Amendments to the petroleum law (what was meant and what came out)

Daniel Vlasceanu – Partner, Vlasceanu & Partners

I. General aspects

Because COVID-19 will eventually disappear and economic life will revive again, we have chosen to analyze the implications of the last amendments to the fundamental piece of legislation of the oil and gas sector: the petroleum law. In the evening of 4th February 2020, one day before the “no confidence” vote given in Parliament, the Government issued the Emergency Ordinance no 27 (the “GEO 27”) together with 24 other emergency ordinances. GEO 27 was meant to provide state control over transfers of petroleum licenses to “unwanted” entities affecting the national security.

The discussions (leading to the enactment of GEO 27) started in the context of ExxonMobil’s intention to sell its stake in the Neptun Deep offshore license. A number of various operators showed potential interest. At the same time, it is public knowledge that ExxonMobil is operating the Black Sea block via the Bucharest branch of a Bahamas registered entity; as such, it was said that the Romanian state had no direct¹ means to prevent a transfer to an undesired third party, should EM decide to sell the entity/ part of the entity holding the Neptun Deep interest (and not the interest itself). This was because the Romanian legislation did not impose the requirement of an approval from the Romanian authorities in case of a change of control over the entity holding the participating interest².

II. National security – explicit reason to deny/ unilaterally terminate petroleum agreements

2.1 Denial of future petroleum agreements

It is normal to recognise a state’s right to deny a licensing application (or petroleum operations) based on reasons of national security. It is stated under para 2, second line of Art 2 under Directive 94/22/EC on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons (the “Directive”).

The Directive (and the amended Art 31 para 1 of the Petroleum Law) enable EU states to exercise such right of denial with respect to applications received from non-EU companies.

2.2 Termination of ongoing petroleum agreements

Para 2 of the same Art 3¹ enables the Government [upon proposal of the National Agency for Mineral Resources (NAMR)] to unilaterally terminate an existing petroleum agreement based on national security reasons.

As detailed below, the application of such right must consider the risk (or, more likely, the certainty) of an international arbitration; however, it is beyond doubt that the underlying principle is in line with the spirit of Art 2 of the Directive 94/22/EC.

III. Transfer of the concession; change of control over a titleholder

3.1 The transfer of the petroleum concession

Prior to the amendment of the Petroleum Law, the transfer of a petroleum agreement was falling exclusively under NAMR’s authority. The procedure is detailed under Chapter IX of the Application Norms.

Following the amendment, any transfer of a petroleum agreement is to be approved by Governmental Decision (upon NAMR’s proposal).

We believe that such approval will add time and effort to a transfer process. Before the amendment, a Government approval was required only in two cases during the life of a license agreement: (i) at the very beginning, for its entry into force and (ii) upon splitting a concession into petroleum zones (as per Art 341 para 3 of the Petroleum Law). As to the first case, one can only mention that following the last bidding round, there were Governmental Decisions issued years after said round; as regards the zone splitting case: we have witnessed only one single case when such a split was under consideration, but it was dropped specifically because of the foreseen complications brought by a Governmental approval! While in other jurisdictions with substantial history in petroleum operations (e.g. the US) the situation of multiple zones under a single concession is commonly met, in Romania said legal provision (i.e. Art 341 para 3) is hardly ever considered…

3.2 Change of control

As mentioned above, prior to GEO 27, a change of control at the titleholder’s level did not require any Romanian authority approval (other than the Trade Registry formalities, if the titleholder was a Romanian entity).

Following enactment of GEO 27, in case of a change of control/ change in the structure of the shareholders holding control over a titleholder, such transfer is to be approved by Governmental Decision (upon NAMR’s proposal). It is highly relevant to mention that the Government may decide (i) to maintain, (ii) to amend or (iii) to unilaterally terminate the respective petroleum license (as per the newly introduced para 5 of Art 34 of the Petroleum law).

Let us analyse this in more detail. These provisions relate to existing (not future) concessions. As such, it is expected that the existing titleholder(s) made certain investments by the time of the transfer. Hypothetically, let us consider the case of a titleholder deciding to transfer its stake[1] in a concession. Such titleholder could end up with its concession being taken over (apparently, without compensation!) based on reasons related to national security. There are no restrictions, no limitations, no criteria mentioned (other than the reference to “national security”) which may provide a minimum indication on what might influence the Government’s decision.

While it is beyond doubt that national security cannot be “limitedly” defined and must prevail over specific private interests, we believe that certain guidelines must have been prescribed. For example, it would have been helpful to mention that “proper compensation” must be granted in such cases. Otherwise, the titleholder “released” of its license will surely go to international arbitration (where there is sufficient case law on nationalisation and indirect expropriation).

At the same time, national security may justify a limitation of rights “only if necessary” (as per Article 53 of the Romanian Constitution). Note is to be made that the same Article 53 refers to the fact that such limitation must be “proportional” to the situation that caused it. As such, the so-called reasonableness test must be ran in order to avoid excessive measures.

3.3 Sanctions. Applicability in time

If such the transfer of interest/ change in control is not notified, the titleholder will loose its interest. It would be recommendable though to stipulate what happens with the respective participating interest (i.e. who takes it over).

There are no indications as to the application in time of said provisions. As to the applications filed with NAMR prior to the entry into force of the amendment (probably, such situations will have to be judged by the general rules of law’s application in time). In the context of the licensing round announced in 2019, one may consider that new titleholders will be aware of the Government’s rights (including the one to unilaterally terminate the concession) from the “beginning of the game”; but there is a big question mark with respect to the existing titleholders that will have to face these risks/ rights from “the middle of the game” (…).

IV. Conclusions

This material is not necessarily meant to provide answers, but rather to highlight certain aspects and open them up for debate. The subject of national security is a sensitive one, constantly evolving in line with the wider regional/global developments and it will always raise live debates; but one should not allow, in the name of national security, the creation of an insecurity feeling among stakeholders of the petroleum industry which is, without doubt, of national strategic importance.

As such, while it is useful to have the national security principle expressly transposed into the Petroleum Law, we believe that is imperative for the amendments brought by GEO 27 to be further clarified. Certain provisions (particularly the state’s right to terminate/ modify the license in case of a change of control) raise questions. For example: how far down the line a change in the shareholding having control over a titleholder is relevant? Or, in case a titleholder loses its interest, what happens if the remaining titleholders cannot take-over the “vacant” participating interest? does it go directly to the state? Could this be a sanctioning measure towards the other titleholders for not opposing the envisaged transfer? etc.

Overall, our opinion is that the last amendments will not stimulate further transfers of interests (which, in certain situations, may be beneficial to the sector), neither further investments…Eventually, the world will overcome the Covid-19 pandemic and the Romanian regulatory framework needs to regain investors’ trust strongly shaken in the last years. If the low oil price spans over a longer period of time, it is likely to further wait until the new bidding round will be officially launched. In such circumstances, one can only hope that the lawmaker will understand the broad context and re-consider the implications of the last amendments to the Petroleum Law for the existing investors.

¹I believe that a state has sufficient indirect ways of (signaling and, eventually) preventing an undesired investor from entering its economic realm (all within the limits of legality, if properly orchestrated); however, it is not the purpose of this material to detail this aspect.

²Para 2, second line of Art 2 under Directive 94/22/EC states that “[…]Member States may refuse, on grounds of national security, to allow access to and exercise of these activities to any entity which is effectively controlled by third countries […]

³It is to be noted that there are business models consisting specifically in the “preparation” of a block specifically for sale, i.e. the titleholder never envisages developing/ producing it.