The gift Gazprom received

The gas market crisis in Romania, despite the existing reserves in the Black Sea, makes us wonder if the situation was avoidable and how quickly it will be resolved. In order to shed light on these issues, I invited this week Mr. Dumitru Chisalita, university professor, president of the Smart Energy Association, oil and gas expert witness.

RC: Professor, is there a gas reserve in the Black Sea?

DC: There are gas reserves in the Black Sea and they have been tracked by various means. At the moment, there is talk of a reserve of about 200 billion cubic meters that spans several perimeters. The largest perimeter is currently held by the joint venture between Exxon and OMV-Petrom.

RC: So the 200-billion cubic meter field is a confirmed reserve …

DC: Yes, this is public information, circulated by the National Agency for Mines and Petroleum (the Regulator).

RC: Is 200 billion cubic meters a considerable amount?

DC: If we compare it to the largest field in Europe, at Groningen, which has 2,000 billion cubic meters, our reservoir is small. But relative to the reserves Romania currently holds put by the Regulator at 100 billion cubic meters of onshore gas, the Black Sea field is enormous.

RC: And if we considered Romania’s energy consumption?

DC: At a 12-billion cubic meter yearly consumption, the Black Sea reserve would ensure the supply for 17 years. If we take into account the onshore reserves, then it’s rather 25-30 years, under current consumption patterns.

Please note, however, that Romania’s energy policy foresees an increase in consumption over the next ten years.

RC: As part of the clean energy transition?

DC: When they were drawn up, the policies did not take into account the transition to renewable energy. They were written with the social perspective in mind, protecting forests and, to some extent, protecting the environment.

RC: I understand, but now, with the advent of the Green Deal, increasing consumption would make even more sense, right?

DC: Yes, it would make more sense. Whether we like it or not, natural gas will be extremely important to Romania in the next 10, 15, 30 years, on account of the Green Deal and of the fact that natural gas is one of the few less polluting resources available. Oil resources are very scarce and depleting, coal use is restricted for environmental reasons, so of all the non-renewable resources, gas remains the only one still available and ready for use. Of course, given that it is drilled out of the seabed and not left there…

RC: Do you find the “this gas reserve is not for export, but for Romanian use alone” approach viable?

DC: In my view, gas, like any commodity, does have value. The important thing is to maximize this value both in the short and long term. For this reason, it would be preferable to have the longest portion of the value chain here in Romania. Ideally, we should not export it as fuel, but in the form of finished products, petrochemicals, chemicals, because, in this way, the added value would be much higher. All the more so that natural gas will survive the Green Deal, because chemical and petrochemical products will be needed for a long time to come.

RC: Under normal circumstances, would Romania have been able to extract its own gas from the Black Sea?

DC: Under all the scenarios advanced, production should have started somewhere between 2022-2023, and peak around 2025-2026.

RC: So we were supposed to get the first natural gas extracted in about 1 year.

DC: Based on studies carried out in 2013-2018, if the investment decision had been made in 2018, as normal, production would have peaked somewhere in 2025-2026.

RC: What happened? Why have the Black Sea projects been put on hold?

DC: There are many reasons stemming mainly from two important factors. Firstly, repeated gas market interventions and administrative changes that have distorted the market.

RC: What do you mean? Price capping?

DC: Ordinance no. 114 that was passed, various other interventions, the 2% tax, the “pole tax” (property tax levied on special types of buildings), which, cumulatively, contributed to the deterioration of the free market. In a face-to-face discussion I had 7 years ago with the then CEO of Exxon, he told me very clearly that the legislation may not be very favorable, the [political] climate may not be stable, but nothing is as disruptive for Exxon as a situation where someone plays with prices all day long. For them this is a great concern.

RC: Everything becomes unpredictable.

DC: Furthermore, it upends any business plan to sell the gas. For a public company, such as Exxon, all of these elements impact the financial results, the company’s value, the way shareholders look at investments. A major problem has been that Romania has intervened in the gas market on too many occasions and has not allowed it to function.

The changes to the legislation were the second major problem, especially following certain events. I mean, you know that when you make a business plan you always look at legislation first, at existing risks. Once you have built your facility, you have brought in the equipment and start production, the last thing you want to see is a change in the legislation governing the way you operate.

Unfortunately, this is what happened, there were all those changes in the offshore petroleum exploitation law, with all those additional taxes to be paid, the royalties that were linked to the price in Vienna and not to the price on the Romanian market, the issues with how exploitation was to be performed offshore. So all these changes that occurred in 2018 were the second major cause for which the company took the decision not to continue with the Black Sea investment and to put the company mandated to deal with the exploitation on the market.

RC: I have noticed that you refer mainly to Exxon.

DC: Yes, because the perimeter owned jointly by OMV-Petrom and Exxon is the largest and represents the bulk of the Black Sea reservoir.

RC: But why BlackSea Oil and Gas have not been deterred by these adverse conditions that you mentioned and are preparing to soon extract the first cubic meter?

DC: Their operations were in the most advanced stage and were planning to bring the gas to the shore as of Q4 2021. In the end, from the information I have, they will not start production this year. Indirectly, they were also affected by this 2018 change in the offshore petroleum exploitation law, which featured an unbalanced approach against offshore site developers.

RC: But how do you see the reasoning underpinning these legislative changes that I think had catastrophic consequences for the Romanian energy market?

DC: It was a populist approach along the lines of “we are not selling our country”, “foreigners must pay us as much as possible”. In my opinion, there was not a balanced approach, an approach that weighs the gains and losses of offshore gas explotation. That law came in 2018 as a result.

Sadder still is that three years have gone by and nothing has changed.

RC: That’s exactly what I want to ask you. In the meantime the political scene has changed. I expected the populist mindset you mention to follow the same trend and, consequently, the offshore petroleum exploitation law to be amended.

DC: I don’t have an answer. We may not change the legislation based on the idea that somehow a bad law will force Exxon to sell at a lower price in the event that it will sell to a Romanian buyer. The law might change later. But it’s a speculative approach…

RC: The bad thing is that Exxon also knows this…

DC: Yes, that’s why I say, it’s a metaphor circulating in the market. No one has clearly stated that this was the reason and, as you say, at the end of the day, the agenda should be as clear as daylight to all those who pay attention. I cannot find another explanation.

RC: This means that we don’t have a clear idea on when the legislation might be amended.

DC: We don’t have a clear idea on when this law might be amended, we don’t have a clear idea on when these natural gas reserves might be exploited, we don’t have a clear idea if the gas will stay in Romania, will be processed in Romania or, simpler still, whether the surplus is going to be exported to neighboring countries.

Beware, though, this opportunity is slowly drawing to a close. Last week for example, Hungary signed a long-term contract with Gazprom.

RC: Is it fair to say that the way the legislation in Romania has been changed has benefited Gazprom the most?

DC: Yes, this is a fair statement, but I think Gazprom was simply on the receiving end of a gift. I don’t suspect it of having played dirty games. The gas that is not extracted is now supplied by Gazprom exports.

RC: The French have an expression for those who make themselves “useful” by giving gifts out of ignorance to the wrong people…

DC: Yes, my belief is that we did it to ourselves, without any outside intervention.

RC: Assuming the legislation is passed tomorrow, how many years would it take for the first cubic meters of gas to be extracted from the sea?

DC: If we are talking about small amounts, it would probably take 2-3 years. If we’re talking about significant amounts that would make a difference to Romania’s energy balance, then it would take 5-7 years or more.

RC: How long would it take for the window of opportunity to put the gas onto the energy market to close?

DC: I would talk about two things here. If we take solely the Green Deal projections, the answer would be 2050. By then, not a single molecule of gas should be used for energy production, but only as raw material for the chemical industry. But if we take into account the offshore and onshore sources, and current energy policies, we should run out of natural gas completely after 25-30 years. This does not consider unconventional reserves.

RC: Let’s suppose that a Romanian company buys the perimeter sold by Exxon. What experience do Romanian companies have in exploiting underwater gas? Wouldn’t that delay commissioning even further?

DC: Indeed, Romanian companies are not experienced in deep water exploitation. The Romanians started with shallow water drilling in the 70s. But lack of the expertise that Exxon had is not of particular concern. There is the possibility to pay an experienced operator, perhaps even Exxon, who would act as a service provider.

RC: Given the current context that we just described, will Romania be able to exploit all the gas reserves in the Black Sea?

DC: I half believe and half hope that it will happen, even if it will take a few years before exploitation starts. And the main pressure in this direction will be put by the major crisis we are going to face. We will reach the end of our tether and that will be the point when certain people will come to their senses and start to exploit the natural gas reserves. The crisis that has already started will become worse and will lead to radical measures being taken by Romania.

RC: So we can say that the increase in gas prices is good news for the commissioning of offshore gas exploitation?

DC: I wouldn’t say that the crisis triggered by higher bills will be the cause of that, but rather the crisis that we will find ourselves into over the coming months starting with this winter when effectively no natural gas will be available in Romania.

RC: And how will this crisis manifest itself?

DC: I think we will end up rationing the supply of natural gas. We will have to choose between entities that use it and those that don’t. We will probably have to ask households to consume less on certain days at certain times. Unfortunately, there is a good chance that we will see all this unfolding as early as this winter. And I think this prospect will put more pressure on us than price increases.

RC: Professor, thank you for these clarifications.