After several years of debate, the Ministry of Energy has drafted a new ordinance on the methodology for concession payments for underground resources.
The concession payment is calculated as a percentage of the total income from the activity using the R-factor scale.
The R factor is the amount equal to the pision of the total cumulative income from the activity for all reporting periods to the total cumulative expenses for the activity related to the concession for all reporting periods.
The R-factor scheme for calculating the concession payment has now more than doubled, which will put on hold the plans of most oil & gas investors in the country. This move is just contrary to the recent move by Romania, which led to unlocking of major investment in the oil & gas sector.
Below is a table giving a clear comparison in the increase of the R factor percentage in the draft Ordinance.
R-factor | Current % | Proposed % |
<1.50 | 2.5% | 5% |
1.50-1.75 | 5.0% | 10% |
1.75-2.00 | 7.5%to 10.0% | 15% to 19.8% |
2.00-2.50 | 10.0%to 12.5% | 20% to 24.9% |
2.50-3.00 | 12.5%to 22.5% | 25% to 44.6% |
>3.00 | 25.0%to 30.0% | 50% to 60% |
Further increase is envisaged within each stage of the R-factor calculation. For example, a value of the R factor from 1.75 to 1.99 forms a concession payment from 15% to 19.8% of the total income from the activity, whereas each increase of the R factor by 0.01 increases the percentage of the concession payment by 0.20%.
Existing concession contracts will be renegotiated to accommodate higher concession payments and this is raising concerns regarding the applicability of the stability cause under art. 63 of the Underground Resources Act.
Reduction of concession payment may be sought for a limited time, based on specific criteria like area of development of the concession, employment levels, etc. An exclusion for oil & gas production is a much necessary step if Bulgaria wants to maintain the slim chances to support its indigenous natural gas production.
Given the current situation and the fact that the government is considering various measures to subsidise the industry for high natural gas prices, any increase in concession payment formula will undermine the potential foreign investment in the sector and development of production. So industry’s reaction will be benchmark for the next steps.
The industry’s reaction is expected by 30 May.
For more details on this regulation, contact your CMS client partner or local CMS experts Kostadin Sirleshtov and Denitsa Dudevska.
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