas National Transmission System (2021-2030) extends the deadline for the development of the LNG terminal until 2028.

Natural gas storage has a major role in ensuring the security of supply by covering consumption peaks caused mainly by low temperatures registered during the cold season, as well as maintaining the optimal operating characteristics of the transmission system.

Such activity is considered a public utility service of general interest and, therefore, is awarded by way of a concession agreement granted by NAMR. Furthermore, various authorizations and licenses are required to be issued by NERA in relation thereto, such as the storage system set-up authorization or the related operating license.

It is worth mentioning that following the amendment of the primary legislation, the obligation of natural gas suppliers to set up minimum gas stocks at the level imposed by NERA was repealed. Therefore, suppliers are free to choose the quantity of natural gas to be put up for storage.

The two existing storage system operators of Romania have underground gas storage facilities with a total active capacity of 33,275 TWh/gas storage cycle.

Yes, Romania has both transmission and distribution systems.

The country has a single natural gas transmission system, which is owned by the State and operated by Transgaz, the state-controlled TSO company, on the basis of concession agreement granted by NAMR. The system has a total network length of 13,110 km (8,150 mi) of pipelines with diameters between 50 mm (2.0 in) and 1,200 mm (47 in) and has an annual transport capacity of 30 billion cubic meters (1.05 Tcf).

Theoretically, in accordance with the applicable law transposing the EU legislation, investors are allowed to build and operate their privately owned transmission systems. Such systems would be subject to a services concession agreement granted by NAMR as well as various authorisations and licenses issued by the NERA. However, no such private systems exist.

The distribution systems are owned by private companies and operated by 34 operators, the largest being Distrigaz Sud and E.ON, operating 85% of the country’s gas distribution network. At its turn, gas distribution services are considered a public utility service of general interest and, therefore are awarded by way of a concession agreement granted by NAMR in a natural monopoly regime i.e. the distribution services are ensured by a single operator in a determined area. Furthermore, various authorizations and licenses are required to be issued by NERA in relation thereto, such as the distribution system set-up authorization, the operating license or the supply license.

A third-party access regime is available both for gas transmission and distribution systems. Within certain rules, the operators must ensure the access of third parties under non-discriminatory and transparency conditions but within the limits of systems capacities.

As already mentioned in our answer to question 6 above, given the institutional and legislative background and membership to the European Union, the Romanian gas industry was gradually privatized after 1989 (the year which marked the fall of the communist regime) and was fully liberalized in 2020. Consequently, the downstream gas market is competitive and mostly privatised, the suppliers and distributors having private majority control.

It has to be noted that the subject of the liberalization of the Romanian gas market has been highly mediatized, various agreements being reached by the Romanian State with the European Union in order to prolong the deadlines for full liberalization. Moreover, as already mentioned in our answer to question 10 above, at the end of 2018, the obligation to supply the domestic market first at a price cap of 68 RON/MWh was imposed, this representing a clear breach of the liberalisation obligation. As it was expected, the said obligation has been repealed and, as of 1 July 2020, the Romanian natural gas market is fully liberalized. In this sense, the prices for the supply of natural gas to end-customers are based on an offer – request mechanism and they are no longer regulated.

In addition, customers may freely choose their suppliers, with NERA currently working on digitalizing the process of switching the supplier with the purpose of allowing for an effective and swift switch, in full compliance with the maximum deadlines provided by EU and domestic law.

In addition to the afore-mentioned on this topic, it is worth noting that Romania’s legislation almost always has provided for some type of centralised market obligation, i.e. the producers’ and suppliers’ obligation to offer to sell and/or purchase gas on the centralised market.

In this sense, suppliers and small producers (with an annual production below 3,000,000 MWh) must offer to buy or sell, as the case may be, on the centralised markets a 40% quota of the natural gas contracted in the respective calendar year. Similarly, big producers (with an annual production exceeding 3,000,000 Mwh) must offer on the centralised market a 40% quota of the previous year gas production and on the basis of a gas release program. These market offering obligations are available until 31 December 2022, but it is expected for the legislation to be amended and this deadline to be extended in the future.

In respect of the regulatory side, all market participants (producers, distributors, suppliers) need to obtain specific licences and authorisations from NERA, such as the gas supply license or the license for the operation of distribution systems. It is also noteworthy that no local content obligations apply to downstream operations.

The last years have been marked by many changes of the oil and gas legislation.

On one side, the regulatory regime has been impacted by the enactment of new legislation, such as the specific legislation applicable to offshore upstream operations or by the implementation of new taxes. In addition, the Government intends to put in place a new royalties regime and has been threatening to impose higher royalties on the industry for several years, while key players have been rightfully invoking the need for a stable tax and royalty regime and the protection of the stability clauses under existing petroleum agreements and related legislation.

On the other hand, the downstream industry has been affected by the ever changing rules related to the sale of gas, such as the obligation to offer to trade on centralised market (for more information please see the reply to question 17 above) or the obligation to supply the domestic market first and at a capped price (for more information please see the replies to questions 10 and 16 above).

In respect to the Government’s policy, the main focus of both the Government and the industry lies in: (i) developing gas projects in the Romanian Black Sea and (ii) ensuring energy security by developing the National Transmission System (NTS) and proper interconnections with neighbouring countries.

To this extent, the implementation of BRUA (Bulgaria-Romania-Hungary-Austria) gas pipeline (which is aimed at diversifying the regional gas supply by connecting the area with future major projects such as TAP) and the NTS’s plan to take over gas production in the Black Sea starting with 2020 faces no delays. Improving energy efficiency is also on the short to-do list of the NTS operator, through upgrades of the system itself.

Romanian seems to have the resources necessary for becoming one of the European powers in the energy sector, especially if it will make use of the recent gas discoveries in the Black Sea.

Nevertheless, the Romanian Government has struggled in being consistent in its relationship with the industry in the manner required for the necessary large-scale investments to be carried-out. A final investment decision (FID) has been made only for the project developed by Black Sea Oil & Gas, a company owned by the Carlyle Group and EBRD. According to the statements of the company’s management, the FID was made in good faith and on the assumption that all restrictions on the free movement of gas on a fully liberalized market shall be removed and that the hostile taxation introduced in 2018 would be removed in a timely manner. The FID for the largest Black Sea project, the Neptune Deep project contemplated by ExxonMobil and OMV Petrom, was postponed. We can only assume that the main reason is the legislative uncertainty, notably the current fiscal regime applicable to the offshore sector, which is widely contested by the industry. Additionally, in July 2019 ExxonMobil announced its intention to pull out from its Black Sea offshore projects and sell its 50% interest of Neptun Deep Block.

According to the latest public information, in April 2021 Romgaz submitted an offer regarding the purchase of ExxonMobil interest in the Neptune Deep Block.

Complementary to the above, a key challenge in the gas sector seems to have been the State’s inability to ensure full compliance of the gas regulations with EU law while at the same time maintaining security of supply, a circumstance which several times triggered the start by the European Commission of infringement procedures against Romania.

The COVID-19 pandemic has a significant impact on the local oil and gas industry. Following the reduction of activity or temporary shutdown of most industries, the oil and gas consumption decreased sharply and triggered a drop in prices, resulting in production cuts and increase of inventories.

For example, OMV Petrom registered a 64% reduction in their 2020 net profits, following a 19% decrease of sales and a 27% decrease of investments. For 2021, OMV Petrom estimates a further 9% reduction in oil production and a 14% reduction in gas production. In its turn, Romgaz registered in 2020 a decrease in gas production, mainly due to the pandemic.

Furthermore, COVID-19-related restrictions also had a severe impact on the operational activities of the oil and gas sector. The successive enactment of various restrictive measures required an additional effort from an already shaken oil & gas industry with a view to comply with regulatory requirements, such as ensuring on-site presence of personnel, compliance with country entry requirements, residence and quarantine formalities, temporary work permits, implementation of COVID-19-related special EHS internal procedures, required.

In the context of the decarbonisation ambitions assumed at the level of the European Union, Romania drafted the National Energy and Climate Plan (NECP) of 2021-2030 setting forth the necessary targets to be achieved in the decarbonisation process.

The NECP touches on the objective to reduce the internal greenhouse gas emissions, on the increase of renewable energy consumption as well as on improving the energy efficiency. The European Commission noticed Romania’s low ambition regarding the renewable energy target (30.7% although the real potential for renewable energy is much higher, respectively of 34%) and the plan is currently in revision by the Romanian Government. Following the launch of the “Fit for 55” package in July 2021, the European Commission requested an increase of this target up to 38% until 2030.

Among the trends inclining towards the low-carbon energy transition, we mention: (i) the phase-out of the coal industry, (ii) the decrease of fossil fuels by setting natural gas at the centre of the energy transition and, thus, encouraging complex infrastructure projects in the upstream gas sector, particularly the exploitation of gas resources in the Black Sea, (iii) the increase of nuclear energy percentage in the energy mix, (iv) encouraging the development of blue and green hydrogen (considered one of the most convenable solution at EU level), or even (v) developing biogas projects.

Currently, there are no specific requirements or regulations regarding the development of carbon capture and storage facilities or obliging the companies within the oil and gas industry to reduce their carbon impact. However, considering the targets assumed by the country regarding the reduction of carbon emissions until 2030, it should be expected that certain regulations will be enacted in the foreseeable future.

Although no national hydrogen strategy was put in place to date, according to publicly available information, a special hydrogen committee will be set-up within the Ministry of Energy with a view to handle the drafting of the hydrogen strategy.

Additionally, a new section regulating hydrogen production was introduced last year into the primary legislation, followed by the enactment of dedicated secondary legislation by NERA, which regulates, among others, the permitting procedure regarding the set-up and operation of new hydrogen production installations.

On a side note, it is noteworthy that the Romanian National Recovery and Resilience Plan envisages the development of smart gas distribution networks, capable of transporting a mix of natural gas and hydrogen. Additionally, it contemplates the development of two new combined natural gas, RES and hydrogen energy projects, namely:

• an integrated project composed of a 159 MW natural gas-fired power plant, a 20 MW photovoltaic park, a green hydrogen production facility and CCS installations at the Black Sea; and
• an integrated energy complex (green city), composed of a 159 MW natural gas-fired power plant, a 100 MW photovoltaic park, a green hydrogen production facility and CCU installations located in Mehedinti County.

Nevertheless, the latest draft NRRP (including the energy chapter) is still under scrutiny by the European Commission and it remains uncertain at this point if these projects will be maintained unchanged in the final draft NRRP.