Europe’s upstream segment has two main challenges – environment-related long-term objectives that gradually narrow down oil companies’ maneuvering ability in terms of where/what they can drill and deficit-ridden governments trying to squeeze as much out of their domestic production as it can get. Whilst most of Western Europe, with its shale drilling bans and forced production phase-outs, gradually started to tilt towards the first variant, Romania is one of the rare examples for the latter option. It would seem that with its 2018 so-called Offshore law Romania has buried itself deep enough already to understand the burning need to render drilling profitable again, yet here we go again, Bucharest is voluntarily constraining the number of partners it can work with. And all this (sadly) takes place against the background of ExxonMobil leaving Romania’s most promising offshore project.
The Romanian government put forward a draft bill this March, with the purported aim of dovetailing EU procurement norms with its own practice of conducting public tenders. Effectively, countries that do not have multilateral or bilateral agreements with the European Union, would be barred from participating in Romania’s tender offerings. This means that only EU-based entities and companies from the United States, Canada, Turkey and Japan would be allowed to bid for Romania’s licensing blocks. Apparently for “reasons of national security”, Romania’s oil and gas segment will close out Chinese and Russian investment opportunities, unless either of the countries complies with the EU’s procurement practices and pledges to fully align itself in its Europe-oriented operations.
There are two main questions stemming from this draft bill. First, would Bucharest seek to utilize this piece of legislation to oil and gas projects or would it rather focus predominantly on nuclear? The thing is that Romania has already cancelled a nuclear deal with China’s GNPC last year on the expansion of the Cernavoda nuclear power plant. The Czech Republic has adopted a similar bill in December 2020, banning Russian and Chinese companies from winning the nation’s Dukovany power plant, so Romania would not even be the first one in EU circles. Judging from public utterances and the general narrative used to present it, the bill was written with a firm eye on oil and gas.
Second, could the suggested bill be circumvented? There is a very slight likelihood that Beijing or Moscow would consent to replicate the EU’s tendering format, therefore the stringency of the wording would be of key importance to the bill’s viability. Perhaps an even more fitting question would be whether Bucharest has any volition to circumvent it – and again, based on what Bucharest is saying, the answer is an unequivocal no.
Concurrently to the public tendering bill, Romania’s Romgaz stated it had placed an offer for ExxonMobil’s stake in the Neptun Deep offshore license block. Romgaz bid for 50%, meaning that if market estimates of $250 million (as per Reuters) are to be correct, lifting such a financing burden will be quite a challenge for the chief Romanian producer. The suggested sum is roughly equivalent to 80% of Romgaz’s net profit in 2020, which in and of itself would not be problematic, were not Romgaz to function as one of the government’s cash-cows. The Government of Romania owns 70.007% of Romgaz, while the rest is free-floating. In the midst of the pan-European travails to bounce back from the COVID-triggered slump, it would seem highly improbable that Bucharest give up its Romgaz dividend, especially as the 2021 budget deficit keeps on widening (at 7.2% currently).
It should not come as a surprise that the Romanian NOC is ready to buy out the ExxonMobil stake in one of the country’s most promising assets, yet still some of the government narrative feels forced. For instance, Romania’s energy minister Virgil Popescu stated that he “doesn’t know if anyone in Romania has deep-water expertise but (he would suggest) the chance should be given to Romgaz”. Inadvertently, this triggers a profound question whether there would be anyone left in Romania capable of appraising and developing deep-water fields, arguably the most prolific part of the Southeast European nation’s resource bounty.
The Austrian-owned OMV Petrom would automatically come up as the only entity fitting that description (after all it was them that discovered the Domino gas field in 2012, hitting a net gas pay of 71 metres), however even they have reservations vis-à-vis the government’s energy policy. With ExxonMobil’s departure, OMV Petrom will spearhead the development of the Neptun Deep license block. OMV Petrom stated that it intends to take a final investment decision on the block in H1 2022, insinuating that it would not move forward were the Romanian government not to amend its controversial offshore law.
Now where does all this leave Romania’s ban on Russian and Chinese investment into its public tenders? The prime suspect to be covered by the draft bill is LUKOIL, Russia’s leading private oil and gas company, which not only runs the 58kbpd Petrotel Refinery but has also held significant acreage in Romania’s offshore. LUKOIL also expressed interest in buying out the ExxonMobil stake in 2020, which was met by skepticism from the Romanian government. Then-Prime Minister Ludovic Orban claimed last year that Bucharest would “like a serious partner which was from the area of its partnerships, the EU and NATO”. Fast-forward to November 2020, LUKOIL announced that it would quit Romania’s Black Sea offshore, namely selling 87.8% of the Trident block, straight to the north of Neptun Deep.