Emerton is a global midsize strategy consulting firm, focusing on the energy, mobility, industry, and high-tech sectors. They recently completed a study on the natural gas market in Romania, commissioned by FPPG.
Before delving into the study you recently released on the opportunities and challenges surrounding natural gas in Romania, can you offer us a brief introduction into Emerton?
Emerton is an independent strategy consulting firm based in Paris, New York and Dubai. I am responsible for the energy practice of the firm, including gas, energy, infrastructure and regulatory. Our activities are global, and personally I have a combined 20 years background of working in the gas and LNG industry, be it with the French Regulatory Authority or several energy companies, which amount to an in-depth knowledge of the gas trade and supply value chain.
The study you did on Romania is a key stepping stone in acquiring knowledge and making more impact aware decisions - what was the methodology you used to put it together?
We used a tailor-made methodology, starting with a clear view of the real market situation acquired by interviewing key players in the industry’s full value chain from upstream and infrastructure, to retail. We combined this assessment with an overview of the regulatory and legislative environment to objectively assess market conditions. Step two was figuring out what the most pressing hurdles in the market were and make our findings function as recommendations for overcoming them. The final step was drawing conclusions about the true challenges, the root causes of the disruptions, and coming up with very concrete action points to overcome them. Our mission was to create a credible, if ambitious roadmap, to set the basis for further discussions between the industry and the regulator.
Can you please summarize the key findings from the study, assessing the market conditions before moving on to recommendations?
Our first observation was that the market, while showing signs of improvement, was far from perfect even before GEO 114/2018. There are two main reasons for this and the first is that the wholesale gas market has been illiquid and erratic, resulting in a lack of trust in the market as an efficient channel of gas supply. This challenge would only be made worse by the obligation to sell half the production on the wholesale market, which is a simplistic condition that only addresses yearly volumes. This obligation is too constraining for producers, while at the same time not being constraining enough because it does not touch upon the matter of the calendar of sale. It is key to design a system in which volumes are traded with regularity, as in any other healthy, predictable and liquid market.
Romania does seem to suffer from irregular market activity, what is your recommendation for addressing this pressing challenge given the shortcomings of GEO 114/2018?
Intuitively one would think simply increasing volumes would fix the matter, but in reality this would be very damaging to the wholesale sector. What we propose is to introduce a new type of daily and monthly obligations, which would impose a strict calendar for producers, creating predictability. Such regularity would substantially improve the market liquidity itself, as well as the overall confidence in it. In addition, we recommend reducing the volume obligation from 50% to 12%, which should ease the burden of producers and counterbalance the calendar obligation we are proposing.
Getting back to where it all started with the sudden spike in gas prices last year, what is your assessment on the best concrete measures to protect vulnerable consumers?
Firstly, GEO 114/2018 caps the price indiscriminately, and it is fair to assume that not all households are made up of vulnerable consumers. So the first step is defining the perimeters of energy poverty and concentrating efforts on the real issue, protecting those who do in fact need it. According to our analysis roughly 20% of Romanian households may fit in this category. One obvious proposal is to subsidize the cost of energy for them. Others could be more long term and focus on improving energy efficiency, such as subsidizing efficient boilers and insulating homes. Another idea is to forbid the disruption of gas and energy supply in the case of non payment of bills, particularly in winter time when vulnerable consumers need it the most. Many of these methods have been successfully implemented across the EU.
The study urges the need to encourage further investments in the upstream segment, could you elaborate on how this should be implemented?
The sentiment put simply is that the government is treating oil and gas producers in a quite punitive way. Romgaz and OMV Petrom are committed to staying here come what may, and are thus heavily impacted by any legislation the government passes. This position of power should not be used by authorities to ostracize, but to steadily reward producers, encouraging new investors and allowing the sector to grow. This applies to both the upstream and downstream sector, which is now plagued with doubt due to repeated recent changes and an overarching lack of predictability. The Black Sea may well offer ample resources and opportunities, but investors remain nevertheless reluctant given the regulatory landscape, which is a shame. All producing countries have a serious responsibility to instill a clear and predictable fiscal and legal regime.
It is evident by listening to voices in the industry that this is a very real concern – what can we do in order to address this challenge and better communicate with the authorities?
Open discussions are really the way to go and an initial step is real openness from the side of the authorities to engage a dialogue with the industry. It is clear that some form of consultation needs to happen. This is the norm in France, where all decisions are taken after public-private impact analyses and debates. This is what the industry should push, building real transparency in the way decisions are prepared and made.
What concluding thoughts would you like to leave our readers with, having successfully finalized this first study on Romania’s gas market?
I would like to stress that liberalization is only a means to an end, and not and end in itself. Free markets provide security of supply, look for example at the nightmarish scenario that happened in Venezuela. Proper free market management serves everyone’s best interest at the end of the day, offering long term security, the backbone for fair treatment of vulnerable customers provided the right instruments are used, and a more attractive environment for what are necessary investments.
