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Archives for : January2014

While gas for Romanian consumers is overcharged, gas for export is exempt

A year after the entry into force of Government Ordinance 7/2013 on overcharging the windfall incomes obtained as a result of gas price deregulation, we find out that while numerous taxes have increased in Romania, about EUR 4.4mln was lost by failing to tax gas exported to Hungary. In the spring of 2012, the Ungureanu Government initiated an Emergency Ordinance for the additional taxation of windfall incomes, which were to be obtained by gas producers, following the application of the domestic gas price deregulation calendar and the establishment of a fund for vulnerable customers. In this regard, the Ministry of Finance has prepared an initial draft emergency ordinance on the establishment of energy companies’ contribution for the financial support of vulnerable consumers due to gas and electricity price deregulation. The draft provided that these companies were forced to pay a contribution of 50-100% of the windfall incomes achieved as a result of gas price liberalization. Provisions were to be applied with the price liberalization calendar. The taxable base consisted of additional incomes obtained by the economic operator as a result of price deregulation, incomes achieved from the exploitation of existing production capacities, including by exploiting investments initiated before the entry into force of the ordinance and which were to be commissioned subsequently, minus the value of investments in expansion, upgrade or rehabilitation performed at the existing production capacities on the date of entry into force of the emergency ordinance, but no more than 30% of the additional incomes achieved. According to art. 3 of the draft Emergency Ordinance on the establishment of energy economic operators’ contribution for the financial support of vulnerable consumers:

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How the price of imported gas is formed

Much ink has been spilled in exemplifying the high price of gas imported by Romania, but causes have been less discussed. There are many ways of forming the price of imported gas, each of them presenting advantages and disadvantages in certain moments.

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How to manage a state company that rules the market ?

Corporate governance or private management of state companies is starting to pay off. While in Tarom and CFR managers have already started to resign, energy companies are in a frenzy, displaying “management plans”, followed, of course, by “pay schemes”. The latter is impressive, compared to the incomes of other managers of private sector companies, for the simple reason that the law allows it, or at least it was designed so. It’s legitimate, when you want performance, payment must be commensurate. But at TRANSGAZ, Transelectrica, Romgaz or Nuclearelectrica, the management teams do not have too many problems on their plate, as long as some are natural monopolies, while others have privileged positions in the national energy system. Man makes his own luck, and when you are served it becomes even easier. Energy-Center announced some time ago that it would analyze in detail the management plans of the new management teams in state companies and, after Nuclearelectrica, along came TRANSGAZ’s turn. We exclusively present only a few elements that the persons who appointed the current management team after a semblance of competition should consider. Theoretically, “like father, like son”. The management plan must be a formal document with a structure that is designed, primarily, to structure the thoughts of those who conceive it, arranging figures and findings in a logical order, which can be understood also by others, superiors or subordinates alike. The indulgence with which the first concrete action of the TRANSGAZ private management is regarded, has a justification pointing out at standard Romanian ailments:

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Transgaz’s management plan: a slightly critical analysis

I read with great interest the Management Plan of SNTGN Transgaz SA Medias for 2013-2017, expecting to discover a new thinking, a strategic thinking, a business thinking specific to the globalization of gas trade and transmission services, aspect which by the geographic position could be harnessed by Romania in South-Eastern Europe. I was surprised however to see a document in which ideas are exactly the same as those from other strategies prepared in previous years. Surprisingly, the widest section presented in the Plan is the analysis of the energy market in Western Europe, sources from Africa etc., with obsolete data, both due to their age (3.5 years) and due to the analyzed period, i.e. the data is in full economic crisis (2008-2010) and from a period prior to great changes in the energy market: Germany’s decision to shut down the nuclear power plants, the commissioning of new transmission pipelines, globalization of LNG trade, the methodology of setting gas prices on the West-European markets, subsidizing renewable energy etc. We find a detailed analysis of the EU gas market, market in which Romania is not integrated, but the analysis of the Romanian gas market is missing, i.e. the supply and demand for transmission services, the usage degree of equipment, pricing methodologies, CAPEX and OPEX, operating pressure of EU operators (or at least of countries Romania plans to interconnect with) etc., which would have been suggestive for the real directions that should have been included in the Management Plan. The managers’ vision – “The company plans to become a transmission operator with recognition in the international natural gas market, a leader in the regional energy market, with a modern national natural gas transmission system, integrated at European level and a performing management system” – is laudable, but unattainable by the strategic objectives in the Management Plan proposed. In terms of the Mission undertaken by the company’s directors, it is extremely poor: fulfilling the national energy strategy for gas transmission, not attractive for a shareholder, not to mention that the text makes reference to a strategy that hasn’t been approved yet. It’s surprising how the private managers are not interested in the mission they will fulfill of what causes the establishment of any company: profit.

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Elimination of gas imports over a short, medium and long term! Maybe in a different approach of the natural gas sector

Reducing Romania’s reliance on gas imports was due to a conjecture, the decline in gas demand, especially due to the closure of some industrial consumers. Eliminating gas imports is a goal which could be reached by a different approach of the gas market in Romania, position that must be analyzed over a short, medium and long term and which shouldn’t be significantly influenced by conjectural approaches. Before any analysis, we will present the following considerations:

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Energy independence by turning off the gas valve

Romania’s energy independence strategy starts with the officials’ hope to decrease gas consumption and thus eliminate Romania’s import needs. Recently, Gabriel Dumitrascu, director of the Privatization Directorate of the Department for Energy, has stated that “energy and chemical fertilizers producers are burning gas with no reason” and hinted that with the elimination of such consumptions from the market and with a slight increase in domestic production “we wouldn’t be forced to import gas”. Successful economies are based on added value obtained by valorizing their natural and human resources and obtaining products with high added value. Thus, from this point of view by processing gas the added value of products obtained is one high compared to the use of gas for other purposes (the lowest added value of using gas is found in heating buildings). In this way, hoping that companies will be closed and thus obtain energy independence and then start export of raw material to the detriment of finished products that can be obtained by it is an action that will not create economic wealth. The economic and energy strategy should stimulate the use of natural gas in Romania, in order to develop industrial production that makes products with high added value, by efficient processes and which executes fair commercial contracts of gas and electricity acquisition with gas and electricity suppliers. The manner in which natural gas sector functioning was conceived in Romania, in the ‘70s, which did not suffer substantial changes, even in the case of eliminating “energy and chemical fertilizers producers that burn gas for no reason”, makes that gas imports cannot be eliminated entirely. There is a significant difference in the balance sheet approach of the issue of gas sources and annual consumption and continuous and safe provision of gas at peak consumption. Calculation according to which Romania’s annual gas consumption will equalize gas production, thus Romania heading to Energy Independence will hit two obvious realities: peak consumption in Romania exceeds by 10-15mln cu m/day the potential to ensure consumption only with domestic sources; average gas pressure in the initial points of the pipeline don’t allow gas transmission through the current NTS over large distances at peak consumption, which makes
those gas, even if they exist under a balance sheet aspect, not flow continuously and in enough amounts to the consumption places (respectively consumption areas in Moldavia, Banat, Bihor, Satu Mare, Baia Mare, Slobozia etc.). Reducing import dependence, to its full elimination, is a realist objective, but in another construction of the gas sector: technically, legally and economically, and it mustn’t be achieved to the detriment of Romanians’ economic welfare. This approach can consider redesigning the transmission system, so that gas transit from west to east and from south to north, but also the vice versa, ensure the necessary energy as transmission and balancing  support between various areas, corroborated with the development of local systems allowing to take over natural gas from the local fields and theirtransmission over relatively small distances. This approach must be possible from a technical point of view and attractive in terms of tariffs practiced.
Rethinking the transmission system legally (distinct rules for each system category), technically (technological regimes, different investment, operational and maintainability approaches on categories of systems), economically (pricing methodologies, royalties, taxes, different tariffs on categories of systems) would allow taking over gas from the local fields and their transmission depending on available pressures, but also bidirectional flow through a national system compatible with the transmission systems of the neighboring countries, taking over potential gas discoveries in new fields of conventional and unconventional gas, interconnection with the current and future gas transmission systems (TAP, TANAP, South Stream), would ensure the operation of the gas sector in accordance with the business principles promoted by the European Directives and Regulations, Romania’s economic development and energy security (including by reducing energy dependence). The strategy of “time passage” through which Romania’s energy problems would be solved by themselves, as a result of stopping and reducing gas consumption should be replaced with the real and professional approach of this subject, accepting the transposition of globalization principles at the level of the natural gas sector and developing an energy strategy corroborated with Romania’s economic strategy.

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Unconventional gas

Multiple questions on unconventional gas, often associated with shale gas, may find answer in the analysis of gas formation in the earth’s crust, of geological conditions in which they are formed and accumulated. Gas is formed from the decomposition of organic substances, captive in the mud from waters bottom and subsequent migration towards areas where they are “blocked” and accumulated, forming the gas fields. The time until the formation of a gas field is of millions of years. This process is continuous, organic substances discomposing and determining the production of natural gas. The advanced degree of exhaustion of gas accumulations, known as gas fields, has determined, especially in the U.S., the beginning of studies to extract gas that hasn’t been accumulated, being found in various stages of the gas formation process (after the decomposition of organic substances) and/or migration. Thus, the notion of unconventional gas occurred.

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Gas market interruptibility and undermining of the national economy

The scandal “cheap gas for the chemical industry” started around a notion: “gas interruptibility”. Customers determined by law as being interruptible benefited from important discounts during 2007-2010 for gas acquisition. A commercial tool used on all the gas markets has been “diverted” in Romania.

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Intra-community gas export

The liberalization of the natural gas market started in 1986 in UK and continued in Europe after 1998, determined the need to introduce in the market new commercial instruments to ensure the functionality of the market. Over 30 new commercial instruments were introduced on the natural gas markets in the past 15 years. One of them is the backhaul capacity. Lately, we have witnessed in the media multiple discussions on “natural gas export from Romania to the EU states by backhaul”, so I think it’s opportune to make some specifications. In 1986 UK adopted the Gas Act, which opened the idea of gas market liberalization in order to ensure balance between the increasing demand and the decreasing and import-reliant supply. In 1998 it was adopted the Gas Directive no. 30, which laid the foundations of gas market liberalization in the EU countries and the unique European gas market. These two activities have allowed the apparition of backhaul capacity in Europe with the construction of Bacton-Zeebruge interconnector.

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Swapping, or gas export without gas

Natural gas market development has determined the apparition of new commercial techniques in response to demand from certain clients for certain given situations that have been legally speculated by market participants and initially turned into response offers to the given situation, and subsequently noticing the advantages conferred in commercial techniques. Natural gas swapping can be defined, according to Trading Natural Gas, PennWell U.S. Editure, as a commercial arrangement through which a supplier buying gas from a gas producer located in country A and having gas sale contracts in country B exchanges gas with another supplier who buys gas from a gas producer located in country B and has gas sale contracts in country A. Thus, gas of the first supplier no longer needs to travel the distance from country A to country B and gas of the second supplier no longer needs to travel the distance from country B to country A. Physically they are consumed locally, but invoiced by another supplier. To give an example about how gas swapping works on the natural gas market, we will consider, absolutely hypothetically, a gas supplier from the Republic of Moldova with a gas sale contract to a consumer in Romania; it will identify a gas supplier from Romania with a gas sale contract to a consumer in the Republic of Moldova, with which it will sign a swapping contract, so gas physically existent in the Republic of Moldova reach the consumer in the Republic of Moldova with the invoice of the Romanian supplier. Both suppliers are licensed in both countries. This procedure does not require backhaul capacity or a physical connection between the transmission systems of the two countries.
Sapping gazCommercial instrument used for the first time in the U.S. to allow market development by increasing competition and gas exchange between various market participants, it developed in Europe with the liberalization of the gas market.
This instrument allows gas – to – gas exchange or the use of an intermediary carrier such as electricity. In this case, indirect gas swapping is performed as follows: a gas supplier F1 buys gas from a gas producer P1 located in country A, processes natural gas turning it into electricity and exports electricity in country B, exchanges electricity exported with energy that had to be produced by a
gas-fired electricity producer in country B and takes over the gas that had to be used by such electricity producer for power generation; thus, supplier F1 owns gas in country B, which it can sell on the gas market from country B. Thus, gas export is possible without interconnections between the gas transmission systems. Specialized literature presents several practices involving gas export
through swapping techniques, using various intermediary products and various functional schemes.

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