Romania plans to hike oil and gas extraction royalties before 2014.

By bne IntelliNews March 5, 2012
Romania might hike the royalties on oil and gas extraction before 2014, economy minister Lucian Bode told Ziarul Financiar daily in an interview. The negotiations on the issue with OMV Petrom, which accounts for nearly all of the country's oil production and for half of its natural gas output, have already started, a report in news agency Mediafax, which cites Bode's interview, said. The topic is particularly delicate since the privatisation contract of Petrom (meanwhile re-named OMV Petrom) includes a clause under which the extraction royalties, set as percentage of the production's market value (3.5% to 13.5% depending on the field of production), cannot be changed before 2014. IntelliNews Comment : The negotiations take place at a moment when the EC and the IMF press Romania to liberalise its natural gas (and electricity) market. At present, the domestic production prices and the end-user prices are softly regulates (e.g. as recommendations rather than compulsory prices), while the extraction fees are at rather low levels. The low level of extraction fees is visible in the local producers' high profit margins achieved even under the conditions of capped end-user prices. Hiking the extraction royalties before 2014, if accepted by OMV Petrom, would unlock the liberalisation process in the natural gas market. OMV Petrom and Romgaz, the country's key oil and gas companies, reported record profits for 2011 and their gains would surge even more if end-user prices rise as an expected effect of the market deregulation. But by hiking the extraction royalties, the state can trim the companies' profitability in line with the international benchmarks and use the royalties to provide consumer subsidies to low-income families. Unfortunately, the mechanism depends critically on the government's ability to use efficiently the royalties. Nonetheless, the hike of the extraction fees followed by a deregulation of the natural gas market, including freeing exports, is the only way to observe the European directives in the energy sector.

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