Two strategic matters have gotten our attention in our last EnVal.
First, at the global level, there is the Helsinki Summit on July 16 where energy matters standing at the core of the talks between the U.S. and Russia prove the two countries are not adversaries. They are merely competitors and sometimes they partner with one another.
Second, there is the offshore legislation recently passed in Romania. Because it affects the investment decision of one of the most important American energy company (Exxon), the topic has got a lot of media attention. We take a somewhat different approach than the media: looking at potential scenarios, we come to the conclusion that this is just a case where companies will recalculate their budgets and options, with some even looking at the sale option (but most likely not Exxon).
Of the ongoing subjects on energy geopolitics we watch, the tactics employed by Gazprom in Europe are one of the most interesting that we enjoy covering. This time, we have analyzed the most recent case: how Gazprom managed to block the implementation of the European Network Code for the Orlovka – Issacea 1 inter-connector, between Ukraine and Romania.
We have also addressed the consequences of the Serbia-Kosovo conflict for the Continental Energy power grid, a matter that Brussels can’t resolve. At least not on the short term.
This Enval also comments on a trend we have noticed back in January 2018 and which is continuing: Poland is slowly shifting its position on the EU energy policy, considering coal becomes less important in the country’s energy mix.
Additionally, we have also briefly looked into the way the U.S. and the EU continue their dialogue on energy security as they held their first Energy Council meeting since Donald Trump became the president of the U.S.
And finally, our tech story was Bulgaria’s “Plasma plant”.
Considering the importance of the offshore legislation for the future of oil and gas business in the Black Sea, we include, below, our evaluation on the topic. If you would like to receive the Enval in your inbox, every two weeks, please register your email here.
Offshore quarrels in Romania
On Monday, July 9, the Romanian Parliament adopted a new legislation concerning offshore law oil & gas exploitation in Romania’s Black Sea Exclusive Economic Zone. Among others, the new law imposes a progressive windfall tax on additional income over certain thresholds for the Black Sea operators and establishes an obligation to sell 50% of the gas produced on centralized platforms in Romania. A previous obligation to trade 30% of the natural gas production on centralized platforms was in place since November 2016.
While the new law clarifies the permitting regime for the new infrastructure, the new taxation provisions prompted a quick reaction of the investors – ExxonMobil, OMV Petrom, Lukoil, and Black Sea Oil & Gas (a company owned by the Carlyle Group). The Association of Black Sea Titleholders contended that the amendments “will have a significantly negative impact on the offshore oil and gas industry in Romania and will discourage investments in the Black Sea, with the immediate consequence of diminishing the potential for additional production of hydrocarbons in the offshore area”. Exxon Romania’s Richard Tusker said that “following the change in the tax regime, it will become more difficult for each investor to take a positive investment decision”, while Austria’s OMV declared that the new rules “move us away from adopting a positive investment decision”. Exxon and OMV are expected to take a final investment decision (FID) for the Neptune deep-water block by the end of this year. The Neptune block is estimated to hold in excess of 80 billion cubic meters of natural gas.
A previous proposal forwarded by the Romanian Government to the Parliament last autumn aimed to exempt the offshore titleholders from the windfall taxation regime that is currently applied to onshore natural gas production.
There are unconfirmed reports that the Ministry of Finance is having difficulties in implementing the new taxation and deductions regime for offshore operators and that the Government is considering drafting of an Emergency Ordinance to ‘fix’ the newly adopted regulation. Such unconfirmed reports, along with others pointing to ongoing discussions between the companies involved and the government appear to point to the fact that final decisions are still being made.
Analysis on such cases imply working with scenarios that take into account the actors’ limitations as well as their interests. For a nation state the time span for such a decision is balanced with the national interest – for a company, be it strategic, the time span relates to business performance indicators such as return on investment and profit. Taking into account all variables, we believe that little if anything will be changed on the regulatory framework, which will, in turn, make the companies adjust their investment plans. Delays, as well as budget recalculation will likely be redone by the companies involved. It is possible that the re-evaluation of the project results, for the company with the lesser stakes, into a re-evaluation of the project itself. But this process is not something new for either of the companies – this is what companies do: re-evaluate their business operations.
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