Legislation and taxes
Oil and gas exploration activities are primarily regulated by Bulgaria’s Ministry of Economy and Energy. The principal laws that authorize these activities are the Underground Resources Act (originally enacted in 1999) and the Concessions Law (enacted in 2006). There are a number of other laws that impact oil and gas exploration activities, including environmental laws and laws governing procurement of goods and services.
The regulatory scheme in Bulgaria is a tax/royalty regime. The Bulgarian Government owns all of the minerals, including oil and natural gas in the ground. Exploration permits are issued by the Government that enable the permit holder to produce and develop specific minerals or oil and gas as authorized by the exploration permit. Title to the minerals or oil and gas pass to the permit holder at the surface, subject to the obligations to pay tax and royalties. The tax on corporate profits is 10%. There is also a 20% value added tax (VAT) on most goods and services.
Upon production from the Vranino 1-11 Block, the Government will be paid a royalty based on a sliding scale, called an R Factor. The R Factor is calculated by dividing cumulative revenues by cumulative expenditures. As long as the R Factor is less than 1.5, the royalty paid to the Government by Park Place will be 2.5% of the oil and gas produced and sold. As the R Factor increases, so does the percentage of royalty paid, with a maximum royalty of 25.5% when the R Factor exceeds 3.0.
In April 2014, the Company signed a five year License Agreement with the Bulgarian Government. The Company will commence exploration following various regulatory approvals of the Company’s planned work programs.
In August 2014, the Bulgarian environmental ministry approved the Company’s planned work programs. However, a number of parties (including non-governmental environmental groups) appealed the decision of the Bulgarian environmental ministry. The Company is confident that this will cause only a temporary delay, and that on ground operations will commence once the requisite regulatory approvals have been obtained.
In general, the terms and conditions governing how a permit holder operates under an exploration permit are described in a license agreement that is negotiated between the Bulgarian Government and the permit holder. The permit holder is the party who has won the competitive auction that is staged for every awarded oil and gas exploration permit. Park Place won the bidding for the Vranino 1-11 Block in 2010 based on the work that it committed to perform during the term of the License Agreement. The specifics of the exploration activities planned by each permit holder are then reviewed and reviewed by relevant Bulgarian ministries for compliance with applicable law.
License Agreement terms
The Company’s work commitment on the Vranino 1-11 Block consists of various specific exploration activities, including the acquisition of new seismic, the re-entry and testing of the Vranino 1 well (drilled in 2005) and the drilling of up to 5 additional wells or the equivalent of 10,000 meters of new wellbores (which may be vertical, diagonal or horizontal and may be drilled as a new well or sidetracked out of an existing well).
The initial term of the License Agreement will be 5 years, with the possibility for two 2-year extensions. Under the Company’s work commitment, geological and geophysical work will occur in the first 3 years and drilling activities will occur in years 4 and 5. However, Park Place will be allowed to modify the timing and order of such work, subject to regulatory approval. The term of the License Agreement will not commence until the initial regulatory approvals have been obtained. Accordingly, until the appeals filed against the decision of the Bulgarian environmental ministry are resolved in the Company’s favor, no on ground operations will commence. However, during this period, the Company will continue its data gathering and analysis and its preparation for future operations.