Romanian energy industry: Challenges to Overcome

With a national strategy draft still to be approved, Romania faces many challenges, as the energy market is striving to find a way to attract major investments that are critically needed to enhance the development of the sector.

2018-07-02 12:01:08

Although there is much to do in terms of legislation, some of the local players believe that the energy sector can find the right path to development, through predictability, flexible regulations and political agreement of all parties.

The energy sector has a pivotal role in Romania's economy and security policy. At present, we are witnessing a shift from the traditional pillars of the energy sector, such as coal-fired power plants - which were the main producer of electricity, and onshore fields being the only provider of oil and gas, to an energy sector where hydro and other renewable sources provide the largest share of electricity. Moreover, Romania's oil and gas deposits could register a threefold increase as a result of the new oil and gas deposits discovered in the Black Sea basin.

The 2016-2020/2030 energy strategy draft is currently under review for approval by the Government. It was sketched based on quantitative modeling, which required macroeconomic, industrial, and employment impact assessments of the energy scenarios and give stress tests for the power and the gas supply systems. These analyses generated five main topics of intervention: maintaining a balanced and diversified energy mix; natural gas infrastructure and supply; role of biomass in households heating; high-efficiency cogeneration and modernization of SACET (combined heat and power producers for central heating); increase in energy efficiency in buildings and countering energy poverty.
According to the Government, Romania has to achieve these goals, while enhancing energy security and competitiveness.

Conpet to develop new business areas

Last year could be considered a real success for the Romanian energy industry, with Romanian energy companies being ranking high in the Bucharest Stock Exchange trading sessions, Dan-Silviu Baciu, general manager of Conpet, told The Diplomat-Bucharest.

"Conpet is a strategic company, part of the architecture of the national energy system, with a monopoly on the Romanian market, its role being to safely operate the national oil transmission system through pipelines," he added.

He went on to say that the energy sector is facing a structural reform.
"Romania′s energy strategy clearly highlights the gradual transformation of the national energy sector as an imperative necessity to adapt to the extensive changes, be them technological ones (digitisation and new technologies for the whole energy sector value chain) and trends in international energy policy (globalisation of markets, development of the European single energy market, new security aspects and regional energy diplomacy)," he explained. "The oil industry market is still marked by the extremely successive oil price hikes (triggered in 2008) that have generated major changes at a global macroeconomic level. The evolution of the oil industry in Europe and in Romania has seen important changes in the last decade, reflected in the restraint of operators′ activities across the value chain. It is very likely that the lack of predictability of oil prices in the medium and long term will also be on the list of key challenges for 2018. Also, the lack of a national energy strategy that includes clear measures to counter oil-specific vulnerabilities (energy security and interconnections in a regional geopolitical context, changes in the legislative and regulatory framework) may be one of the market challenges for the coming period."

Baciu the national energy strategy needs to be put in place as soon as possible, so that investments could make their way in by the year 2030 with the perspective of 2050.
He explained: "It should contain the defining measures in the upstream segment, including the estimation of the investment volume (an example of the potential of offshore Black Sea resources which is an important opportunity to replace aging and depleted exploitations). It is very possible to exhaust domestic oil reserves without extensive investment in exploring new oil deposits and increasing the secondary recovery of existing ones."

On the downstream segment, the 2030 horizon outlines a retention of national refining capacity, amid fuel consumption, particularly in the industrial and transport sectors. Given the downward trend in domestic oil production, the energy strategy must also include retaining key elements under the conditions outlined above.

"Obviously, in parallel with the completion of the energy strategy review process, the regulatory frameworks need to be revised," Baciu added.
Last year, Conpet transported 6.8 million toe, meeting all transport requests received from the beneficiaries.

"The transport contracts for 2018 were concluded at the end of 2017 and in the first month of 2018," Baciu underlined. "From an operational point of view, the quantities of oil to be transported during this year will be similar to the level recorded in 2017. Conpet can capitalize on opportunities for diversification by addressing new activities related to the core one, with significant financial results lately allowing for involvement in large-scale projects, including at regional level. As mentioned above, the predictable oil price evolution, the domestic market specificity and the regional geopolitical conditions have led to reductions in the activity of the three main customers of Conpet and, implicitly, the decrease in the use of pipeline transport systems, with the direct effect of degradation. In the absence of predictability in the medium term, coupled with the lack of a regulatory framework review, Conpet cannot avoid the costs of maintaining the pipeline sections used under the projected capacity. The legislative framework needs to be revised to address situations where legal support is unclear, impacting on investment projects and major upgrades (delays and additional costs)."

The Conpet general manager is currently focusing on implementing a strategy focused on adapting to changes and developments in the energy market that takes place at national and international level, on opening up to our customers′ needs, identifying new development opportunities and maintaining stable financial results.

"In the short term, our intention is to support our clients to create the framework for the development of common strategies, based on the ongoing dialogue we need to identify," he added. "For both this year and the years to come, we have kept a high interest in the investment programme to maintain the National Pipeline Transport System at the best possible level. In this respect, we have ambitious modernisation programs, both for transport pipelines and tanks′ parks, pumping stations and other auxiliary elements of the transport system."

According to Baciu, the investments are primarily aimed at satisfying all customer needs, increasing the level of trust in the National Pipeline Transport System and finding common solutions for sustainable development.

"In order to strengthen the company′s market position and the development of its main activities, the Board of Directors has established through its Management Plan the following strategic objectives: developing new activities related to the core one, defining the company as a regional player, lowering operating costs," he explained. "In this context, the key elements of the strategy are to stimulate revenue by developing new business areas, by initiating new income-generating activities, improving business efficiency by reducing technology consumption in storage and transport processes, minimizing energy consumption, fuels and lubricants , the reduction of the operating costs due to the redefining of the necessary pipeline infrastructure, the interconnection of the National Oil Transmission System to the Regional and European networks."

Throughout 2017, Conpet has maintained its upward trend in financial and capital market attractiveness, with its shares showing a positive evolution of around 25 per cent.

"The turnover for 2017 was around 83 million Euro, with a net profit of 16.4 million Euro, which resulted in an increase in profitability by four per cent compared to the previous year," said Baciu. "For the current year, the company has budgeted total revenues worth 92.6 million Euro."

Conpet focuses on finishing all ongoing projects as well as streamlining internal processes. "The investment projects for 2018 amount to 16.8 million Euro and are mainly aimed at ensuring the maintenance of the National Pipeline Transport System," Baciu explained. "The main goal is to improve the national transport network by implementing the leakage localisation and detection system, upgrading the cathodic protection system and the monitoring, controlling and collecting data system, renewing the pipeline network, running a rehabilitation programme and resizing the oil tanks, adapted to transported quantities."

Smart Eco Plus: "Digitalisation of public services is essential for the development of Romania"

All the industrial fields had a very difficult year in 2017, Ana Maria Icatoiu, commercial director for Smart Eco Plus (Elsaco Group) told The Diplomat-Bucharest. "The market's reaction to the general instability was quite similar, going from postponing investments - which needed funding from loans, to cancelling major projects altogether or putting them on hold indefinitely," she said.

She believes that 2018 was supposed to be a year of re-balancing for the field, but it doesn't appear to be so at the moment. "National authorities should finish once and for all the legislation and regulations in the energy sector, whether we speak of heat and district heating networks, high-efficiency cogeneration, or of electricity, gas, sustainable development or energy efficiency," she explained. "There are laws which have been under discussion for years, and this is not healthy for the market. Secondly, it is essential that this process include all the stakeholders, be they end-users, specialized NGOs, professional associations, direct actors in these fields. We consider that it is vital to include the representatives of the end-users in these talks, because it is their needs that must be at the core of legislative modifications."

According to Icatoiu, we have been living a permanently downward spiral of Romania's industry, which has turned entire cities into the ghosts of their former national (and even international) industrial giants, which used to "feed" tens of thousands of families.

"In addition to this, there is the uneven development of Romania's regions: different maturity level of the cities, fluctuating purchasing power, devastating emigration levels (a real exodus that still goes on, in favour of other European countries, but also of other continents), huge gap – from the point of view of economic power, education, access to healthcare, etc - not only between the urban and the rural, but also between cities and towns," she explained. "These are major challenges that should be addressed by a coherent action plan, or a road map, meant to restart Romania, and the energy field must play a major role."

Smart Eco plus celebrated its tenth anniversary last year by undergoing a change in the shareholders structure.

"We were formerly 50 per cent owned by a Danish company, but we now have a 100 per cent Romanian structure of the shareholders," Icatoiu explained. "Therefore, we not only changed our name, but especially our business approach: we turned from a company which sold heat cost-allocators and water meters into a company which provides services for time- and resource-savings done with the help of professional, modern, efficient equipment whose purpose is to improve clients' lives. We want our clients to consume resources (utilities: cold water, heat, hot water) whenever they need them, exactly how much they need, in order to only pay for what they consume. But we also want our clients (i.e. end-users) to be responsible citizens, fully aware of their role and impact in the life of the community, of their Carbon footprint. And we want them to be informed and educated as to the actions and gestures which they should do on a daily basis in order to actively contribute to the sustainable development of their cities, all this in order for themselves and their families to live better, healthier lives."
After analysing the particularities of its subsidiaries, Smart Eco Plus decided to adhere to the more general concept of "smart city".

"We have all heard, especially more recently, of how important it is for our communities to start becoming "smart cities" in order for the people to live better, to save time and resources," said Icatoiu. "But most of these discussions have been about smart mobility, smart connectivity, smart health, smart education/learning, smart administration, etc. Only very rarely have we heard about smart buildings, smart energy or smart metering. Our slogan – ‘Smart Savings' – is perfectly coherent with the ‘smart living through smart metering' message we want to convey to all our clients: we are there as their resource-saving counsellor, or expert – our aim is to provide services and tools for families in order for them to consume the utilities they need without wasting them, by balancing the need for comfort with the financial power and, more than anything, with the impact on the lives of future generations."
She went on to say that there still is a huge need for the information and education of the general public of all ages and backgrounds, but they consider this as one of their core duties.

"We are doing this with every occasion we get, be it on our website (where we have an entire page dedicated to advice on how to use resources wisely) or through the partnership we have with the City of Iasi, for example (through the articles on responsible consumer and citizen behaviour we write for their weekly publication).

We are also ready and willing to work with local and national authorities to identify incentive methods meant to encourage people to invest in their homes in order to save resources by simply adapting tools used in other countries to our national particularities," Icatoiu added.
According to Smart Eco Plus, digitalisation of public services is essential for the development of Romania.

"Having smart public services directly leads to transparency, responsibility, efficiency, traceability, consumption and money savings, accountability of both public authorities, public service operators and end-users," said Icatoiu. "We intend to bring our contribution, as an expert actor on the smart metering market, through professional services based on smart meters for cold water, heat and hot water. We want to help our clients live in a smart apartment / household in order to have a better life: correct metering, online monitoring, periodic analysis and permanent optimisation of water, heat and hot water consumptions through modern radio equipment directly contributes to more comfort in parallel with sustainable growth and a cleaner environment."

Smart Eco Plus had a turnover of about two million Euro in 2017 and a profit of around 133,000 Euro, with 90 employees. For the current year, the company estimates a turnover of around 2.4 million Euro.
Since its name change (from Elsaco Brunata to Smart Eco Plus), the company also changed its commercial approach to become a supplier of "smart services" for end-users.

"We will focus on investing in tools for the sales activities," Icatoiu underlined. "We refer mainly to marketing tools, with a special attention given to digital/online marketing, since most of our potential clients use smartphones and digital tools/apps on a daily basis, but also to personalized offers, brochures, training for the sales teams, rebranding items and pilot-projects in all our subsidiaries (we want to promote our services directly through the positive power of example closest to our potential customers)."

Electroalfa to increase its production capacities

Gheorghe Ciubotaru, general manager of Electroalfa also feels 2017 was challenging for the entire energy industry in Romania. "If we talk about investments, unfortunately in the energy production area there were quite few projects," he explained. "Investments in re-technologizing of existing capacities or in the development of new capacities are either postponed or blocked. As far as the energy transport sector is concerned, although ambitious investment plans have been announced, things have taken place in difficult conditions, with 2017 being marked by both regulated tariff cuts and rising prices. Little investments have been made in the energy distribution area, but on a general level the energy infrastructure requires major modernization projects."

Ciubotaru feels that the development of the real estate market (residential, commercial, office, manufacturing) has been an important pillar for the development of energy infrastructure projects. "This is where many projects were completed in 2017 for players in the field of electrical equipment production," he said. "For 2018, we expect to see investments in the energy distribution sector, but this optimism will be moderate and cautious, given the evolution of the first quarter of the year. There are not that many public tenders in this sector and the projects have small budgets."

For Electroalfa, the construction sector is a key element in the list of opportunities, due to the many offers. "We consider that there will be a period of discontinuation of construction works in the second part of the year, as the biggest projects are already underway," Ciubotaru underlined. "We noticed that project financing is not seen in the mall area, but rather in objectives such as leisure areas, logistics and industrial spaces."

As any other investor on the Romanian market, Electroalfa calls for the need for more predictability and coherence. "Because of legislative changes or the lack of implementation of publicly-announced plans, it is difficult for us to anticipate the next big projects to come," said Ciubotaru. "It's very important to have a proper national energy strategy for 2021-2030, as a strategic tool for developing the energy sector in Romania. The renewable energy sector can be improved by applying measures such as subsidies or tax exemptions."

According to Ciubotaru, Electroalfa faced a very dynamic market last year with a lot of opportunities and risks. "We focus on projects that ensure a healthy and stable business in the market," he explained. "We are witnessing a continuous process of adaptation to the mechanisms in the market, a market that is quite mature today. Our partners may also be our competitors in some projects. When a supplier is also a competitor, it is harder to have access to important projects."

This year, Electroalfa wants to increase its production capacities by building a new medium voltage equipment production facility and expanding the metalworking factory. "We also invest a lot in people to ensure we have well-trained employees," said Ciubotaru. "One of the biggest challenges is the lack of specialists in the field. We need to analyse our inner processes to identify those activities that have added value and focus only on them. Internal processes analyses can also be a good opportunity to streamline the activities of people who are currently in the company."

Romgaz posts a net profit of 108.9 million Euro in Q1, down 10.6 per cent

Romania's natural gas company Romgaz posted a net profit of 108.9 million Euro in the first quarter of 2018, a decrease of 10.6 per cent compared to the year-ago period. Total revenue stood at 321.7 million Euro, down 1.02 per cent, whilegross profit was of 129.9 million Euro, down by 10.68 per cent.

The gas production recorded for Q1 2018 was 1,364.1 million cubic metres, 2.3 per cent higher than the production recorded in Q1 2017. The natural gas imported by Romania increased by 14 per cent in Q1 2018, up to a total quantity of 8.3 TWh. Romgaz withdrew the equivalent of 11.9 TWh from its underground storages, less than in the same period of 2017.

The natural gas consumption estimated at a national level for Q1 2018 was of 49.77 TWh, down by 1.05 per cent compared to Q1 2017 (50.3TWh) out of which about 8.33 TWh was covered by import gas and the remaining 41.44 TWh by domestic production to which Romgaz participated with 18.46 TWh, representing 37.09 per cent of the national consumption and 42.45 per cent of the consumption covered by domestic gas. The company's market share decreased by 2.5 per cent as compared to the market share held in Q1 2017.

For Q1 2018, the electricity quantity supplied was by 52.8 per cent lower than the similar period of 2017 due to a warm winter, low prices and lack of commitment to the Balancing Market due to increased hydro and wind power generation. According to the data offered by Transelectrica, the market share was 1.64 per cent in Q1 2018.

For Q1 2018, Romgaz had scheduled investments in the amount of 64.6 million Euro but spent 91 million Euro, 40.87 per cent more. Thus, the implementation degree of Romgaz Annual Investment Schedule in amount of 348.9 million Euro was 26.11 per cent. Compared to the similar time period of 2017, the investments increased by 460.7 per cent, respectively 91 million Euro compared to 19.7 million Euro.

Investments were exclusively financed from the company's own sources. The value of fixed assets commissioned during the reviewed period is 21.5 million Euro.

The total value of non-current assets increased by 2.75 per cent, to 1.4 billion Euro on March 31, mainly due to the investments made for the new power plant at Iernut and for seismic investigations. In Q1 2018, the company recorded an adjustment for the depreciation of the investment at Electrocentrale Bucuresti, in amount of 4.1 million Euro. The investment did not generate a negative effect in the course of the year, being recorded as retained earnings following the transition to IFRS 9.

Transgaz successfully completes key tender for Romania's offshore gas projects

Romania's state-owned monopoly Transgaz successfully completed a tender for gas pipeline capacity reservation in Tuzla, a key procedure that allows it to build the Tuzla-Podisor pipeline, which will transport the offshore natural gas to the international Bulgaria-Romania-Hungary-Austria (BRUA) pipeline.

According to Transgaz, the total transport capacity reserved by bidders for a period of 15 years (July 2021 to October 2036) amounted to 1,278 billion MWh, slightly above Transgaz's minimum threshold of 1,277 billion MWh to justify the investment in the Tuzla-Podisor pipeline project.

Potential customers reserved gas transmission capacity from the Neptun Deep Black Sea area of 1,278 billion MWh for 15 years, or about 85.2 million MWh per year on average.

Last year, Romania's gas production amounted to 115.34 million MWh, which means that the gas extracted from the perimeter concessioned by ExxonMobil and OMV Petrom could increase the national production by 74 percent.

According to a recent report by Deloitte, investments in the Romanian Black Sea oil and gas sector will generate revenues of over 26 billion USD to the public budget and an additional 40 billion USD to the country's GDP until 2040, as a result of total investments of 22.2 billion USD.

Deloitte estimates a total production of close to 170 billion cubic metres of natural gas in Romania's offshore fields, based on a prudent scenario.

"The resulting estimates therefore show that each billion USD invested in offshore oil and gas upstream activities in Romania generates three billion USD in the Romanian GDP over the upcoming 23 years of production. Moreover, it contributes with 1.9 billion USD direct and indirect revenues for the Romanian state, as well as creates and/or maintains, on average, an annual number of 2,198 jobs in Romania over the entire period," the study estimates.

Deloitte says that the impact on the labor market translates into creating and annually maintaining an average of over 30,000 jobs.