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Upstream sector in Romania

Gas prices in the hands of Liviu Dragnea

Liviu Dragnea invites this week, in the Parliament, PM Sorin Grindeanu, Economy Minister hai Tudose and Energy Minister Toma Petcu to a discussion on the amendment and supplementation of the Electricity and Gas Law, more precisely to make a decision on gas prices to be paid by population as of 1 April.

According to a statement made by PSD President, the discussion will also be attended by Iulian Iancu, President of the Committee for Industries of the Chamber of Deputies, and specialists. "I want to have a discussion on the decision to be made, because we have to make it in the Parliament, and I don't want to make the decision according to some or others say, because each one has its own interests, I want to make sure that the decision we make is the best for the Romanian consumer, more affordable and good from a strategic point of view for Romania", Liviu Dragnea has recently stated at Romania TV.Which is at least bizarre! Only two months ago, PSD President had no doubt! He asked ANRE to decrease electricity and gas prices, because the tax on special construction was no longer applied! Now, he seems to reconsider the decision to be made! According to Liviu Dragnea, there are "certain economic operators" who support that GEO 64/2016 remains in force, while other operators request that this ordinance be repealed.

"But in these disputes no one has considered the consumers. We have several strategic objectives - the consumer shouldn't be vulnerable and costs should be paid. In turn, repealing GEO 64 may attract major effects for Romania from an economic and strategic point of view. (...) The infringement clause could be activated. "I want to have a discussion on the decision to be made, because we have to make it in the Parliament, and I don't want to make the decision according to some or others say, because each one has its own interests, I want to make sure that the decision we make is the best for the Romanian consumer, more affordable and good from a strategic point of view for Romania", Liviu Dragnea has also argued at Romania TV.

"Because the entry into force of Ordinance 64 or keeping it in force may produce - some say that it produces positive effects, meaning that it does not affect the final energy price for population, on the contrary it gives the possibility, on ANRE's electricity model, to have for consumers in the end an affordable price and boosts competition greatly. We are in the situation in which it's good that we all know this. In the bill reaching every home, from the total amount of RON 100 RON 40 is the price to producer and RON 60 are the supply costs, i.e. the supplier and distributor. This is not right. In Europe it's the opposite: 60% is the producer's price of the total price of the bill and 40% the distribution and supply", Liviu Dragnea also said.

We recall that in order to access European funds of almost EUR 1880mln for the construction of BRUA gas interconnector, the Government approved GEO 64/2016, which provides that population will no longer receive gas with priority from the domestic production. On the other hand, a liberalization schedule is currently in force, agreed with the IMF and the European Commission, under which, by 2021, the price of gas from domestic production reaches convergence with international prices. For Romania, the international reference price remains the price at which Russia's Gazprom, our only import source, sells gas in our market.

Until full liberalization, Government decides the price of gas from domestic production. But GEO 64/2016 provides that, as of 1 April 2017, the Government will no longer establish gas prices, which means that it will be liberalized. But there are still several problems, which are not small at all! GEO 64/2016 has provisions regarding only the price of gas from domestic production, without any reference to the final price paid by population and power plants supplying hot water and heat to Romanians. Some interpret the legislation so that the final price remains the same. Which means that, if the gas price increases, the transmission, distribution and storage tariffs will have to decrease. On the other hand, if the price is liberalized, the market will also be liberalized.

Under these conditions, two problems occur. One refers to the market itself, which is far from functional. Because there are no spot or balancing markets. Moreover, the domestic market is not able to establish price signals, so the only reference price will be the import one. And as, over time, Gazprom sold in Romania at higher prices than in the region, the price of gas from domestic production will increase accordingly! The second, maybe the most important problem for Liviu Dragnea and PSD, is that, if the market is liberalized, the deregulation schedule disappears and, with it, the amounts of hundreds of millions of RON to the budget, collected by the state in the form of supplementary charge!

Gas prices should decrease
Early this year, PSD President Liviu Dragnea requested the National Regulatory Authority for Energy (ANRE) to decrease gas and electricity prices, because the tax on special constructions, of 1% of the construction value, was eliminated. "It was included in the price in an incorrect manner, in my opinion, by energy and gas distributors. With the elimination of the tax on special constructions, I expect the electricity and gas bills to drop and I ask ANRE President to deal with this issue and intervene immediately", Liviu Dragnea said. Niculae Havrilet, ANRE President, mentioned that the tax was no longer included in electricity bills.

"As of 1 January, the tax on special constructions was not introduced in the electricity tariff because it was not provided in the Tax Code, resulting in a reduction of the final tariff by 1.9%, together with other reductions of the distribution tariff", ANRE head said. "In terms of gas, this tax will be excluded starting with the new gas year, which starts on 1 April, as tariffs are calculated and remain unchanged for the period of a gas year: 1 April - 31 March. The difference collected during 1 January - 31 March will be transferred to consumers in the following gas year, by reducing tariffs", Niculae Havrilet explained.

"Apocalypse" by ACUE
The Federation of the Associations of Energy Utility Companies (ACUE) announces some sort of "apocalypse" if gas prices are fully liberalized: prices would increase by 75%, power plants would go bankrupt, people will live in the cold during winter! ACUE proposes, for a transition period, until we have a functional gas market in Romania, a gradual price liberalization. One of the main reasons why ACUE is in favor of delaying the deregulation of gas acquisition prices refers to the fact that deregulation of gas acquisition prices would lead to an increase in final gas prices for household customers and for thermal energy producers.

"Thus, while currently the gas acquisition cost for the regulated market is RON 60/MWh, deregulating this cost element would lead, in a first phase, to an immediate increase thereof to the level of the acquisition cost for the free market, which is currently RON 72-80/MWh, as it results from the few transactions concluded so far on the centralized markets", a communique of ACUE shows. It should be noted that the price of RON 72/MWh is a "reference" price in the gas market: it appears in the formula setting the supplementary charge for gas, established during the validity of the deregulation schedule. But, when the schedule disappears, normally the supplementary charge will also disappear!

"It should be mentioned that the import gas price is determined through a mechanism that considers correlation with oil prices (average in the last 9 months) and the USD/RON exchange rate. Regarding the perspectives for the cold season of 2017-2018, the forecast on import gas prices, which in absence of a fair price for gas from domestic production, resulting from supply and demand, in a liquid and functional market, will remain the only reference price in the gas market, indicates for the end of the year a significant increase in the cost of gas as commodity (approximately RON 100/MWh in Q3 and RON 104/MWh in Q4)", ACUE's communique also shows. It's true, at the beginning of last year, international oil prices fell to almost USD 25/bbl. This is why, last year, Russian gas imports increased by around 700%: the import gas price was lower than the price of gas from domestic production! Forced to pay the supplementary charge at RON 72/MWh, even if they had sold below this price, some of the domestic producers (especially Romgaz, checked by the Court of Auditors) refused to trade at lower prices than the limit imposed by the supplementary charge.

"Considering the aforementioned, there is a very high probability that domestic producers establish their selling prices for gas from domestic production at a close value to the import gas price, which may generate dramatic effects in the gas market, which risks affecting the continuity and safety of gas supply and lead to the bankruptcy of certain participants to the market, first of all of thermal energy producers in centralized system and of gas suppliers", the communique mentions.

Oil prices started to decline
At the beginning of this year, the oil price reached approximately USD 55/bbl, hence ACUE's calculations, indicating an increase by almost 75% in the price of gas from domestic production. However, oil prices are following again a downward trend: Brent crude, the reference for the European market, reached around USD 51/bbl, and WTI crude, the reference for the U.S. market, fell below USD 50/bbl, to around USD 48. Thus, gas prices will also have to decrease! Basically, ACUE proposes a liberalization similar to that in the electricity sector. The bills of household consumers include "CPC" (component for the competitive market - Ed.), which, starting from 10% of consumption, it is currently 80%, following to reach 100% by the end of the year. The rest of the electricity bill (currently 20%) is established by ANRE, both in terms of price and amount supplied by Hidroelectrica and Nuclearelectrica (the cheapest state-owned producers). It seems that ACUE would want some sort of CPC for gas. But it does not mention what should be the price set by ANRE or the amounts and companies that would supply them. Currently RON 60/MWh, gas prices could as well increase for the component regulated by ANRE to the figures announced by ACUE itself!

"Companies in the regulated gas distribution and supply practice a distribution tariff and a supply margin that are established by the National Regulatory Authority for Energy in Romania and currently account for around 30% in the final gas price (without taxes). We also mention that the gas acquisition price does not influence in any way the level of the distribution tariff and of the supply margin", ACUE communique also showed. According to ANRE, for the period July 2016 - March 2017, the average cost of acquisition of gas from domestic production at the entry in the distribution system, including storage and transmission services, is RON 76.64/MWh. A household customer pays approximately RON 110/MWh (without taxes). Thus, distributors and suppliers charge about RON 33.4 for each MWh of gas supplied to population. The transmission operator charges RON 9.9/MWh and the storage tariff, for injection and extraction from the underground storage facilities, reaches RON 17.86/MWh. "The Federation of the Associations of Energy Utility Companies (ACUE) expresses its confidence that all these reasons are properly understood and that the competent authorities will take the best measures to avoid major distortions on the natural gas market, as a result of unprepared and precipitated liberalization", the communique also shows.



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