Natural gas is a paramount in reaching the objectives set for the European energy transition to which Romania is a part, considers Franck Neel, president of the Federation of Employers of Oil and Gas – FPPG. Romania has a historic opportunity to position itself as energy security supplier at a regional level, as well as an investment destination, one of the few such destinations for European oil and gas. In order to create the best climate for companies and end consumers, the market should be left to function freely, without administrative interventions from the part of the regulator – and the GRP was one of the main topics in this exclusive interview/
How did the COVID-19 pandemic affect this year and how will affect the O&G markets during 2021 on a longer term? Will the prices regain field?
The current period might be the toughest times the oil and gas industry has experienced in the past 100 years. Prior to the coronavirus outbreak, the oil and gas industry was already under pressure as the major oil producers, Saudi Arabia and Russia, where flooding the market to reinforce their positions. The pandemic has only compounded sector’s woes, leading to an uncanny situation where oil prices even turned negative in the spring, for the first time in their history.
The industry, in general, has been on a downward trend since early 2018 and the pandemic exacerbated its difficulties, with industrial output falling by almost 40%, in April. Although industry has recovered somewhat since then, it is still in negative territory, thus continuing to have a negative impact on the production and consumption in the downstream industry.
Furthermore, slower recovery over the next quarters, both in 2020 and 2021, will continue to impact fuels demand with factories and industrial plants running at lower levels. The decrease in demand for both fuels and gas will create an unprecedented difficult environment for upstream activities as well. Wells will need to be shut down with potential later impact on restart. In both oil and gas wells cases, recovery of production level is a costly and time-consuming process with potentially unsuccessful trials and overall duration that may exceed 4-6 months.
We estimate that long-term fuel consumption and overall buying behavior will change as the market structure is going to be permanently affected by the crisis. People will most probably come out of the crisis with their financial resources impacted, a significant part of them being even unemployed, therefore, they are not expected to instantly resume consuming at the levels prior to the crisis. The imports and exports of merchandise will probably still be significantly affected for a minimum of 3-4 months with a slow recovery rate afterwards, especially in terms of exports.
However, not only our sector of activity, but the entire economy, worldwide and in Romania, has been heavily affected by the pandemic. The industry acknowledges the shared responsibility in handling the public health emergency and it is already contributing in a constructive manner: critical personnel accommodation, insulation measures, plexiglass installed at work, thermo-scanner at refinery entrances.
How should the liberalization of the gas market develop from now on? What is still needed, in terms of legal changes and market conditions?
First of all, we are pleased by the efforts from the government to repeal the famous 114/2018 ordinance and implement, starting July 1st, 2020, the liberalization of the natural gas market. In addition, starting June 1st, 2020, the central market obligation was replaced by an offering obligation, implemented in the form of a gas release program (GRP), as designed by Romanian market regulator, ANRE, in view of increasing liquidity in the market and of creating price references.
The design of the said GRP made by ANRE imposes a mechanism for setting the starting price of the auctions, being initially correlated with the CEGH quotations for the month of June. This mechanism artificially generated significant price differences between neighboring markets due to the decision to initially correlate the starting price with the CEGH quotations, which were conjunctively low at that time and which is still reflected in the current starting prices of the auctions. Prices on BRM are artificially kept lower by 10-15 lei/MWh, compared with CEGH prices, leading to losses for Romanian producers and creating an incentive for traders and suppliers to export the gas purchased in Romania abroad, for better prices.
In a nutshell, GRP imposes a standard price mechanism for a commodity whose price fluctuates on the market due to the supply/demand balance and due to seasonality. More, GRP overlapped with the pandemic, when gas prices were low in the region due to the lockdown. Given the export tendencies incentivized by prices kept low in an artificial manner, when cold temperatures will come and a higher gas consumption will be required, locally produced gas will be hard to find and, hence, local consumption would be covered by imported gas, at a higher price. Such situation detrimental to Romanian consumers can be avoided through functional market mechanisms and low intervention from the part of the regulator.
To answer your question, for a producing country like Romania, with mature fields, the liberalized market must be accompanied by predictable measures to stimulate the production of natural gas, in order to ensure the security of supply. We believe that the GRP can be seriously improved, for its application limited in time and, further on, the market should be left to function freely, without administrative interventions from the part of the regulator, which will create the best climate for market participants and end consumers.
What are the main effects of the gas release program? How should the gas market become more liquid? How can we really protect the vulnerable consumers?
In its essence, the gas release program is a useful and proven to be successful tool for incentivizing liquidity and free price formation in European markets. However, the Romanian GRP in its current design made by ANRE has raised criticism, as shown before, and not only from the part of local market participants, but also from the part of European bodies, reuniting experienced market players all over Europe.
For instance, EFET, the European Federation of Energy Traders, has repeatedly shared standpoints on how the GRP should be improved in Romania, based on other European successful models already implemented, especially in terms of the imposed starting price, which “effectively forces market participants to sell the gas at a loss. Any restriction on the free formation of prices will automatically limit the Romanian gas market ability to optimize the cost of the commodity and will threaten the gas supply and demand equilibrium in the short and long-term. No price floor or cap can bring any lasting benefits to the consumers, while they are bound to damage the attractiveness and competitiveness of the gas market in Romania”.
Given the problems of the current GRP, negative effects have already been felt. Such effects reflect on the activity of natural gas producers, including the investment activity and actual production levels. Due to the non-economic framework created by ANRE, on top of the consumption decline registered in spring due to the coronavirus outbreak, production levels were decreased in, -19% since GRP has been introduced, from June to September versus last year. At the same time, revenues to the state budget have been also affected, with lower gas prices leading to lower contributions, based upon government information 25% lower than last year in the first 9 months. With this trend, we expect by 2024/2025 Romania will have to double the import of gas to fulfill its demand.
Most importantly, free flow of gas based on competitive prices, including the security of supply, is currently heavily affected by creating an artificial price difference between neighboring markets, a difference derived from the above-mentioned starting pricing mechanism, and which actually encourages trading activity for export purposes.
In order to achieve the objectives of increasing liquidity and creating price references in the market, it is necessary to meet a set of requirements. One of the most important such requirement is for the prerogatives of the regulator to be limited only to establishing the total quantity of natural gas subject to the offering obligation for each producer, as well as the allocation of the quantity so as to be calculated on standardized products (monthly, quarterly, seasonal and annual), hence no interference in pricing.
At the same time, it is desirable to establish a level of the obligation that does not generate negative effects on the activity of market participants, as well as in the way the price is formed, provided that the purpose of the GRP is to facilitate the increase of liquidity and not to generate liquidity in itself. Such level, as previously advocated by the entire industry, was supposed to not surpass 30% of the total production levels, except for the technological consumption and the own consumption. We note that all similar programs implemented in the past in other Member States had a level below 10% compared to those markets.
To conclude, the producers have been forced again to support the economy by subsidizing the gas price through the GRP, after the cap on the gas price for households. This will in long term be detrimental for the consumers and the security of supply of the country.
How can the oil & gas sector cope with the Green Deal, as Europe is only in part considering gas a transition fuel?
Natural gas is a paramount in reaching the objectives set for the European energy transition to which Romania is a part. In this respect, local framework addressing the European Green Deal should be well defined in the upcoming period, in order for the business environment to be able to plan and timely adapt.
More specifically, it is important for the roadmap of the Integrated National Energy and Climate Change Plan to be soon defined. Another important aspect here is the need to stimulate energy efficiency projects, with substantial benefits in achieving the goals of the European Green Deal by reducing energy consumption.
In terms of funding, large scale investments are projected. companies need to implement projects with high costs. Although we are ready to invest, we also need external funding to cope with the transition. Accessing European funds available for 2021-2027 is an opportunity, especially the 10D funding line, namely the modernization fund. Further on, it is extremely important for the Romanian guidelines for accessing the said financing line to be properly developed, so as many funds can be attracted to the Romanian economy but also the companies selected for the funds have a track record and capabilities to develop projects on time as it will be damageable for the economy to under use the funds. Depending on this, an assessment can be made on how the outlook of the industry investments for the energy transition will shape.
What role can Romania play with so many new gas pipelines available around us and where do we stand in terms of interconnection and energy security?
Romania has a historic opportunity to position itself as energy security supplier at a regional level, as well as an investment destination, one of the few such destinations for European oil and gas. This opportunity is the development of the offshore gas sector which, if done properly, can bring major economic, social and energy security benefits.
In the medium to long term, increasing investment attractiveness in this capital intensive area can only be achieved through a competitive, stable and predictable legislative and fiscal framework is of outmost importance. It is necessary to adopt a fair and predictable regulatory framework for the offshore sector, which will allow the start of development and production works, but also to maintain its stability, given the long duration of the project.
Therefore, it must be borne in mind that offshore projects span decades, which requires political consensus and a long-term vision from legislators. The political decisions to be taken in the coming months are decisive for the future of this economic sector of crucial importance, but also for the future of the Romanian economy.
How do you see the future of alternative fuels, including CNG and hydrogen, developing in Romania?
Gas, one of the major assets of Romania, can significantly contribute to the reduction of the CO2 footprint of transport as well as of Romania’s industry segment. Reduction of CO2 footprint can be intensified furthermore when combined with bio-gas.
CNG & LNG with a mix of biogas are solid contributors to reach the targets and for energy mix, yet are underestimated today in the regulatory framework. Funding will be needed for further developments. There is an opportunity for sustainable projects to push forward by providing connection between projects with EU funds.
However, reducing the impact of the transport sector on the environment, enhancing transport efficiency and fostering economic growth in the sector of alternative fuels Romania must rely on an energy mix, including hydrogen. We need applicable regulatory framework at all stages in the development of alternative fuels infrastructures and to identify potential gaps in the Romanian availability of a coherent and up to date regulatory framework allowing achievement of these key objectives.
This interview firstly appeared in the printed edition of Energynomics Magazine, issued in December 2020.
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