MARKET LIBERALIZATION ACCORDING TO PETROM Cheap gas for the population and dearer gas for companies

• Prices in the industry will not double overnight

The authorities need to liberalize the market for gas and electricity and to announce a schedule for doing so, exactly this year. The process of liberalization means that the regulatory authority (ANRE) would only set the prices of gas and energy for vulnerable consumers, particularly for the population. Thus, all companies will negotiate their prices with suppliers under free market conditions. This will also help resolve the infringement procedure which the European Commission launched against Romania and which is at an advanced stage.

Hilmar Kroat-Reder, a member of the Executive Board, in charge of Natural Gas, Power and Chemicals, said, in an interview: "The Romanian authorities are now debating the amendment of the laws of energy and gas in order to implement a program for the liberalization of markets. Concerning the natural gas market, Petrom has proposed its liberalization, and the gradual elimination of the well-known < basket > which sets the ratio of domestic gas and of imported gas and which defines the population as a vulnerable consumer. For the former, Petrom has proposed supplying only domestically produced natural gas, at the current price, which currently costs half of the price of imported gas. This would reduce household gas bills by 15%".

He said that at the moment, the natural gas market is not free. Companies don"t have a real ability of negotiating volumes and pricing with their suppliers. For instance, in the case of domestically produced gas, Petrom is not allowed to charge more than the price set by the ANRE (the equivalent of 150-160 dollars/1,000 cubic meters) for the regulated market, because the ANRE basically imposes a price cap. The Petrom official explained: "Consumers who opted to change their supplier can return to the regulated market at any time if we charge them more for domestically produced gas. So we can"t raise prices. The electricity market isn"t fully liberalized either. Petrom"s proposal in this respect requests the amendment of the existing legislation allowing the price of gas for non-household consumers to be set according to supply and demand".

When asked how high would gas prices for companies go after the liberalization of the market, Hilmar Kroat-Reder answered: "In a free market, prices are set according to supply and demand, so we can"t estimate a certain price level. We need to consider that gas producers aren"t planning raises which would be so big as to affect demand. We need buyers for our products".

He stressed that market liberalization will make the Romanian industry invest in modern technologies for energy production and efficiency. This will also allow Romania"s economy to be more competitive. So far, few companies concerned themselves with that, because of cheap energy, the Petrom official says.

• The postponement of the market"s liberalization drives investors away

Hilmar Kroat-Reder said that the postponement of the adoption of a definitive schedule for market liberalization is driving investors away from the Romanian energy sector. Furthermore, the domestic industry needs to adapt to the new market prices.

Hilmar Kroat-Reder said: "Petrom wants to create value with the gas it is producing. The current price level imposed by the regulator, which is keeping it very low, is not sustainable for business. On one hand, price liberalization would increase state budget revenues, and on the other hand it would encourage investments in this sector. Romania needs investments, and in order to stimulate them it needs a favorable climate. As you know, by the end of the year, Petrom will complete the gas-based electric plant of Brazi, which involved an investment of 550 million Euros, as well as the wind electric plant of Dorobanţu, with an investment of 100 million Euros. Moreover, in order to maintain gas production in Romania, major investments are needed, since most of Romania"s deposits are mature. Without such investments, gas production will continue to shrink, thus increasing Romania"s dependency on imported gas. Over the past six years alone, our investments in exploration and production in Romania have amounted to almost four billion Euros."

The Petrom official insisted on mentioning that the legislative uncertainty in the energy sector will prevent new investments, which are absolutely crucial in the field of energy generation, given the old production capacities: "the Law no. 220 for supporting investments in renewable sources isn"t yet applicable because it needs the approval of the European Commission, even though it was supposed to come into effect three years ago. We currently don"t know how many green certificates we are going to receive for the energy we will generate in our wind power plant. Also, we aren"t receiving emissions certificates for our plant of Brazi, even though it uses cutting edge cogeneration technology, with low carbon emissions. We are disadvantaged compared to other plants in Romania, which receive free carbon emissions certificates, as the plant of Brazi is the largest Greenfield project for generating electricity".

In the near future, Petrom will review the factors which led to the current state of things.

• Gas consumption in the industry will fall this year as well

Gas consumption in the industry will continue to shrink slightly this year as well, with a few percentage points compared to the level of 2010, says Hilmar Kroat-Reder. Romania"s economy is still hurting from the crisis, and if a recovery takes place, it will only be tepid. Mr. Kroat-Reder said: "We hope and we believe that Romania will recover. We hope that we will see a sustainable economic growth in the coming years. Thus, gas and electricity consumption will most likely recover starting next year".

The official of Petrom added that the trend for the price of natural gas does not bode well, as the international market for crude is seeing steep rises and large price swings and the price of gas on the international markets follows the trend of the market for crude oil.

Hilmar Kroat-Reder added: "It is difficult to make an exact price forecast. Nevertheless, the market for natural gas will follow suit and will react to the current peaks in the price of oil within 3-9 months, depending on the formulas for adjusting prices on each long term bilateral contract ".

This year, Petrom will continue importing natural gas through the Szeged - Arad pipeline to cover the domestic consumption. The management of Petrom claims that these imports, even though they are not as big as those from Russia, maintain the equilibrium of prices, and will help guarantee Romania"s uninterrupted gas supply.