Taxation regime for oil & gas industry in Romania

www.pwc.com

Andreea MitiritaTax & Legal Services DirectorPwC Romania

PwC 2

Agenda

24 March 2017Taxation regimes for oil & gas industry

Overview of tax systems applicable in upstream (oil and gas industry)

Specific conditions of oil and gas industry in Romania

Taxation regimes for oil & gas industry3PwC

Overview of tax systems applicable in upstream (oil and gas industry)

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Taxation regimes for oil & gas industry4PwC

Of the three types of fiscal regimes applicable, in OECD countries the dominant one is Concessionary (including Romania)

Concessionary (CC)1

Production sharing agreement (PSA)

2

Service Contracts (SC)3

CC

PSA/ SCSC

PSACC / PSACC / SC

* Countries indicated in grey were not analysed

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CC / PSA/ SC

Taxation regimes for oil & gas industry5PwC

Characteristics of concession type systems

Tax base System Description Profit linkage

Revenue

Flat rate

o Single royalty rateo Discourages investments in marginal

fields (with small productions/difficult conditions)

Minimum

Sliding scale

o Production- based – dependent on the volume of production per field

o Price – based – dependent on the prices of oil and gas

Medium to High

Profit

Flat rate - supplementary

o Supplementary tax on profit, additional to regular corporate income tax, with deductions for different types of fields

High

R-Factor

o Royalty / hydrocarbon tax rates increase when ratio between cumulative revenues and costs of project is higher than defined thresholds

Maximum

Mixed (revenue and profit)

o Tax on both revenue and profit, based on a combination of the 4 systems from above.

Medium to Maximum

Beyond the pure financial analysis, the use of each system must also take into consideration the complexities of implementation.

Where Romania is

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Where Romania might be

Taxation regimes for oil & gas industry6PwC

Issues considered System based on revenue System based on profit

The impact on state revenues Certainty of revenue

State revenues are not certain, due to the fact that they depend on the profit obtained from fields exploitation

Time record of revenue Since the start of production Later, after making profit

Challenge of implementing Reduced efforts for monitoringHigh administrative efforts for monitoring and control, because usually it involves determining profitability.

Tax system based on revenue versus based on profit

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Taxation regimes for oil & gas industry7PwC

Specific conditions of oil and gas industry in Romania

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In Romania conventional deposits have a high maturity and a natural decline accentuated

Natural decline of oil production is about 10% per year

To compensate the natural decline, major investments are needed in production capacities

Source: BP Energy Statistical Yearbook 2016

824 March 2017Taxation regimes for oil & gas industry

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

0.0020.0040.0060.0080.00

100.00120.00

Evolution of oil production(Mbbl / year)

104 114

53

3137

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

-

10.0

20.0

30.0

40.0

Evolution of natural gas production(bcm/year)

10

23

33

28

11

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Romania Gas production trends & forecasts

Source: BMI Romania Oil and Gas report – Q2 2017

924 March 2017Taxation regimes for oil & gas industry

2016e 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f02468

10121416

9.9 9.9 9.7 9.4 9.1 8.8

13.114.6 14.8 14.4 14

Dry natural gas production, bcm

Black Sea discoveries:

OMV & Exxon Mobile

• Domino Project in the Neptune block ;

• Estimated volume 42-84 bcm; Investment decision: 2019 ;

• Estimated production: 2021;

Lukoil

• Lira -1 discovery in Trident block• Estimated production 30 bcm; • Investment decision: 2016 (up to this

date no new info) ;• Postponement reason: waiting for a

fully liberalised market

New licensing round:

• potentially 2017• NAMR – 11th tender expected for:

o 28 onshore blockso 8 offshore Black Sea blocks

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Tax principles

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Stability and predictability

Flexibility and progressiveness

Competitiveness

Neutrality

Certainty of taxation

Efficient administration

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Royalty(per field)

Production sliding scale (for oil in ‘000 tonnes / quarter;

for gas in mn cm / quarter)

Production sliding scale on an annualised basis1

(for oil in ‘000 tonnes / year;for gas in mn cm / year)

Oil 3.5% - 13.5%

Range 1: Small fields <10 – 3.5%Range 2: Small fields 10-20 – 5.0%

Range 3: Medium 20-100 – 7.0%Range 4: Large >100 – 13.5%

<40 – 3.5%40-80 – 5.0%

80-400 – 7.0%>400 – 13.5%

Gas 3.5% - 13.0%

Range 1: <10 – 3.5%Range 2: 10-50 – 7.5%

Range 3: 50-200 – 9.0%Range 4:>200 – 13.0%

<40 – 3.5%40-200 – 7.5%

200-800 – 9.0%>800 – 13.0%

Romania - Revenue based royalties*

*no differentiated rates for onshore vs offshorePayable by 25th of the month following the quarterRoyalties rates were introduced in 2002 and were not amended since

A tax system should be stable and predictable

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Supplementary tax on supplementary revenues* from liberalization of prices for natural gas, with:

• Allowances for investments, capped at 30%

• Deduction of royalties paid

* Introduced as of 1 February 2013 **Introduced as of 1 February 2013

*** Introduced as of 1 January 2014 and abolished as of January 2017

These are transitional taxes until the upstream fiscal regime enters into force.

Tax on revenue from crude oil**

0.5%

Tax on special construction***

1.5%/ 1%60%

A tax system should be stable and predictable

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Romania considers a new tax system for the upstream industry

A mixed system based on revenue and profits

Royalty rates potentially adjusted and differentiated for onshore and offshore

Supplementary tax on profits (with allowances)

A tax system should be flexible and progressive

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16% CIT rate

No ring fencing rules

Deductions for provisions &

reserves

Specific depreciation rules

for upstream

Royalties deducted for corporate tax

purposes

A tax system should be competitive – Corporate Income Tax features

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Joint venture agreements

Exemption of reinvested profit

R&D allowances

Tax consolidation

allowed only for PEs of foreign

companies

Tax on capital gains from

disposal of right over natural resources

IFRS and RAS for accounting

purposesLosses can be carried forward

for 7 years

A tax system should be competitive - Corporate Income Tax features

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A new tax system should not negatively impact ongoing investments

Viability of projects should be protected

• Ring fencing rules for upstream activities• Rules for determining the tax base

Tax provisions should be clear and transparent

The tax system should be easy to administer

A tax system should be neutral, certain and easy to administer

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What attracts investors?

1724 March 2017Taxation regimes for oil & gas industry

Privatisation

New concessions

Transfer of concessions

Cooperation with authorities

Gas price liberalisation

Infrastructure

•2004: OMV Petrom;•2013: Romgaz - listed on the stock exchange (BVB, LSE);

•Tender rounds for new concessions; •New potential round in 2017;

• Farm in, Farm out, Joint Venture agreements;• Enhanced production contracts;

•Open consultation with market players, both with the regulator (NAMR, NAER) and tax authorities (Ministry of Finance, NAFA);•The Romanian Government negotiated a calendar for the gradual liberalisation (despite EU restrictions);

•Undeveloped infrastructure, however investments are envisaged.

Tax system•Concession agreements (royalty rates);•Stability clause;

PwC

Thank you!

Andreea MitiriţăDirector, Tax and Legal ServicesPwC Romania

Tel.: +40.21.225.3727

+40. 0722.942.017

E-mail: andreea.mitirita@ro.pwc.com

Thank you!

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