Romania Energy Report - Q2, 2013

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Romania Energy Report - Q2, 2013

Romania’s economy continues to expand this year, by some 1.5-2% this year and possibly more in the coming years, driven by industry, but the negative output gap remains wide. The change in the structure of economy, rather than investments technology, will however push down the energy consumption thus improving energy efficiency.

Energy market liberalisation will particularly result in higher natural gas prices [hence shrinking consumption in sectors like fertilizers production that has capitalised on cheap gas so far] while the renewable energy support mechanism has already pushed up end-user electricity-related cost. Domestic consumption of energy will stabilise at a lower level in response to higher energy prices. Sectors like chemistry and metallurgy are under significant pressure. Hopefully, the less energy-intensive sectors [more value-added] will offset the predictable decline of the energy-intensive ones and furthermore support further growth.

Romania’s net energy consumption decreased sharply by 11% year on year in Q1 after a more moderate 1/6% year on year decline in 2012. The definition includes all the energy inputs less the exports of electricity and petroleum products. The decline in energy consumption occurred in spite of rising GDP – 0.7% year on year in 2002 [2.1% year on year filtering out the volatile impact of agriculture] and 2.2% year on year in Q1 of 2013. Technically, the energy intensity decreased visibly in 2012 and rather sharply in Q1 of 2013.

The improvement in country’s energy intensity was driven by i. certain shift in the structure of industry, toward less energy intensive sectors [automobiles, compared to steelmaking, chemical industry or fertilizers production] and ii. warmer weather in Q1 of 2013. The weather plays an important role in country’s energy consumption, particularly in the winter quarters. The impact of renewable energy capacities coming online last year and in 2013 was also visible in the structure of energy inputs.

Besides hydropower generation returning to normal levels, more wind power put the coal-fired plants under pressure. The government intervened in order to prevent excessive negative impact of volatile renewable energy coming into the grid – some 8.7% of the total power generation as of Q1. On a one hand, it extended limited support to coal-fired plants by allowing them better access for a guaranteed part of their capacity and on the other hand the executive trimmed down the support given to renewable energy producers under law 220/2008 [on quota and trading system of green certificates]. In fact, this latter action turned to be the key story in this first half of the year – besides the visible decrease in energy consumption.

Lower imports of energy inputs in Q1 this year [natural gas mainly, but also certain amounts of coal] notably resulted in much smaller trade deficits and a Current Account surplus in Q1.

In the upstream area, there is a visible shirt in the attitude expressed by both PM Victor Ponta and president Traian Basescu vis-à-vis the shale gas. Both of them expressed support for exploration and exploitation of shale. Nonetheless, the outlook remains moderate in spite of the EIA updated evaluation showing abundant reserves. Chevron holds licenses for two large areas in Romania and received permits for explorations already. Nonetheless, the potential for shale gas turning into a major factor for Europe’s gas market remains moderate in spite of Ukraine’s and Poland’s efforts.

Other projects, like Nabucco or TAP might contribute more likely to the diversification of the gas mix in Europe – and hopefully in Romania. The consortium that operates the Shah Deniz block – the first source of gas to fill either Nabucco or TAP, was expected to make a choice between the two routes in June 2013. For Romania, Nabucco would be more beneficial – since TAP aims at bringing the gas through Turkey-Greece-Albania-Italy to Europe [compared to the route through Turkey-Bulgaria-Romania-Hungary-Austria – under Nabucco].

Another important choice in the upstream area is the one expected from OMV-Exxon that will pick a route [destination] for the gas to flow [starting 2019] from Romanian offshore. Output is expected at 6.5bn cubic meters per year / compared to 10-12bn cubic meters to flow through Nabucco or TAP in a first stage.

Domestic energy prices remain low, market reforms advance slow. Electricity and natural gas prices remain roughly the lowest in EU [except for Bulgaria in some cases] and the pressures for higher prices are visible, yet not immediate due to sluggish advance of market reforms. Hiking the regulated natural gas prices toward market levels is being pursued as a preparatory stage before full liberalisation of the market. The problem however is that since there is no functioning market in place yet, the “market level” can be only arbitrary. The two-pillar liberalisation process already endorsed by the government is however realistic and workable. Still, the executive and the market regulator lag behind plans to set up a natural gas exchange – which is critical for one of the two pillars [price hikes being the second pillar]. Gas market liberalisation depends critically on first having a market with an adequate structure [including diversified supply and trading institutions among others].

The reforming the electricity market also advances slowly, speaking of the expected market coupling prospects. Power grid operator signed a memorandum with the members of Prague-based area that includes Czech Republic, Slovakia and Hungary but no follow-up is available yet. Domestically, the market regulator ANRE has reportedly drafted plans for an OTC market and Transelectrica might waive certain fees for the electricity exported. Speaking of the market developments, more wind and hydro power pushed down the short-term prices while the medium-term future prices remain more or less steady [even though at historic low levels].

Romania’s Official Journal has published the emergency ordinance that amends the 220/2008 law on the support mechanism for energy producers that use renewable energy resources. The amendments are: temporarily withholding part of the support [the tradable green certificates] extended to investors. Licensing of new projects is restricted. Solar farms built on productive farming land are banned from support. The association of investors in wind farms announced plans to appeal in court and at the EC the ordinance. The effects of the ordinance will be better visible after the market regulator runs a first profitability evaluation [supposedly as soon as possible].But at first sight investors in wind farms and micro-hydro might be entitled to challenge the ordinance since the internal rates of return [IRR] for their projects might fall under the target set under the law 220/2008 – though final results can be provided only by market regulator ANRE. Investors in photovoltaic will probably not have their profits lowered below the target.

The country’s refining sector hit in Q1 the lowest activity level in the past decades as the crude oil under processing dropped to below 2mn tonnes. This occurred however as country’s largest refinery owned by the Rompetrol group has completed upgrade works thus remaining in outage for a period of time [it processed 40% less crude oil than one year earlier].

Number of pages: 47
Release Date: Tue, 18 Jun 2013