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 reserves are estimated to amount 200 bcm, allowing the expansion of 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 gas being expected to be produced in the second part of 2021.

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 reduction. During last year, crude oil production equalled 2.778 million toe, being 1.2% (33,500 toe) lower than the previous year.

We note that the exact amounts of oil & gas reserves are not public, such being classified by the applicable legislation as work secret.

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. Little differences may exist in timing and scrutiny but the project development process is 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) to the 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 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 stipulated by the law.

Unconventional resources are not currently exploited in Romania.

There was an attempt to develop shale gas projects in the country but, due to protests occurred back in 2012-2014 and a political reluctance to approve controversial projects (as the shale gas ones were viewed in Europe at the time), the investor left Romania 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 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 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, 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, where it holds a 70% stake and OMV Petrom, where it holds a stake of about 20%.

Until recently, foreign companies were almost equally treated as Romanian companies. The only real requirement was to incorporate a Romanian subsidiary or a branch.

However, in early 2020, an emergency government ordinance introduced several restrictions related to national security reasons 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.

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.

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 tax on supplementary profits which was introduced in 2013 and extended year by year was made permanent, a new supplemental tax was enacted in relation to 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.

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 the Romania with the consequence of said obligations having been gradually repealed. From a legal process perspective, these measures have been both introduced and repealed by way of emergency government ordinances which, according to the Romanian Constitution, have to go through the parliamentary approval process, still ongoing. Hopefully, in the near future the obligation to supply the national market first will be a subject closed definitely.

In terms of transmission infrastructure and interconnectivity, Transgaz, the national TSO undertook a very ambitious upgrading and development program, aimed at ensuring the free flow of gas out of the country.

As far as local content obligations are concerned, these were put forward only in respect of offshore concessions.

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 and petroleum legislation. Such obligations entail the performance of strict regulatory procedures and the obtaining of 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 follow 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 a single 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 (2019-2028), Romania will develop a LNG receiving terminal by 2026.

Natural gas storage has a major role in ensuring the security of supply by covering consumption peaks caused mainly by temperature variations, 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.

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 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. 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, the Romanian gas industry was gradually privatized after 1989 (the year which marked the fall of the communist regime). 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 national 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 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 changing the supplier with the of allowing for an effective and quick switch, in full compliance with EU 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 sell and/or trade on the centralised market.

Following the legislation enacted this year, 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.

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.

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 trade on centralised market (for more information please see the reply to question 17 above) or the obligation to supply the market first and at a fixed price (for more information please see the replies to questions 10 and 15 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 legislative instability.

Complementary to the above, a key challenge in the gas sector seems to have been the State’s ability 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.

In the context of the decarbonisation ambitions developed 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.

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 green hydrogen (considered one of the most convenable solution at EU level), or even (v) developing biogas projects.