European and international practice differentiation between offshore and onshore upstream oil and gas taxation
The present summary includes a detailed presentation of the following key points:
1. Differentiation between offshore and onshore taxation is common in international practice, including EU countries;
2. Romania’s royalty system generates higher effective royalty rates for the offshore compared to the onshore, as production thresholds for royalty purposes do not reflect the specific nature of offshore production.
1. Differentiation between onshore and offshore taxation – international and EU perspective
International upstream oil and gas fiscal systems are tailored to reflect the specific economics and challenges of each resource type.
Countries having both offshore and onshore upstream oil and gas sectors often provide different fiscal terms (e.g. differentiation in royalty rates, different terms for upstream specific taxes, production sharing arrangements with specific provisions).
The following EU countries that have both offshore and onshore upstream oil and gas activities have differentiated fiscal regimes for onshore and offshore:
No property taxes applicable for offshore assets while property taxes are applicable for onshore oil and gas assets.
No royalties are applicable for offshore fields while royalties are due for onshore fields (up to 7% and increasing in certain conditions) with production above defined levels;
25% investment allowance, which is an additional deduction, is applicable for marginal offshore fields;
No property taxes applicable for offshore assets.
The increased royalty rates in Schleswig Holstein do not apply to the only offshore producing field (‘’Deutsche Nordsee A6/B4“) for which stability of royalties exists.
Higher production thresholds for royalties/production taxes applicable to offshore fields as follows:
0% royalty for annual gas field production up to 80 mn. m3 for offshore compared to 25 mn. m3 for onshore;
0% royalty for annual crude oil field production up to 50 thousand tons for offshore compared to 20 thousand tons for onshore;
7% royalty rate for offshore oil production compared to 10% for onshore oil production;
No local tax applied on profits for offshore activities outside territorial sea, while a 3.9% rate on profits for onshore oil and gas;
No property taxes applicable to offshore assets outside territorial sea.
The rates of production tax applicable for offshore fields are lower compared to conventional onshore fields as follows:
Natural gas: 1.5% of production value in offshore compared to 3% for onshore (for gas fields with higher permeability and porosity);
Crude oil: 3% of production value in offshore compared to 6% for onshore (for oil fields with higher permeability and porosity).
Lower production tax rates for offshore fields compared to onshore fields.
2. Romania’s royalty system generates higher royalty rates for offshore compared to onshore
Unlike international practice in jurisdictions with production volume sliding scale royalties, where generally either offshore royalty rates are lower compared to onshore for a defined production volume or production volumes for offshore are higher compared to onshore for a defined royalty rate, (e.g. Spain, Italy, Algeria, Vietnam, Thailand, Colombia), as typically offshore projects require larger volumes for economic exploitation compared to onshore projects, Romania’s oil and gas royalty rates and production thresholds, however, are not differentiated between offshore and onshore.
This aspect of Romania’s royalty system, due to the high production rates for offshore developments, results in current and estimated future offshore gas production being subject, almost without exception, to the maximum royalty of 13% of production value, while the onshore industry, due to significantly lower average production rates, generates an average effective royalty rate of 7% of production value, according to the public information presented by Romania’s largest onshore producers, Romgaz and OMV Petrom.