Member Article

On December 29, 2018, Government Emergency Ordinance No. 114/2018 on the establishment of measures in the field of public investments and of fiscal – budgetary measures, the amendment and completion of certain normative acts and the extension of certain deadlines (“GEO 114/2018”) was published in the Official Gazette.

GEO 114/2018 provides that the Romanian Energy Regulatory Authority (“ANRE”) shall issue secondary legislation regulating the obligation of natural gas producers to sell gas with priority in order to ensure the entire consumption of household customers and the mix structure of import/domestic gas (“Gas Basket”) for the consumption of non-household customers. Therefore, ANRE published on February 1, 2019 a draft Order comprising the Methodology for the allocation of natural gas quantities to household customers and the Gas Basket Methodology.

The draft Order was submitted for public consultation and may be subject to changes before being adopted.

What is new and important?

1. Obligation of the two largest producers to ensure the entire consumption of households from April 1, 2019 to February 28, 2022
2. Obligation of producers to sell gas with priority for the consumption of non-household customers from April 1, 2019 to February 28, 2022
3. Uncertainties regarding the centralized market obligation of the market participants from April 1, 2019 to February 28,2022
4. Re-engineering the Gas Balancing market

1. Obligation of the two largest producers to ensure the entire consumption of households

OMV Petrom (majority stake owned by the Austrian company OMV AG) and ROMGAZ (majority stake owned by the state) must sell with priority to suppliers of household customers natural gas in order to ensure the entire current consumption of household customers and natural gas to be stored in order to ensure the consumption of household customers in the winter season. The two producers and suppliers of household customers will conclude the framework agreement for the sale of natural gas, approved by ANRE, at a regulated price of RON 68/MWh.

As a response to prior debates under the prior methodology for allocation of gas for the consumption of household consumers who did not exercise their eligibility right (which was applicable until October 2016), the draft order allows the suppliers of household customers to choose for the gas that shall be purchased for storage purposes during the injection period to be stored by the selling producer on their behalf. In this case, the price of the natural gas will also include storage tariffs and financing costs.

Not only is the designation of OMV Petrom and ROMGAZ as the only producers that have the obligation to sell with priority in order to ensure the entire consumption of household customers not in line with the provisions of GEO 114/2018 (given that GEO 114/2018 does not limit the applicability of the obligation to the two largest producers from Romania), but such approach might also raise concerns in what regards discrimination of OMV Petrom and ROMGAZ against other producers.

2. Obligation of producers to sell gas with priority for the consumption of non-household customers

The obligation of producers to sell gas with priority for the consumption of non-household customers is indirectly regulated by the Gas Basket mechanism, which provides that the natural gas quantities remaining from the domestic production after deducting the gas quantities used for technological consumption, reinjection in deposits, stocks of the transmission system operator and consumption of household consumers will qualify as natural gas available for the consumption of non-household customers.

Consequently, imported natural gas will be used for the consumption of non-household customers only when the domestic production cannot ensure the entire consumption thereof. During the summer months, for example, no Gas Basket will be established by ANRE.

The sale of natural gas destined for the consumption of non-household customers shall be performed only by means of bilateral agreements concluded in accordance with the framework agreement, approved by ANRE, at a regulated price of RON 68/MWh.

ANRE seems to have deviated once again from the rules laid down by GEO 114/2018. More specifically, GEO 114/2018 requires ANRE to establish a Gas Basket (meaning an export and import component) and not to regulate an actual prohibition to export in order to ensure that the entire domestic production will be consumed in Romania.

3. Uncertainties regarding the centralized market obligation of the market participants during April 1, 2019 – February 28,2022

The draft Order provides that from April 1, 2019 to February 28, 2022, only imported gas and gas from the domestic production that remains available after ensuring the consumption of final customers will be traded on the centralized market.

However, the draft Order may be viewed as being in contradiction with Gas Law 123/2012, which enjoys a higher legal force than the draft Order and which provides that the producers and suppliers have the obligation to sell on the wholesale centralized markets a quantity of gas equal to at least 50% of the quantities of gas for which they conclude sale contracts with delivery in that year. Even more, for the breach of this obligation the Gas Law 123/2012 provides a significant fine ranging from 5% to 10% of the annual turnover.

Hence, it seems that, if adopted as described herein, the draft Order will generate severe uncertainties regarding the centralized market obligation of the participants on the natural gas market, as they may find themselves in the impossibility of complying with both the draft Order and Gas Law 123/2012.

4. Re-engineering the gas balancing market

The gas traded on the gas balancing market will originate only from the domestic production.

The price of the gas traded on the gas balancing market, excluding services, cannot exceed RON 68/MWh.

5. Conclusions

The draft Order introduces several restrictions in addition to those already regulated by GEO 114/2018, which will materially affect the functioning of the gas market. GEO 114/2018 and the draft Order may raise serious concerns regarding the continuation of the liberalization process of the gas market and may deter investors from making Romania the country of choice for investing, with direct consequences on the country’s security of supply.