Sharp plunge in Romania’s energy consumption

Romania’s economy continues to expand by 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 therefore 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  energy-intensive sectors and furthermore support further growth.

Romania’s net energy consumption decreased sharply by 11% y/y in Q1 after a more moderate 1/6% y/y decline in 2012. The decline in energy consumption occurred in spite of rising GDP – 0.7% y/y in 2002 [2.1% y/y filtering out the volatile impact of agriculture] and 2.2% y/y in Q1 of 2013. Technically, the energy intensity decreased visibly in 2012 and rather sharply in Q1 of 2013. To be more specific,  the improvement in country’s energy intensity was driven by

1. a shift in the industry structure that is more curved towards less energy intensive sectors [automobiles, compared to steelmaking, chemical industry or fertilizers production]
2. warmer weather in Q1 of 2013. The weather plays an important role in energy consumption, particularly in the winter quarters. The impact of renewable energy capacities last year and in 2013 was also visible in the structure of energy inputs. Besides hydropower generation returning to normal levels, more wind power left the coal-fired plants under pressure. The government intervened in order to prevent excessive negative impact of volatile renewable energy production – some 8.7% of the total power generation as of Q1. On  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 factor 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 shift in the attitude expressed by both PM Victor Ponta and president Traian Basescu vis-à-vis the shale gas. Both 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 has already received permits for explorations. 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 pressure 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 electricity market reforms are also slow in terms of expected market coupling prospects. Power grid operator signed a memorandum with members of Prague-based area that includes Czech Republic, Slovakia and Hungary but no follow-up is yet available. Domestically, market regulator ANRE has reportedly drafted plans for an OTC market and Transelectrica might waive certain fees for the electricity exported. As of market developments, more wind and hydro power has pushed down  short-term prices while the medium-term future prices remain relatively steady [even though at historic low levels].

Romania’s Official Journal has published the emergency ordinance that amends the 220/2008 law on 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 of 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].However, 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 220/2008 law– though final results can be provided only by market regulator ANRE. Investors in photovoltaic will probably not have their profits lowered below the target.

These are only a few of the insights in the new Intellinews Report : Romania Energy Sector. Learn more and purchase now>>

 

Independence through extraction for Ukraine

Ukraine seems interested in developing own shale gas resources as a diversification from predominant Russian imports, but the business climate in the country looks problematic. The state is very interested in energy projects; however investors are cautious of moving into Ukraine’s energy business at the moment, as this often meant joining up or competing with state-based organizations, or groups that could be linked to state officials or their relatives.

Ukraine has significant shale oil gas reserves, according to the existing estimates, equal to those of Sweden and roughly one quarter of the reserves of the major reserve holders Poland and France. OECD/IEA indicates roughly 1,100bn m3 of gas reserves. Wood Mackenzie however indicates  that the Lublin basin, in Poland, could have reserves in excess of 1,400bn m3 and have equal reserves in the Ukrainian portion of the basin.

Main shale gas basins in Ukraine [Source: Advanced Resources International, IntelliNews]

With Europe’s fourth largest shale gas reserves according to the OECD/IEA, and hopes for even more as supported by prognoses like those put forth Wood Mackenzie and others, the production stakes in Ukraine have aroused international interest. Exploration on the Ukrainian side of the border so far has been narrow however.  This is largely the purview of internationals.  TNK-BP, Gazprom and Shell are looking at Ukrainian exploration. There are also several junior explorers, such as Eurogas, actively exploring in Ukraine.

This is only a small extract of the insights in the IntelliNews Special Report, Ukraine Shale Gas Sector; read more and purchase>>

 

Poland on the front line of shale gas extraction

Poland is in the front line of Europe’s shale gas operations. According to the Environment Ministry’s data, 18 research drillings were successfully conducted and 14 another were under preparation. Still these drills are not enough to reasonably assess the actual potential for commercial use of shale gas. Even if the existence of gas is confirmed, it does not necessarily mean that there is potential for commercial use. From the tests made so far, the only concession, which may hold a satisfying amount of gas is PGNiG’s Wejherowo concession in Lubocin.

Apart from uncertain resources, experts mention several other potential barriers, which may increase the risk for shale gas investors in Poland and may even make such investments unreasonable:

• Protectionism of local service sector especially regarding drilling firms
• Restrictions to foreign drilling firms to enter the Polish market (for example a requirement to operators of drilling equipment to have local permissions)
• Long lasting procedures for importing the drilling equipment from outside the EU
• The necessity to announce tenders for drilling operations;
• Uncertainty concerning the price of gas on the regulated market;
• Complicated regulation concerning access to geological information and high price of such information;
• Changing and unclear regulation regarding the environment protection.

This is only a short extract from all the insights provided in the IntelliNews Special Report, Poland Shale Gas Sector; read more and purchase>>

 

Shale gas extraction boom in Eastern Europe: fact or fiction?

In the US, 12 years after the start of significant operation, shale gas flows reached some 170bn m3. The real impact was visible in the second half of the cycle, when supplementary non-conventional gas pushed exports and consumption up and imports down.

Will this be the case in Europe? Our findings point to the fact that even if certain areas of the continent (Eastern Europe particularly) are strongly interested in grasping this opportunity, a would-be shale boom in Europe reach neither the magnitude nor the speed of development seen in the US.

Europe will rather seek to diversify its external gas resources by building LNG terminals or investing in pipeline to gas rich regions. Actually, the shale gas at global level will not reach the magnitude seen in the US recently, as suggested by the consensus projections.

More detail, including extensive analysis of markets, technologies, political landscape and specific businesses, in the IntelliNews special report, East Europe Shale Gas Sector; read more and purchase>>