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Developing onshore resources vs. offshore resources

Offshore oil and gas resource developments are significantly different from onshore developments, particularly in “frontier” locations without existing infrastructure or mature regulations. In general, offshore developments require very specific technology for drilling, production, transportation and operation, extensive planning and execution times, and result in much higher upfront investments than onshore developments. In addition, it is not unusual that complex commercial agreements need to be established to underpin offshore development projects and ensure their commercial viability.

What makes the offshore developments different?

Technology

  • Offshore resource developments require specific technology.
  • Offshore resource developments in the Black Sea are significantly more complex than onshore developments because they are located in a corrosive environment with challenging sea-bed topography. They require the use of cutting-edge technology, specialized equipment and, for developments located in deepwater, experienced operators and service providers.
  • Offshore resource developments have much longer project lead-times compared to similar onshore developments (from the start of seismic activities until the start of production). Therefore, these projects are more exposed to changes in the business environment and the legal framework in Romania than onshore developments.
Higher costs

Offshore oil and gas resource developments require significantly higher investments than onshore developments, and may reach several billion dollars prior to first production.
  • Drilling an offshore well in shallow waters can cost 10 times more than a conventional onshore well, whereas drilling an offshore well in deep waters can cost 100 times more than a conventional onshore well.
  • Drilling one deep water well may cost US$150 million – $200 million.
  • Over $2 billion were invested in the last 15 years in exploration activities only offshore Romania. The development of production facilities for the new projects involve additional investments of several billion dollars.
  • The magnitude of investments often leads to multiple partners forming joint ventures to manage the financial risk to explore and produce the resources. International oil companies’ involvement is critical to project success as they typically have the financial strength and project expertise to successfully oversee such large projects.
Infrastructure and market access

Contrary to onshore developments, investors into offshore gas resource developments in Romania must also develop extensive offshore infrastructure to transport and/or process gas to shore, connect it with the national gas transmission system (NTS) of Transgaz.
  • Because the NTS does currently not extend all the way to the Black Sea coast, the development of offshore gas resources typically implies an expansion of the NTS. Such extension needs to be supported by significant financial commitment from the offshore investors.
  • Securing NTS and market access often requires a complex chain of multi-year transportation and/or sales agreements that provide future financial visibility to the investors. Their ability to implement such a chain is highly dependent on the predictability of the applicable fiscal, legislative and regulatory frameworks.
Can exceed 15 years from exploration to first production

  • Pioneer projects: Domino 1, the first deepwater exploration well drilled in Romania, was completed in 2012. The ongoing MGD project will be the first offshore new gas production facilities to be built in Romania in the last 20 years.
  • The lack of existing offshore infrastructure: Offshore projects do not benefit from existing infrastructure. Investors would construct the entire marine, subsea and onshore infrastructure up to the takeover in the NTS.
  • Investment amounts are spent upfront, with several years until the start of production and corresponding revenues.
 
Fundamentally different conditions for the infrastructure construction and operation compared to operations performed exclusively onshore

Black Sea specificity implies special technologies:
  • The subsea environment is corrosive at water depths of more than 100 m.
  • Drilling and other large equipment and material may need to transit through the Bosphorus straits to access the Black Sea.
  • Watch: Ocean Endeavor Rig Mobilization
 
High effective royalties rates

13% offshore gas royalty rates: high production rates for offshore developments result in current and estimated future offshore gas production being subject, almost without exception, to the maximum royalty of 13% of production value, which is one of the highest royalty rates in comparison with similar offshore European jurisdictions.

Read more:  EY Global oil and gas tax guide 2019 (“EY Guide”); Deloitte Study (April 2018) - An overview on royalties and similar taxes; Oil and gas upstream sector across Europe and Biris Goran Study (September 2019) Status upstream natural gas specific taxation regime in Romania
Consistent with other European countries’ practices

Consistent with other European countries’ practices including Great Britain, Italy, Netherlands, Poland, Spain, etc.

Read more: European and international practice differentiation between offshore and onshore upstream oil and gas taxation