This analysis is based on the PhD thesis “The Romanian Regional Gas Hub. Geographic, Economic and Geopolitical Aspects” Filip Negreanu-Arboreanu sustained in 2019; it aims to demonstrate that a Romanian gas hub would represent a key driver for increasing the economic competitiveness and ensuring the security of gas supply in the South-East Europe. The PhD thesis analyzed the implications of building such a hub and demonstrates its necessity mainly by establishing a direct statistical correlation between the level of the average prices for natural gas wholesale volumes, and the degree of development of the liquid markets or the so-called gas hubs. Simply put, the price reduction in the region will follow the development of a Romanian gas hub.
Based on the example of the emerging liberalized energy market in Romania and based on highlighting the threat represented by re-nationalization of energy policies for South-East Europe in terms of economic competitiveness and security of supply – the convergence of energy markets in the European Union emerges as a significant need.
In order to achieve the major objective of building a Romanian gas hub, we believe that it is necessary to understand and use in the national interest of Romania all major changes already triggered in the global energy markets.
Tools and measures
The European Union is currently proposing a new framework strategy for creating a robust Energy Union. It is for the first time that the entire energy policy of the Union is crystallized in a central steering document, which initiates a short, medium and long-term strategy. Romania is also, for the first time, in the position to reinvent itself as leader in the process of European integration – namely within the Single Energy Market. Thus, Romania can play a decisive role in ensuring Europe’s security of energy supply, insofar as it understands to use its location potential, as well as its geological and commercial resources.
For achieving this main objective, a series of programmatic tools might be taken into account, such as: building a national energy strategy fully linked to the wide-ranging transformation processes initiated at Union level, developing a vision for the energy market integration and for increasing energy security, as well as prioritizing the construction of a liquid and robust energy market in Romania. Rethinking the energy strategy and changing the paradigm where cheap energy from domestic production functions only as a lever to sweeten Russian gas prices are yet another two of measures, aimed at a new vision where energy becomes a fully marketable asset in a liquid market.
This study derived from the extensive debates in the Romanian society regarding the regime and the future of the exploitation of the newly discovered natural gas resources, in the area of economic exclusivity of Romania in the Black Sea. The uncertainty of the development path of the Romanian gas market, as well as the regional and global unknowns of the role of natural gas in the energy mix of the future, has directed our research into an extensive analysis of the options for a Romanian gas hub. This analysis of the opportunity of building such a hub on the territory of this country proposes for the first time to the academic society and to the Romanian public as a whole, a global perspective on the major changes in the natural gas economy.
The need to build the Romanian hub in order to access the global gas market pricing is reinforced by four secondary objectives: the build-up of interconnection infrastructure, the increased competition between different sources of supply, the role of gas in the energy transition, and the legislative and policy conditions that need to be met as to facilitate the hub’s realization.
The relatively late introduction of gas into the global mix of fuels (after coal and oil) has led to the construction of a traditional price formation mechanism by reference to oil quotations. At the same time, due to its physical nature, which prevents the storage of large volumes, and which initially restricted the gas pipelines; gas was treated until the end of the 20th century in a purely geopolitical key. However, the geopolitics of gas, manifested à la lettre through the construction of large gas pipelines between the USSR and Western Europe (following the oil crisis of 1973 and 1979), simultaneously triggered the first gas liberalization initiatives in the United States and the United Kingdom. These developments were included and then expanded into the impressive development of the Single Energy Market of the European Union, through the series of EU legislation on total liberalization and unification of gas markets, which are continuing today. From a technical point of view, the evolution of technologies that allowed liquid gas transports on liquefied natural gas tankers (LNG tankers), coupled with the discovery of huge US shale gas resources (both due to technical innovation) has accelerated the evolution of wholesale price formation mechanisms of natural gas. Thus, traditional oil price linkage as well as restrictive delivery and volume clauses have started to drop in the share of the global gas price-fixing mechanisms.
Gas resources in the Black Sea region
In terms of the geographical distribution of gas resources in the Black Sea region and the supply opportunities for Romania, it is worthy to note the availability of Romania’s indigenous gas resources, their distribution, and the ways of access towards Romania for external resources, such as the ones located in the economic exclusivity zone in the Black Sea basin, or in the states bordering the region.
At the same time, we have been able to observe the phenomenon of continuous depletion of Romania’s continental resources, which jeopardizes the security of the gas supply for the economy and the population, by increasing the degree of dependence on imports. However, theoretically, Romania could eliminate this threat by exploiting the Black Sea gas discoveries, which measure about 130 billion cubic meters of gas, as certified by concessionaires in the exclusive economic zone. The untaken final investment decision for the exploitation of these volumes, as well as the delayed finalization of the auctions for the rest of unattributed exploration fields, represents, according to our analysis, the real threat on the success of the Romanian gas market development.
With regard to resources in the Black Sea basin, different circumstances make it impossible for either Bulgaria, Turkey or Ukraine to provide additional sources of supply for Romania.
Unlike the Black Sea riparian states, those in the adjacent region present significant gas reserves that could supply the regional market in South-East Europe. Russia, with its huge reserves, will continue to provide the European Union with about 40% of its medium-term consumption demand, in spite of blocked new Arctic operations because of the economic sanctions regime. However, the development of the Southern Corridor and the evolution of gas markets in Eastern Europe will put pressure on rigid price formation mechanisms used by Gazprom and will subsequently lead to a fall in Russian gas prices. By analogy with the OPEC decisions taken during the massive decline of oil prices in 2014, the timing of the entry of Romanian and Caspian reserves in the regional market is decisive for the success of the exploitation and the profits obtained from these new resources.
In respect with new gas resources accessible to Romania, the importance of liquefied gas terminals in the Mediterranean Sea must not be overlooked. Some already exist, such as the one in Revithoussa, Greece; others are developing, such as the ones in Greece, and Krk in Croatia. These represent a real gateway of the South-East European region to the global gas markets and to prices exclusively based on competition among different sources. That is why we have stated that the efforts to accelerate the exploitation of Romania’s new resources are extremely important, in order to secure a market share in a context in which the struggle for the control of these terminals exposes the major interests of the large companies that are developing the Southern Corridor.
The quantification of sources and volumes available to South-East Europe allowed us to assert that the decrease in dependence on Russian gas is a certainty with a medium-term materialization horizon. Gazprom’s economic relations architecture with its Western customers is causing an irreversible course of contamination of Russian gas price formation by mechanisms of competitive pricing, such as price references to quotations in the main European hubs. However, these recent changes in Gazprom’s presence on Western markets cannot guarantee the exit of Eastern Europe from the paradigm of contracts with uncompetitive prices, especially in the perspective of the insecurity of the Ukrainian transit route. This is a challenge for the countries in the region to build those projects capable of diversifying sources of supply. The analyzed projects, which we consider vital to this goal, are the components of the Southern Corridor, which finds itself in the last stages of construction: the South Caucasus Pipeline, the Trans-Anatolian Pipeline and the Trans-Adriatic Pipeline. This project complex, linking gas fields from the Caspian Sea through Georgia to Turkey, Greece, Albania and finally Italy, will have to be complemented by the Greece-Bulgaria Interconnector and the BRUA project linking Bulgaria, Romania, Hungary and Austria if it to feed the entire Eastern European area with the new Azeri gas.
Geopolitical aspects of the natural gas economy
At the same time, the geopolitical aspects of the natural gas economy find themselves in a series of major changes, driven by the evolution of gas markets and their integration into an emerging global market.
The creation and development of the UK trading hub driven by British Gas’s privatization initiative, following the successive oil crises and Western Continental’s decision to build gas pipelines from the USSR was the first step towards liberalization. This privatization has created the physical demand for a balancing platform for the gas transmission network. The British example extended afterwards to Western Europe through new European legislation. Thus, the geopolitical pressure of the lack of alternative to Russian gas has accelerated the development of liquid gas markets in a counterintuitive manner. The contribution of liquefied gas, transported elsewhere in the world, has led to a continuous increase of competitive gas prices in the share of global gas pricing, at the expense of long-term restrictive contracts.
These developments towards liberalization of gas markets also included a reduction in the average gas price in liquid markets. We have demonstrated this direct correlation between the liquidity level of a gas hub and the lower prices by applying the method of data processing and statistical analysis of data on average prices for natural gas combined with the classification of hubs by the European Federation of Energy Traders with the help of the SPSS software. The mathematical demonstration of this correlation relationship is one of the main building blocks of this paper, which allows us to affirm that the realization of a Romanian gas hub is necessary to reduce the prices of natural gas.
The Romanian gas grid cannot exist, however, in the absence of an adequate infrastructure that will allow access to all sources of supply and markets in the region. Through the comparative analysis of the situation of the interconnections in the European Union, facing simultaneous reflexes of renationalization and protectionism, as well as with the desire to have access to as many sources of supply, we highlight the need for infrastructure development. At the same time, the case study of the Lithuanian gas market, which obtained a 43% rebate for the price of Russian gas following the acquisition of a floating LNG regasification terminal the need for access to the global gas market through is clearly demonstrated.
The global context of correlating and integrating gas markets via the price alignment driven by the growth of LNG and US gas exports determines a phase-out of the geopolitical factor in the economic gas equation. Thus, we postulate the concept of the geopolitical gas paradox, which is the antagonism between the reflexes of protecting supply and the need for international cooperation for the construction of gas pipelines.
The shift from security of supply, to ensuring long-term sustainability
Analyzing the driving forces that fuel the debate and design of current European energy policies, we see a shift in the ultimate goal of any technological or infrastructure project, from short term needs of ensuring security of supply, to ensuring long-term climate and environment sustainability.
This major change of purpose of energy policies is part of a wider global action process generically called the fight against climate change. Major polluters, such as China or India, or other developing countries, consider that this process of decarbonizing the economy must be coupled primarily with keeping the pace of economic growth. Instead, the developed economies consider that the dangers of the rise in the average global temperature precede the urgency of economic development.
This duality of tackling climate change creates great difficulties in the international coordination of energy policies. Instead, the European Union has been a leader in the past decade. As a result of this political positioning of the EU as the world leader in climate sustainability, natural gas and its future in the new sustainable energy architecture has become a central topic of the debate.
The future role of gas in the European energy mix is not clear, because of changing European targets and legislation. These targets may lead to a drastic reduction in carbon emissions. The gas hedge as the fuel of the future is therefore still open. This should lead to the acceleration of Romanian operations to secure support through European legislation and for projects funded at European level for the infrastructure necessary for a future gas hub.
Strengthened gas infrastructure
Romania’s position in European politics should be directed at lobbying for those projects that serve the Romanian regional hub without betting on a single solution, as was the case with the Nabucco gas pipeline. For this to happen, Romania needs a revised institutional architecture linking national and European decisions. We support affirmation by comparing the negative example of Nabucco to the positive one of the negotiations on the new funding mechanism Connecting Europe Facility.
Romania’s energy strategy must change form and content to offer a solid basis for policy options, and to explain the beneficial role of a liquid gas market and a functioning gas hub. This strategy should also include comparative analysis of gas price evolution in various European markets and should make a clear choice for the role of gas as a major part of the energy mix of the future (to the detriment of coal). Increased and transparency and increased competitiveness between concessionaires, finalizing the auctioning of exploitation fields, and the creation of a national digital register for mineral resources – are also among the desirable pathways to go.
The aggregation of the region’s liquidity is a sine qua non condition for the realization of the Romanian gas hub. The only way to achieve this is by developing the infrastructure for connecting the new Black Sea resources to neighbouring markets and by building up all the interconnections through which the Romanian gas would acquire the role of arbitrage between the northern Russian gas corridor and the southern Azeri gas corridor. Regional cooperation for the completion of the Vertical Corridor projects such BRUA and the Interconnector Greece-Bulgaria, are therefore vital for the construction of the Romanian hub.
Three final scenarios emerged from our analysis. The optimistic, moderate and pessimistic scenarios highlight the effects of an accelerated or a slow timing for the exploitation of Black Sea resources, the built up of necessary interconnections and finally the creation of the regional hub.
The latest developments on the Romanian political scene during the last years include the lack of a long-term predictable decision on the tax regime of offshore operations, as well no advance on regulating a free and transparent gas trading market. In this light, we affirm that we seem to be approaching the pessimistic scenario, which actually means the end of the Romanian gas hub.
This article firstly appeared in the printed edition of Energynomics Magazine, issued in March 2020.
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