January 19, 2022

Security of gas supply, dependent on the development of domestic resources

Over the past few years, the gas market was assaulted by a number of legislative initiatives that had a negative impact on both producers and consumers. The measures imposed in the desire to raise as much money to the budget missed their objective, but, in turn, they affected the security of gas supply in the long run. Lower prices on the domestic market stimulate in this period suppliers to export gas from the domestic production to obtain higher prices, but this behavior could penalize us in the cold period. Amid low temperatures and higher gas consumption, there is a danger that gas from domestic production be available only in small amounts and then we will be forced to resort to expensive imports. About all this and about what should be changed to have a functional gas market and with fair prices, Adrian Stoica, deputy chief editor of Jurnalul National, talked with Dumitru Chisăliţă, expert in the oil and gas market, President of the Intelligent Energy Association.

1. How prepared is Romania in terms of gas supply in the coming winter?

The gas market in Romania presented in the last year an atypical evolution, due to multiple amendments brought by the primary and secondary legislation, such as:

* repealing GEO 114;

* full gas market liberalization;

* Gas Release Program (GRP);

* lifting the obligations set for minimum stocks that suppliers must meet, shortly followed by the future elimination of such obligations.

Added to these measures was an oversupply in the gas market, due, on the one hand, to the mild winter of 2019/2020 and, on the other hand, to the large gas quantities stored prior to December 31, 2019, as a result of the existing danger at the time of ceasing gas supply through Ukraine to Central and Eastern Europe.

This situation places us today in an accidentally favorable situation, in case of a mild winter of 2020/2021. If the forecast on the mild winter is not fulfilled, things can lead to local crises in gas supply to consumers. In Romania, the price of gas dictates the comfort of consumers and this is noticeable by them especially during winter. The new and many regulations implemented without impact studies do not cover the deficiencies of the gas sector, thus risking the security of Romania’s gas supply both in the coming winter in the event of extreme temperatures and for long periods. Romania’s security of gas supply depends, in the long run, in the long run, on the development of domestic gas resources, onshore and offshore. Towards 2030, the biggest contribution to the security of supply can be brought by Black Sea fields. The Gas Release Program (GRP) may represent another obstacle in this regard. Both GEO 114/2019 and the Gas Release Program (GRP) of 2020 are legislative acts that constituted a real attack against domestic gas producers, promoting gas imports. These approaches do nothing else than eroding the hydrocarbon industry, risking to bring it in line with other industries that are endangered.

2. How does the gas market liberalization look like for individuals 3 months after the process started?

According to data provided by ANRE, 3 months from the full liberalization of the gas market, only 10% of household consumers that were in a non-regulated system chose to negotiate their gas supply contracts. An extremely low number, taking into account the following aspects:

* July 1, 2020 the gas market was fully liberalized, so that we were in a situation of imposing an obligation;

* The average price of gas as commodity, this summer, fell by 50% compared to the price in 2019, according to ANRE.

* The savings in the family budget could reach up to RON 600/year by renegotiating the supply contract.

The bills for November 2020, which will be visible in December 2020, could bring a wave of outrage from some gas consumers and determine intents to change the supplier, but I think few will materialize, for fear of running out of gas in full winter. Therefore, I believe there will not be important changes in the number of Romanians who will choose to change their gas supplier in the following period.

3. Although favoring gas import brings us no benefit, we delay regulating offshore exploitation, in line with the requests of titleholders. Why do you think this happens?

It is difficult to find an answer, given that this situation has been going on for 2-3 years. Probably the answer is related to the influence of interest groups, unprofessional approaches, populism that revolves around this topic etc. We are in the situation of decline in the annual gas production by a significant rate – 10% in 2020 and, in this context, all political forces block the development of new investments in the exploitation of offshore resources. If the “aggression” against gas producers is not stopped, we will find ourselves in the situation in which we are in terms of almost any consumption production. Becoming very dependent on imported gas.

4. As of June 1, gas producers whose annual production exceeds 3,000,000 MWh were required to offer 40% of the production related to 2019 on the centralized markets in Romania. The obligation, which is valid until December 31, 2020, also brought the imposition of a maximum starting price of the auctions, calculated and published by ANRE. What was the effect?

The introduction of the GRP in the summer of 2020 was in conjunction with full gas market liberalization, in order to “force” gas suppliers for the population to offer lower prices for it. This desideratum was not reached, the recent data published by ANRE showing that only 10% of the gas consumers negotiated their contract and benefited, to some extent, from this administrative decision. It is important to mention that 90% of household gas consumers pay the same price they paid before the introduction of the GRP. Those that benefited massively from this measure were the traditional gas suppliers to the population, which recorded large margins (15-25%). Starting with June 1, 2020, the application of the GRP on the gas market in Romania, by imposing a mechanism for setting the starting price of the auctions, artificially generated significant price differences between neighboring markets. Moreover, imposing a level of the obligation to offer 40% of production, way above the level of similar programs, generated:

Positive effects:

* GRP led to the development of gas exchanges in Romania, in terms of both development of new products and the volumes traded

* It brought lower prices for non-household consumers, which in 2019/2020 suffered price increases by over 30%, as a result of the price freeze for the population.

Negative effects:

* Increase in the revenues of traditional gas suppliers for the population, most of them companies with foreign capital, recording much higher margins than the other operators on the market.

* Decrease in the activity of gas producers, including in the investment activity, both in terms of offshore projects and onshore projects, with all the collateral negative effects derived from the balance of internal sources/consumption. Moreover, the high level of the release offer in conjunction with the lack of visibility on transactions actually performed may have a negative impact, including on the production level.

* Decrease in revenues to the state budget by diminishing the contributions paid by gas producers.

* Affecting the security of gas supply, in conditions in which by creating artificial price differences between neighboring markets, difference coming from the previously mentioned mechanism of setting the starting price, encourages in fact the trading activity for export purposes, an approach which is already manifested, taking into account some transactions concluded and is already visible in the gas flows exiting Romania.

* Considerable price differences are recorded, of approximately RON 10-15/MWh, between those practiced internationally – relative to CEGH Vienna exchange – and the domestic ones. As a consequence, local producers are disadvantaged, as the current trend consists of stimulating suppliers to export gas produced locally to obtain more competitive prices for the commodity sold. A situation of this type may favor traders and suppliers whose tendency will be to purchase from our country and sell abroad – generating a gas flow from Romania to the markets where quotations are still at higher levels.

* Investments in gas production will be affected, resulting in a decrease in gas production and increase in Romania’s reliance on imports.

“I believe the current GRP model makes the price of gas as commodity to be maintained at low levels artificially, without this measure being felt by the population. It is necessary to make a quick review, before the start of the cold season, of this model and set an adequate GRP for the Romanian market”.

Dumitru Chisăliţă

5. The security of gas supply of our country depends, in the long run, on the development of domestic gas resources, onshore and offshore. Towards 2030, the biggest contribution to the security of supply can be brought by Black Sea fields. Can GRP represent an obstacle in this regard?

By artificially maintaining low prices on the gas market, export is mainly favored; in the cold season, when we face low temperatures and automatically a higher gas consumption, domestically produced gas could be hard to find. Therefore, we will be forced to resort to imports, which will have a high price. This scenario will definitely be to the disadvantage of Romanian consumers. To avoid the situation, we must resort to functional market mechanisms and a reduced intervention from the regulatory authority, while strengthening the functions for consumer protection (including the vulnerable ones), boosting competition, sanctioning anticompetitive measures and developing an Alternative Dispute Resolution mechanism on the gas and electricity markets.

6. Why do you say limiting state intervention is beneficial for consumers?

A free market will always be functional, as long as supply and demand can be formed freely, without restrictions. Altering the best economic model (through interventions, price caps, other obligations), we only eliminate the conditions of competitiveness, and negotiation is no longer easy. Given that gas data production fell in Romania by approximately 10% (September 2019 – September 2020), the development of Black Sea gas exploitation is a must, and in its absence, Romania will soon reach a high degree of reliance of gas and electricity imports. Today, affordable gas is the one produced in our country. “Through healthy policies” we are in the phase of choosing to import, paying a higher price or supporting the national economy by promoting investments in the onshore and offshore gas production.

7. Given the current situation on the Romanian gas market we can expect next winter the following scenario: keeping low prices artificially will favor mainly export. Moreover, with the cold season and the increase in consumption, there could no longer be domestic gas. We will have to resort to imports, but prices will be already high…

Interventionism in the gas market has always left negative marks for gas consumers. The same happens now. A first negative effect is the excessive export of gas, which as the cold will be installed will be to the detriment of the coverage with gas sources from domestic production for the Romanian consumer, favoring imports at peak demand with higher prices. Another negative effect is the gas swap, an operation that will not cause even physical exchanges, but some virtual ones (gas from domestic production will be sold as imported gas, with a high price in Romania, and the gas that was to be imported will be sold in other countries as gas from Romania, at lower prices). Winter will come and with it the “economic frost” as well. We still have time to build a viable/sustainable framework for the domestic onshore and offshore production, to meet the current and future gas demand, following the development of smart gas networks.

8. The legislative framework is full of restrictions/taxes that distort the market, not providing conditions for competitive transactions. What do you think the first measures taken by ANRE should be to overcome this impasse?

The Romanian gas sector has undergone a process of deep restructuring, having as main pillar the decrease in the concentration of gas production and import by granting licenses and authorizations to an increasing number of companies. The profound transformations in the configuration of the market and of the natural gas sector, which have taken place since 2000 and until now, have determined the adaptation of the institutional and regulatory framework to the new situations. In general, evolution and progress require some variation, but not too often. Too high a rate of change generates imbalances in the market and even prevents the consolidation of the benefits brought by the previous changes/regulations. All citizens must have access to and be able to benefit from energy, especially those who are disadvantaged or who are part of disadvantaged communities. At the heart of the development policies for the energy sector must be the consumer, especially through measures to protect the vulnerable consumer, to extend the population’s access to energy and to implement appropriate environmental policies. Price affordability is one of the main challenges of the energy system, and solving the situation consists in the state’s partnership with the business environment/local producers. Specifically, ANRE should analyze the usefulness of GRP in the coming winter and modify the elements that would cause market distortion. ANRE should be restructured, in order to become an institution responsible for ensuring the realization of a functional market in which the TRANSACTION is the existential goal of the gas sector, the starting point of building the way in which the other activities in the gas sector will take place. Thus, it would be necessary to move urgently to the implementation of at least the following measures:

* Adaptation of primary and secondary legislation, so that all activities in the gas market are aimed at developing trading;

* Total transparency on the activities carried out in the gas sector (without prejudice to the elements of confidentiality);

* Detailed and continuous dissemination of the modality of performing transactions, of carrying out the activity of design, execution, operation of pipelines not as an end in itself, but with the only goal to develop the market, to increase the number of transactions and volumes traded, to increase the degree of use of infrastructure, determining all actors in the gas sector to act with the purpose of favoring gas trading;

* Computerization of the gas sector, to ensure the quick and detailed access to information supporting transactions, market development, increase in gas demand, cutting costs with the associated activities;

* Establishment of an institution to settle disputes in the gas market (SAL), as autonomous, non-governmental, apolitical legal entity, of public interest;

It is urgently necessary to eliminate measures against producers and in the existing pandemic context, stimulating investments are the only measures that can rectify the sharp downward curve recorded by gas extraction in Romania. It’s time to give up the Cinderella role that gas producers in Romania have been playing for at least 15 years, with the specification that, over the past few years, their situation has worsened a lot.

Translation from Romanian by Romaniascout.