Co-authored by Laurentiu Pachiu*
Keywords: Romania, OMV Petrom, natural gas, energy sector
The Ukrainian crisis has heightened the volatile environment for investments in Eastern Europe. However, it has also had the effect of concentrating the region's focus on its long-term prospects regarding energy sufficiency.
Romania, with its direct access to the Black Sea, has an opportunity to play an important energy-related role in the region. A member of both NATO and the European Union, Romania has a long history in the energy sector and has produced crude oil since 1857. In fact, numerous energy projects in Romania have been supported and financed by the European Union. The country benefits from a balanced energy mix and has one of the highest levels of energy security in Europe, with hydrocarbon production and potential both onshore and offshore. Romania enjoys an important strategic position with regards to the developing European Cross-Border Interconnectors system, forming a geographical bridge from the Caucasus region and Turkey to Central and Western Europe.
However, Romania's existing conventional onshore production is suffering from a relatively high depletion rate, which is accelerating. This rate of depletion means that its existing reservoirs, for the most part, are estimated to be exhausted by 2020. To address this critical issue, the Romanian government is planning to offer bids for new exploration blocks as early as the fall of 2014. There is also a need to improve the country's existing domestic hydrocarbon oil and gas transportation networks, in addition to the development of the European interconnectors system. These developments offer a series of opportunities for potential investors in the energy sector in Romania.
Overview of the Upstream and Midstream Sectors in Romania
Below are some big-picture data points regarding the current state of Romania's oil and natural gas industry:
- Romania's annual crude oil production has averaged approximately 4 to 4.5 million metric tons in recent years, while its crude production volumes have steadily declined since 19771.
- Annual domestic natural gas production has averaged approximately 10-11 billion cubic meters per year, but natural gas production
- has generally decreased since 1986, although the rate of decline in annual natural gas production has stabilized during the past two years. This stabilization is largely a result of technological improvements being introduced and not because of new discoveries2.
- Romania's current production comes from approximately 400 operational reservoirs held almost exclusively by two companies:
- OMV Petrom S.A., the largest oil and natural gas producer in Eastern Europe(239)3;
- Romgaz SA, the state-controlled and largest producer and supplier of natural gas in Romania (more than 150)4.
- Substantially all of the crude oil currently produced from Romanian properties is produced by OMV Petrom. The company holds concessions in 239 blocks, which are currently producing or in the process of being developed. Approximately 20 percent of Romania's total crude oil production is extracted from reservoirs located in the Black Sea, which are operated by OMV Petrom. The company's predecessor was privatized by the Romanian government in 2004, and that company was then sold to OMV, the Austrian integrated energy company5.
- Romgaz and OMV Petrom each separately account for approximately 49 percent of Romania's natural gas production6. Romgaz holds 132 blocks7, most of them in Transylvania and Northern Moldavia.
- Most producing reservoirs are small, having yearly production below 40,000 tons (280,000 Bbl) of crude oil, and 4 million cubic meters (141,26 Mcf) of natural gas. Approximately 20 percent of the total production is from mature reservoirs that are expected to be exhausted during the next 10 years. The recovery rate for oil produced is approximately 25 percent.
- There are 59 existing oil exploration, development and production licenses in various stages of performance in effect; exploration periods under many of these licenses have been extended due to difficulties encountered during drilling or due to needs for further testing.
- Participants in the upstream sector in Romania include super-majors, such as ExxonMobil (offshore in the Black Sea), Chevron (onshore shale gas plays), Lukoil and Gazprom, regional companies such as OMV, MOL, Petrom and Romgaz, independent international companies and medium and small companies. Most of the newcomers are still in the exploration phase.
- One refinery affiliated with OMV Petrom produces refined hydrocarbons in Romania. Its operational refining capacity currently totals approximately 4.5 million tons per year,8 but its output could be much greater considering that the national oil and natural gas transmission systems have not been utilized at their maximum capacities.
Upstream Business Opportunities
A new bid round for new blocks is expected to be launched very soon. There is a possibility that OMV Petrom and Romgaz could partner with experienced operators having special technological know-how (such as deep-zone drilling) or perhaps farm out or otherwise transfer all or a portion of their rights to blocks in favor of a third party.
Romania has been, for the most part, self-sufficient in meeting its energy needs during modern times, and so the Romanian government has not actively sought major outside investment in this sector. However, it now appears that the government would be more supportive of energy sector investment by Western companies.
Currently, the partnering of existing licenses by way of joint operating agreements or take-over (farm-in) of existing licenses can be regarded as available business opportunities for exploration and production companies in the following areas:
i. Increasing the recovery rate from mature reservoirs;
ii. Exploring oil fields for depths exceeding 4000 meters;
iii. Investigating unconventional resources, namely shale gas;
iv. Drilling and hydraulic fracturing operations for unconventional resources, due to the fact that there are currently few specialized companies operating in Romania.
For the type of projects described in (i) and (ii) above, currently, the only potential business opportunities lead to the two majors on the market (Romgaz and OMV-Petrom) because they "control" most of the conventional reservoirs. Be it due to high financial costs and/or a lack of advanced technologies, these two companies do not insist on higher recovery rates or deep drilling on a larger scale. As a result, a potential third-party investor would either have to wait for relevant blocks to be abandoned by Romgaz or OMV-Petrom (whenever that would happen) or enter joint operating agreements with them. With regard to service companies, their opportunities would lie with the operators and the participation in the procurement process for the awarding of contracts.
Another potential opportunity lies in the expected 11th bid round for exploration blocks. The regulator, the National Agency for Mineral Resources (NAMR), should be launching the 11th bid round for 28 new licenses for on-shore blocks and 8 offshore blocks in the Black Sea9. NAMR states that it intends to have the bid launched by 2014.
Midstream Business Opportunities
There are four projects that are currently prioritized by Transgaz SA (the Romanian state-owned Transmission System Operator "TSO"):
i. First priority would be to develop access to future major European gas infrastructures (e.g. TAP) or to sources from Central Europe. The total estimated cost is approximately 550 million euro—Required investments: New pipeline sections (approximately 520 km) and three compressor stations;
ii. Developing reverse f low capacities on existing infrastructures-interconnectors between (a) Romania-Hungary10—Required investments: New pipeline (approximately 170 km) and two compressor stations; estimated cost: 190 million euro; deadline is 2016. (b) Romania-Bulgaria—Required investments: New pipeline (approximately 80 km) and one compressor station; estimated cost: 90 million euros; deadline is 2016.
iii. New pipeline project for connecting the Black Sea shore with the transmission corridor, including interconnections; Required investments: New pipeline section with a total length of 250 km; estimated investment cost: 255 million euros; estimated completion date is 2019–202011.
iv. Additional developments for an Increased Transmission Capacity connecting Black Sea offshore with National and Regional Markets. This will be a second route through Central Romania and a new interconnection with Hungary. This includes the rehabilitation of existing pipeline sections, the building some additional new pipeline sections and two compressor stations, with an estimated investment cost of 500 million euros.
It should be noted that financing for all of these projects must be structured.
For many years the Romanian government has declared its intention to promote the storage of natural gas, which should have been performed in depleted reservoirs of Romgaz. After some failed discussions with the Russian company Gazprom on the development of such storage projects, no notable progress was made in this regard. However, this is still considered a top priority.
As stated earlier, given the volatile geopolitical context in the region, energy security has moved to the top of the political and business agenda for European and local governments. This means that local Romanian stakeholders can prove to be more flexible toward new investors.
General Information About Romania
Romania has a uniquely advantageous strategic position at the crossroads of Europe, the Middle East and Eurasia:
- Active member of NATO and the EU, with a strong traditional pro-Western orientation
- Generally stable and democratic institutional framework
- One of the lowest corporate income taxes in Europe at 16 percent
- One of the lowest hydrocarbon royalty systems in Europe (between 3 and 13.5 percent)
- A lasting history in the oil and gas industry u
*Laurentiu Pachiu is the managing partner and founder of Pachiu & Associates in Bucharest.
1 Data from the Romanian National Agency for Mineral Resources – available here: http://www.namr.ro/petroleum-law/general-presentation-oil/
3 Petrom Annual Report 2013, p.31, available on their website here: http://www.petrom.com/portal/0/petromcom/petromcom/Petrom/AnnualReport
4 Data available on their website here: http://www.romgaz.ro/en/activities/natural-gas-production.html?type=0
5 Data from the Petrom Investor Presentation, p.17, Available here: http://www.eastcapital.com/Documents/Events/OMV Petro mAndreas Matje.pdf
7 Info available in the second attachment of the following document: http://www.cdep.ro/interpel/2014/2r3359A.pdf
8 Petrom Annual Report 2013, p.39, available on their website here: http://www.petrom.com/portal/01/petromcom/petromcom/Petrom/AnnualReport
11 The Diplomat, Online Iss., 2014.07.03, available here: http://www.thediplomat.ro/articol.php?id=5246
Originally published Winter 2014
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