Fall in price of imported gas and Romania’s energy independence
- Written by Dumitru Chisalita, Judicial Technical Expert in Oil & Gas
In recent years, the important steps on the path to Romania’s energy independence were appreciated by some analysts, although the truth showed that this independence was a conjectural one, given the closure of industrial consumers and not due to public policies. Could a significant fall of import gas prices throw Romania anytime into the position of dependence on gas imports? Both positions are conjectural, for Romania is important to remove an outdated concept, such as the energy independence, and to replace it with the concept of energy security (see the article written in 2013, entitled ‘Energy security versus energy independence’ http://dumitruchisalita.ro/2013/12/28/securitate-energetica-versus-independenta-energetica/).
Contrary to some assessments on the market, in my opinion, the reduced price of Russian gas supplied to Europe is not a decision decisively based on extra-trade issues. I believe that the trend of natural gas prices, corroborated with the price of petroleum products, linked by existing formulas in sale contracts of natural gas, reveal a decreasing trend in the price of natural gas since 2014, which can reach in 2016 the level of USD 200/1,000 cubic meters. In fact, my forecast, presented at the beginning of 2015 in the book ‘The natural gas market’, Transylvania Braşov Publisher, showed the possibility that gas prices might reach USD 200/1,000 cubic meters in 2016.
I believe that a level of natural gas sale price of USD 200/1,000 cubic meters is not to jeopardize Gazprom; even if the company will face a significant cut in revenues, this price level is far from being a matter of survival for the Russian energy giant. At the same time, I believe that the fall of imported gas price to this level is an important lesson that countries like Romania must learn from.
Among these important lessons we can mention:
• The free market of natural gas is highly volatile (the fall in price of imported gas in three years by about 300%) and the participants should be able to manage it, especially several dozens of months from now, when the price will start to grow.
• The recognition of the danger posed by the concept of energy independence, this may cause situations such as the one when the cost of energy produced in Romania is higher than the imported one. Thus, security is jeopardized by the lack of competitiveness of products made in Romania; not least, the transport channels (transmission, distribution, etc.), given the discoveries of new resources in the Black Sea, require major changes and investments as they can make the gas price paid by the final consumer surpass the price of imported gas. The elimination of imports may lead to energy independence, but not to energy security.
A company as large as Gazprom, which has an important backing, given the lower demand for gas, has an interest in keeping its market share and to impose new directions. ‘Energy games’ which are currently being played, will have an effect in the next five to ten years and will be decisive for the next 20-30 years in terms of access to sources, access to transport routes and in positioning on the energy markets.
As I’ve shown in countless exposures, the so-called Romania’s energy independence is a conjectural phenomenon, unsustainable on long term. The most significant evidence of Romania’s ephemeral energy independence is that, when the Russian gas price will fall below the price of natural gas produced in Romania, we’ll suddenly notice Romania will import gas. In fact, the free market rules will always determine choosing the source of gas having the lowest price, whatever its origin.
Romania has an import capability that can cover in full the current natural gas consumption. An evolution of the imported gas price to the level of USD 200/1,000 cubic meters will lead to competition of sources, possibly with end market price in Romania around this value or even lower. The wholesale market, at sources level, will face strong competition phenomenon that will bring lower prices in purchasing gas. This will reduce the natural gas producing companies’ revenues, with two major immediate consequences: cuts in investments and lower receipts from taxes, royalties, dividends, income taxes, etc. to the state budget. In this context, the project of new taxes in the gas sector comes late and is totally inconsistent with the market realities. In the past five years, when the margins in this sector were significant, there was no major change over these taxes, and last month a document inadequate to realities has been proposed.
An element of concern for Romania, which is in the process of developing important projects both in the upstream sector and in the development of transmission pipelines, is that the major change in the price of natural gas on a market impacts all present and future projects.
In an article published in 2013, I wrote it is necessary to rethink the transport system so that the transit of gas from west to east and from south to north, but also vice versa, in order to provide the energy required as support for transmission and balancing between different areas, corroborated with the development of local systems to enable taking gas from local fields and transport them over relatively small distances. This approach should be technically possible from the point of view of tariffs.
Rethinking the transport system from the legal point of view (rules within each system), from the technical point of view (technological regimes, investment, operational and maintainability approaches for different categories of systems) and the economic point of view (pricing methodologies, royalties, taxes, tariffs distinct on categories of systems) would allow taking gas from the local deposits and transport them according to the available pressures, as well as the bidirectional transit through a national system compatible with the transport systems of neighbouring countries, the exploitation of any newly discovered conventional gas and unconventional gas deposits, the interconnection with the current and future systems of gas transmission would ensure the functioning of the gas sector according to the business principles promoted by the European directives and regulations, the economic development and the ensuring of energy security for Romania (including by reducing energy dependence). This approach is one that we can provide us shelter against the many ongoing moves that will continuously arise on the future natural gas market due to price volatility, due to supply and demand.
Apparently, the consumers should enjoy the fact that cheaper gas imports would increase competition of the gas sources and also the alignment of gas price offered according to the lowest price.
I believe that a decline of the imported gas price at a level of USD 200/1,000 cubic meters would cause a fall in the wholesale market price, on the suppliers’ market, for the traders and large consumers.
However, I believe that there will not be a significant influence on the price of gas for the final consumers. The lack of competition on the retail market will not bring lower prices to the final consumer. This situation will favour gas suppliers, which will increase their profits. The losers of this scenario will be the consumers, the state budget and the producers.
According to my calculations, in 2015 the price of natural gas has fallen during the past nine months by 10% upon the acquisition by suppliers and traders, but this decrease was not reflected in the price of gas at the end consumer, where I believe that during the same interval the gas prices have increased on average by about 0.5%.
The isolation of the Romanian gas market, the falling demand for gas, gas oversupply, market competition on the wholesale market, etc. have led to a market reaction and this was reflected in the falling price of gas purchased by suppliers. Instead, the lack of competition on the retail market caused the slight increase in final consumer prices.
Two years ago I was saying in another article that the liberalization of the gas market entails the elimination of monopolist positions of the companies operational in this sector, eliminating the possibility of influencing the gas price on the market by means of rules imposed on the market, but requiring adequate information for the consumers.
As long as consumers will not acquire minimum specific knowledge to enable them having a proper position on the purchased gas, they will remain ‘captive’ on the liberalized market.
In fact, there is very high risk that the liberalized market turns into a ‘smart’ suppliers’ market to benefit indirectly from liberalization, in fact to take advantage of the consumers lack of information, to benefit from the financial effects that such a market would produce.
The liberalized gas market without informed consumers encouraged to intervene, supported to carry on negotiations, able to analyze various offers, determined to act responsibly, prudently and without constraint, would be yet another disappointment for the Romanian people.
Unfortunately, what I forecasted at the time, we see as results today.
Dangerous is the myopia of state institutions responsible for the apparent realities on the gas market.
I believe that the imported gas price trend is based on commercial issues, according to the Russian giant’s strategy on the European market, which may significantly influence the market and the natural gas operations in Romania. But at the same time, I believe that a non-commercial decision can always be adopted with a much greater impact on Romania, once again pointing to the vulnerability in terms of energy security, including on reducing energy poverty.