ROMANIA AND THE OPPORTUNITIES OF AN INTEGRATED NATURAL GAS MARKET IN CESEEC

Gazprom’s project to increase the transport capacity of the Nord Stream pipeline will change the map of energy flows in Europe and will unbalance the countries of central, eastern and south-eastern Europe (Central, Eastern and South-Eastern European Countries - CESEEC). Beyond the problems, the question marks and the challenges posed by Gazprom’s project to Europe, this context could turn Romania into the most important gas supplier, and especially into a stability provider in CESEEC; it is a market that consumes about 100 billion cubic meters of gas per year, of which 66 billion cubic meters of imported gas, it has a population of about 135 million people and an overall GDP of over USD 1,500 billion.

Announced in June this year, the Gazprom’s plan to increase the transport capacity of Nord Stream pipeline took by surprise the European public opinion, bringing up to date both the questions regarding the EU’s energy security policy and the discussions on the risks posed by Europe’s high dependency on a single supplier (i.e. Gazprom). In such a context, maintaining the energy balance in Eastern and South-Eastern Europe is a prerequisite for stability in the region and a determinant issue for the future European single energy market; Romania, due to its geographic location, due to its natural resources, the infrastructure and the know-how and due to its human resources is a player that will have a big say, almost regardless of the chosen solutions.

NORD STREAM 2, BOTH A PROBLEM AND A SOLUTION FOR THE EU

In early June, the Russian company Gazprom announced that it had reached an agreement with Shell, E.ON and OMV - to expand Nord Stream’s transmission capacity to 55 billion cubic meters per year; in early August, just two months later, international media showed that Gazprom seeks to convince the French company Engie (present in Romania as well) to join the project. We are talking thus about the second phase of the largest Russian project to supply gas to Europe on routes bypassing Ukraine; in 2011, Gazprom and its Western partners inaugurated the first phase of Nord Stream - pipeline consisting of two pipes with a capacity of 55 billion cubic meters per year, connecting Vyborg (Russia) to Greifswald (Germany) by the Baltic Sea, thus bypassing transit countries in Eastern Europe.

The construction of the third and fourth transmission lines, as intended (also having a capacity of 55 billion cubic meters per year), would basically double Nord Stream’s volume, which can be considered a solution and/or an answer to EU’s need to ensure the stability of energy sources on the long term. On the other hand, the Gazprom project is a major source of problems across the Union. It amplifies questions about the direction of the European energy policy, given that the Gazprom project leads to higher EU dependence on Russian gas, in a context in which the EU officials made it clear that they want lower dependence on Russia and overall higher energy independence. Such a contradiction is leading to uncertainty and tensions at continental level, especially that the large European companies involved seem to act without restraint contrary to the declared interest of the European area.

The situation is different for the ‘two Europes’. Thus, for Western Europe, besides the fact that the project can be part of the solution answering the need for supply securitization, potential problems arising from it are rather on long term and principled; this is because the West European market has a high degree of diversification, with more suppliers and several supply streams, as well as a high level of interconnectivity - making it very least sensitive to risks; unlike it, for the countries in Eastern and South-Eastern Europe, the negative potential impact might take place strongly and directly in the coming years.

So, given that the upgraded Nord Stream would enable the rerouting out of the traditional routes of almost the entire Russian gas exports to Europe, the Gazprom’s project could unbalance not only the CESEEC energy system, but also the state budgets of the countries that cashed in royalties for the transit of natural gas to Europe (Ukraine being the country most affected by this!). As a detail, it should be noted that, after the second phase of the project, the Nord Stream’s transport capacity would reach 110 billion cubic meters per year, while Russia’s annual exports to Europe were, during the last decade, of about 130 billion cubic meters per year, on average.

As these changes are envisaged to occur in an extremely difficult geopolitical and economic context - characterized on the one hand by the existence of an open conflict in Ukraine and by a state of high tension between Russia and the countries on the eastern border of the EU, and on the other hand by the delay in European economy’s recovery and, more recently, by the immigration crisis (which divides the European unity to an unprecedented degree and manner in recent decades)... the speeding up of the development policies implementation, the reorientation and interconnection of the EESC gas markets and connecting this region to the EU energy market are, undoubtedly, priorities for the region.

THE EU ENERGY STRATEGY

For more than a decade, Europe has been trying to build a single and competitive market, in this endeavour being included the energy market and thus the electricity and gas markets; Europeans aim to build on the medium and long term a single energy market, where consumers have the opportunity to choose suppliers and where prices converge to the same level. This is an important issue in order to ensure a competitive environment in all sectors of the European economy and to successfully build the EU single market; the efforts towards achieving a single energy market materialized through the adoption of several laws at European level, the most relevant being those developed in 2003 - known as the ‘Second Internal Energy Market Package’ and subsequently issued in 2009, known as ‘Third Internal Energy Market Package’.

Natural gas prices in EU and SEEThis regulatory framework aimed at improving the market conditions for consumers and is facilitating access of new companies to the energy market (electricity and natural gas) in the EU. In this respect, the European Commission requested the separation of transmission from generation and supply, thus aiming to create the necessary framework to ensure access to the transport infrastructure for any company that wants to enter the domestic electricity or natural gas market, with production or supply operations. The Commission supports the separation by the types of operations, not only on legally or operational, but even deeper, down to the level of ownership; thus, a company that owns a transmission network cannot own property in production or supply.

But the European Commission’s agenda came into collision with Gazprom’s interests in the European Union since launching; so, after a series of disputes in statements, the Russian company was accused by the European officials of violating the EU’s legal framework, namely that the granting of contracts and prices to some of its business partners was conditioned on concluding subsequent contracts by the latter with a number of companies agreed by Gazprom. In parallel, the situations arising from the disputes between Russia and Ukraine in 2006 and 2009 have confirmed the problems generated by Europe’s dependence on a major supplier of gas and showed how vulnerable are actually the isolated and dependent economies (as the Southern and Eastern European ones were and still are) to disruptions in supply, as compared to the integrated economies into large energy markets which have diverse supply sources (such as the ones in Western Europe). The impact on eastern and south-eastern Europe, the repeated escalations of the conflict between Ukraine and Russia, have thus led to understanding that the involvement of CESEE countries in EU’s plans to develop a single gas market is a precondition for a successful European approach; especially since this region is the gateway to the Union of the future European routes designed to bring gas from the Caspian Sea (an example being the Trans-Adriatic Pipeline project, which is currently underway).

EU’S COUNTER REACTION

The new context created by the recent announcement made by Gazprom highlights the relevance of the actions and plans of the, not known until very recently, ‘Energy Community’ organization, established in 2006 at the initiative and under the control of the EU members, which includes the EU Member States and non-member states in central, eastern and south-eastern Europe that have undertaken the implementation of the acquis communautaire on energy and market liberalization. The aim is to boost the infrastructure development and the mechanisms needed to achieve an optimal interconnection between the national energy systems at regional level.

InfographicHaving originated from the Energy Community of South East Europe – ECSEE, established in 2002 in Athens – in view of preparing the countries in South-Eastern Europe (SEE) for the EU accession, the current ECSEE has 19 EU members (including Romania, Austria, Greece, Hungary), eight non-EU countries adherents (Albania, Bosnia-Herzegovina, Kosovo, Macedonia, Montenegro, Serbia, Ukraine and Moldova), three observers (Armenia, Norway and Turkey) and a candidate - Georgia, former observer until 2006 - in the process of accession. This organization, just a month after the Gazprom announcement, specifically in early July, informed in turn, that 15 of its members have completed and signed in Dubrovnik (Croatia), an agreement to accelerate the infrastructure construction of natural gas to interconnect the region and to expedite the overcoming of technical and regulatory difficulties that might impede the construction and proper functioning of a regional common market for natural gas.

Natural Gas Exports in CESEECThe signatories of this agreement (Austria, Bulgaria, Croatia, Greece, Hungary, Italy, Romania, Slovakia, Slovenia, Albania, Macedonia, Serbia and Ukraine) are to be joined by Bosnia & Herzegovina and Moldova. The development comes after the re-launch of Nord Stream project by Russia, as a result of discussions within the ‘Central Eastern and South-Eastern European Gas Connectivity Group’ that works at the European Commission level since February 2015. The agreement is also a response to the conclusions of the ‘stress tests’ conducted by the European Commission in 2014 on the EU gas market, tests which revealed (as evidenced previously also by the regional problems caused by the shutting down of Russian gas in 2006 and 2009) that most CESEE economies cannot offset the gas supply disruptions, being trapped in by the poorly developed infrastructure and by the long-term contracts with a sole supplier. The situation is maintained and perpetuated by the lack of competition and by the inefficient use of interconnections. “This region is very important for Europe, especially as regards securitization of energy supply. Infrastructure improvement is crucial for the diversification of energy supply and for increasing the region’s capacity to withstand shocks. The key issue in this case is the cooperation between the countries in this area and the Commission’s support for this approach as part of its European Energy Union Strategy,” said at the time of signing the agreement Maroš Šefčovič, Vice-President of the Energy Committee with the European Commission.

The importance of the agreement is given by the fact that out of the long series of projects and initiatives, in progress or under study at European level, some of them, such as the Trans-Adriatic Pipeline (TAP), the LNG terminal in Croatia and the upgrading of connection points between Bulgaria and Romania, Greece and Bulgaria, Serbia and Bulgaria, have been placed on the list of projects of utmost importance - considered to receive priority funding from the European financial institutions and/or international institutions. For Romania, the Dubrovnik Agreement is also very important because, according to the group’s Action Plan, Romania is part of no less than five of these priority projects.

Thus, the modernization and the upgrading of the national transport system, by increasing the transfer capacity and by building the two-way traffic capacity at interconnection points with other countries in the region are classified as being of greatest importance. On the list of priorities there is also the strengthening of the national transport in view of building and updating the infrastructure needed for the reception and rerouting the gas extracted from the future Black Sea offshore operations. On the list of priority projects there are also: the completion of the connection with Bulgaria, increasing the supply capacity to Moldova and achieving the two-way transfer capacity of the Romania-Ukraine interconnector through the Isaccea point. All these projects could have the possibility of receiving preferential funding from the European financial institutions, and thus can have a significant economic impact by adding value in the national economy.

CHALLENGES AND OPPORTUNITIES IN CESEEC

Therefore, analyzing the situation from the perspective of the importance of building a single EU market and of its energy security, Europe must speed up the interconnection of energy markets within CESEEC! On the one hand, this has to be done because the region is the gateway to the EU for the gas coming from the Caspian Sea, as the only viable alternative to Russian gas and secondly because this approach can be a test for the European single energy market project. And if the South Eastern Europe

Proven reserves of natural0gas in CESEECintegration is crucial for the success of the European single market, so the development of the transport infrastructure (pipelines and interconnections) which connect the SEE regional economies, prisoners on land with no seaside (such as Macedonia, Kosovo and/or Serbia), is the key to success for the CESEEC area interconnection plan; this is a critical point because these countries have no other options, such as maritime supply with liquefied natural gas. Therefore, their land interconnection is the only way possible. In other words, only the construction of a sound and well ramified ground infrastructure in this region can meet the need for routing/rerouting natural gas, according to the needs and under conditions determined by the market/free competition between economies/countries in the region; this is the only way for ensuring the operators’ access to a market with free prices and at lower levels than those established under the current long-term contracts concluded with one supplier; at least that is the conclusion to be drawn following the figures showing that the prices paid by ‘captive’ states and the ones paid by the states integrated on larger energy markets, which are very significant. Thus, while Macedonia, Bosnia and Herzegovina or Bulgaria have paid over the past years between USD 500-USD 560 per thousand cubic meters (tcm) of natural gas imported from Russia, and Greece and Serbia were buying Russian gas for USD 470, USD 460 respectively – during the same period Austria, Germany and France, whose energy systems are much more integrated/interconnected, paid individually less than USD 400/tcm (see the map ‘Natural gas prices in the EU and SEE’).

Natural gas imports in CESEECThis context makes the CESEE countries a realm of challenges and equally a space of opportunities! The first element to be considered is that the CESEE countries are the gateway to Central Asian gas to the EU; so that regardless of the route or the project considered, no pipeline designed to bring gas to Europe from the Caspian Sea could be built without crossing the region! And, as regional infrastructure is highly underdeveloped, regardless of the project, the investments in the region will be significant. Therefore, a first series of opportunities on the CESEE natural gas market arise from the disparities against the rest of Europe.

It’s not just the disparities in infrastructure – an issue underscored above, but also the large disparities in terms of the degree of economic and social development, which, in view of the convergence of these economies to the European space, imply a potential economic growth much higher than the one of EU economies; in this regard, it should be noted that if the EU annualized average growth is forecast to 1.5% by 2030, for the SEE economies, for the same period, it is estimated an average growth of about 2.5% per year. Also, the area’s current growth rate (which is already significantly higher than that in the rest of the EU), or the population growth rate and its structure by age, are other serious advantages of the region. In addition, as in most countries in the region coal (a resource with large emissions of carbon) has a large share in the energy mix - another opportunity is given by the very likely change in the structure of energy consumption, in order to reduce pollution, by increasing the share of natural gas in the overall energy consumption. On these assumptions are probably based the forecasts showing that the natural gas demand in the countries of South-eastern Europe will almost double by the end of 2025. And, not least, it should be also considered that a CESEE gas market, integrated, functional and competitive would create a virtuous circle of opportunities. Thus, due to lower gas prices, the energy bill and the currency effort of the countries concerned will decrease, accompanied by lower trade deficits and lower current account deficits; also, the fall in utilities prices (and not only!) supplied to the population will leave more money to the citizens who can thus stimulate other economic sectors; In addition, another set of opportunities will be generated by falling costs in the energy intensive economic sectors, which could attract new investments.

WHAT DOES THE CESEEC MARKET MEAN FOR ROMANIA

Beyond the opportunities given by the growth potential and by the development of the regional market, reviewed above, a regional system of transport and distribution/redistribution of natural gas between national systems is particularly important, especially because it opens a market having a population of 135 million people and an overall GDP exceeding the threshold of USD 1,500 billion.

Natural Gas Consumption in CESEECAnd the fact that the region is a net importer of natural gas is another element of attractiveness: by the end of 2013, the CESEE countries natural gas imports (mainly from Russia) amounted to about 66 billion cubic meters out of a total consumption at regional level exceeding slightly the threshold of 100 billion cubic meters. This may be an opportunity for Romania, the only country in the region that has a surplus of natural gas from domestic production, being the second largest holder of gas reserves in the area; furthermore, perhaps even more important is the fact that Romania is the only country in the CESEE whose proven reserves of gas have increased in recent years and has the perspective of an ongoing trend in the coming years, following the exploitation commencement of the Black Sea deposits (see the table ‘Proven reserves of natural gas in CESEEC’).

Romania’s proven natural gas reserves for 2015 are estimated by the US EIA to 105 billion cubic meters, stalling as compared to 2014 and 2013, but by about 60% higher than at the end of 2012; for comparison, the largest consumers of natural gas in the region - Hungary, Austria, Greece have, according to the same US EIA estimates, proven gas reserves that do not exceed overall the level of 15 billion cubic meters (see the table ‘Natural gas consumption in CESEEC’).

Natural Gas Production in CESEECRegarding the proven resources, Romania is surpassed by Ukraine, which has reserves of over 1,100 billion cubic meters; Ukraine has consumed, during the last four years, on average, about 50 billion cubic meters of gas per year, but extracted only about 20 - the remaining 30 billion cubic meters per year being imported (from Russia!) (see the table ‘Natural gas production in CESEEC’). And even if gas demand in the region is on a downward trend (see the table ‘Natural gas consumption in CESEEC’), previously data show Romania has the fundamentals necessary for positioning in a way that can bring many opportunities to gain on the CESEEC natural gas market. On this market Romania seems to be in an unstated, but quite likely, competition with Austria and Hungary (economies well connected to the Western European natural gas transport system) for the status of regional ‘hub’. By their positioning and by their connections to the European energy market, Austria and Hungary are probably, individually or together, better positioned in the complicated game to get this role of energy arbitrator in the CESEEC area.

However, in the new context – by its natural resources (existing and pending to be harnessed!), by its infrastructure network and by its domestic market relatively well developed (in comparison to the region!), through experience and human resources and, not least, by the fact that next year it could give up on gas imports (according to ANRE’s estimations), Romania - a country that has the profile of a credible and reliable balance provider in the region – could be a major beneficiary of the opportunities offered by the CESEEC gas market.

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