TransAtlantic Petroleum Corporation - Romania

Romania

In February 2006, the Company was awarded three production licenses onshore by the Romanian government in the 7th Licensing Round. The three oil and gas fields, Izvoru Field, Vanatori Field and Marsa Field, each cover about 1,200 acres. They were discovered by the former national oil company, Petrom, and are all located within 60 miles of Romania's capital, Bucharest. The licenses were awarded to TransAtlantic based upon its commitment to certain work programs on each of the respective fields over three years. TransAtlantic will be the operator and 100% working interest owner of the fields.

All three fields previously produced oil, gas or both but were not fully developed. Discovered in 1968, the Izvoru Field produced 1.35 million barrels of oil from 26 wells. Completion difficulties and sand production resulted in limited flow rates and recoveries and led to premature field abandonment in 1998. Izvoru is a stratigraphic play and produces from Sarmatian (Tertiary age) shallow marine sandstones (about 4,000 feet sub sea). Additionally, there is deeper potential in Cretaceous Albian age limestones which are productive in adjacent fields and were penetrated by four wells in the Izvoru field but not developed. The initial work program will be to re-start production. The Company plans to re-enter up to 9 wells and shoot a 25 sq. km. 3-D seismic survey and drill a new well thereafter.

The other two fields, Vanatori and Marsa, were both discovered in the 1970's. Five wells were drilled in the Vanatori Field, two of which produced a total of 1.3 Bcf over six years from the Sarmatian formation (about 5,600 feet sub sea). There is also deeper Cretaceous potential in the field. The Vanatori Field was prematurely abandoned due to sand production and water invasion (the wells may be located too close to the gas/water contact). The Company plans to shoot a 2-D seismic survey and provided this confirms the prospect, drill a new well. In the Marsa Field, five wells were drilled of which three were productive. Between 1974 and 1983, these wells produced a cumulative 0.3 Bcf from the Meotian (Tertiary age) reservoir (about 2,100 feet sub sea). The Company will shoot a 2-D seismic survey over the field and provided this confirms the prospect, drill a new well.

Romania has a developed infrastructure for oil and gas and all production is sold at or near world market prices. There is ready availability of drilling rigs and technically competent workforce.

Fiscal Terms

Romania's current petroleum law (enacted in late 1995) introduced a royalty tax system with the award of concessions. This replaced the production sharing system which had been adopted when foreign investment was first allowed in 1990. This law essentially provides a framework for investment and operation that allows foreign investors to retain the proceeds of the sale of petroleum. The fiscal regime is comprised of royalties, excise tax and income tax. Two forms of royalty are payable:

A percentage of the value of gross production on a field basis, such percentage being fixed on a sliding scale depending on production levels. The production royalty rate varies between 3.5% to 13.5% for crude oil and between 3% to 13% for natural gas production; and
A fixed percentage of the gross income obtained from the transportation and transit of petroleum through the national pipeline system and from petroleum operations carried out through oil terminals belonging to the state. The royalty rate is currently fixed at 5%.

The licence holder pays corporate income tax, but enjoys a one-year income tax holiday from the first day of production. Corporate income tax is at a rate of 16%. All costs incurred in connection with exploration, development and production operations are deductible for corporate income tax purposes. Excise duty is payable on crude oil and natural gas at the rate of 4 euro per tonne of crude oil and 7.4 euro per 1,000 cubic metres of natural gas. Excise tax is not payable on crude oil or natural gas delivered as royalty to the government, or on quantities directly exported. Resident companies which remit dividends outside Romania are subject to a dividend withholding tax at between 10-15 % dependent upon the proportion of the capital owned by the recipient. No customs duty is payable on the export of petroleum nor is customs duty payable on the import of material necessary for the conduct of petroleum operations. The current fiscal regime does not levy signature/discovery bonuses, production bonuses or rentals. There is also a 19% value added tax. Oil is priced at market while gas is tied to a bundle pricing based in part on the import price and in part on the domestic price.

Licensing Regime

The Ministry of Industry and Resources has responsibility for petroleum policy and strategy. The National Agency for Mineral Resources ("NAMR") was set up in 1993 to administer the petroleum industry and represent the state in dealings with oil companies. NAMR's responsibilities are to regulate petroleum operations by:

Preparing and promoting areas for competitive bids;
Negotiating terms and agreements for exploitation and production;
Monitoring and regulating petroleum related operations;
Establishing legal taxes, royalties and prices for related activities and operations; and
Organizing the national database including maintaining records for oil and gas reserves.

When licenses are to be made available, NAMR publishes a list of available blocks for concession in the Official Gazette. Foreign and Romanian companies must register their interest by a specified date and must submit applications by an application deadline. Applicants are required to prove their financial capacity, technical expertise and other requirements as stipulated in the tender call. The licensing rounds are competitive and the winning bid is based on a scoring system.

NAMR negotiates the terms of agreements granting the licenses with the winning licensee and the license agreement is then submitted to the government for its approval. The date of government approval is the effective date of the license. Blocks which fail to attract a prescribed level of bids are re-offered in a subsequent licensing round. NAMR may issue a prospecting permit or a petroleum concession. A prospecting permit is for the conduct of geological mapping, magnetometry, gravimetry, seismology, geochemistry, remote sensing and drilling of wildcat wells in order to determine the general geological conditions favouring petroleum accumulations. A petroleum concession provides exclusive rights to conduct petroleum exploration and production under a petroleum agreement.


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