Changes to the offshore law and facilitating the Black Sea projects are paramount, and it seems that the Romanian Parliament has finally reached a consensus to adopt them, as a new broad coalition Government has formed, says Cătălin Niţă, Executive Director of The Oil and Gas Employers’ Federation (FPPG). ”Price controls may be enacted with the best of intentions, but the reality is that they don’t really work,” Niță tells Energynomics, in an exclusive interview.
Why are there still delays in adopting the Offshore Law changes and what are the FPPG’s demands regarding the change in legislation?
The so called „Offshore Law” was adopted by the Romanian Parliament in late 2018 and is still in force since then as Law 256/2018. However, this piece of legislation did not encourage investments from the titleholders, which should have not been a surprise since Romania has the highest effective rate of taxation of offshore gas production (23%) of the most relevant European countries in offshore gas production, approximately 4.3 times above their average, according to the latest study issued by Deloitte on this matter. The modification of this law is the prerogative of Romanian legislators and there were several signals from different authorities that the changes necessary to enable the development of offshore projects are prioritized at the moment. A genuine political consensus was needed for what has been described by many as a true „country project” for Romania in the current decade. This consensus seems to have been finally reached at the end of this year, but I think it is important to highlight at this point that there were never demands from the industry. The companies involved have always assured the Romanian authorities of their full support in providing necessary expertise through FPPG, for the best informed choices and will continue to do so in the future.
As such, what FPPG has done relentlessly was to constantly remind all the stakeholders involved in the process for amending the Offshore Law, that the following aspects should be taken into account, being the prerogatives required by investors for the projects to become economically viable and secure:
- Strong stability clause for concession agreements
- Government’s take to be decreased to a level (~60%) that offers projects a chance to be economically viable
- Clause to ensure free-market principles
- Competitive fiscal terms
- Increase of deductibility of investments for offshore tax from 30% to 60%
- Offshore tax to be computed for supplementary revenues above 100 lei/MWh (i.e., elimination of tax bands from 45.71 to 100 lei/MWh)
How is the new Capping law 259/2021 affecting the market, in your view, on short and mid-term?
On top of the already multilayer crisis that began last year, 2021 brough a new dimension to this global situation, i.e. an energy crisis that has led many governments try any measures necessary to manage the short-term consequences of the situation we are going through.
Although the goals for price controls may be affordability and economic stability, they may have the opposite effect. Over the long term, price controls have been known to lead to problems such as shortages, rationing, deterioration of product quality, and illegal markets that arise to supply the price-controlled goods through unofficial channels.
Price controls may be enacted with the best of intentions, but the reality is that they don’t really work. Most attempts to control prices often struggle to overcome the economic forces of supply and demand for any significant length of time. When prices are established by commerce in a free market, prices shift to maintain the balance between supply and demand. Government-imposed price controls can lead to the creation of excess demand in the case of price ceilings, as the case of law 259/2021.
What are the effects of GRP in the market, combined with the liberalization?
The Gas Release Program (GRP) obligation was supposed to generate more market predictability and was expected to lead to increased gas market liquidity and the formation of correct reference prices. At the same time, it was expected to ensure the conditions for commercial balancing of market participants, as well as increase access to all market participants, including small suppliers and end clients of domestic gas. I believe that what we see now in Romania should be analyzed in a broader, international context and should be interpreted as a failure of the necessary liberalization of the market. However, it will be the prerogative of Romanian authorities to figure the best way to handle what will most likely be a rough winter in terms of energy prices across the whole globe.
What can we expect in the future, from the price perspective, and from imports and exports point of view, also considering that many new pipelines are ready?
On liberalized markets, the price will always be set by supply and demand. On the supply side, as you mentioned, there are projects for new pipelines. After Nord Stream 1, once Nord Stream 2 is completed, the total capacity of both pipelines will be 110 bcm per year. Turk Stream has been opened in January 2020 and operates only in an estimated half of capacity which is to double from 15.75 to 31.5 bcm per year after and if the second pipe becomes operative. Cumulative, that means that two projects that are just to be operational, will increase supply capacity of non-Ukraine transit routes, bringing the commodity to Germany and Turkey, as Europe main consumers of Russian gas along with Italy, potentially, additional 141.5 bcm annually. This rises Ukraine’s concern about monopoly issues and using these project as political tools. On the side of the demand, the International Energy Agency estimates a possible increase of global demand for gas by 45% in 2040, which would allow for some opportunities for Romanian gas as well. Last, but not least, in understanding the trends for pricing in the future, digitalization and modernization of the refining and petrochemical sector are expected to reduce the refining costs and process losses. This, in turn, is expected to create an opportunity for the Romanian market in the coming years.
What can be done to accelerate the Black Sea project? We have seen from Government declarations that the time schedule for extracting the first gas has changed to 2026. How is that affecting the investment and the market?
For the past years, the industry has constantly highlighted two aspects that would decisively aid in the enabling of the Black Sea offshore projects. The first one is stability and the second one is predictability. Unfortunately, the recurrent postponements in key decisions that were supposed to be made by certain dates have definitely impacted the investments, reason for which there is no FID for the Neptune Deep project from either of the operators and, arguably, ExxonMobil exited from this project, by starting the selling process to Romgaz, for precisely this reason. The fact that the Black Sea offshore projects were not accelerated a long time ago, when the gas markets looked better, leaves us at this point with conditions that have also allowed the increase in prices due to more imports and lack of sufficient Romanian gas options in the market.
Nevertheless, we still have hope for this project, I hope that we have finally reached the tipping point for this project to be enabled. Both the Parliament and the Government, which is now more representative than in the past years, can now not only enable the Black Sea gas projects in a very short term but can achieve through this even the end of the current energy crisis in Romania and ultimately achieve the stability needed for our country to achieve robust energetic independence and security for the decades to come.
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This article first appeared in the printed edition of Energynomics Magazine, issued in December 2021.
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