VZCZCXRO7591
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #0110/01 0510713
ZNR UUUUU ZZH
P 200713Z FEB 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9240
RHMCSUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 03 BUCHAREST 000110 
 
STATE FOR EUR/FO MBRYZA, EUR/CE ASCHEIBE, EUR/ERA, EEB/ESC/IEC 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ENRG PBTS ECON PGOV RO
SUBJECT:  ROMANIA: CONTROVERSY OVER OFFSHORE ENERGY CONCESSIONS 
FOLLOWING ICJ DECISION 
 
Sensitive but Unclassified; not for Internet distribution. 
 
SUMMARY 
 
¶1.  (SBU) Romania's initial euphoria after prevailing over Ukraine 
in a Black Sea boundary dispute has given way to political 
finger-pointing over offshore energy concessions.  The International 
Court of Justice (ICJ) in a February 3 ruling awarded Romania 
exclusive rights to 3,745 square miles of the Black Sea's 
continental shelf.  A media circus followed when it was revealed 
that the government had conceded oil and gas exploration rights for 
much of the zone years ago on apparently very favorable terms to the 
concession holders.  The controversy has centered on a small 
Canadian company, Sterling Resources, and how it came to be a major 
player on Romania's newest oil and gas frontier.  Particularly 
controversial is the murky process that allowed a Government 
production-sharing agreement involving multiple companies to turn 
into a royalty-based agreement with just one company without any 
public transparency.   End Summary. 
 
¶2.  (SBU) The unanimous ICJ ruling on February 3, 2009 awarded 
Romania an exclusive economic zone (EEZ) of 9,700 square kilometers 
(3,745 square miles) of the continental shelf abutting Romania in 
the Black Sea.  The area had been the object of a 40-year-old 
boundary delimitation dispute, initially with the Soviet Union and 
later with Ukraine.  Unable to reach an agreement through bilateral 
negotiations, Romania sued Ukraine in September 2004 at the ICJ. 
Romania asked the Court to rule on the delimitation of the 
continental shelf and the exclusive economic zones belonging to 
Romania and Ukraine in the Black Sea.  The final ruling awarded 
Romania approximately 80 percent of the area in dispute. 
 
¶3.  (SBU) Romanian officials were quick to announce plans for 
exploiting possible oil and gas reserves in the area.  Initial 
statements by the Romanian National Agency for Mineral Resources 
(NAMR) estimated possible reserves of up to 100 billion cubic meters 
of natural gas and 10 million tons of oil in the area awarded to 
Romania.  If these estimates prove accurate, offshore oil and gas 
would increase Romania's natural gas reserves by 50 percent and oil 
reserves by 15 percent, helping to offset the accelerating depletion 
of onshore oil and gas fields. 
 
¶4.  (SBU) Media reports surfaced quickly, however, that most of the 
surface area awarded to Romania was already under the control of 
Petrom (owned by OMV of Austria) and a little-known company called 
Sterling Resources (Canada).  (Comment:  While the media is 
reporting that only half of the surface area has been deeded to 
these two companies, the companies' publicly declared holdings would 
actually amount to 80 percent.  End Comment).  Petrom's concession 
agreements cover 40 percent of the newly delimited area, while 
Sterling holds the other 40 percent.  Until the ICJ decision, Petrom 
and Sterling were prohibited from actually operating in the disputed 
area.  They now appear poised to ramp up exploration activities 
quickly in light of the settlement. 
 
THE HISTORY OF ROMANIA'S PETROLEUM LAW 
 
¶5.  (SBU) Until 1995, the Romanian oil and gas sector operated under 
a Petroleum Law first passed in 1942.  During the communist regime, 
the state awarded exploration and production contracts for oil and 
gas to state-owned entities.  At the time, Rompetrol was in charge 
of natural gas imports, offshore exploitation, and overseas oil and 
natural gas activities.  Petrom was primarily focused on domestic 
onshore oil and gas production and distribution.  Both before and 
after 1989, Petrom was awarded concessions entailing the right to 
explore, develop and operate over 300 onshore fields.  In 2000, 
Petrom, which was still state-owned, expanded into the offshore 
arena by acquiring two offshore blocks:  XVIII-Istria and XIX Neptun 
directly from the Romanian State without any public tender. 
 
¶6.  (SBU) In 1992, Romania opened its oil and gas sector to foreign 
investment and mandated that state-owned Rompetrol negotiate and 
conclude partnership agreements for offshore oil and gas exploration 
and development.  In 1992, Rompetrol, Enterprise Oil Exploration, 
and Canadian Oxy signed an Exploration and Production Sharing 
Agreement (EPSA) for the XIII Pelican and XV Midia XV blocks, with a 
total surface of 4,119 square kilometers (1,590 square miles). 
Under the EPSA, Rompetrol was entitled to an in-kind share of up to 
40 percent of the production.  In 1993, Rompetrol was privatized, 
and the National Agency for Mineral Resources (NAMR) replaced the 
company as the Government of Romania (GOR) entity in the EPSA. 
Through transfers, mergers, ownership changes, and acquisitions, the 
parties to the EPSA have changed.  Sterling Resources first became a 
party to the EPSA in 1997 and has increased its interest from an 
initial 16.67 percent, to 20 percent in 2000, and then to 100 
percent in 2006.  Throughout this entire period the underlying 
agreement has remained intact, but has been modified and extended 
through amendments on multiple occasions. 
 
BUCHAREST 00000110  002 OF 003 
 
 
 
PSA MORPHS INTO A ROYALTY-BASED CONCESSION 
 
¶7.  (SBU) As time passed and the parties to the EPSA changed, ten 
amendments -- each extending the initial exploration period -- were 
negotiated between the companies and the NAMR.  However, the basic 
framework of the EPSA remained unchanged until 2007.  In August 
2007, Sterling Resources and the NAMR signed an eleventh amendment, 
transforming the Production Sharing Agreement into a royalty-based 
Concession Agreement for Exploration, Development and Production. 
The royalties were set according to the percentages stipulated in 
the 2004 revisions to the Petroleum Law, i.e. a maximum royalty of 
13.5 percent.  On November 11, 2008, the Tariceanu Cabinet passed 
Government Decision 1446, approving the amendment.  Many local legal 
experts are questioning the validity of this 11th amendment, which 
seems to have replaced the original 1992 contract in its entirety. 
 
 
A NEW PETROLEUM LAW 
 
¶8.  (SBU) In 2002, arguing that steady cash royalties were more 
reliable than shared production for budgeting purposes, the Nastase 
Cabinet passed Emergency Ordinance 42/2002, changing all of the 
pre-existing PSAs into concessions.  This ordinance stated that 
royalties were to be paid in cash, and set up percentages pro-rated 
against the output of the field, with a maximum percentage of 13.5 
percent of the value of the output.  In addition, to bolster the 
sale of Petrom to OMV in 2004 and to provide legal grounds to extend 
the length of pre-existing concessions (an OMV priority), the 
Nastase Cabinet conducted a wholesale revision of the Petroleum Law. 
 As revised, the law formally established the provisions and 
percentages regarding oil and gas royalties, while also allowing 
concessions to be extended for an extra 15 years at the conclusion 
of the initial 30-year period.  Passed at the same time as the law 
sanctioning Petrom's privatization to OMV, the law further 
stipulated that the GOR could not change the level of royalties 
until after 2014. 
 
OFFSHORE TODAY 
 
¶9.  (SBU) Today, Romania has two companies holding concessions to 
explore, develop, and extract offshore oil and gas.  One of the 
companies, Petrom, is currently operating two Black Sea offshore 
blocks (XVIII Histria and XIX Neptun), covering an area of 13,800 sq 
km (5,328 square miles).  Petrom also operates four productive 
fields (East Lebada, West Lebada, Sinoe and Pescarus) and has one 
field under development (Delta).  According to data released by 
Petrom, its current offshore production is approximately 31,000 
barrels of oil equivalent (boe) per day, which represents 26 percent 
of Petrom's total production.  In December 2008, Petrom entered into 
an agreement with Exxon Mobil to cooperate in exploring the 
hydrocarbon potential of the deepwater portion of the Neptun Block. 
The Neptun Block covers an area of approximately 9,900 square km 
(3,822 square miles), with water depth ranging from 50 meters (164 
feet) to 1700 meters (5,577 feet). 
 
STERLING RESOURCES CONTROVERSY 
 
¶10.  (SBU) The new cabinet of Prime Minister Emil Boc is 
scrutinizing the agreement with Sterling, and seeking legal grounds 
to abrogate Amendment 11, as the terms now appear unfavorable to the 
Romanian state.  Underlying the public furor is skepticism regarding 
the exact terms of the original 1992 contract, which was classified 
by the GOR and has yet to be released, as well as serious questions 
about how it morphed into a royalty agreement, advantageous to the 
company.  Sterling is defending its case, claiming the amendments 
did not grant Sterling any additional rights and that, despite a 
reference to the eastern and northern boundaries of its concession 
in one of the amendments, it has not received rights to any 
additional surface area.  Former Prime Minister Calin Popescu 
Tariceanu is aggressively defending his record in the matter, 
accusing the new Government of creating a scandal purely for 
political gain and announcing a lawsuit against the GOR for slander. 
 Sterling says it has so far invested $56 million in offshore 
exploration (seismic surveys and drilling) since 1997.  Sterling 
also announced that in light of the ICJ ruling it would ask the NAMR 
to lift the suspension of exploration activities which had been in 
place for 3,865 square kilometers (1,492 square miles). 
 
¶11.  (SBU) It is still unclear what the full economic stakes are, 
since reserve estimates based on seismic data have not been 
confirmed for the entire area of the two blocks.  Exploratory wells 
drilled by Sterling at three sites in undisputed areas struck gas in 
two fields, Doina and Ana.  Sterling estimates the natural gas 
volume in the Doina and Ana fields to be 6 billion cubic meters, 
with a recovery rate of up to 80 percent, depending on the equipment 
used.  Should the gas resources be commercially exploited, Sterling 
estimates that it would require a 450 million USD investment in 
 
BUCHAREST 00000110  003 OF 003 
 
 
order to start production in 2011-2012.  It would also require an 
additional investment of 80 million USD in a 130-kilometer pipeline 
to bring the gas onshore and connect it to the national gas grid. 
 
COMMENT 
 
¶12.  (SBU) Black Sea oil and gas have the potential to contribute 
significantly to Romania's energy security.  It is essential, 
however, that Romania be able to attract the investment and 
technology required for offshore operations in a clear and 
transparent manner.  The existing, non-transparent oil and gas 
concessions are not an encouraging first step.  Notwithstanding 
possible legal challenges, the way the Sterling contract was 
drastically changed through an amendment, rather than a new public 
tender, creates the appearance that a sweetheart deal was done for 
the company.  Not helping Sterling from a public relations 
perspective is the recently-discovered ownership link between the 
company's largest shareholder and the controversial Rosia Montana 
gold-mining venture.  This connection has fed media speculation that 
certain investors in both projects may be unfairly trying to exploit 
Romania's natural resources for personal gain.  Of note, however, is 
the lack of media controversy and the absence of GOR statements 
surrounding an equivalently large area leased to OMV-Petrom, on what 
appear to be similarly favorable terms.  It seems that the GOR is 
consciously avoiding reopening the Pandora's box of Petrom 
privatization, including the terms for Petrom's offshore 
concessions, by focusing all the public ire on the smaller Canadian 
competitor.  End Comment.