EU regulators close one probe, open another [NGW Magazine]
Ensuring the free flow of gas across borders remains a top priority for Brussels, but despite progress in recent years, the European Commission still has plenty of work to do in this area. Eastern states in particular have generally been slow to implement market reforms and Romania is no exception.
However, an antitrust case launched by the European Commission (EC) almost three years ago against national grid operator Transgaz appears to have been settled after Brussels recently approved a set of remedies put forward by the monopoly. In short, Transgaz has agreed to make available at least 1.75bn m³/year of export capacity on the Romanian-Hungarian border at the Csanadpalota interconnection point and 3.75bn m³/year on the Romanian-Bulgarian border at Giurgiu/Ruse and Negru Voda I/Kardam. Moreover, Transgaz has pledged to refrain from hindering exports of Romanian gas, for example it will not set export tariffs at an unreasonably high rate, which the EC alleged when it launched the investigation.
The EC also suspected that Transgaz had been underinvesting in, or delaying construction of, infrastructure for gas exports and using unfounded technical arguments as a pretext for restricting exports. This is at odds with Article 102 of the Treaty on the Functioning of the European Union (TFEU) which prohibits the abuse of a dominant position.
Two factors in particular seem to explain why the Romanian TSO gave in to pressure from Brussels. First, Transgaz would have wanted to avoid a fine similar to the one that the EC had a few years earlier imposed on Bulgarian Energy Holding (BEH) and its subsidiaries. In December 2018, the EC fined BEH €77mn after concluding that grid operator Bulgartransgaz and supply arm Bulgargaz had restricted access for competitors to key infrastructure, including both domestic gas pipelines and the Transit 1 pipeline’s interconnection point with Romania. A fine of a similar magnitude would have been a major setback for Transgaz particularly as it does not hold large cash reserves.
“The Romanians really tried to co-operate with the EC; a fine would have been difficult to stomach. That is why they put forward commitments at an early stage and agreed to more ambitious measures later on in the discussions,” Catalin Suliman, a Bucharest-based partner with law firm Filip & Company told NGW.
Second, the EC in 2016 gave a €179mn grant to the Romanian section of the planned Bulgaria-Romania-Hungary-Austria (BRUA) gas pipeline and such grants do not come without strings attached. In fact, Transgaz’ commitment to make export capacity available on the Hungarian and Bulgarian borders is directly linked to the first phase of the €479mn BRUA project. In its decision, the EC said Transgaz would be subject to legally binding deadlines for the commitments, but without giving further details at this stage. The first phase of the BRUA pipeline – which is for 1.75bn m³/yr – is under construction and could be completed this spring. The second phase of the project is for 4.4bn m³/yr.
"The first phase of BRUA seems to be on track for late April. But interest from shippers in capacity auctions has so far been limited; the second and third phase of the project will hinge on whether new players commercialise the Black Sea discoveries," Eugenia Gusilov, director at the Romanian Energy Center, told NGW.
Black Sea potential
Romania produces just above 9bn m³/year of natural gas which is roughly the same volume as it consumes. In other words, development of its gas rich assets in the Black Sea will be a prerequisite for filling BRUA with gas for exports, at least the second phase.
But it is highly uncertain whether the commercial incentives are in place to develop the Black Sea resources. Changes to the Romanian energy law implemented by the previous leftist government – which saw the introduction of a windfall profit tax – has prompted foreign investors to rethink their future engagements.
Austria’s OMV Petrom says it continues to evaluate the commercial and technical viability of the Neptun Block; but ExxonMobil is quitting the partnership and OMV has announced major cuts in its budget in order to navigate the present crisis. The field is 170 km offshore in waters about 1 km deep, which makes it expensive in today’s climate, and the uncertain regulatory framework only worsens the situation. The new liberal-conservative government led by Ludovic Orban has vowed to undo some of the energy law changes enforced by the previous administration, but firm details have yet to emerge.
The EC has also put Romania under pressure to abolish export restrictions on gas, which put an obligation on domestic producers to prioritise sales on the domestic market. Brussels sent an infringement warning or a ‘reasoned opinion’ to Bucharest in July 2019. NGW understands that the Romanian authorities have replied to the letter and that EU regulators are now analysing the proposed changes to the law from the Romanian side.
"The way the export restrictions were introduced was not elegant – there was no consultation with stakeholders. I think the current liberal government will scrap this legislation, it goes against EU law, not to be able to sell the gas where you want," said Gusilov.
Nevertheless, a major overhaul of the Romanian gas grid is now needed in order to comply with the commitments approved by Brussels. More than just increasing border capacity, Transgaz must also address technical challenges such as differences in the level of grid pressure compared with the Bulgarian and Hungarian systems. It had better act swiftly; the EC can fine the company 10% of its annual turnover if it breaches the commitments which will remain in force until the end of 2026.
French storage woes
The EC’s efforts to boost competition in gas markets are not restricted to southeast Europe. On February 28, it opened an in-depth investigation into subsidies to French gas storage operators Storengy, Geomethane and Terega which received a total €540mn in 2019. The bill was ultimately paid by gas shippers through tariffs that are collected by network operators.
In much of Europe, the economics of gas storage has deteriorated in recent years as the difference between summer and winter gas prices has been too small to allow profit. This was exemplified by the closure of Centrica’s Rough storage facility in the UK in 2017, when it was deemed too costly to repair. Similarly, in France, the EC noted that the take‑up rate for storage capacity in France has dropped considerably in recent years, falling from 100% in 2009 to 63% in 2017.
Although the EC acknowledged that storage assets are important for security of supply, it questioned whether the French system over-compensates operators.
First, it said France did not carry out an independent, market-based economic evaluation of the storage assets in 2017, which is when the compensation mechanism was implemented. For example, the mechanism remunerates investments made before the compensation mechanism came into effect and this may have allowed storage operators to cover their initial investment costs.
Second, subsidies paid to storage operators in France reduce incentives to use LNG terminals and interconnectors and may prompt gas suppliers to use storage assets in France rather than in neighbouring countries, the EC said.
France is not the first EU country to hear from Brussels over its gas storage practices. In November last year, the EC sent a reasoned opinion to Poland over its storage obligations for companies importing gas into Poland which it says is incompatible with the revised security of supply regulation 2017/1938. The Polish case may well end up before the European Court of Justice unless it is resolved soon.
Moreover, France is not alone in subsidising gas storage operators through tariffs. It is a common practice in many EU countries. However, it seems to be the sheer size of the French subsidies – over €500mn/yr – that has caught the eye of EU regulators.
France has around 19bn m³ of gas storage capacity compared with annual gas consumption of around 43bn m³. Storengy – a wholly owned subsidiary of Engie – is the main player with 12.2bn m³ of capacity spread across 14 underground facilities in France. Paris must now demonstrate that the subsidies are necessary to avoid closures of such storage facilities.