CHALLENGES AND PROSPECTS: INTERCONNECTING THE GAS TRANSMISSION SYSTEMS BETWEEN REPUBLIC OF MOLDOVA AND ROMANIA
- Written by Natalia Timofte, Researcher, Institute of Energy with the Republic of Moldova Academy of Sciences
The interconnection of the natural transmission systems of Republic of Moldova and Romania is on the agenda of high level negotiations between the two countries since the ‘90s. There are opinions saying that initially the project was seen only in the context of additional supply for Romania with natural gas from the Russian Federation, as an alternative for gas supply to the region, part of the national gas transmission system, defined as “territorial exploitation Bacau”, which includes the cities of Iasi, Bacau, Onesti, Piatra Neamt and others. The geopolitical and economic developments in the region and in the European area during the past decade require another meaning to this interconnection.
The interconnection of the gas transmission systems between the two countries – R. of Moldova and Romania, is currently in fact the interconnection of the R. of Moldova’s system to the European Union (EU) one and the alignment with the ongoing processes in this geographic area. In 2010 R. of Moldova has become member of the Energy Community, whereas in 2014 the Association Agreement between R. of Moldova and the EU was signed. The Energy Community acquis communautaire and the R. of Moldova-EU Association Agreement form the legal basis for the integration of the R. of Moldova’s energy system, including the electric power and natural gas transmission systems, into the European system.
Interconnection with Romania could be for R. of Moldova an important alternative as direction and natural gas supply source against the traditional one, i.e. the natural gas of mainly Russian origin supplied to R. of Moldova through the Ukrainian gas transmission system. The complexity of the relationship between the Russian Federation and Ukraine as well as Gazprom’s statements in regard to the eventual supply cessation through the Ukrainian transmission system after 2019, when the natural gas transit agreement from Russia to Europe via Ukraine expires, require the speeding up of the interconnection and Chisinau’s connection to this source of gas supply.
The gas transmission pipeline Iasi (Romania) - Ungheni (R. of Moldova) was put into operation in August 2014 and the first gas deliveries in this direction began on March 4, 2015. Currently works are undergoing to connect Chisinau, capital of R. of Moldova, to this source of gas supply. The natural gas consumption in Chisinau represents about 65% of the country’s total consumption, which in 2015 was of 927.6 million cubic meters. From the moment, the connection takes place, Chisinau will start the fuller use of the gas transmission technical capacities on the direction Iasi-Ungheni. As of that moment, this direction of gas supply for Moldova should be fully functional and viable.
The interconnection of the transmission systems for Iasi - Ungheni brings along several technical and economic uncertainties. Such uncertainties are in fact challenges, among the most important being the availability of natural gas to be supplied to R. of Moldova from Romania and their price.
The main questions in this context are related mostly to the availability of natural gas: 1. Will Romania have the needed natural gas volumes to be supplied to R. of Moldova and, if yes, for how long? 2. Will the technical infrastructure be completed, or is already completed, for the transmission of gas on Romanian territory? 3. On the other hand, in regard to the natural gas supply prices for the final consumers: an alternative gas supply source against the current one, will it lead to the constant price increase of natural gas for the final consumers or not?
The historic development has led to the fact that two neighbouring countries are part of separate energy systems, i.e. the two major (dominant) one in Eurasia: ENTSO (the European network of the electric power transmission operators (ENTSO-E) and of natural gas (ENTSO-G) and the integrated system of the former USSR. Romania is part of the first system and R. of Moldova of the second one. Ukraine is part of R. of Moldova’s integrated system, but has a status of observer to ENTSO-G. The second system has decades of experience of integrated operation, whereas the European system is yet during an interoperability integration and development process.
The natural gas market principles and ways of operation in R. of Moldova and Romania are currently essentially different. Romania’s supply system and the natural gas market are much more complex and more developed than in R of Moldova. The interconnection of the natural gas transmission systems between R. of Moldova and Romania will need major operational, economic and technical changes for the R. of Moldova natural gas supply system.
Romania’s population is 5.6 times larger than R. of Moldova’s population; in 2015, the Gross Domestic Product (GDP) was 27 times bigger. The GDP per capita is about five times bigger in Romania against R. of Moldova. In R. of Moldova the population’s urban concentration is much lower than in Romania. In Romania, the industrial sector contributes to the GDP in a share of 26%, whereas in R. of Moldova the share is about 17%. The GDP per energy consumption unit is twice as large. The electric power and energy consumption per capita is 2.5 bigger in Romania against R. of Moldova. The overall energy imports in R. of Moldova is about 90%, in Romania is about 19%. Romania has an installed power for producing electric power, hydro, nuclear, wind, solar, etc., whereas in R. of Moldova the hydro potential is moderate, the nuclear one does not exist and the wind, solar and biogas power is incipient.
In 2015 Romania imported low volumes of natural gas, whereas the domestic consumption (10.3 bn cubic metres) was 100% covered by the domestic output. Natural gas imports from Russia fell to 0.3 billion cubic metres against 1.4 billion cubic metres in 2013 and 3.2 billion cubic metres in 2011. It’s worth mentioning the fact that this major cut in natural gas imports takes place given the constant fall of imported natural gas prices, which leads to the conclusion that it’s not the price the decisive factor in reducing the imports.
In R. of Moldova the natural gas consumption is covered by imports in a 99.98% share. Until 2015 the natural gas imports were completely covered by Gazprom (through Moldovagaz). In 2015, of the 1,008.5 billion cubic metres imported gas 1,007.4 billion cubic metres were supplied by Gazprom and 1.1 million cubic metres by OMV Petrom, Romania. According to the account on September 12, 2016, at the Ungheni gas collecting point (R. of Moldova), since the first deliveries on this direction some 25 GWh of natural gas have been supplied, including 11.37 GWh in 2015 (22 days in March and December) and 13.69 GWh in 2016 (23 days in April and August). Hitherto the maximum gas supplies on this direction were of about 1.3 GWh per day.
In R. of Moldova, out of the final consumption, about 60% is for households and about 23% - for the trade and public services sectors, whereas in Romania the share of the two sectors is of about 50%.
In the past ten years, Romania’s natural gas proven reserves fell to 110 billion cubic metres, meaning at the current level of output and consumption that Romania could cover the domestic needs for about ten years. It’s worth mentioning that since 2005 Romania’s natural gas consumption has dropped from 17.6 billion cubic metres per annum to 10.3 billion cubic metres per annum. In the near future, it is expected a continuous reduction of natural gas consumption. There are estimates saying that by 2030 Romania will increase the installed solar power up to 9.5GW and of wind power to 5.5 GW. This would cut the natural gas consumption to produce electric power, which currently is of about 15% of the total primary energy resources.
According to the SNTGN TRANSGAZ SA Medias’ Development Plan of the National System of Gas Transmission 2014 - 2023, by 2018 the domestic production of natural gas in Romania will drop to about 9 billion cubic meters per annum, and as of 2019 the domestic output will grow. The domestic output growth forecast is conditioned by new discoveries of natural gas, including in the Black Sea, but also in Romania’s region of Moldavia.
CHARACTERISTICS OF THE TRANSMISSION SYSTEMS
R. of Moldova is transited annually through the gas transmission system (STGN) towards Romania by about 17 billion cubic metres. The total length of the transit pipelines is of 1,559.6 kilometres. The northern pipeline - Ananiev- Cernauti - Bogorodciani is carrying natural gas during the warm seasons to the underground storage facilities in the area of Bogorodciani in Ukraine (storage capacity of 2.3 billion cubic meters) and in the cold season is carrying the stored natural gas to the consumers in R. of Moldova. The supply of the central region of R. of Moldova is provided by the main pipeline in the direction Ismail - Isaccea. The natural gas deliveries from Romania through the Iasi - Ungheni pipeline have started on March 4, 2015.
Romania’s natural gas transmission system has a total length of about 13,138 km, of which 553 km are transit pipelines. Romania has no liquefied natural gas (LNG) terminals. The project for the LNG terminal in Constanta has no deadline set yet. Romania’s STGN has ten interconnections to other transmission systems, including five to Ukraine, three to Bulgaria, one to Hungary and one to R. of Moldova.
The transit operations started in 1974 in Romania, by inaugurating the first pipeline 190 km long with a diameter of 1,000 mm between Isaccea, Tulcea County and Negru Voda, Constanta County, in view of natural gas transiting Romania from the former USSR to Bulgaria. The operation was developed later by completing another two pipelines with diameter of 1,200 mm on the same route (1989 and 2002) to extend the natural gas transport to Turkey, Greece and Macedonia. The STGN overall designed capacity is of about 30 billion cubic metres per annum (excluding the international natural gas transmission routes, with a designed capacity of 27.7 billion cubic metres per annum and a total technical capacity of 21.34 billion cubic metres per annum at the current operating pressure). Currently, the natural gas imports in Romania are carried out through three interconnection border points:
Ukraine Orlovka (UA) – Isaccea (RO): Dn=1000 mm, capacity=8.6 bn cubic metres per annum
Tekovo (UA) - Mediesu Aurit (RO): Dn=700 mm, capacity=4.0 bn cubic metres per annum
Hungary Szeged (HU) – Arad (RO) - Csanadpalota: Dn=700 mm, capacity=1.75 bn cubic metres per annum
In the event of natural gas supply cessation through Orlovka-Isaccea, Romania has the infrastructure to supply about 4.5 billion cubic metres per year, the main direction being Slovakia-Ukraine (Tekovo)-Romania (Mediesu Aurit).
Romania has seven underground storage facilities with an overall capacity of 3.1 billion cubic metres. The increase of storage capacity is envisaged for two storage facilities by about 1.4 billion cubic metres until 2024. By 2018 in the Romanian region of Moldavia a new storage facility with an overall capacity of 0.2 billion cubic metres is planned to be built. STGN in Romania has more than 250 interconnections with direct consumers, including 18 gas power plants (installed power of 3,084 MW), industrial plants and other consumers.
STGN in Romania is made up mainly by seven transport corridors, among which the eastern corridor: Onesti - Gheraiesti - Iasi (RO) - Ungheni (R. of Moldova). Through the pipelines of this corridor the transmission of natural gas is ensured from the interconnection point Isaccea to northern Moldavia. The development of this transmission corridor aims at ensuring the bidirectional connection with R. of Moldova, in Ungheni. The works in this regard include the rehabilitation of some of the existent pipelines, as well as the building of new ones and establishing compression stations or enlarging some of the existent ones (Onesti, Gheraiesti). These operations are part of the project included in the list of STGN’s five major development projects in Romania. The completion of the development project for the eastern corridor is set for 2017.
Other four STGN major projects in Romania include: The Bulgaria - Romania - Hungary - Austria corridor (BRUA, estimated deadline 2019); The southern transmission corridor to take over the natural gas from the Black Sea coast (2019); The interconnection of the national transmission system to the international natural gas transmission pipelines (2018); The central transmission corridor to take over the natural gas from the Black Sea coast (2023).
CHARACTERISTICS OF NATURAL GAS MARKETS
Following R. of Moldova’s accession to the Energy Community in 2010 and the signing in 2011 of the Energy Community ministerial council decision - D/2011/02/MC-EnC – regarding the implementation of directives and regulations that are part of the EU third law package (since 2009), R. of Moldova has become part of the process of creating the single European market for electricity and gas. Subsequently, Ukraine has become also part of this process. Following the decision D/2011/02/MC-EnC, the Treaty establishing the Energy Community (acquis communautaire on energy) contains the following documents: Directive 2009/73/EC; Regulation (EC) No. 715/2009 of July 13, 2009 on the conditions for access to the natural gas transmission networks, including the amendments according to the Commission Decision No. 2010/685/EU; Directive 2004/67/EC concerning measures to safeguard security of natural gas supply, adopted by Decision 2007/06/MC-EnC of the Ministerial Council of the Energy Community.
Moldova has undertaken to implement by January 1, 2020 the conditions for the separation of the transmission systems and of transmission and system operators, set out in Directive 2009/73/EC. Another commitment under this directive is to ensure, as of January 1, 2015, the inclusion of all consumers in the category of eligible consumers.
The natural gas supply, transport and distribution in R. of Moldova have been hitherto dominated (more than 90%) by the state company Moldovagaz and its ‘daughter’-companies. The main shareholder is Gazprom from the Russian Federation. According to the public information delivered by the National Agency for Energy Regulation of R. of Moldova, the licensed operations on the natural gas market are the producing, transmission, distribution, storage and supply of natural gas by gas pipelines and a compressed gas for vehicles at the fuel stations. The natural gas transmission is provided by Moldovatransgaz (daughter-company of Moldovagaz) and by IS Vestmoldtransgaz (since July 16, 2014). The natural gas distribution at regulated tariffs is provided by 23 license holders, among which 13 Moldovagaz’s daughter-companies. The companies Energocom and Partener-Gaz have licenses for natural gas supply at unregulated tariffs (by gas networks).
Romania has the largest gas market in Central Europe and was the first country to use natural gas for industrial purposes. The natural gas market has reached record dimensions in early 1980s. Institutional and structural reform of energy and natural gas markets in Romania began after 1989 and especially in 2000. Romania currently has six producers of natural gas, more than ten participants in the gas imports and about 15 suppliers of natural gas.
The monthly share of market opening for domestic natural gas in Romania in 2014 (cumulative) exceeded 60%. The number of eligible customers increased sharply in early 2015, but their contribution to the cumulative growth of the openness of the natural gas market was moderate.
NATURAL GAS PRICES
In Moldova, since Q4 2014 and during 2015, the quarterly calculated acquisition price of natural gas steadily fell: in Q4, 2014 - USD 376.1/1,000 cubic meters; in Q1, 2015 - USD 316.7/1,000 cubic meters; in Q2, 2015 - USD 258.8/1,000 cubic metres; in Q3, 2015 – USD 217.0/1,000 cubic meters and in Q4, 2015 - USD 184.4/1,000 cubic meters. The average import price of natural gas in 2015 was of USD 256.0/1,000 cubic meters against USD 377.1/1,000 cubic meters in 2014. The decrease in price of natural gas supply is due to the fall in oil prices and of the petroleum products on the world market. Concomitantly, in R. of Moldova the natural gas prices for end consumers are growing steadily. In 2015, the difference between the average tariff of natural gas, expressed in USD, and the average price of natural gas supply was of 30%, including 8% VAT.
The natural gas market in Romania is made up of the competitive segment, which includes trading of natural gas between suppliers/producers and between suppliers and eligible consumers and the regulated segment, which includes the natural monopoly activities conducted under the framework contracts (transport, underground storage, distribution) and supply by regulated price. In the competitive segment, prices are freely floating, based on supply and demand, as result from the competition mechanisms. In the regulated segment of the market, the price systems and tariffs are set by the regulator (ANRE), based on methodologies developed in this respect.
Since the beginning of 2014, the monthly prices of imported natural gas in Romania decreased from USD 390/1,000 cubic meters to USD 226 USD/1,000 cubic meters (March 2016). The import price is much higher than the domestic output (on the regulated and competitive market), but also against the weighted average price resulting from centralized wholesale markets transactions. During 2014-2016, the average weighted prices on the regulated and competition markets increased from RON 50.62/MWh to RON 59.88/MWh, and respectively from RON 67.63/MWh to RON 75.37/MWh. Expressed in USD/MWh the development of these prices decreased from USD 15.2/MWh to USD 14.5/MWh, and respectively from USD 20.4/MWh to USD 18.2/MWh. On the centralized wholesale market, the average weighted price decreased from RON 122.1/MWh to RON 73.9/MWh (from USD 36.8/MWh to USD 18.4/MWh) and respectively on the centralized retail market from RON 131.7/MWh to RON 110.4/MWh (from USD 39.6/MWh to USD 27.4/MWh).
For the Republic of Moldova, currently it is advantageous to benefit from natural gas price from Romania’s domestic production and the one resulted from the centralized wholesale market transactions. In a few years’ time, the natural gas prices from domestic production in Romania might be growing, mainly due to the depleting natural gas proven reserves. This can be moderated in the case by the confirmation of new gas reserves and by starting their exploitation. On the other hand, the continuous decrease in natural gas consumption, as result of using renewable energy and fuels and due to energy efficiency increase, could contribute to maintaining the current price level for natural gas from domestic production, or even to a slight decrease.
Another major factor that will influence future natural gas prices in Romania will be the constant development of the centralized natural gas market. Decoupling the prices of petroleum products and natural gas will contribute to setting the natural gas price based on supply and demand on the gas market. The experience of Western European countries shows that the prices set on the market, based on gas supply and demand, are smaller as compared to the prices set on the basis of indexation applied to petroleum products and to long-term contracts. At the same time, the speculative factor’s development on the market could result in higher prices. The essential role in diminishing the speculative factors belongs to the national regulatory authority in the field.
There are opinions that the natural gas supplied to R. of Moldova from Romania will be in fact imported gas from Russia and the price will not be lower than the imported price set for Romania. It is to be noted that, in Romania, in order to ensure an organized framework for fair and equitable allocation of natural gas from domestic production and from imports, the Market Operator was set up, organized within the National Dispatch for Natural Gas Bucharest, part of the SNTGN Transgaz SA Medias structure. The Market Operator: sets the quantitative monthly percentage shares of the mixture of natural gas from domestic production and the import requirements for all the licensed suppliers/distributors and for the eligible consumers; daily monitors the purchases/gas consumption of domestic/imported gas; prepares the monthly report on the procurement of natural gas from domestic production and from import by each operator on the gas market in Romania and by each eligible customer, informing them on the import share in total consumption, for billing the gas.
Until the convergence of natural gas prices from domestic production with the imported gas to ensure non-discriminatory access for all customers to sources from domestic natural gas production, the gas supply to consumers is done in the same structure of domestic/import sources. Moreover, based on the methodology approved in 2014, ANRE sets the mix of natural gas for household customers and for non-domestic customers, producers of heat, on monthly basis, only for the amount of natural gas used to produce heat in cogeneration plants and in heating plants intended for consumption. The structure of the gas mixture is displayed on the ANRE and Transgaz websites.
Concluding, the likelihood of gas supplies exclusively or predominantly of Russian origin from Romania to R. of Moldova is small and the structure of the gas mixture will be provided equitably by the Market Operator, under common rules for market participants. Given that Romania’s proven reserves of natural gas will not be supplemented by new reserves and alternative sources of gas supply from East and/or South will not be ensured, then Romania will focus on the interconnections in the West, which could possibly result in deliveries of natural gas of Russian origin from this direction, via Germany. This scenario is unlikely in the near future. However, regardless of Romania’s supply source, the market rules should ensure common conditions for all market participants, including the mix of the supplied natural gas.
Given that Gazprom will stop gas supplies through the gas transmission system in Ukraine, R. of Moldova can benefit from a new gas supply route by the already present infrastructure needed on the territory of R. of Moldova and Ukraine. The gas transmission system in Slovakia is the largest land pipeline for gas transportation by capacity from the former Soviet Union to Germany. If the bidirectional flows are ensured, sufficient gas volumes to cover the import needs to Ukraine, R. of Moldova and Romania can be supplied through Slovakia. On this natural gas supply corridor in western Ukraine, there are five underground gas storage facilities, including Bogorodciani, which has five underground storage facilities with an overall capacity of 25 billion cubic meters, out of Ukraine’s total capacity of 32 billion cubic metres. In the event of supplying natural gas to R. of Moldova through Slovakia and western Ukraine, unlike the direction of gas supply from Romania, most likely the expectations would be the supply of natural gas of Russian origin through the German gas transmission system and, respectively through Nord Stream. Although Ukraine has proven natural gas reserves about six times higher than Romania, it is unlikely a supply of gas produced in Ukraine to R. of Moldova. The regional gas market development includes Ukraine and, in time, the decisive factors in directing the flow of gas will be the availability of gas (including production/import/underground storage) and the market prices to sell/buy, but also the prices of system operators for transport services and for the storage of natural gas. Currently, the natural gas supply price of Russian origin at the German border is considerably lower than at the border with R. of Moldova, and at the Baltic States border. Thus, it can be estimated that the price of an eventual supply of gas of Russian origin to R. of Moldova, purchased on the centralized markets of Germany or the Czech Republic and transported through Ukraine’s and Slovakia’s transmission systems, may not exceed the price resulting from indexation applied to the supply of natural gas under the long-term contracts with Gazprom.
The development and strengthening of R. of Moldova capacity for analysis of the EU gas markets could result in major benefits in the supply of natural gas from this direction. Subsequent price formation for final consumers in R. of Moldova will depend on the competition between suppliers, domestic operators of transport systems, on the tariffs applied by the transmission system operators and by the distribution services rendered, and on the tax rates applied by the state and on the activity the national regulatory authority in the field.
The natural gas transmission system operator in Romania - Transgaz, applies different tariffs for transport services, depending on the flow direction (input/output), time (daily, monthly, quarterly, annually), time of the year (summer/winter), etc. For the 2014-2015 gas year, the Transgaz tariffs at the exit point of interconnection with other transmission systems of non-EU member countries (Ungheni) were the lowest for transport services. The tariffs are set by ANRE.
Following accession to the Energy Community, R. of Moldova has assumed the commitment to integrate into the European energy market, including of the supply systems for electricity and gas. This commitment was reinforced by the signing of the Association Agreement with the EU. A major step in this direction in the field of gas supply is R. of Moldova’s interconnection with Romania on the corridor Iasi (RO) - Ungheni (MD). Completing in 2014 the Iasi - Ungheni pipeline construction is only part of the project, the other works in R. of Moldova and in Romania are to be completed in 2017-2018. The project is carried out with a major contribution of grants from the EU and with European funds. The project will enable R. of Moldova’s access to new sources of gas supply and to access the European gas market.
Based on the commitments and due to the interconnection with Romania/EU, the natural gas sector in R. of Moldova is going through a period of substantial transformation in operations. During this period is taking place the transition: from natural monopoly to the gas market; from a single integrated operator by supply segments, transmission and distribution to operational and legal division of supply, transmission and distribution and to the participation of many companies in each segment; from natural gas prices set on the basis of indexation for petroleum products to prices set by the market, based on the supply and demand of natural gas; from long-term contracts for gas supply weekly/monthly/quarterly/annual contracts; from a single source of gas supply to multiple sources and directions; from lacking the possibility to choose the natural gas supplier to the right and option to choose the supplier; from lack of competition by supply, transmission and distribution segments to competition between suppliers and the existence of two transmission system operators.
The effects of these changes will mainly reflect on the consumers in Chisinau and Ungheni, but also on other natural gas consumers in R. of Moldova. In case of termination in 2019 of the gas supply from the traditional Eastern source, in R. of Moldova there are three possible alternative options for gas supply, i.e.: in the direction Iasi - Ungheni - mainly gas from Romania’s domestic production; in the direction Isaccea - Causeni from the reverse flow on the Trans-Balkan corridor: possible sources of gas: LNG from Greece, Romania’s domestic production and transit through Turkey/Bulgaria/Romania of the natural gas from Iran, Turkmenistan and Russia; in the direction Bogorodciani - Cernauti - Ananiev from the reverse flow through Slovakia and, possibly Poland: gas mainly of Russian origin transported through Nord Stream to Germany and the associated countries with this system.
In all three scenarios, R. of Moldova’s region on the left bank of the Dniester River can become vulnerable in terms of gas supply. Given the current status of the region and the fact that in this region is the CERSM (MGRES) power plant, which is currently owned the Russian group Inter RAO, it is most likely that the natural gas supply of Russian origin through the traditional direction will not stopped in 2019, despite the Gazprom statements in 2015.
By 2020, R. of Moldova will have multiple sources of natural gas supply, benefiting from real competition on the gas market, a functional natural gas sector according to the EU Directives and Regulations, to which is associated, and higher security in terms of gas supply. This is mainly due to R. of Moldova joining the Energy Community and to the Association Agreement with the EU, to the ongoing EU processes, and is determined by bilateral relationships Ukraine - Russia, Ukraine - EU, Russia - EU, R. of Moldova - Russia, R. of Moldova - EU, R. of Moldova - Romania and R. of Moldova - Ukraine.
The costs resulted from R. of Moldova’s integration into the European gas market, including the interconnection of gas transmission systems of R. of Moldova and Romania, are largely covered by the EU and by European sources. It is possible that the natural gas prices will not have a negative trend for end consumers following this process. Although the expected outcome can bring many benefits, both at national level and for the end consumer, it is undeniable that the uncertainties and associated risks with this process can have negative effects, their mitigation and settlement depending on the R. Moldova decision makers. The fact is that, following the interconnection of natural gas transportation systems of R. of Moldova and of Romania, the costs to end consumers in R. of Moldova will not exceed the costs incurred to these consumers while lacking this interconnection and the natural gas supply.