VZCZCXRO6467
PP RUEHIK
DE RUEHBM #0801/01 3371247
ZNR UUUUU ZZH
P 031247Z DEC 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 0122
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RHMCSUU/DEPT OF ENERGY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000801 
 
SENSITIVE 
 
DEPT FOR EUR/CE ASCHIEBE AND EEB/ESC 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV PGOV RO
SUBJECT:  ROMANIA: ROMGAZ TRIES TO ADAPT TO CHANGING ENERGY MARKET 
 
BUCHAREST 00000801  001.2 OF 002 
 
 
Sensitive but Unclassified; not for Internet distribution. 
 
SUMMARY 
 
¶1.  (SBU) One of the top two gas producers in Romania, state-owned 
Romgaz, echoed in a November 20 meeting the previous public 
statements by OMV/Petrom and other private players on the domestic 
market that the regulated price of domestic gas suppresses 
production in Romania.  Until now Romgaz has maintained a public 
silence on this point.  Concerning investment plans, Romgaz hopes to 
obtain additional on- and off-shore exploration concessions, develop 
new underground gas storage areas, and begin producing electricity. 
The proposed liquefied natural gas (LNG) terminal in Constanta also 
ranks high among Romgaz's priorities.  End Summary. 
 
REGULATED DOMESTIC GAS PRICES IMPEDE PRODUCTION 
 
¶2.  (SBU) The regulated price of domestic gas is among the biggest 
challenges facing Romgaz.  While gas imported from Russia is sold at 
one of the highest prices paid by any European country (currently 
280 USD per thousand cubic meters (mcm)), by regulation domestically 
produced gas may be sold for no more than 160 USD per mcm.  In a 
November 20th meeting with EconOff, Romgaz Deputy Director General 
Lucian Stancu stated that the company has developed economic models 
to show the correlation between gas prices and the amount of gas 
that could be produced domestically, but the Ministry of Economy has 
never even asked for the information.  Stancu admitted that Romgaz 
was uninterested in exploiting smaller and/or unconventional 
reserves (i.e., gas found in coal beds, shale formations, or other 
non-conventional reservoirs) given the expected low rate of return 
on investment.  These fields would only become economical if either 
the gas could be exported or if the domestic wellhead price could 
approach the Russian import price, neither of which yet seems 
feasible. 
 
¶3.  (SBU) While Romgaz could in theory export domestic gas, the lack 
of infrastructure to do so and political pressure to use Romanian 
gas at home make this unlikely.  Instead, Romgaz would like to tap 
into foreign markets by exploring outside of Romania's borders.  To 
this end, the company has recently developed joint ventures to 
explore for gas in Slovenia and Poland.  Romgaz also hopes to 
develop activities in the Caspian Sea, building on the expertise 
gained in the region when it was part of the Soviet Union.  In 
private, Romgaz officials hope the European Commission will force 
Romania to eliminate its regulated gas pricing system, but Stancu 
admits that this would be politically unpopular, especially among 
poorer consumers in the midst of a severe recession. 
 
LOOKING FOR GAS IN NEW PLACES 
 
¶4.  (SBU) Romgaz is well aware of the country's potential for 
unconventional gas and that current technology could increase yields 
from existing fields.  At the same time, Romgaz points to the high 
costs it faces in the application of new technology.  According to 
Stancu, insufficient infrastructure results in well services costing 
at least twice what they would elsewhere; the price Romgaz pays to 
drill one well would easily cover drilling two wells in the United 
States.  Negotiating with service companies to lower fees in return 
for higher volume is a tactic that Romgaz has attempted, so far 
without notable success. 
 
¶5.  (SBU) Offshore, Romgaz plans to bid for exploration and 
production licenses in blocks near Romania's maritime border with 
Ukraine in the bidding round that the National Agency for Mineral 
Resources will conduct in May 2010.  Lacking the technical expertise 
for offshore operations on its own, Romgaz is contemplating a joint 
venture with an international oil company but has not decided 
whether it will seek the joint venture before bidding or after 
obtaining the concession.  Romgaz will also likely bid on the few 
remaining onshore blocks in the upcoming bid round. 
 
GAS PRODUCER BECOMES ELECTRICITY PRODUCER? 
 
¶6.  (SBU) Romgaz presents a clear case of regulations driving 
rent-seeking market behavior.  According to Stancu, Romgaz is in the 
process of taking over a gas-fired power plant in Iernut (central 
Romania) under a debt-for-equity swap arrangement with state-owned 
thermal power producer Termoelectrica.  The acquisition is 
economical due to the huge disparity between domestically regulated 
gas and unregulated electricity prices.  Per kilowatt hour of 
energy, electricity sells at double the cost of gas, according to 
Stancu.  Romgaz plans to use this plant as a peak-load generator to 
cover the electricity deficit in central Romania.  Romgaz believes 
it can avoid the regulatory requirement that gas used for power 
generation be part of a blended basket comprised of both domestic 
and imported gas.  If Romgaz integrates the plant onto its balance 
sheet as an asset and uses some of the electricity produced for 
internal consumption, it is not bound by the basket rules and can 
 
BUCHAREST 00000801  002.2 OF 002 
 
 
sell excess production (which will be most of what the plant 
produces) to the market. 
 
¶7.  (SBU) With regard to the long-standing proposal to consolidate 
state-owned energy companies into one or two integrated "national 
energy champion(s)," Stancu believes Romgaz has enough political 
clout to remain independent of the new company.  State-owned, but 
profitable and independently operated from the city of Medias 208 
miles from Bucharest, Romgaz has little interest in subsidizing 
inefficient and loss-making producers elsewhere in the 
state-dominated energy sector.  Despite initial plans to include 
Romgaz in the energy holding company, Stancu said he had received 
assurances from the Ministry of Economy that this proposal was 
definitively off the table. 
 
LNG IMPORTS AND MORE GAS STORAGE ARE FUTURE GOALS 
 
¶8.  (SBU) While unclear on the precise economics, Stancu confirmed 
that diversifying Romania's gas import capabilities to include an 
LNG option made sense.  U.S. contractor Granherne is conducting an 
LNG import terminal feasibility study for Romgaz with funding from 
the U.S. Trade and Development Agency (USTDA).  To avoid problems 
with Turkey over importing gas through the crowded Bosporus Straits, 
Romgaz hopes the terminal will be fed by Caspian Sea gas transported 
across the Black Sea, compressed in Georgia or brought via tankers 
with onboard compression capability.  Romgaz believes that using LNG 
to feed electric power plants could help make the economic case that 
the terminal is warranted.  If the LNG could be sold for less than 
pipeline Russian gas, this would also inject a new element of 
competition into the market.  As additional cross-border 
interconnections are built, LNG imported into Romania could also be 
used for gas swaps with neighboring countries. 
 
¶9.  (SBU) Romgaz also wants to improve its gas storage capacity. 
Over the last several months, Romgaz has invested in existing 
underground facilities to improve the gas extraction rate from 20 
million cubic meters (MMcm) per day to 25 MMcm per day.  While 
Romania had enough gas stored during the Russian supply cutoff last 
January to last through the winter, the limit on extraction capacity 
still stressed the system and forced cutoffs to some industrial 
consumers.  Romgaz currently has 2.9 billion cubic meters in 
underground storage, part of which will be drawn down over the 
course of the winter.  The company is also studying a project with 
Gazprom to develop an underground storage facility in Margineni, in 
eastern Romania. 
 
COMMENT 
 
¶10.  (SBU) Romgaz's shares of both the domestic market and 
production have declined compared with Petrom ever since the latter 
was acquired by Austrian-owned OMV.  While Romgaz has remained 
profitable, Petrom's increased nimbleness as a private company has 
undermined Romgaz's position as the clear market leader.  Despite 
this, the Romanian Government is broadly opposed to further 
privatization in "strategic" sectors like energy, especially when it 
comes to crown jewels like Romgaz.  While this ensures that 
important strategic priorities like Nabucco and Black Sea LNG remain 
important, ultimately it means that Romanian consumers must pay a 
price for over-regulation, underinvestment, and relative 
inefficiency in this state-owned sector.  End Comment. 
 
GITENSTEIN