Catastrophic policies have made Romania energy dependent
Romania is the only country in the European Union that does not have a concrete plan to substantially increase its natural gas production. Not connected to other regional markets, and unable to diversify its supply sources, the security of its gas supply is fragile.
The interventions of the head of the ruling Social Democrats, PSD, Liviu Dragnea, the Prime Minister’s counselor, Darius Valcov and Finance Minister Orlando Teodorovici – implemented by Dumitru Chirita, the PSD-appointed head of the energy regulatory agency ANRE – have together had a catastrophic influence on the price of natural gas production.
The provisions of the government’s Emergency Ordinance 114 (GEO 114), adopted in December 2018, have turned Romania from one of the cheapest to one of the most expensive markets in the region.
The recipe of the PSD-ALDE coalition government in the energy sector has been to combine issuing nonsensical statements with unpredictable changes to the fiscal framework. Poor decisions are oriented towards political rather than economic goals.
This amalgamation of factors has put great pressure on the 35 per cent of the electricity mix of Romania that relies on hydrocarbons – coal plus gas.
Against the backdrop of the cost problems facing Romanian coal production, the risk of a tumultuous and disordered energy transition is increasing.
Lack of investment in coal in recent years has had a strong impact on this sector in Romania, which has suffered under the pressure of spiking carbon prices.
The effects of the reduction in coal electricity production will begin to impact the country’s two gas-fired power plants, Brazi and Iernut. To ensure the flexibility of the electricity system, these two production capacities will have to consume more and more natural gas.
With ever-declining domestic gas production and poor coupling with the regional gas market, the limitations of the Romanian energy sector are really beginning to be felt.
On one hand, it has turned Romania into a net importer of electricity when consumption peaks. On the other, because of the limited production possibilities, the pressure on the price of gas is increasing.
If we also take into account system losses due to obsolete infrastructure, the state of the Romanian energy system is directly reflected in consumers’ bill and in the quality of the services offered.
The Romanian market has become increasingly rigid, moreover, when gas and electricity prices in the region are falling.
Frequent changes in the fiscal framework for the exploitation of natural gas, the return of politically driven price regulation and lack of truly diversified sources of supply have made Romania an energy-isolated country.
With domestic gas production going down, and with competition being obstructed by the state itself, prices are far more rigid in Romania than they are in free and flexible markets, where there is a wide range of sources and supply.
Unable to fully cover the consumption needs of its domestic market, Romania imported 25 per cent more Russian gas in 2018 than it did in 2017 – which was, of course, reflected directly in consumers’ bills.
Official data from Russian energy giant Gazprom show Romania imported almost 1.35 billion cubic meters, bcm, of natural gas last year.
In percentage terms, Romania saw the largest increase in imports of Russian natural gas of any country apart from the Netherlands.
Whereas state intervention in Romania has led to an artificial rise in the price of Romanian gas, the case is different in other markets in Europe.
There, developments have been influenced by larger quantities of LNG available on the European market, amid a mild winter in Asia, Australia’s decision to increase LNG production and Japan’s decision to put part of its nuclear power into operation.
US and Russian LNG traders have also flooded the European gas market with cheap LNG, wishing to increase their market share.
The decline of European and North Sea production has been compensated for by the doubling of imported LNG, at the expense of Gazprom’s offer.
With constant inputs of LNG, European gas prices have fallen to one of their lowest levels in recent years, and Gazprom has rallied to this dynamic amid increased competition.
But this has not happened in Romania, where competition is stifled by the state itself.
In March, LNG from EU terminals reached a new monthly record of 9.6 bcm. Overall, since the beginning of the winter, the EU has imported 45 bcm of LNG, compared with less than 20 bcm in the previous winter.
LNG accounted for more than 21 per cent of total EU gas supplies in March, exceeding the EU’s domestic production.
The LNG supply was only 0.5 bcm less than the supply from Norway, the second largest natural gas supplier to the EU.
But with its poor interconnections with Central and Western European markets, Romania is not able to benefit from these price dynamics.
If Romania had the lowest domestic production price in the EU in 2018, due to government ordinance GEO 114, this price has now reached the highest level in the EU.
In the short term, Romania seems to be waiting to see if Russia’s state energy giants extend their gas transit contract through Ukraine. If this does not take place, the flexibility of the Romanian energy system will truly be put to the test.
Meanwhile, political interference in the Black Sea gas project risks putting Romania’s security of supply in jeopardy – and in the hands of Russia.