Wikileaks - MCCCXX

200928 4/6/2009 13:42 09BUCHAREST234 Embassy Bucharest CONFIDENTIAL 09BUCHAREST10|09BUCHAREST60 VZCZCXRO0527 PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR DE RUEHBM #0234/01 0961342 ZNY CCCCC ZZH P 061342Z APR 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 9400 RHMCSUU/DEPT OF ENERGY WASHINGTON DC PRIORITY INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000234

SIPDIS

EUR/CE ASCHIEBE, EUR/FO MBRYZA, EUR/ERA EMCCONAHA, EEB SMANN STATE PLEASE PASS TO USTDA DSTEIN AND JMERRIMAN ENERGY FOR MAPICELLI

E.O. 12958: DECL: 04/05/2019 TAGS: ENRG, ECON, PREL, PGOV, RO SUBJECT: ROMANIA: RETROSPECTIVE ON NATURAL GAS CUTOFF

REF: A) BUCHAREST 10 B) BUCHAREST 60

Classified By: Charge d'Affaires a.i. Jeri Guthrie-Corn for reasons 1.4 (b) and (d).

1. (C) While Romania successfully survived the January cut-off of natural gas imports from Russia, working-level officials at the Ministry of Economy (MOE) believe that pain was averted largely through lucky timing. Cornel Zeveleanu and Liviu Stoican, officials in the MOE's General Directorate for Energy Policy, both agreed that if temperatures had been several degrees colder, or if the global economic downturn had not already shuttered some major domestic industrial consumers, the Romanian gas system would not have been able to make up for the supply shortfall. Even the lower-than-normal level of demand in January 2009 was met only after switching gas consumers with interruptible supply contracts to alternate energy sources (mostly fuel oil). Demand through the first quarter of 2009 has remained low, due both to the continued use of fuel oil stockpiles and to the slowing economy. For 2009, MOE expects consumption to fall by 50 million cubic meters (mcm) to just over 15 billion cubic meters (bcm) for the year. Current domestic production is expected to cover at least 70 percent of this demand, with the remainder imported from Russia via Ukraine.

2. (C) The gas crisis highlighted three main areas for the Government of Romania (GOR) to focus on in order to mitigate the impact of any future shutoffs: 1) the GOR needs to secure new sources of supply; 2) it must develop better interconnections with neighboring countries; and 3) it needs to increase underground storage capacity. (Note: President Basescu identified the latter two as high priorities when he met with DAS Matt Bryza on January 29th (ref B) End Note). As far as securing new supplies, the GOR is encouraging Romgaz to finalize the contract for the USTDA-funded feasibility study of an LNG re-gasification facility in Constanta. Romanian officials are also becoming increasingly vocal in EU circles to encourage the development of the Nabucco pipeline as an EU-supported element of the southern corridor. Romania is looking domestically too, hoping that geological surveys will reveal large pockets of exploitable natural gas reserves in the Black Sea. One small U.S.-Romanian natural gas producer, Amromco, believes that deploying better technology and investing in Romgaz's mature gas fields on land could also result in significant production boosts. Romania is making progress on interconnections, with the Arad-Szeged gas interconnection with Hungary under construction and expected to be operational in January 2010. This pipeline will allow Romania to tap into gas flowing through Hungary from the Baumgarten hub. The other project, the Giurgiu-Ruse connection with Bulgaria, is currently in the pre-feasibility study phase. Lastly, the GOR supports Romgaz's plans to expand underground storage capacity from 4 to 5 bcm and pay for it by implementing a utilization policy which will require both consumers and suppliers to set aside and store a portion of their 2008 usage. One lesson learned from the crisis is that, while the GOR had sufficient underground storage reserves to theoretically meet demand for several months, the ability to extract these reserves placed a limit on how much of daily demand could be met from underground storage, hence the need for expanded facilities.

3. (C) One argument frequently advanced by private domestic gas producers is that raising the price of domestic gas to the same level as imported gas would spur more domestic production. However, this idea shows no sign of being politically palatable, especially in the current economic environment. MOE officials argue that the commitment in principle to gradually equalize prices, which the GOR made as part of EU accession negotiations, came when the imported gas price was USD 140 per thousand cubic meters (tcm). The current import price of over USD 450 per tcm makes this commitment impossible to implement due to the costs it would impose on the average Romanian consumer, MOE claims. (Note: the import price is linked to the price of oil with a nine-month lag, so it is expected to fall significantly by mid-summer. End Note.) For this reason, the GOR expects to leave the regulated domestic price at its current level through 2009 (although lower import prices should reduce gas bills for consumers). The MOE officials did state unequivocally that all consumers are now required to buy gas from a "basket" composed of both imported and domestic gas and that there are no longer any special deals or exceptions for large industrial consumers. The MOE has not yet developed a firm policy on whether a gas producer can burn

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its own gas in a power plant that it owns without paying the "basket" price for the gas used, a point raised recently by Petrom when it announced plans to build a gas-fired power plant and supply it from Petrom's own production.

4. (C) Comment. Even before the gas crisis the GOR was thinking strategically about energy security. If anything, the cut-off only heightened their concerns and made them more willing to be vocal within the EU in defending their energy priorities. Suspicion of Russian motives and distrust of Ukraine run rife among the officials charged with overseeing the Romanian natural gas system. Zeveleanu blamed the January gas cut-off squarely on Russia, saying that the only reason gas was cut was because the Russians needed an excuse to exercise the force majeure clauses in the supply contracts to get out of supply commitments they could not meet. Testy relations between Romania and Ukraine, though, provide an additional opportunity for scapegoating the Ukrainians as well. Distrust of both countries makes the Romanians willing to support any system that relies on neither, with the best options being Nabucco, an LNG terminal on the Black Sea, and EU-wide interconnections. End Comment. GUTHRIE-CORN