Sparks of Progress: Romania’s Growing Role in European Energy Provision
Key Takeaways:
The Offshore Law of May 2022 provides unparalleled opportunities to invest in new oil and natural gas projects in the Black Sea.
Romania already boasts a vast network of pipelines and is keen to modernise its existing infrastructure to facilitate incoming foreign investment.
The Russian invasion of Ukraine has forced Romania to seek energy independence, with it now on track to become Europe’s largest supplier of natural gas.
The Romanian zone of the Black Sea is well defended by the Armed Forces, ensuring operational security for trade and energy extraction in the region.
The Offshore Law removed punitive restrictions on oil and gas exploitation in the Black Sea and creates a clearer regulatory environment for investors.
Romania's multifaceted geography and strategic position along the Western shores of the Black Sea gives rise to promising investment opportunities. Boasting robust manufacturing and service industries, particularly in vehicles, electronics, and pharmaceuticals, the nation also showcases a burgeoning IT sector. However, amidst these opportunities, prudent caution is advised for potential investors due to the ongoing conflict in Ukraine. Over the last twenty years, Romania has witnessed a decline in the agricultural sector's contribution to its GDP. Nevertheless, the country's geographical advantages provide abundant access to natural resources and a substantial potential for renewable energy, rendering it a market worthy of serious consideration.
An Abundance of Fossil and Transitional Fuels
Romanians famously consider the Black Sea the country’s most peaceful neighbour, a historical source of food and trade. More recently, the Romanian government has invested in the exploitation of vast energy reserves present in the Black Sea. Romania has the opportunity to tap an estimated 200 billion cubic metres (bcm) of natural gas, and 600 million barrels of crude oil, making it the 49th and 44th, respectively, in the world for its offshore reserves. While overall production of natural gas has seen a steady increase since 2013, the Russian invasion of Ukraine led European leaders to diversify their main supplier of natural gas. Despite Romania not relying as heavily on Russian gas, comprising only 2% of Romanian consumption in 2015, policymakers nonetheless saw this as an opportunity to become the EU’s principal oil and gas provider.
In May 2022, the Romanian Parliament passed the Offshore Law, which modified existing legislation around drilling in the Black Sea and extended the parameters for onshore drilling. With early 2023 seeing Romania’s lowest natural gas consumption since 2000, this legislation poses significant potential for investment in Black Sea oil and gas extraction for both domestic use and export, in addition to petrochemical production. Romanian politicians initiated the Neptun Deep offshore gas project, jointly owned and operated by Romgaz and OMV Petrom, which aims to extract approximately 100bcm of gas from the Black Sea using funds from the EU’s recent initiative which designates natural gas as a transitional resource. The project began in 2000 when the Romanian government partnered with OMV Petrom and ExxonMobil. They agreed to explore and develop the Neptun Deep area, covering 7,500 square kilometres (km2) about 160km from the shore. Although the Government extended the concession agreement until 2045, Romgaz acquired ExxonMobil Exploration and Production Romania in August 2022. As a result, OMV Petrom became the main operators of the project.
EU funding has contributed EUR 628 million towards the construction and maintenance of the Tuzla-Podisor pipeline, connecting the Neptun Deep project to Romania’s gas network. The new pipeline will also link Neptun Deep to the BRUA pipeline which supplies gas to neighbouring Hungary and Austria. OMV Petrom suggest that Neptun Deep will generate EUR 4 billion worth of investments, EUR 20bn worth of state budget contributions and an additional EUR 40bn contributing to Romania’s rapidly growing GDP.
The construction of the Neptun Deep project in Romania, crucial for securing EU strategic independence from Russian energy dominance, faces staunch opposition from environmental campaigners due to its potential CO2 emissions, equivalent to Romania's annual electricity sector output. Despite this being typical for offshore operation emissions, environmental groups vehemently oppose any rise in CO2 and methane, which is why a robust carbon offset policy is advisable. Despite opposition, the government remains committed, emphasising the importance of energy security, whilst the European Commission supports the project by citing its contribution to overall emissions reductions and energy diversification. Simultaneously, some MPs, MEPs, and analysts criticise the project for delaying Romania's shift away from fossil fuels, perceiving it as a deviation from renewable energy commitments. However, natural gas' transitional classification in Europe's energy mix means the project is seen as a vital step in ensuring energy autonomy. Political pressures emphasising immediate energy transition pose significant financial risks if legislation succumbs to their influence.
Infrastructure - Strength and Obstacles
Investment in Romanian energy projects depends heavily on infrastructure for export and extraction. Prospective investors must consider two key questions: (1) Can existing infrastructure be relied upon? (2) How can investors benefit from planned infrastructure projects?
1) Existing infrastructure
Romania lags behind its neighbours in infrastructure development, relying heavily on a limited number of roads and railways that operate below their intended speeds. The mountainous terrain poses challenges for cost-effective route construction. With just 1,008 km of motorway and expressway, the strained road network is expecting relief from the A1 motorway completion, spanning the country from Hungary to Bucharest, connecting to the new A0 ring road around the capital. Despite a vast 22,298km railway network overseen by the state-owned CFR, it suffers from a reputation for being slow and unreliable, hampering transportation to the Eastern Black Sea region. However, Romania's airports offer a more dependable and efficient travel option for investors moving between major cities.
Romania also has a vast natural gas pipeline network spanning 14,209km and a well-developed maritime network of 39 ports, with Constanta being the largest in the Black Sea and 17th largest in Europe. Constanta's strategic position connects it to two Pan-European transport corridors, facilitating trade valued at over EUR 5.5bn and serving nearly 70,000 passengers annually. Moreover, the port links Romania to other Danube River ports, extending trade routes into Serbia, Hungary, Slovakia, Austria, and Germany.
2) Planned infrastructure
Transgaz plans to build the EUR 478m, 308.3km pipeline from Neptun Deep to the national grid via the ‘Gas Transmission Pipeline Black Sea – Podisor’ project, connected to Europe through the BRUA corridor. Transgaz signed a contract with OMV Petrom and Romgaz's subsidiary, specifying the capacity booking and ensuring the provision of transport services for natural gas. This contract guarantees the management of gas from extraction to transportation and onward to the point of sale. OMV Petrom and Romgaz have finalised the investment of EUR 3.7bn for the Neptun Deep project in mid-2023, and it is expected to produce an estimated 6bcm of gas annually. Romania’s energy security, and the Neptun Deep project, are heavily dependent on the Vertical Gas Corridor and the Trans Balkan Gas Pipeline becoming operational and functioning at its maximum capacity, according to the Romanian Energy Minister. This would result in Romania, and the EU, becoming less reliant on foreign gas imports, particularly from Russia. As it currently stands, Romania imports small quantities of Russian gas via intermediaries as it has no direct contracts with Gazprom. This situation makes Romania's gas imports more stable compared to other European countries.
In 2014, the European Investment Bank sent officials to oversee EU-funded projects in Romania, ensuring compliance with high standards. They're currently spearheading a major overhaul in Romania's infrastructure strategy, focusing on the largest transport project since 1989: the EU transport corridor from Athens to Dresden. This includes modernising 144km of railway track to boost transport links, accommodate faster trains, and attract potential investments, which will also facilitate more efficient export of petrochemical goods to Europe.
Romanian Energy Security
Romania’s rapidly evolving economy enhances its energy security and geographical stability, which the EU has found advantageous, especially following the Russian invasion of Ukraine. Romania currently enjoys an energy mix comprising natural gas, nuclear power, and renewable energy sources. In 2020, Romania generated 56.1TWh of electricity, with the majority coming from renewable and nuclear energy. Despite this, Romania maintains an unsustainable reliance on coal, which still accounts for one fifth of the country’s energy mix, followed by natural gas at 15%, and wind and solar at another 15%. Romania has committed to further diversifying its energy mix, embarking on long-term modernisation of its existing nuclear infrastructure, as well as developing new nuclear reactors based on emerging technology. It is also expanding its solar and wind energy production, both onshore and offshore, following in the footsteps of similar successful projects in the UK. Hydropower has been Romania’s largest source of energy for decades, generating around 30% of its electricity, but its plants are in desperate need of modernisation. For instance, Romania’s state-owned hydroelectric company ‘Hidroelectrica’ was publicly listed on the Bucharest Stock Exchange in July this year, indicative of burgeoning opportunities for private investment.
Romania is set to boost its nuclear power generation with a new small modular reactor (SMR) at Cernavoda by 2030, approved by the EU's green taxonomy. The country also plans to complete Cernavoda Nuclear Power Plant Units 3 and 4, as part of a EUR 8.2bn project which aims to increase its nuclear energy capacity by 6.9GW compared to 2015 levels, positioning itself as a leader in SMR deployment in Europe. The country is working towards 15% interconnectivity in its electricity network with Europe by 2030, enhancing its role in developing smart grids. However, the implementation of smart metering, crucial for energy efficiency, faces challenges due to limited enthusiasm from policymakers and energy suppliers. Despite this, there exists an investment opportunity for infrastructural suppliers in Romania's energy sector by supporting energy companies to roll-out the necessary improvements across the country and bring Romania in line with European standards. The EU also mandates that Romania achieve 3.82MW of hydrogen energy production by 2030, aligning with the European Fit for 55 climate legislation. This necessitates the generation of 3-4.5GW of additional renewable energy, creating another potential investment opportunity in the country's renewable energy sector.
Romania’s geographic security is made difficult by its proximity to the Russo-Ukrainian War. Romania’s 381-mile border with Ukraine makes for an complex security environment, given it is Ukraine’s largest EU border. Romania embarked on a securitisation mission alongside Bulgaria and Turkey on the Black Sea, carrying out maritime defence missions and conducting patrols alongside de-mining operations to protect trade, transport, and communication routes. Romanian naval vessels have been instrumental in escorting Ukrainian export ships as part of the grain deals with Russia and Romania considers it a responsibility to continue neutralising mines which make their way to Romanian, Bulgarian and Turkish territorial waters. While this potential risk is worth consideration, the Armed Forces are intent on making the Black Sea a safe operational environment. While Romania’s geography positions it at the centre of Eurasian trade and transport links, it also makes Romania a hotspot for organised crime groups. Potential investors are advised to take out requisite insurance policies and factor organised crime risks into their operational security planning.
Romanian policymakers are actively exploring the full integration of the Black Sea-Danube corridor into European transport networks to enhance connectivity between the Black Sea region, Central Europe, and Eastern Europe, with a particular focus on Germany. This endeavour necessitates additional military and financial backing as Romania staunchly protects its Black Sea interests, thereby amplifying operational security for private investors. However, Austria's veto on Romania's Schengen entry has impeded this progress, challenging the country's efforts to expand economic and transport ties within the EU. Russia's opposition to this unified EU-based Danube strategy, which it views as part of its hybrid war against the West, has encouraged further engagement from NATO and EU member states. These institutions are now advocating for deeper economic connections and fostering socio-cultural bonds as a response to Russia's utilisation of soft power and cyberterrorism in Europe.
The Romanian Navy plays a crucial role in ensuring safe maritime access to Black Sea ports, such as Constanta, Mangalia, and Midia. They've established alternative shipping routes in their area of responsibility, particularly between Mangalia and Sulina near the Ukrainian border. The Navy actively counters Russia's hybrid threats, including during the naval blockade of Ukrainian ports. Western Europe retaliated by increasing traffic through Romanian ports carrying Ukrainian goods, while NATO's reinforcements, consisting of multinational battlegroups in various Eastern European countries, bolsters Romania's geopolitical strength. In response to Russia's invasion, NATO allies enhanced existing battlegroups and established four more, marked by the first-ever deployment of NATO's highest-readiness element to Romania. This reinforces the country's geopolitical security alongside strides for energy independence.
Political and Regulatory Hurdles
Investors eager to tap into Romania's large-scale Black Sea development projects have faced obstacles for seven years, including high taxes and an export ban by the 2018 government. Recent changes, such as reduced taxes and the withdrawal of the export ban, signal a renewed focus on production. Despite strict EU and Romanian regulations, the investment potential in Romania is significant, and partnering with a reputable law firm can streamline the process further. With sufficient resources and project confidence, the Romanian market is receptive, and politicians actively empower such initiatives. Recent legislative advancements, particularly in the energy sector, promise lucrative returns for both foreign investors and the state, ensuring the 2022 Offshore Law further opens opportunities for growth in Romania's energy sector within the Black Sea.
The EU Modernisation Fund, which partly funds the Neptun Deep project, allocated billions of Euros for member states to invest in relevant and necessary projects that can generate economic growth and strengthen markets. Up to 30% of this allocation can be used for investments that generate demonstrable reductions in greenhouse gas emissions. The European Commission’s National Recovery and Resilience Plan (NRRP) aims to promote member states’ development by “implementing critical programs and projects that boost resilience, crisis readiness, flexibility, and growth potential”. These programs target major reforms and key investments, with financing provided under existing structures that have already benefitted the public sector in digitisation, as well as transport, decarbonisation, technology, hydrogen and the electricity market.
Typical of Eastern European nations, most vital infrastructure and energy firms in Romania are predominantly government owned. From the electricity grid to hydroelectric and nuclear power plants, almost all energy companies are state-owned. This nationalised energy environment presents both advantages and risks, as this setting can be uncertain if projects face financing challenges or encounter difficulties in construction, potentially exceeding budgets. However, many local and foreign investors favour this environment for the security that government contracts provide, offering potential for higher returns compared to private sector initiatives and a chance to establish working relations with Romanian Government officials. Considering the large customer base that these companies provide energy to, such investments are typically the safest and most lucrative in Romania by comparison to working with private energy companies. Prospective investors must consider that adherence to European practices and standards is considered crucial for competitiveness in the bidding process overseen by relevant Ministries.