As the president elect of ROPEPCA, and also a a veteran of the O&G industry, with huge experience in Romania, Harald Kraft answered the questions raised by energynomics.ro. Mister Harald Kraft covered in a few pages all the hot topics of the industry at the moment: from oil prices, and their impact on the gas market, from royalties and (unfair) competition from gas imports, from accessing land necessary for carrying out the petroleum operations and the future of a centralized platform for trading gas in Romania. Slightly surprising, but still encouraging, he believes that Romania is well positioned to become an important South-East European hub for the security of supply and flexibility in the region, “provided that the legal and regulatory framework supports this”.

Esteemed Mr. Harald Kraft, you have almost 35 years of well-rounded experience in the oil and gas industry. During this long career you witnessed significant highs and lows of the oil price. How should a market be designed in order to cope with such volatility, in terms of domestic production, imports, and market tools?

We all know that oil prices are beyond the control of the operators which can only react to the market developments. A fully liberalized liquid market always is the most appropriate tool to manage volatility, and this in the best interest of the consumer and the producer. We see this working in many Western European countries. The question for the producer, however, is not that how much the market should be designed, but how is the operator positioned within this market. A prudent operator reacts proactively and not only if it is too late. The operational efficiency and strict cost control should not be a topic only during low price periods, but are mandatory during a period of price prosperity.

Regarding to natural gas price also, we have a very peculiar situation in Romania, because the gas price is regulated at the producer level for the residential and district heating sector the Romanian producers being obliged to subsidize this segment. Allow me to use this opportunity to clarify one misunderstanding widely present in the public opinion. It is not only the price of the domestic gas which is responsible for the gas price that the households have to pay; it contributes only with approximately 50% to the aggregate costs, besides the distribution and transportation costs, storage and profit margin of the supplier.

On the free market, the producers are in competition with Russian imports, which after the collapse of the international oil price generated a downward trend for the Romanian domestic gas as well. This demonstrates that we have a competition that is well functioning, despite the fact that we have only a handful of gas producers in Romania.

You also have an extensive experience in Romania, with WIROM and Wintershall, then OMV Petrom, and currently as the Country Manager of Stratum Energy. In your opinion, a sustainable market is based more on transfrontalier interconnectors, on local storage, or on flexible production? How would you describe the Romanian O&G industry from this three-folded perspective?

Let me focus on gas. Romania is in the very favorable situation to be almost self-sufficient in regard of its gas supply, which is the merit of the Romanian gas producers. I am not that sure that this is duly appreciated by the public, and here I like to explicitly include the politics as well. We have some transfrontalier interconnectors, mostly for imports, which offer an additional security in terms of supply and flexibility. Gas exports currently are not an important topic at the moment, since there is a limited capacity and pressure restrictions. The flexible production is not a solution and definitely is not the duty of a gas producer. He always has to cover his fixed costs, which represent the major part of his expenditures. I trust that the state budget as well prefers having a stable and predictable income from royalties and taxes. The fluctuations of demand on the market during the summer and winter period always have to be balanced by storages and this has to be the task of the supplier and not of the producer. Focusing on the storage capacity in the context of the domestic production and local consumption, Romania has a favorable position compared to other countries. Maybe you remember the gas supply crisis in January 2009, when Russian imports stopped. Even during the period of peak demand nobody suffered from any shortage. Our neighbors were not that lucky! When you are asking me what can be improved, it is the flexibility of the injection system and withdrawal. What we need is an easy to handle multi-cycle injection/withdrawal regime, which allows withdrawal during summer and injection during winter as well, in case the market asks for this. This is a standard procedure in most Western countries. Having established this, I believe that Romania is well positioned to become an important South-East European hub providing security of supply and flexibility for the region provided that the legal and regulatory framework supports this.

The national gas transport operator is undergoing a huge project for interconnecting Romania with the neighboring regions (BRUA). What are the main technological and engineering challenges taht need to be taken into consideration?

The performance of such a complex project indeed is a challenge. From a technological competence point of view, Transgaz is very well positioned. I have no doubt that they will manage this, but the real challenge of such a project is another, it is having all the authorizations, permits and servitutes of way in place, – and on time. This is a cumbersome and time consuming undertaking in Romania. Getting a construction permit even for a smaller project easily might take 9 months or more. ROPEPCA since long is strongly advocating to accelerate and facilitate the bureaucracy and to ease the access to public and private land for upstream and midstream projects in the national interest. In the above context, ROPEPCA received with great interest and welcomed the promoted legislative initiative for the implementation of BRUA. Given the complexity of the BRUA Project, which involves extending a pipeline that crosses 11 counties, we appreciate that the mechanism for the implementation of the project was designed to eliminate certain obstacles that petroleum title holders are facing as well when trying to access the land necessary for carrying out the petroleum operations.

After more than 150 years of exploitation, it seems that Romanian underground does still host enough hydrocarbons. What is mostly needed for getting access to these untapped resources? It is technology, it is money, it is the engineering know-how?

All three are necessary. The Romanian underground is already extensively explored. We should not forget that Romania was amongst the first, if not the first country in the world, producing hydrocarbons on a commercial scale. The period of easy to find oil and gas deposits is gone. Exploration today is a financially risky undertaking, requiring the most advanced technology and engineering skills. Nevertheless, the on-shore sector of Romania is an interesting target especially for small and medium sized companies.

The Romanian oil and gas infrastructure has reached a matured age and huge investments are necessary to try and flatten the natural decline of developed reserves. Serious analysis exist which foresee the necessity of investments of more than 1 billion euro per year in the upstream sector just to maintain the current status quo. This money needs to be earned before! ROPEPCA strongly believes that it is in the economic interest of the country to motivate the investments in this domain through a stable and balanced fiscal regime.

There are certain discussions in the public sector and on political level on the petroleum royalties. However, one cannot focus only on this. In fact, the aggregated governmental earning from the petroleum production in Romania is amongst the highest in Europe, not even considering the support that the gas producers have to give to the residential sector by a very low gas price.

ROPEPCA recently warned that, due to some domestic regulations, local production is now under threat from cheap imports. Do you think this situation is to linger on? What changes in regulations are needed for a fair competition between the domestic oil and gas and the imported volumes?

Domestic oil production is not that much endangered by cheap imports. However, the decline of the international oil prices had its impact on the import gas prices and the domestic price was affected by this. We don’t criticize this. This is a market risk, everybody has to accept. What we criticize is the unfair competition given by gas imports, which is not subject to a mandatory quota of very cheap gas for the residential sector, which is not subject to the gas overtax and which is not subject to the obligation to sell a certain fraction on the centralized market. Here we urgently ask the regulator to eliminate this severe market distortion. Needless to say that imported gas is not paying royalties, is not paying taxes, is not investing in Romania, is not creating working places in Romania and is not contributing to the gross domestic product. So why grant an advantage to it?

We know there are undergoing discussions with the authorities regarding how the gas trading system will function after April 1st. What is your view on this major change on the local gas market?

There are strong voices that want to force the producers to sell their entire production on a centralized platform. Especially suppliers, focused on their interests, are heavily lobbying for this. ROPEPCA does not support this idea. The experience from Western Europe gas exchanges shows that such platforms predominantly are the playground for traders and not so much for end-consumers. The later prefer a direct contract with the producer or supplier getting tailor-made agreements covering their individual needs, which rarely can be accomplished by standardized products traded on a platform. The insertion of intermediaries, i.e. suppliers, between the producer and the consumer – here I am referring to medium and large commercial and industrial consumers – definitely will not lead to reduced prices. The legislation should not patronize consumers where to buy from and leave this decision at their discretion. A basic element of a free market is the freedom of choice. Not to be misunderstood, I do not question either the justification or the benefits of a centralized market, but only on a voluntary basis. To enforce participation on the centralized market by imposing severe penalties definitely is the wrong way and is opposite to a functioning market economy. If such a centralized market offers attractive products and liquidity, the problem of its acceptance will be immediately resolved.

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The full version of this article can be read in printed edition of energynomics.ro Magazine, issued in March 2017.

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