Romania’s New President: Good News for O&G sector

The surprise second-round election victory of Klaus Iohannis in Romania's presidential contest on 16 November could bode well for the country's energy security, development of its oil & gas resources and investment in the sector, according to Radu Dudau, Director, Energy Policy Group, a Bucharest-based non-profit, independent think-tank specializing in energy policy.

Mr. Dudau, who is also an Associate Professor of International Relations at Bucharest University, offered his perspectives to National Gas Europe at the 3rd annual Romania Oil & Gas Conference in Bucharest.

What does the election of Mr. Iohannis mean for Romania's energy security?

First of all, it sends a clear and important signal about the stability of our country and its pro-Western orientation. That was somewhat in question before the elections. It’s a solid signal now that with the new president we keep a pro-European, pro-NATO, and pro-American course in terms of values and security policy orientation.
Internally, the main signal, again, is that the current, firm law-and-order movement in Romania with this very efficient Direcţia Naţională Anticorupţie (DNA), which is the prosecution service for high profile corruption cases, will be maintained. You’ve seen numerous arrests at a very high level, former ministers, current dignitaries, MPs. This has been a huge shift over the last few years. A concern was that a too powerful PSD in power, with government and presidency, might have an interest in stifling this.

Klaus Iohannis, the elect president, sent very clear signals of stability in this respect, too. DNA is going to stay independent in the current structure, as it has been in the last couple of years. Hence, it should be reassuring for investors that they are able to operate in a stable, law-enforcing environment.

Since the Ukraine crisis, how would you describe Romania's energy security?

There has been some concern and some internal debate, mostly about the possibility of a renewed Russian cut-off, to Ukraine firstly and then to the EU.

In 2006 and 2009, Romania was also affected. Unlike our immediate neighbors, we had the domestic wherewithal to withstand the crisis better, but at economic costs nonetheless. Although Romania is more energy self-sufficient than its neighbors, it still imports Russian gas, mostly so at the winter months. There were concerns about reduced Russian deliveries this fall, but luckily we have enough gas volume in storage and I am confident we can withstand a new supply crisis were it to come.

Aside from that, there have been concerns about the security situation, about the whole uncertainty in Ukraine and its possible insecurity spillover.

Thirdly, although maybe not a widespread concern in Romania, but a preoccupation of those closer to energy issues, is the situation in the Black Sea generated after the annexation of Crimea. The question is what is going to be the status of the Crimean continental plateau and exclusive economic zone (EEZ). There will be litigation about that, no doubt, between Kiev and Moscow. The international community is not likely to recognize Russian sovereignty on that maritime surface, but Russia will claim and exert it.

Now that Romania’s EEZ has a new neighbor, I’m wondering what the consequences of that will be on the offshore operations of the companies there. It mainly depends on how Russia decides to behave: in a calm and pacifying manner, or rather in an aggressive manner. That remains to be seen, but it is an element of risk.

As long as we're speaking about the Black Sea, could you give us a status report on Romania's offshore oil & gas prospects? How are things progressing?

There is a sizable level of activity in the Romanian Black Sea offshore. The biggest discovery so far remains the 2012 find by ExxonMobile and OMV-Petrom in the Neptune block: the Domino-1 well, a field of anywhere between 42 and 84 bcm – possibly 100 bcm. Encouraging confirmations of that discovery’s geophysical properties have been made recently, along with some other finds in the shallow waters of the Romanian Black Sea.

What remains to be done, I’d say, is a commerciality decision and an investment decision by the title holders in order to really see commercial activity taking off. I’d expect a wave of other investments in the midstream and service sectors to follow. The potential of that is very important.

My assumption is we’re getting close to a “click”-moment that will trigger an investment wave, but we’re not there yet. In that respect, there is still an element of uncertainty, but my assessment is that the Romanian offshore remains the major new potential source of natural gas for Romania and the region, provided a proper transport infrastructure be put in place.

Has Romania's shale potential overcome its public acceptance problems? What's happening in that field?

The main shale gas player, Chevron – owner of a concession in Vaslui county in northeastern Romania – has finished exploration operations there and they are assessing the geochemical and geophysical data. No official statement from the company to that effect has been made yet.

Prime Minister Victor Ponta stated in the middle of the election campaign that Romania should diminish its expectations as there's not much to be expected in terms of shale gas resources, but that was a statement made in a very political context and should be taken with reservations. And anyway, a negative result in Pungesti (Vaslui county) should certainly not count as a negative verdict for Romania’s overall shale potential.

Besides, even in the optimistic case, I wouldn’t expect shale gas production to turn into a major upsurge – nothing really comparable to the North American phenomenon. It would certainly make a noticeable contribution; however, considering the level of social opposition in Romania to hydraulic fracturing as an extraction technology, at the very least I’d expect the operational costs of shale energy to be increased, because it's more costly to operate in a socially hostile environment. The level of regulation and security of operations has to be proportionally higher.

So, while the jury is still out on Romanian shale, even in the optimistic case we’d only see a moderate – albeit important – contribution to the whole natural gas industry in Romania rather than a boom of shale gas production.

Could you tell us a bit about traditional sources of oil & gas in Romania and where they stand?

There is a third line of O&G development in Romania, which has to do with redevelopment of mature fields, as most of the country’s fields are mature and fragmented. We have a rather low productivity per well and the operational costs are correspondingly high. One safe bet is to apply new technology to redevelop mature fields – and we’ve seen with OMV-Petrom significant investments in that direction – plus drilling at depths that are called “frontier depths” – in a range of 2,500-3,000 meters. This is also something novel in Romania, even in terms of exploration. It will also contribute, although this approach is very capital- and technology-intensive.

The two main actors in Romanian O&G – OMV Petrom and Romgaz – are the two biggest natural gas producers. They have managed to stop the production decline in the last couple of years, which is quite remarkable given the obvious negative trend of depleting conventional resources.

All in all, Romania has the potential to overturn this trend and become self-sufficient, and even an energy exporter by the end of the decade – some say 2019. From then on, the question is whether a functional regional market will have been constructed, able to handle the anticipated production level. One reason why Romanian decision-makers have to work on that line is that, investors need today to have the certainty that no later than the end of the decade a market will be in place, that they will be able to reach a larger market than Romania, or otherwise they won’t sustain such capital intensive activities.

Once you do that, you’ll also have the benefit of being able to import gas that by 2020 will reach this region from the south through the Southern Gas Corridor and also from the West via Hungary, through the North-South Gas Corridor, with its planned LNG terminals at its ends, in Poland and Croatia. From then on, the Romanian final consumer should be able to buy according to the best offer. This is the notion that makes the most sense and that is being promoted by the EU and most investors in the market.

We want to have a competitive environment with a decently liquid market. Some players may like the uncompetitive market they function in, but the newcomers push for more competitiveness because that’s the way for them to acquire market share. Of course, at the end of the day, it’s in the interest of the final consumer to be in a workable market environment as opposed to an energy island governed by a concept of national self-sufficiency. Some might contemplate the latter option, given Romania’s relative energy abundance compared to its neighbors. Nonetheless, for all the outlined reasons, it simply makes sense for Romania’s economy and energy security to become an active part of a wider regional gas market.

-Drew Leifheit