236300 11/24/2009 8:38 09BUCHAREST784 Embassy Bucharest CONFIDENTIAL VZCZCXRO6836 PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR DE RUEHBM #0784/01 3280838 ZNY CCCCC ZZH P 240838Z NOV 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 0101 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RHMCSUU/DEPT OF ENERGY WASHDC PRIORITY C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000784
STATE FOR SE MORNINGSTAR, EEB/ESC DAS HENGEL, AND EUR/CE ASCHEIBE
E.O. 12958: DECL: 11/23/2019 TAGS: ENRG, ECON, PGOV, PREL, RO SUBJECT: ROMANIA: TRANSGAZ SUPPORTS NABUCCO BUT FINANCING PROBLEMATIC
Classified By: DCM JERI GUTHRIE-CORN FOR REASONS 1.4 (B) AND (D).
1. (C) Summary. Financing the Nabucco pipeline project will present significant challenges for state-owned natural gas carrier Transgaz, according to Deputy Director General Liviu Pintican. While the company remains supportive of the project and is working toward its ultimate realization, Transgaz is simply too small to come up with its 933 million euro (1.397 billion USD) share without relying on state-guaranteed loans. Furthermore, completion of the Nabucco project will likely result in delayed maintenance to Romania's existing natural gas network, 60 percent of which has exceeded its recommended design life. Of more immediate concern, Transgaz is actively working to link Romania's natural gas grid with those in neighboring countries in an ongoing effort to ensure no supply disruptions this winter. End Summary.
2. (C) Majority (73.52 percent) state-owned natural gas carrier Transgaz is the sole operator of Romania's natural gas transmission system and the Romanian representative company on the Nabucco project. While Transgaz took pains to highlight its support for Nabucco in a meeting with EconOff, Pintican was candid in laying out the hurdles remaining before the project can be finalized. Chief among the hurdles is the sheer magnitude of Transgaz's stake in the project given the relatively small size of the company. For a firm with revenue of only 1.176 billion RON (411 million USD) in 2008, raising nearly 1.4 billion USD from the commercial capital markets would be impossible without state guarantees, which the company plans to seek. Worryingly, Romania's IMF agreement places a limit on the country's ability to extend sovereign guarantees, meaning that Nabucco will have to compete with other priority projects. Provided it can obtain a sovereign guarantee and commercial credit, Transgaz is reasonably confident of the project's economics, projecting an internal rate of return on capital of 13 percent. This projection assumes that the pipeline's capacity is fully booked at the consortium's projected tariff rate. If unexpectedly weak demand lowers this fee, Transgaz would have difficulty servicing its debt and achieving a return on its investment. Pintican confirmed that a final investment decision would not be made until the end of 2010.
3. (SBU) Of particular concern to Pintican is the precarious physical state of Romania's 800 mile network of pipelines. Transgaz's high regular dividend payouts of fifty percent have starved the company of funds needed to upgrade aging pipes, 60 percent of which have exceeded their recommended design life. While the grid can still be safely operated, Pintican noted that the pressure on many of the lines has been gradually reduced, with some operating at half of their nominal design pressures. The looming need to invest significant sums in the transmission network places additional financial pressure on Transgaz to score a home-run with Nabucco.
4. (SBU) On a positive note, Transgaz's efforts to link Romania's transmission network with Hungary's are progressing. Most of the needed pipeline has been laid on both sides of the border, with only the final interconnection still to be completed. According to Pintican, Hungarian law requires an intergovernmental agreement for construction along the border, something which has proven difficult to coordinate in the fluid political situation playing out in both countries. The pipeline is designed to accommodate bi-directional flows, but Transgaz anticipates that gas will typically flow from Hungary to Romania. The company is exploring an interconnection with Bulgaria, but Pintican was dismissive of a Moldovan proposal for an interconnection with Romania. He sees a project with Moldova as a stalking horse for Gazprom to gain access to Romanian gas, which it would then re-export.
5. (C) Comment. While at least on paper Nabucco is a commercial project, Transgaz's comments illustrate the degree of ongoing political involvement which will be required to bring the project to fruition. If the stars fail to properly align and Transgaz fails to obtain both state loan guarantees and a high rate of return from shippers, Romania's participation (and the project itself) could be jeopardized. While the political establishment continues to believe that Nabucco is of the highest strategic importance for Romania, 2010 will be a year of hard financial choices and Romania cannot have it all. Constrained by the IMF agreement and without a growing economy and easy access to external credit, the next Romanian government will have to choose which strategic priorities to fund. Spending more than one billion
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USD on Nabucco may be a priority, but so is replacing the soon-to-be-grounded MIG-21 fleet and reinvigorating Romania's aging infrastructure. Using up Romania's limited ability to issue sovereign guarantees for Nabucco will necessarily limit what will be available for other investments and other projects. End Comment. GITENSTEIN