Chevron Romania director Tom Holst stands next to drilling equipment in Pungesti, Romania, on April 8.(MIRCEA RESTEA/AFP/Getty Images)
Summary
Energy security has become a key issue in Romania as a consequence of the still-deepening row between Russia and the West over Ukraine. Bucharest sees the Ukrainian crisis and the United States' renewed interest in Central Europe as an opportunity to develop its own energy sector and insulate itself from the growing influence of an assertive Russia.
Considering the current political environment in Central and Eastern Europe, as well as the growing U.S. support of the Romanian government and its push for Bucharest to open up for foreign investment in the energy sector, the Romanian government will move forward in the coming months with the design of a new regulatory framework to promote more investment in the field.
Analysis
The ongoing crisis in Ukraine has in many ways fundamentally shifted the relationship between the West and Russia. Both parties' efforts to bring Kiev decisively into their respective political and economic spheres of influence tore the country apart. Ukraine is now teetering on the edge of being a failed state with violent insurgencies in the country's restive east and no clear economic or political roadmap out of the crisis in sight.
To be successful in containing what it sees as an aggressive and resurgent Russia, the United States has found it can count little on its traditional Western European partners, for whom a confrontation with Moscow would yield many costs and few benefits. Instead, Washington has had to reach to the front lines of this budding new Cold War: the Central European countries where concerns over Russian expansionism persist, especially because Moscow has spent the past five years expanding its commercial and political footprint in the region.
As the recent consecutive visits by U.S. Vice President Joe Biden and U.S. Defense Secretary Chuck Hagel indicate, Romania (alongside Poland) seems to be one of the focal points of the United States' new foreign policy in Central and Eastern Europe. Both officials have promised increased U.S. economic, diplomatic and military support for the region, and for Romania in particular, as Washington looks to forge a protective barrier between the Baltic and Black seas to keep Russia at bay.
Opportunities Are Growing
Perhaps the single largest challenge to this ambitious plan is the region's dependency on Russian energy imports and the strategic leverage it affords Moscow. Lacking viable alternatives for most of their modern history, Central European states have seen Russia use natural gas import prices as leverage to exact concessions from energy-starved national governments.
Romania, to a certain degree, shares this burden. Roughly 70 percent of the country's consumption of natural gas is produced domestically, but the rest is imported mainly from Russia -- a very significant strategic vulnerability.
What sets Romania apart are its significant oil and natural gas reserves and substantial coal deposits, which already make the country considerably less dependent than its neighbors on energy imports. In fact, Romania was a net exporter of oil and natural gas until the 1970s, when a lack of investment and infrastructure rapidly led to declining production.
The crisis in Ukraine has not only renewed the sense of urgency for the Romanian government to reduce its energy dependency on what it sees as a volatile and aggressive Russia, but it is also creating commercial opportunities stemming from Washington's newfound benevolence toward Bucharest.
U.S. companies have perhaps the highest capital availability and technical expertise in energy exploration and are Romania's best bet to revitalize its underperforming oil and natural gas production sector. However, the Romanian government must contend with Western investors' serious reservations about entering what has so far been a relatively risky market, especially given the costs imposed by legal red tape, bureaucratic delay and rampant corruption.
Romania now has a significant but finite window of opportunity to achieve some of its most important strategic goals by attracting investors in its energy industry. It is therefore no surprise that Prime Minister Victor Ponta announced June 4 that a new national petroleum law is being written with the World Bank. The recently developed legislation will be presented by year's end and should provide a clearer and fairer royalty scheme for newly auctioned blocks. Romanian government representatives also announced that production rights for 36 new exploration fields (eight offshore and 24 onshore) will be put forth for auction in 2015.
Most of Romania's acreage left to auction off is close to the shore, with water depths of 50 meters (160 feet) or less. These blocks were also up for auction in 2009-10 during Romania's 10th licensing round but were not awarded. If they have economic resources, these blocks would have likely been cheaper to develop. Since they were not awarded, their prospects were probably not as geologically attractive as other areas in the Black Sea. By restructuring the oil and natural gas contracts to recognize the different offshore and onshore challenges, Bucharest is probably designing the offshore acreage to make these potentially marginal blocks more attractive to exploration.
But it is not just the upstream segment that is receiving more attention from both the government and foreign investors. There is a clear, ongoing push from the main players in the field (OMV Petrom and ExxonMobil in particular) for the government and the main state company, Transgaz, to invest in Romania's decaying transportation network. Energy infrastructure reform was one of the subjects of conversation and study during Biden's visit in late May and will likely be the next top priority topic on the government's energy agenda.
While reforms that would entirely root out bureaucracy and corruption from Romania are extremely unlikely to take place in the foreseeable future, the current government will work to make the business environment as favorable as possible, at least for large foreign companies and Western energy firms in particular.
Challenges Remain
While there is cause for optimism in Romania, challenges do persist for both investors and the government. The social, environmental and political controversy surrounding gold mining and shale gas exploration is perhaps one of the most telling examples of how vulnerable the sector remains.
Extractive resource exploration with a high environmental impact is a controversial issue in Romania, with protests against shale gas and mining becoming relatively common. The gold mining project at Rosia Montana, which is owned by Canadian company Gabriel Resources, has triggered many controversies over the years, with people protesting the use of cyanide and arguing that the project could destroy the landscape. In November 2013, a parliamentary commission was tasked to revise the project. On June 3, Romania's Chamber of Deputies rejected a bill that would have allowed Rosia Montana to start.
On the shale gas front, U.S. supermajor Chevron postponed the start of its shale gas exploration work from October 2013 to May 2014 due to anti-shale protests, even though the company had all the necessary permits to start working. Bucharest regards shale gas as a long-term development with production not reaching significant volumes until after 2020.
Romania's fractured government also has implications for the country's energy sector. Romania is holding a presidential election in November, and Ponta is rumored to be running. Even if he does not run, his Social Democratic Party needs to win the presidential seat to put an end to the current political dispute between the prime minister and the president, who currently belong to different political parties.
The Social Democratic Party's electoral campaign is currently focused on attracting center-left and left-wing voters, who tend to have a negative view of shale gas exploration (and hydraulic fracturing in particular). The party is also interested in attracting votes from environmentalist groups and parties, or at least making sure they do not support center-right candidates.
Therefore, we expect Bucharest will maintain a cautious line on the issue of shale gas exploration and gold mining, at least until the end of the year. Conventional oil and natural gas exploration, both onshore and offshore, will remain the center of attention, with Romania making more obvious moves to attract Western investment through a new regulatory framework, but implementation will take time. Major shifts in Romania's energy industry will more likely be seen in 2015, but the pieces have begun moving now.
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