Editor's Note: This Outlook Report on Romania's energy sector was produced as an internal guidance document for Stratfor's business development division. We are publishing it because of energy security-related developments in the European Union over the past month. The European Commission recently released its Energy Security Stress Tests, urging Romania to accelerate the development of natural gas interconnections with neighboring Bulgaria and Hungary to better manage any potential disruption of natural gas imports from Russia. Meanwhile, Hungary is planning to introduce new legislation that will allow any gas company that is not a certified transmission system operator to build a natural gas pipeline. This implicit reference to construction of the controversial South Stream pipeline project — mostly in an effort to bypass Ukraine in Russia's connectivity to Europe — further challenges the European Union, especially after the EU's announced suspension of its deliveries of natural gas to Ukraine earlier this month.
Energy security has become a key issue in Romania as a consequence of the still-deepening row between Russia and the West over Ukraine. The European Commission put Romania on the list of countries affected by a Russian cutoff in gas deliveries, analyzing the resilience of the EU energy system to a potential six-month disruption. However, Romania is the least affected country in the region, having a good energy dependence rate (21 percent) compared to the EU average (54 percent). Moreover, Romania is also a producing country, having a large potential of energy resources, making it key for the region's energy security in light of geopolitical trends.
Romanian Crude Oil and Natural Gas Sector Overview
Bucharest's declared goal is energy independence through efficient exploitation of the country's natural resources, while simultaneously considering the highest standards for environmental protection. As stated by government officials, Romania's energy strategy is to secure supply through both fuel imports and domestic supplies and maintain a balanced energy resource portfolio by promoting clean coal technologies, nuclear energy, renewable energy expansion and shale gas development. Romania's energy dependence rate is at 21 percent, a good rate compared to the average for the European Union, which is 54 percent.
Romania has a great deal of potential crude oil and natural gas resources in unconventional onshore resources, including shale gas, as well as conventional and deep-water offshore in the Black Sea. While some of Romania's offshore resources are included in officially proven natural gas reserves, none of the country's onshore shale gas resources are included. Development of these deposits is an important part of Romania's goal for energy self-sufficiency and is perhaps Romania's most promising prospect for further increasing its proven resources. The U.S. Energy Information Administration estimates that Romania may have 51 trillion cubic feet of technically recoverable shale gas resources, which — as compared to Romania's current proven reserves of 1.4 trillion cubic feet — constitutes a large prize. However, shale gas resources have become politically sensitive due to social opposition to hydraulic fracturing.
In the meantime, offshore resources are more promising and advanced and could come online in a reasonable time frame. However, deep-water development, such as ExxonMobil and Petrom OMV's Neptun block, often has a riskier and more capital-intensive cost structure than conventional onshore developments. The new petroleum law is partly designed to address these problems and will reportedly separate the royalty rate between onshore and offshore projects — applying different royalty rates to more capital-intensive offshore projects. While the deep-water offshore and onshore resources have their challenges and costs, it is quite clear that Romania is trying to prioritize these developments in its broader effort of energy security.
The New Framework Supporting Shifts In Energy Policy
Stratfor has tracked Bucharest's steps to create a new framework to improve the environment for investment over the last few months. Many of these steps are in response to the current political environment in Central and Eastern Europe, as well as growing U.S. support for the Romanian government's push to open up for foreign investment into the energy sector.
A new petroleum law is being written, and a new royalties regime is expected. At the same time, the government is currently drafting the outline document for the country's energy strategy. Yet, it is only a framework document that considers the main long-term goals publicly expressed in the media by the government's representatives. Energy Minister Razvan Nicolescu said on Oct. 21 that the first draft was to be completed at the end of the month. However, public consultations may start after the results of the presidential elections (mid-November), confirming that energy security is the main goal supported by the Romanian energy strategy, followed by Romanian industrial competitiveness and a sustainable, clean environment. The Ministry of Energy is also active in implementing reforms to increase transparency and reduce corruption in the state-owned companies it controls.
The Crude Oil and Natural Gas Market
- Oil production in Romania has steadily declined over time. Total crude oil and other liquids production in Romania were 104,000 barrels per day (bpd) in 2013, down from around 134,000 bpd in 2003. Romania has the fourth-largest crude oil reserves in Europe, with 600 million barrels of proved reserves as of Jan. 1, 2014, according to Oil and Gas Journal estimates.
Crude oil market structure:
- Main producers (exploration and production): Petrom, Romgaz, Rompetrol
- One transportation company: Conpet S.A. — Romanian company for transport of crude oil, rich gas, ethane and condensate through pipelines and by railway tankers, in view of supplying the refineries from Romania and the Balkan area with domestic and imported crude oil and derivatives. The operated network is divided into four sub-systems. These include the sub-system for domestic crude oil transport, 1,540 kilometers in length; the sub-system for imported crude oil transport, 1,350 kilometers in length; the sub-system for rich gas and ethane transport, 920 kilometers in length; and the sub-system for the transport in railway tanks.
- Refining capabilities: Romania has nine crude oil refineries with a total capacity of 467,642 bpd, according to the Oil and Gas Journal — among the largest refining capacities in Eastern Europe. Although Romania's refineries operate below capacity, refinery output exceeds domestic consumption (Romania consumed 215,000 bpd of petroleum in 2013). This allows Bucharest to export the surplus.
- Dry natural gas production has declined steadily over the past three decades, from its peak of 1.4 trillion cubic feet in 1983 to 375 billion cubic feet in 2012. Romania has the fifth-largest natural gas reserves in Europe with 3.7 trillion cubic feet of proven reserves as of Jan. 1, 2014.
- Romania's oil and gas developments are reportedly increasingly expensive and technically challenging. This is why attracting of foreign investment into the sector is one of the government's most pressing goals.
- OMV Petrom's solutions to stabilize domestic production: Efforts to improve the production landscape focus on the use of new technologies. These efforts include field redevelopment (water, steam and polymer injection), which accounted for 25 percent of the domestic crude oil production in 2012. Efforts also include partnerships with Petrofac (at Ticleni) and PetroSantander (Turnu fields) to increase production at 18 mature but smaller fields, partnership with Expert Petroleum (13 fields) and partnership with Repsol in 2013 (four onshore fields redevelopment).
Natural gas market structure:
- Main producers (exploration, exploitation and production): Romgaz, Petrom, Amoroco, Toreador, Wintershall Med, Aurelian O&G, etc.
- One transportation company: Transgaz
- Three gas storage operators: Romgaz, Amgaz, Depomures
- Thirty-four distribution companies for captive consumers and 76 suppliers on the en-gros market.
Tax Legislation and Historical Background
Transition of regulatory regime:
The current system of crude oil and natural gas royalties will remain in force until the new law on petroleum is issued and enters into force at the beginning of 2015. Prime Minister Victor Ponta said on June 4 that the new law aims to establish a royalty regime that ensures stability and predictability for investors. He added that the new legislation on the oil royalties would establish a differentiated regime, depending on the type of hydrocarbon field exploited. This envisions that royalties paid to the government for offshore resources will be lower than those for onshore fields, as a result of the fact that investments required to develop the offshore hydrocarbon fields are significantly higher. The prime minister also underlined, on various occasions and during interviews from June onward, that he does not foresee a "significant" increase in crude oil and natural gas taxes because he wants the country to remain "more attractive than others" when it come sto enlisting energy investments.
Key junctures in Romania's oil and gas history:
- Bucharest became the world's first city to be publically illuminated with kerosene, having around 1000 street lamps by April 1, 1857.
- Romania was the first country in the world with oil production officially registered in the 1857 international statistics, a production quantity of 275 tons. It was followed by the United States in 1859, Italy in 1860, Canada in 1862 and Russia in 1863.
- The world's first refinery. The first processing equipment for petroleum, considered the "oil pumps" from Lucacesti-Bacau, belonging to N. Choss in 1840 and M. Heimsohn in 1844. These were only simple handmade workshops equipped with rudimentary methods, which were used for refining, a system similar to the one for obtaining "tuica" in a rustic boiler. More important, the world's first large refinery was opened at Ploiesti in 1856-1857, with U.S. investment. Nazi Germany took over the Ploiesti refineries, but the Allies bombed them in Operation Tidal Wave during the Oil Campaign of World War II. As a consequence, Ploiesti today hosts the National Petroleum Museum, established in 1959.
- Romania was the first country in the world to export gasoline, in 1900.
- Romania is recorded as the first region in Europe where natural gas was industrially utilized. This began in 1913 with the establishment of the first natural gas production, transportation and marketing company in Turda — which later become the first European town to be lit with natural gas in 1917.
- Romania maintains the second oil-mine in the world as a semi-museum site located in Sarata Monteoru. Although listed as a tourist site and historical monument, the mine cannot be visited because it is privately owned by OMV Petrom.
Romania Coal Sector Overview
Romania is the sixth largest coal producer in Europe (seventh if Turkey is included). This production is mostly of lignite and almost all of it is consumed domestically for power generation. The country produced 1.8 million metric tons of hard coal in 2013, versus 22.9 million metric tons of lignite.
Production is concentrated along a band running through the center of the country from the Serbian border to just northwest of Bucharest. Most of the current mining, however, is in the Oltenia basin. The calorific value of this lignite is between 7,200 and 8,200 kilojoules per kilogram, with 30-36 percent ash and 1-1.5 percent sulfur content. The state-owned companies, especially Oltenia Energy Complex, dominate the industry and are subsidized by the government.
Production has been broadly stable over the last 10 years, until it dropped off in 2013. The International Monetary Fund is pressing the Romanian government to privatize two of the largest coal-based energy producers in Romania: Oltenia Energy Complex and Hunedoara Energy Complex. The current government has taken responsibility to close on the privatization of the two, aiming to sell the energy complexes to strategic investors.
The Main Producers
Oltenia Energy Complex
Oltenia Energy Complex is the largest coal-based energy producer in Romania and was set up in May 2012 by merging Turceni Energy Complex, Rovinari Energy Complex, Craiova Energy Complex and Oltenia Targu-Jiu National Lignite Company. Its total production capacity is of 3,900 megawatts, providing 30 percent of the Romanian electricity consumption.
The activity of Oltenia Energy Complex is carried out in four counties: Gorj, Dolj, Mehedinti and Valcea, including four thermal power plants. Lignite resources in Oltenia Basin are distributed according: 82 percent in Gorj County, 10 percent in Mehedinti County and 8 percent in Valcea County. Energy production activity is ensured by the thermal power plants Rovinari, Turceni Isalnita I and Craiova II. The number of employees in Oltenia Energy Complex is approximately 18,800, of whom 13,800 are in mining and around 5,000 in energy activity.
- A total of 170 units of high capacity mining equipment and a conveyor belt of over 280 kilometers ensures the production of over 34 million metric tons of lignite per year.
- 17 mining blocks — continuous flow extraction.
- Two underground blocks — long front stopes.
Hunedoara Energy Complex
The Hunedoara Energy Complex was founded Nov. 1, 2012, after the merger of two thermal power plants: Mintia/Deva (four energy plants of 210 megawatts each and 1 energy group of 235 megawatts based on coal) and Paroseni (one energy group of 150 megawatts) and four viable coal mines in Valea Jiului: Lonea, Livezeni, Vulcan and Lupeni, part of the Coal National Company. With an installed power combined from the two thermal plants of 1,435 megawatts and a total annual production of 5 terawatts, the Hunedoara Energy Complex covers 5 percent of Romanian electricity consumption.
The Romanian government is in the process of hiring a consultancy to oversee the privatization process of the complex, as reported in the official gazette of Romania. There are rumors that Hunedoara Energy Complex is close to insolvency, making it likely that the government will privatize it in the following months because of increased pressure from the International Monetary Fund.
- Four mining blocks with more than 39 years of coal reserves, alongside current industrial coal reserves of 56 million metric tons.
- Production capacity: 1.5 million metric tons per year.
- Ploiesti National Coal Company has reduced its activity and no longer runs mining activities — it currently employs about 100 people but only administers the mining assets. It is owned and managed by the Romanian government.
Government Policy and Environmental Issues
The coal industry (power generation and mining) has been largely subsidized by Bucharest. Most of the support received by the coal industry is classified as operating subsidies, or subsidies designed to keep a matured industry afloat by covering part of its operating costs so that it stays competitive. This has been the purpose of the formation of Oltenia and Hunedoara, as the government considered that integrating the works of both power generation and mining capabilities would diminish transfer costs and would generally grow efficiency at the macro-level. Also, without the current subsidies, the marginal cost would be above what the market is willing to pay for the closest substitute commodity, be it imported hard coal, gas or renewable generation. Consequently, Romanian coal mines would have to shut down with large attendant social costs. However, subsidies were also given on special schemes for mines that have been closing down since the mid-1990s, with the purpose of supporting the communities that were largely living on mining activities. The effects of such schemes, however, have been marginal.
Considering the stringent need of countries in Central Europe to diversify their energy resources in such a way as to diminish independence on Russian natural gas, Romania, which finds itself in the position of having to reform its coal industry while also still sitting on large coal reserves, is determined to consider ways to support industry development. One short-term problem that the government may face, should policies not attract foreign investment to the sector, is unemployment in areas that are largely dependent on the mining industry.
The government understands the need for sustained investment and is aware of the challenges the sector poses. Still, Bucharest hopes to attract strategic investors who will assure long-term growth of the sector and positively contribute to energy diversification that would be sustainable for the country's energy national strategy.
Environmental groups generally do not target the coal industry in Romania. Moreover, local communities in the industrial areas, being dependent on the coal industry related activities, are largely supporters for the continuation of mining activities. Strikes against mine closures have occurred in the past. The only environmental nongovernmental organization lobbying for closing down the coal mines is Greenpeace — however, compared to others, its activities on the coal sector are marginal.
European Union statutes are the driving force for most of the environmental regulations, and Romanian power plants must comply with some European standards by 2015. In order to meet these requirements Romania has been upgrading and closing plants. Although government officials have stated that they wish to see investment in the coal sector, foreign companies have found it challenging to operate there, complaining about an unstable regulatory environment. In November 2013, Italy's Enel dropped plans for an 800-megawatt coal-fired plant in Galati, Romania, five years in the making, citing unfavorable economics.
The law governing mining activities in Romania is Mining Law number 85/2003. This law replaces the previous law adopted in 1998. The sectoral legal framework is supplemented by the adoption of application norms by the government, as well as by a series of regulations and instructions issued by the competent authority, the National Agency for Mineral Resources and the Energy Ministry.
Mineral resources are turned into value by means of mining activities carried out by Romanian or foreign legal persons. These persons possess the required technical and financial capacity to which the competent authority, the National Agency for Mineral Resources, grants mining concessions in accordance with the provisions of the law.
Prospecting is carried out based on a non-exclusive permit issued by the competent authority in accordance with the law upon receiving a written request for an area defined by topographic-geodesic coordinates. The prospecting permit is issued for a maximum period of three years, without the right to be renewed and with the obligation to the payment of an activity tax prior to the beginning of each calendar year.
Exploration is carried out based on an exclusive license granted in respect of any mineral resource discovered within the area, upon the request of interested Romanian or foreign legal persons. The exploration license is granted for a maximum period of five years with a renewal right of maximum three years.
Mining exploitation is carried out based on an exclusive license. The exploitation license is granted for a maximum of 20 years with renewal rights for successive periods of five years. The exploration/exploitation licenses are granted to the winner of a public licensing round based on documentation submission. The documentation required for the exploitation license consists of the submission of a feasibility study, an environmental and social impact assessment in line with the principles of sustainable development, a development plan and an initial mining activity cessation plan including a regularly updated environmental rehabilitation program.
Coal represents 22 percent of the total energy consumption in Romania, and 39 percent of its electricity production. The main power plants that consume the coal are near the lignite-mining region, the Turceni (2,640 megawatts), Rovinari (1,720 megawatts) and Mintia-Deva (1,260 megawatts) plants.
Romania has said that it has no plans to remove coal from its energy mix, and some government officials have spoken about how their use of coal has insulated them from events in Russia and Ukraine, mainly because they get only 15 percent of their electricity from gas.
Imports and Exports
Romania is a very small exporter of coal (less than 7,000 metric tons in 2013), and a modest importer, with more than 900,000 metric tons in imports in 2013, or around three percent of consumption. Around 42 percent of these imports were from Russia, 28 percent from South Africa, and 18 percent from Ukraine.