First commercial announcement from the Black Sea – end of 2017, at best, first gas in 2019

At least 5 promising discoveries have been made in recent years at the Black Sea, starting from 2008, still no commercial announcement has been made. Even before such an announcement being made, a so called “Project Sanction” Event is necessary which is to meet five fammilies of prerequisites: technical, commercial, economic, financing, and regulatory. This being said, the experts expect that first commercial announcement will come no sooner than the end of 2017, with first gas production to follow two years later, in 2019.

Royal Dutch Shell has kicked off its Bulgarian exploration campaign at the offshore Silistar block in the Black Sea with seismic work in Block 1-14 under the terms of a five-year contract signed in February. Shell promised to spend 18.6 million euros on seismic surveys as part of the agreement. French Total is also exploring Block 1-21 in Khan Asparuh block. This is the largest block in Bulgaria’s Black Sea zone and lies close to ExxonMobil’s Neptun discovery in Romania, where estimates have placed gas resources at 42-84 bcm. Total said in its third-quarter earnings report in October that it found oil on Bulgaria’s Black Sea shelf, but gave no further details beyond a single mention that it was “opening a new play”.

The drastic drop in oil prices since 2014, which has prompted oil majors to cut back on capital expenditures, including exploration activities, prompted Total to delay drilling on the Bulgarian Black Sea shelf until April 2016. This is just one kind of blockage impeding with a faster development of the Black Sea projects. First, there are the technical issues. As Mark Beacom, Director and CEO Black Sea Oil & Gas SRL, put it in a public conference this October, „it is absolutely vital that the entire project is scoped and designed and costed. It is the drillings offshore, the design and the cost of building of the platforms and the topsides on those, the pipeline that has to be reached from the platform to the shore. Coming onshore, there is the pipeline onshore and the gas treatment plant. That entire thing has to be designed and the cost understood before project sanction could be enacted”.

Then, there are the commercial issues. Mark Beacom, again: ”Foremost, this gas has to be removed from that gas treatment plant. There has to be some type of offtake, in Romania it will be through Transgaz, to be able to move that gas to the market. So an understanding of how that gas moves and its costs have to be understood and agreed. In addition, there has to be someone who is willing buy that gas – a gas buyer, and there has to be a gas sales grid that also has to be in place”.

Putting together everything from the commercial side (the revenues) and from the technical side (the costs, both CAPEX and OPEX) allows a decision to be made on whether the project is actually economic. Once this is made clear and accepted by the board of the shareholders, next is financing, signing an agreement for project finance.

For the Romanian offshore, regulatory issues represent one of the biggest challenges, Mark Beacom said: “environmental impact assessments have to be done and consents granted, construction permits have to be in place, and all of these things have to be in place before we can even say we have a project sanction”. However, the mark Beacom took the risk to estimate that Black Sea Oil & Gas will the first from all the projects ongoing to reach this stage probably late 2017, at best, with the first gas to be produced two years later, in 2019.

Few weeks later, Black Sea Oil & Gas has announced that it has awarded to Xodus Group, together with its co-venture partners, the contract for the Front End Engineering and Design of its offshore and onshore facilities for the development of Ana and Doina Gas Discoveries on Midia Shallow Block.

Major blockages were removed

Romania has still to solve a few blockages from those that for many years stood in the way of moving forward with the offshore developments. One was the offtake connection with Transgaz, which should allow the E&P companies to move the gas production from the Black Sea into major transmission lines, and also unobstructed access to export. In this respect, the major BRUA project is, most probably, going to solve the issue of interconnectivity into the market. Also in connection with the the BRUA project, another regulatory missing link, which prevented works to be done in order to bring a pipeline across the beach, was recently resolved after a new law was passed.

Another issue still to be solved is complying with the European Offshore Safety Directive regulations. They were  transposed into the Romanian law, but a specific office and person responsible with these issues has not been nominated yet.

Romania has took some important steps forward for continuing the gas market liberalizing, and there are official promises from the ministry of Finance that a stable fiscal regime will be put in place. Romania’s Finance Ministry has completed the draft law on oil royalties, and the bill keeps the current taxation level in the field, said Finance minister Anca Dragu. The bill will distinguish between investments in offshore and in onshore projects. As the offshore investments are more substantial, so the authorities are pondering to grant higher deductions in this segment. The new Government and the new Parliament after December elections will be able to take over this draft, which is “from our point of view, completed”, said Anca Dragu.

Benefits

The new draft for the Romanian energy strategy says that additional resources from the offshore gas fields are counted on Romania’s energy mix in all scenarios, except an unlikely long period of time of low prices, that would not justify further investment. Projections revealed by the Energy Minister show that gas production from the Black Sea fields would reach its peak no earlier than 2025, but no later than 2030.

Such offshore projects come with clear benefits, not just in terms of energy security, but also in terms of revenues for the state, as the royalties and the taxes paid to the government. Besides, the investment that will mostly be spent in Romania and the employments they come with are sustainable high paying, high quality jobs.

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The full version of this article can be read in printed edition of energynomics.ro Magazine, issued in December 2016.

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