With oil reserves constantly estimated between 150 and 200 million barrels, Albania has been widely regarded as one of the richest in hydrocarbons European countries, whereas Patos-Marinza oil area is recognized as the largest onshore oil field in continental Europe. Therefore, it was only normal for the industry to be quickly regulated upon the transition of Albania towards democracy in the early 1990s, by adopting industry specific legislation. Law 7746/1993 and Law 7811/1994, dealing with the granting of exploration and exploitation rights and the taxation of the activities, respectively.
The Ministry of Infrastructure and Energy is the competent authority for concluding petroleum agreements with the investors for an initial term of up to 5 (extendable to 8) years for exploration, and up to 25 (extendable to 30) years for production and exploitation of the hydrocarbon reserves. With regard to areas that, by virtue of an agreement entered with the Ministry, are under the operation or administration of the state-owned company Albpetrol, it is the latter that is entitled to sub-grant the respective exploration and production rights to investors interested in the research and production of oil and gas. Production sharing agreements are the most common instrument used so far, whereby the contractor assumes the financial and technical risk in exchange for recovering its costs from revenues from sale of oil and gas produced.
Despite the abundance of natural resources, however, the production and the economic benefits from the sector have been lagging. On one hand, only a few agreements have moved into production phase. On the other, the companies that invested in exploration and production are yet to reach a point of recovery of their exploration and production costs. For the purpose of determining the taxable profit, contractors are entitled to deduct any investment made against petroleum revenues. As a result, the upstream oil & gas sector had hardly generated any taxable profit so far and, despite the significant tax rate on the profits from petroleum operations (50%), the positive impact of the exploitation of hydrocarbon resources on Albanian economy had been marginal.
While undertaking various attempts to promote the business opportunities in the sector, the state initiated a public consultation process for the introduction of fiscal measures aiming to improve the revenues of the State from petroleum operations, including but not limited to the extraction, production and sale of oil and gas. As a result of this process, on December 17, 2020, the Albanian Parliament passed Law 153/2020 “On the fiscal regime in the petroleum sector”, effective as of February 2, 2021. This act introduced some significant changes forming a substantially different fiscal ecosystem compared to the previous one.
First, the new law introduced a limitation on the amount of annual expenses and carry forward tax losses which can be deducted against the annual revenues. By setting forth that the deductible amounts cannot exceed 85% of the income, the new law is seeking to ensure a minimum of 15% of taxable income of all petroleum related operations and therefore aims to secure a tax revenue of effectively at least 7.5% of the total income of such operations.
Another novelty is that the new regime shall apply not only to legal entities that are licensed to carry out onshore petroleum exploration and production activities, but also to their subcontractors carrying out, directly or indirectly, petroleum operations. The expansion of the material scope of the Law in that direction is expected to result in the increase of the rate of the profit tax from 15%, to which the subcontractors were subject prior to the entry into force of the Petroleum Fiscal Law, to 50% with regard to the taxable profit deriving from petroleum operations carried out by the subcontractors.
Not surprisingly, the change was not welcome by the key industry players who already raised concerns during the consultation phase. It remains to be seen how it shall actually impact both the existing operations and the appetite of the future investors for the Albanian petroleum sector. However, it would certainly stir the status quo, and would be expected to trigger transformations in the oil and gas sector in Albania.
By Svetlin Adrianov, Associate Partner, and Krisela Qirushi, Senior Attorney at Law, EY Law