Setting the maximum level of selling prices of gas from domestic production, useless, without legal ground and with message for Black Sea investors

The Natural Gas Price Bulletin, published on 1 July 2018 by the Intelligent Energy Association, highlighted that gas prices in the Romanian market would increase by around 15.6% in Q4/2018, vs. Q4/2017.

The era of cheap gas is OVER.

After the peak of gas prices reached in 2012, at global level, the price fell to a level similar to the ’90s. After 6 years of low gas prices, we will enter a new “era” of prices, significantly higher. This period was used in an intelligent manner by companies and countries, to streamline certain activities, reduce costs, initiate investments in infrastructure (which otherwise wouldn’t have met the conditions of feasibility), and which allowed repositioning in the market.  In fact, this period of cheap gas was used to prepare the following period, of expensive gas.

Romania did not take advantage of the cheap gas period, which will certainly find many gas consumers unprepared for the following period.

Desperate of this situation, which was looming since two years ago (years wasted), the increase in gas prices brought government officials of Romania in the situation to take measures. Thus, an Explanatory Memorandum was prepared, through which Romanian consumers are “prepared” for a new gas “era”. A Memorandum prepared without any justification of the actions that it intends to regulate, containing an enumeration of facts, omissions and even false statements. Drawing up, endorsing, signing such a document would be an unconscious act. In the Explanatory Memorandum it is shown that this legislative act will not affect the Consolidated General Budget from a financial point of view during its validity. According to GEO 25/2017, the state applies a windfall tax on revenues obtained from domestic gas production, in other words 60% of the difference between the revenue obtained from the price at which gas from domestic production is sold and the reference of RON 45.71/MWh (minus the investment costs and royalty), tax transferred to the state budget. By capping the selling price of natural gas to a value of RON 55/MWh, the state will receive almost nothing from the windfall tax, aspect which will negatively impact the Consolidated General Budget, which is intentionally not mentioned in the Explanatory Memorandum. In fact, the reasons highlighted in the Explanatory Memorandum for the issue of a GD capping the price of gas from domestic production are already included in the Explanatory Memorandum underlying the drafting of GO 7/2013, amended by GEO 25/2017, on the establishment of the tax on windfall gains obtained as a result of price deregulation in the gas sector. Ordinance 7/2013 aimed to diminish the price increase and, if the market price went up, to transfer to the state budget part of the revenues obtained from the sale of natural gas from domestic production. What the Explanatory Memorandum for the approval of the cap on gas prices fails to mention is the law based on which the GD will be issued. This is another omission of those who drew up the document, as Law 123/2012, based on article 180, allows the Government to cap gas prices under certain conditions: in the event of major imbalance between supply and demand and/or obvious dysfunctionality in the gas market. Probably there was no reference to this article due to failure to meet the conditions stipulated by law, as well as the fact that invoking this article would have affected certain operators/end suppliers, which are treated in a privileged manner since their apparition in the market and which constantly manage to impose their desires to the detriment of public interest. The uselessness for the winter of 2018/2019 of this cap on the price of gas from domestic production results by analyzing the amounts of gas traded on the exchange with delivery in the winter months and how gas was sold based on bilateral contracts in the previous years. We thus estimate that domestic gas production is sold almost entirely for Q3,4/2018, gas being sold at a rate of around 90% in Q1/2019 and around 70% in Q2/2019. Thus, even if the price for domestic production is capped, it will have no effect in following winter, when an important increase in gas prices is expected. In the long run, this cap on gas prices will allow an increase in the price of imported gas, Romania not being able many years from now on to go through winter without this gas. Thus, this measure allows Russian gas or Hungarian gas to take over part of the price margin that until this cap was taken over by gas from domestic production (respectively represented important revenues to the state budget through taxes, windfall taxes and dividends). Capping the price of gas from domestic production cannot determine higher competition in the gas market.

Increase in competition in Romania’s gas market could be achieved by eliminating blockages that have been maintained for 3 years in the application of Law 123/2012, which in art. 177 para. (3^12) provides for the obligation to issue regulations that ensure the conditions of competition and transparent and non-discriminatory access of buyers to the gas amounts offered on the competitive market. Lack of such regulations determines mainly the lack of competition. The upward trend of gas prices is shown internationally and will bring higher gas prices in Romania, this being the main reason, which cannot be overturned through Government Decisions. Moreover, this potential upward trend of gas prices was considered including in the Offshore Law, recently adopted by Parliament, when it established a differentiated rate for the windfall tax, depending on the future gas prices estimated, to the doubling of the current one. The message of the draft for capping the price of gas from domestic production is negative for Black Sea investors, which were probably about to accept some of the conditions imposed under the Offshore Law and start getting the job done.

Within the Fair Gas Price Caravan, the Intelligent Energy Association has been campaigning for 3 years to protect end-consumers through real and sustainable measures, measures that need to be corroborated with the realities we live in and not through “interventions” that in the long run do much more harm than the joy they create for the moment.

Translation from Romanian by Romaniascout.

 

About Dumitru Chisalita 168 Articles
Engineering Faculty, profile: Utilisation of Natural Gas, “Lucian Blaga” University, Sibiu. The Management of Petroleum, University of Petroleum and Gas Ploiesti. Doctor’s degree study, profile The Utilisation of Natural Gas, “Oil and Gas” University, Ploiesti. Tehnical expert authorized of Ministry of Justice for oil and gas.

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