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Romania vs Baltic States: two different approaches to gas supply diversification

Romania

Romania has been slow in articulating its own strategy of supply diversification in response to Russia’s war in Ukraine. Rhetorically, Romania stands with Europe and adheres to all the sanctions imposed on Russia, including the ones that target Russian oil and natural gas imports. From the outside, it may even seem that the country is in a much better position, especially if compared to other EU states, that were much more dependent on imports of Russian oil & gas. However, Romania is far from the ideal situation in which it could have been, considering its undisputed advantages in resource endowment. The first priority of any state that wants to be independent should be to develop its own resources. Few European countries are, however, in this blessed position, of having domestic natural gas deposits. Romania is one of them. Nevertheless, Romania has failed to develop them in time to make a difference for itself as well as for the region. Ten years ago, in 2012, a significant natural gas discovery was made in the deep offshore segment of the Romanian Black Sea by a consortium consisting of OMV Petrom and Exxon Mobil. Known as the Neptune Deep gas field, it holds an estimated 42-to-84 Bcm. To date, no final investment decision (FID) has been taken on this project. So, in the middle of the biggest energy crisis of our times, with gas prices reaching unprecedented and historical highs, Romania sits on gas reserves and doesn’t develop them. Sure, some observers would say that the decision belongs to the companies involved. However, all the Romanian governments in power between 2012 and 2022 do bear the responsibility for the uncertainty that resulted in the current situation: no gas flowing from Neptune Deep. By comparison, Egypt’s super-giant Zohr gas field (located offshore, just like Romania’s Neptune Deep, albeit in Eastern Mediterranean) was discovered in 2015 and put into production in 2017, in just 3 years.

Furthermore, in 2016, another gas discovery was made in Romania, this time onshore, in Buzau county, by Romgaz, the national state-owned natural gas company. Located well below one of its currently producing wells at Caragele, the company found that there is a larger gas-bearing structure located below the shallow gas reservoir. Called Caragele Deep, because it is located at 4,000 meters below ground, this new structure is estimated to hold at least 30 Bcm. This field too is not producing any gas for Romania at the moment. Instead of developing its own gas, in the past 3 years (2019-2021), Romania has relied on Russian gas imports, which increased significantly over this period, reaching even 30% of Romania’s gas consumption during the winter months (January-March 2022).

However, there is one piece of good news this year: Black Sea Oil & Gas (BSOG) – owned by Carlyle International Energy Partners and the European Bank for Reconstruction and Development – started production in June from its project located in the shallow waters of the Romanian Black Sea. Against all adversities, back in 2019 the company went ahead with the investment decision at their two gas fields (Ana and Doina). This adds 1 Bcm/year to Romania’s gas production, but this volume will contribute more to offset the decline in domestic gas production in recent years rather than increase it to the point where no imports are needed. Also, this positive development has more to do with the determination of this particular company to push the project ahead in spite of the country’s regulatory headwinds.  

Out of the possible external solutions (gas imports being the second viable option), Romania seems to bet on the Interconnector Greece Bulgaria (IGB). Although this project should have been ready in 2014, it was finalized only this summer with its inauguration scheduled on October 1, 2022. With an initial capacity of 3 Bcm/year, the pipeline (also known as Stara Zagora-Komotini pipeline) is meant to bring a marginal volume of azeri gas via Turkey (TANAP) and Greece (TAP) into Bulgaria. For Romania, the project matters because it fits well with its BRUA project and closes a „missing link” in the vertical gas transport corridor it tries to build. Bulgaria has booked half of the capacity on IGB which leaves 1.5 Bcm in which both Romania and Moldova expressed interest. IGB can also be extended to 5 Bcm/year in which case the additional gas could supply Romania or transit further to Ukraine or Moldova as final destination. In addition, Serbia and Hungary (which now rely entirely on Russian gas) also have expressed interest in this alternative supply route and gas source. It would be good news if gas flows through IGB can reach Romania this year, however it remains a puzzle why Romania did not prioritize development of its own indigenous gas resources which should have been a no-brainer: option no. 1 in Romania’s gas supply strategy. 

As far as the gas storage obligation for the upcoming winter is concerned, on the last day of September, Romania had 85.7% of its underground gas storage (UGS) full, equivalent to 28 TWh or 2.9 Bcm in volume terms. That is very close to the EU average which reached 87.8%, being equivalent in volume to 978 TWh or 100 Bcm in storage for the entire EU.  

In conclusion, the outlook for Romania looks different based on the time horizon under consideration. Short term, Romania may face some challenges. Medium and long term, Romania has an excellent outlook, especially if it succeeds to go ahead with developing its proven domestic gas reserves. As far as Romania’s plans for upcoming winter, the prevailing reasoning in Bucharest is this: during winter, Romania traditionally consumes 70-75 million m³/day. In previous years, this demand used to be met with domestic production (25 million m³/day), withdrawal from UGS (25 million m³/day) and imports (20-25 million m³/day). In a „no gas imports” scenario, Romania will have to make due with only 50 million m³/day this winter. The government in Bucharest banks on industrial consumption shrinking enough to reach this level (many large industrial consumers have already downsized or ceased operation) and hopes for a mild winter.

The Baltic States

The aggregate gas consumption of the three Baltic States stood at 4 Bcm in 2021, of which Lithuania accounted for 2.3 Bcm, Latvia 1.2 Bcm and Estonia 0.5 Bcm. There is no domestic gas production, so all this gas is imported. Decades of vulnerability and dependence on what proved in the end to be a hostile source have convinced the Baltic States to take bold steps towards gas supply diversification. After many years of discussions about the optimum location and on whether to build a regional LNG import terminal, Lithuania went ahead and built its own LNG import terminal at Klaipeda. Opened in 2014, with an annual capacity of 2.9 Bcm, it immediately halved Lithuania’s dependence on Russian gas imports and was the project which broke the Russian gas supply monopoly. Aside from tapping into the global LNG market, the Baltic States have completed various infrastructure projects the result of which is that they are now in a strong position to manage a „no Russian gas scenario” this winter. The Baltic Connector (2.6 Bcm/year) linking Finland and Estonia was put into operation in 2020. This allowed the Baltic States to export gas to Finland, but also will allow them to import gas from Finland as soon as the Hamina LNG terminal in Finland (4 Bcm/year) will be open for business, in October 2022. Several other significant events took place this year. In May, the Gas Interconnection Poland-Lithuania (GIPL) was put into operation allowing natural gas to flow bidirectionally, and thus enabling also Poland to import natural gas from the Klaipeda LNG terminal if need be. In addition, Finland has leased its first floating LNG terminal (called Exemplar). The FSRU has a regasification capacity of 5 Bcm/year and will service both Finland and Estonia under a 10-year joint charter deal. The FSRU will be commissioned in December 2022 and will dock either at the deep-water Inkoo port (in Finland) or at Paldiski (in Estonia) – whichever location completes the preparatory work first. Furthermore, on September 27, 2022, Poland completed the construction of its first offshore gas pipeline. Called the Baltic Pipeline, it will carry 10 Bcm of Norwegian gas to Poland and will further strengthen the energy security of the region, including that of the Baltic States.

On the gas storage front, a completely different story emerges. Of the three Baltic States, only Latvia has an UGS facility, at Inčukalns. With a total working capacity of 24 TWh (equivalent to 2.5 Bcm), it serves all three Baltic States plus Finland. On September 30, the Latvian UGS facility was only 52.5% full holding 12.65 TWh (or 1.3 Bcm) – the lowest level (in terms of % fullness) among European gas storages, but not the lowest in terms of volume held (Sweden had only 0.09 TWh, while Portugal 3.9 TWh, Croatia 4.3 TWh and Bulgaria 4.4 TWh). 

All in all, the two approaches could not be more different: a story of domestic advantage and lost opportunities in Romania versus a story of domestic disadvantage counteracted with new gas infrastructure and faster market integration in the Baltic States.

NOTE: a version of this expert opinion has been published in the CEEP Special Report „Central Europe on the brink between dependency and diversification”, October, 2022, available here: https://www.ceep.be/www/wp-content/uploads/2022/11/CEEP_PP_2022_MOD3.pdf (see pg. 31)