Romania has the third largest natural gas reserves within the European Union (EU) and new reserves are still being discovered. With domestic gas production within the EU declining, the country could play an important role in the regional market. But for this to happen, interconnections need to be expanded and the liberalization of the market needs to be completed, write Ramona Visenescu and Henry Bartelet of the independent international think tank DynaMundo.

Romania occupies the third place in the EU in term of natural gas reserves, after the Netherlands and the United Kingdom. This makes it different from its neighbours, as it needs to import only a small quantity (some 3% in 2015) of natural gas.

At this moment two companies account for almost 95% of Romanian gas production: state-owned Romgaz and OMV Petrom, a subsidiary of Austrian company OMV. Imports (usually in the winter) come from Russia, although not directly from Gazprom, but through intermediary companies, like WIEE and Conef Gaz.

Although Romania was one of the first countries that used natural gas in Europe, nowadays consumption and production in Romania are steadily decreasing. In fact, the Energy Strategy drafted at the end of 2016 by the government envisions a continuing decrease in gas production and consumption from onshore reserves in the period 2016-2030, mainly because of the shutdown of important industries.

There is an important barrier to Romania’s export hopes, namely the lack of interconnectivity with other countries

This is a continuation of a trend that started in the 1990s, when production declined from almost 25.5 billion cubic meters (bcm) in 1990 to around 9.7 bcm in 2014, with the share of natural gas declining from 60% to 33% of total energy production.

Consumption has decreased from almost 32 bcm in 1990 to 10.4 bcm in 2014, the biggest decrease of consumption in the EU, where the majority of countries increased their consumption of natural gas. For example, Poland saw its gas consumption grow from 10 bcm in 1990 to 15 bcm in 2014.

Romania’s gas imports have followed the same path, with volumes decreasing from almost 6.5 bcm in 1990 to 0.5 bcm in 2014.1 In 2015, imports accounted for only 3% of Romania’s consumption. Romanian energy regulatory authority, ANRE, has said that Romania will become energy independent from the year 2016.2

Vital role

Nevertheless, despite these trends, Romania could play a vital role as gas supplier, helping to achieve the EU’s objectives to create an Energy Union and a single gas market, and improving the energy security of its neighbors. The country has significant reserves and new ones are still being developed.

Romania has proved reserves of 101.37 bcm according to the newest draft of the Energy Strategy and new prospects are being made, especially in the offshore sector. For example, in 2012, a venture between OMV Petrom and ExxonMobil discovered high volumes of natural gas offshore in the Romanian part of the Black Sea. The estimated reserves are approximately 84 bcm. Compared with the Romanian consumption of circa 10 bcm per year, this quantity is quite large for Romania.

Any decision to invest profit from the energy companies in infrastructural projects reduces dividends paid to the government. This can explain why the construction of interconnectors with Bulgaria and Hungary have been stalled for many years

Although the size of field is perhaps not large enough to sustain a long-term export portfolio, it should be noted that this discovery was the result of one of the first deep-water explorations in the Black Sea. This could mean that, potentially, other discoveries could be made in the future using this exploration technology.

And other discoveries have been made. Russian company Lukoil, which owns a refinery in Romania, has found a natural gas field in the Black Sea with estimated reserves of around 30 bcm in 2015. OMV Petrom discovered an onshore field at Totea in 2016, estimated at 4.7 bcm. Romgaz discovered an onshore field at Caragele of circa 27 bcm in 2017. The estimations are only preliminary, as the fields are still in the process of being explored. Still, the new discoveries, especially the ones in the Black Sea, have brought hope of real ‘gas bonanza’ in Romania and of becoming a gas hub in the region. In political, industrial and academic circles, natural gas has become a hot topic again.

Lack of interconnectivity

However, there is an important barrier to Romania’s export hopes, namely the lack of interconnectivity with other countries. So far, Romania has done little to interconnect its gas grids to other European countries. The only significant amounts of natural gas that are exiting Romania come from Russia, with Romania’s role being only that of a transit country.

There are interconnectors with Hungary and Bulgaria, but because of the lack of complementary constructions (compressor stations), they transmit only negligible quantities of gas. The pipeline Giurgiu-Ruse, which connects Romania and Bulgaria, has zero flows of natural gas. Also, Romania has not made proper retrofitting to its existing pipelines to allow reverse flows. Because of this, Romania’s large amounts of natural gas cannot be exported and because of the declining consumption within the country, there are no incentives to invest in bringing new reserves to the market.

This situation has caught the attention of the European Commission, which on 1 June 2017 opened an investigation to find out whether Transgaz, the Romanian transport system operator (TSO), Transgaz “has been abusing its dominant position by isolating the Romanian gas market and preventing its integration into the European gas network.”

The Commission’s antitrust investigation will focus on “indications that Transgaz has devised a strategy to restrict gas exports from Romania to other Member States. This strategy may have been implemented in several ways including through the use of: interconnector transmission fees, underinvestment or delays in the building of relevant infrastructure, and un-founded technical arguments as a pretext to prevent or justify delays in exports.”3

Romania should pay attention to the changes at its western border and open dialogue with all its neighbours in order not to repeat the Nabucco scenario

A reason for restricting the exports could be related to fears that these increasing exports might intervene with plans for Romania to become self-sufficient in natural gas. Transgaz is a state-owned company and therefore it is following the policy lines of the government. Also, the Romanian budget is heavily dependent on dividends from energy companies, which are large providers of the national budget.

This means that any decision to invest profit from the energy companies in infrastructural projects reduces dividends paid to the government. This can explain why the construction of interconnectors with Bulgaria and Hungary have been stalled for many years. For example, the Arad-Szeged gas pipeline between Romania and Hungary inaugurated in 2010 works in only one direction, from Hungary to Romania.

However, the new discoveries and the possibility of Romania becoming an important player in the regional gas market seem to have changed the policymakers’ attitudes towards interconnectivity. A lot of hope is put on a new pipeline which is being built by Transgaz that would connect Bulgaria, Romania, Hungary and Austria (known as BRUA or ROHUAT).

BRUA, supported by the EU as a project of common interest, has already received funding from EU institutions and is viewed as a major infrastructure project in the new Energy Strategy draft. The project should become operational by 2020 and will have a length of 550 km on the Romanian territory, with a capacity to export gas to Bulgaria of 1.5 bcm per year and to Hungary of 4.4 bcm per year.

The construction of the pipeline has a second stage that will connect the main pipeline with the offshore fields of the Black Sea.

The construction of the pipeline is a hugely important factor in decisions to exploit offshore fields, given the fact that the offshore quantities are also for export. The destination for the gas would ultimately be the Baumgarten hub in Austria, one of the most mature in Central and Eastern Europe.

However, the BRUA project is now being threatened, because the Hungarian TSO, FGSZ Ltd, announced at the end of July that it is not economically viable to make the interconnection with Austria, which means the pipeline will finish in Hungary.5

This announcement from the Hungarian side is part of a broader policy change. At the beginning of July, Peter Szijjarto, Minister of Foreign Affairs and Trade of Hungary signed a roadmap with Russian company Gazprom to develop the Hungarian gas transmission system and to eventually connect it with TurkStream, the Russian pipeline that will deliver natural gas under the Black Sea.

Also, there are talks with Hungary’s Russian and Serbian partners to revitalize the South Stream Project, a pipeline that was abandoned by Russia after difficulties with the European Commission. The South Stream project should bring some 6 bcm of Russian natural gas through the south of Hungary.

Transgaz has announced that it will continue with its part of construction of BRUA, regardless of what the Hungarians are doing, but the situation is a major blow for the Black Sea offshore gas that could have helped Romania play a regional role by connecting it to one of the most important gas hubs within the EU.

FGSZ Ltd has suggested an alternative route for the Romanian gas – to enter the Hungarian national transmission system and from there to be transported to Slovakia, Ukraine, Croatia or Serbia, without a separate interconnection with Austria. Romania should pay attention to the changes at its western border and open dialogue with all its neighbours in order not to repeat the Nabucco scenario, when it bet all its cards on the construction of the EU-backed pipeline, while its neighbours were turning towards the construction of the Russian South Stream project.

The lack of competition is partly due to the lack of incentives for companies to invest in the natural gas industry – mostly as a result of lack of infrastructure and uncertainty in the legislation

In the south, Romania started the construction of compressor stations at the border with Bulgaria and is planning to interconnect with the Greek market via Bulgaria. Another project of common interest for Romania is Eastring, which would connect Bulgaria, Romania and Slovakia. This project, currently under review for feasibility, is being developed by the Slovakian TSO Eustream. It will have an annual capacity of circa 20 bcm in the first phase.

Moreover, Romania is considering a project for reverse flows to Ukraine on the pipelines that are for now reserved for Gazprom to transport natural gas to the Balkans. This project, which includes a compressor station, should be commissioned in 2019.

When these projects are finalized, Romania will become connected with most of its neighbors and also have access to the larger European market. The country will be able to export natural gas instead of only being a transit country. The first steps are being made and Romania has started with the construction of compressor stations at the border with Bulgaria and Hungary, in order to adjust the different pressures of natural gas existing in the national transmission systems of the countries.

Liberalization

For Romania to become a regional player in the gas market, it also needs to reform its domestic market and make it conform to EU rules. Romania has transposed into its legislation the European directive on establishing a liberalized market (Third energy package) in 2012, e.g. giving third-party access to pipelines. In 2017, the wholesale price was liberalized for the majority of customers. This means that all consumers are free to choose their supplier and the rights of consumers increased significantly. In order to protect the population from increasing gas prices, the government decided to keep the regulated price for household consumers and the district heating thermal power plants (CETs) until 2021.6

Active on the Romanian market now are 7 producers (OMV Petrom, Romgaz, Amromco Energy, Stratum Energy, Hunt Oil Company, Raffles Energy, Foraj Sonde), 34 distributors and suppliers of natural gas for consumers and 76 wholesales suppliers.7

Perhaps the Czech Republic could serve as a model for the Romanian government how to successfully liberalize the gas market

Still, in 2016, the two main producers, Romgaz and OMV Petrom covered 94% of internal gas production.8 On the regulated retail market, the two main suppliers, E.ON Energie Romania and Engie Romania account for 90% of the market. On the liberalized market, the share of the four main suppliers – Romgaz, OMV Petrom Gas, Engie Romania and E.OnEnergie Romania – is 80%.

The lack of competition is partly due to the lack of incentives for companies to invest in the natural gas industry – mostly as a result of lack of infrastructure and uncertainty in the legislation. But things are slowly improving.

Following the liberalization of the market, the amount of natural gas traded on the centralized market has increased, which shows willingness from the market actors to have a more competitive market. The Romanian Mercantile Exchange (BRM – Bursa Română de Mărfuri) is the platform that trades the biggest quantities of natural gas. In 2014, almost 4 million MWh were traded on the exchange, in the first quarter of 2017, 44.3 million, representing almost 71% of the consumption of that period.9 The exchange still lacks some services that will make trading more appealing, but there are plans to make it more competitive and sophisticated.10

The government and the political environment are supportive of the process, although there have been changes in the taxation for oil and gas companies that could bring uncertainty for investors. The Romanian Petroleum Exploration and Production Companies Association (Ropepca) has voiced its concerns over a plan to increase the tax rate for the upstream sector,11 which is already one of the highest in the EU.

Czech example

For the liberalization of the gas market, the legislator has taken the electricity market as a model, which was already opened in Romania in 2005. Even though it’s not completely finalized, it’s working well and is connected with other European markets. But the gas market has some peculiarities that make it different from the electricity market. One major difference is the small number of producers of gas.

Perhaps the Czech Republic could serve as a model for the Romanian government how to successfully liberalize the gas market. Like Romania, the Czech Republic had a centralized economy until the beginning of the 1990s and became prosperous after joining the EU. The Czech Republic has liberalized its market after it first put in order its infrastructure, putting in place adequate interconnections with its neighbors.

The belief that natural gas could be the next big thing for Romania has triggered new mobilizations in some areas

The international context also helped, because after the construction of Nord Stream, it became an important transit country for gas coming from Russia via Germany that went further to the east to Slovakia and Ukraine. In 2015, it stopped receiving gas from Slovakia, instead getting it from Germany.

The development of new infrastructure has raised the flexibility and lessened the dependence on one route or supplier, which consequently diminished the price gap between countries. At the virtual gas hub that the Czech Republic has created, VirtuálníObchodní Bod, the price of natural gas has decreased, becoming more aligned with the gas price in other European countries, especially the one in Germany.

All this while the Czech Republic does not have the advantage that Romania holds of having large gas reserves. These reserves could boost Romania’s importance, especially after the finalization of the Southern Gas Corridor, the infrastructure project promoted by the European Commission in order to diversify the imports of natural gas and also to interconnect the member states in the south-east. Because of these interconnections, Romania could diversify its sources of natural gas, which would bring more liquidity to the market and also start to export its domestic natural gas.

The way forward

Romania still needs more steps to implement the necessary measures in order to become a proper functioning market. But progress has been made and the belief that natural gas could be the next big thing for Romania has triggered new mobilizations in some areas.

Around the year 2020, the major infrastructure projects, BRUA, compressor stations and extraction from the Black Sea are due to be completed. Around that time, the Southern gas corridor is also to be ready and if the interconnector between Greece and Bulgaria will be finished, new flows of gas could come in Romania via the south, which will increase the liquidity on the gas market.

Also, by 2021, the price for all end-consumers will be liberalized and around that time the trading platform will become more mature and ready to offer a variety of services. Hence, Romania could become a regional player in the gas market, but it is necessary that policymakers will continue to support this idea and to promote it with different member states in the region.

Editor’s Note

DynaMundo is a Seattle-based think tank that applies systems thinking, data science, advanced simulation and participatory methods to solve complex problems.

Ramona Visenescu is a research fellow at DynaMundo and PhD student at the Saint-Petersburg State University of Economics. Her research focuses on European energy policies with a special focus on the implementation of the Third Energy Package within the Eastern European gas market and the broader EU-Russia energy relationship.

Henry Bartelet is the founder and commercial director of DynaMundo. He is involved in a variety of projects around the world on economic policy, energy markets and sustainable development.

Notes:

Eurostat, Energy balance sheets. 2014 Data, p. 57 http://ec.europa.eu/eurostat/documents/3217494/7571929/KS-EN-16-001-EN-N.pdf/28165740-1051-49ea-83a3-a2a51c7ad304