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Will Romania Become One of the European Powers in the Energy Sector?

Will Romania Become One of the European Powers in the Energy Sector?

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Will Romania Become One of the European Powers in the Energy Sector? The answer seemed clear last year: Yes it will, as the recent gas discoveries in the Black Sea offer Romania the opportunity to become an important voice on the European Union’s energy market.

However, a final investment decision (FID) has been made only for the project developed by Black Sea Oil & Gas, a company owned by the Carlyle Group and BERD. According to the statements of the company’s management, the FID was made in good faith and on the assumption that all restrictions on the free movement of gas on a fully liberalized market shall be removed. 

The FID for the largest Black Sea project, developed by ExxonMobil and OMV Petrom, was postponed. We can only assume that the main reason is legislative instability.

On December 21, 2018, the Romanian Government issued Emergency Ordinance 114/2018 (the “Emergency Ordinance”) providing for many highly controversial fiscal, budgetary, and public investment measures in sectors of strategic national importance, such as energy, banking and telecoms. For the gas sector, the Emergency Ordinance establishes: (i) the obligation to supply the national market first at a price cap of 68 RON/MWh (applicable until February 28, 2022), and (ii) a new 2% tax, defined as a tariff.

The Emergency Ordinance breaches, among others, rules on gas market liberalization. Gas liberalization has been a complex process over a period of more than ten years, having as its purpose the creation of a single market. The entire philosophy of the European Union’s Third Energy Package is to make the energy market fully effective and to create a single EU gas and electricity market. This is in line with the Treaty on the Functioning of the European Union as well as with the core of EU law and its four freedoms: the free movement of goods, capital, services, and labor. 

Basically, just when Romania finally achieves a liberalized market, the Emergency Ordinance came and wiped it all out, and seems to propose starting again from scratch, disregarding the core policies of the European Union.

In light of this, it was almost inevitable that the European Commission would initiate an infringement procedure against Romania. However, before this could happen, on March 29, 2019, the Government issued a new emergency ordinance (the “Second Emergency Ordinance”), amending the Emergency Ordinance. The Second Emergency Ordinance limits the price cap and the obligation to supply the national market first, by providing that the obligation applies only to supply for household consumers.

It remains to be seen: (i) if the amendments brought by the Second Emergency Ordinance will be sufficient to satisfy European Law (i.e., if they constitute public service obligations as per Directive 2009/73/EC concerning common rules for the internal market in natural gas), and (ii) to what extent the new 2% tariff will be maintained, as it seems to breach both national and EU law as well as the stability obligations assumed by the State towards investors in the gas sector

Indubitably, the primary effect of all these legislative amendments is the potential postponement of gas development projects. This postponement should be viewed in the broader context of the future of natural gas in the European Union. According to the European Commission, natural gas is the “bridge to decarbonize the economy,” but its role will decrease considerably around 2050, the target year for the ambitious EU plan to have a climate-neutral economy. Currently, the European Union is investing more than one billion euros into developing natural gas projects. These projects are designed to ensure interconnection between Member States as well as supplying the Union with natural gas. One of these projects is the BRUA (Bulgaria-Romania-Hungary-Austria) pipeline, which is envisaged to bring gas from the Caspian Sea (Turkmenistan and Azerbaijan) to Central and Eastern Europe. The BRUA pipeline will also transport Black Sea gas.

Although no one can say with certainly what the energy market will look like after 2050, we know that natural gas will be of crucial importance in the coming decades. So this is an extraordinary moment for Romania, having the opportunity to become a key producer for the European Union. Later may become too late, and Romania may miss the train. 

Thus, the only question remains if Romania will grab this huge opportunity. For this, first and foremost, we need legislative stability. Trust must be established again between investors and the Government. The Second Emergency Ordinance is a good sign and we remain hopeful that Romania will have at least two offshore gas developments projects and become a European power in the energy sector. 

By Anca Mihailescu, Partner, Ijdelea Mihailescu

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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