The ANRM has once again decided to raise the reference price for natural gas

The reference price for natural gas extracted from Romania, in order to establish the royalties, will be calculated based on the trading prices of the CEGH Viena hub, the National Agency for Mineral Resources announced on Friday, which issued the Order concerning the approval of the Methodology to set the reference price for natural gas extracted from Romania.

According to the ANRM, the Order has been sent for publication to the Official Gazette and will come into force starting with the date of its publication in the Official Gazette.

The Order is the same one that was issued by the ANRM in December, but which never appeared in the Official Gazette, as it got stuck at the government level. PNL senator Daniel Zamfir claimed that the issuing of this order was the reason why former prime-minister Mihai Tudose fired ANRM president Gigi Dragomir. Dragomir was reinstated last month by interim prime-minister Mihai Fifor.

In a recent debate, Dorinel Ursărescu, advisor with the National Agency for Mineral Resources (ANRM) said that over the last ten years, the Romanian state has lost almost 7 billion lei by failing to update the reference price for natural gas, according to the reports by the Court of Auditors, as he pointed out that unfortunately, the ANRM did not have the willingness to update that price, which remained at its 2008 levels.

As a matter of fact, the ANRM mentions in its Friday press release, that through the Order for the approval of the methodology for setting the reference price for natural gas extracted in Romania, the National Agency for Mineral Resources is fulfilling the decisions of the Court of Auditors of 2010 and 2015, which were upheld through the decision of the High Court of Cassation and Justice no. 972 of March 4th, 2015: "The Court of Auditors has found that by failing to update the reference price since 2008, the Romanian government has lost approximately 7 billion lei between 2008-2015".

The Court of Auditors has asked for the updating of the reference price for natural gas extracted in Romania.

Gigi Dragomir, the president of the National Agency for Mineral Resources said: "We have acknowledged the observations of the natural gas producers concerning the new methodology for calculating the reference price and we are open to carrying out talks concerning the new formula, in order for the reference price to be fair and specific to every operator, depending on the quality of the natural gas that is exploited. We have understood the desire of the domestic producers to have the reference price determined based on the quotations of the Romanian market. Thus, the National Agency for Mineral Resources supports the development of the Romanian natural gas trading market and wants it to become a relevant reference.

The new reference price does not mean just a doubling of the price of natural gas for end consumers, but also fair terms for producers, as well as for the Romanian state, as the price of natural gas has been liberalized but it is still hovering around the 2008 levels. Given that according to the calculation formula, the new reference price is close to the one that transactions have been made at on the natural gas market over the last few months, we see no reasons for the price of natural gas paid by end consumers to increase".

On the other hand, the Romanian Association of Oil Exploration and Production Companies (ROPEPCA), reiterated, in a press release, the fact that natural gas producers do not agree to the reference price being pegged to the quotations in Austria.

So far, Romanian natural gas producers have paid their royalties based on their revenues, which is a basic principle for any tax applied to revenues, ROPEPCA wrote on Sunday.

The producers added: "It needs to be understood that the much discussed «reference price» does not represent anything else except a minimum base for calculating the royalty, which must be the minimum price that may not be lowered.

Other public institutions, such as the ANAF take into account the income made from the sale of natural gas for calculating the various other taxes. Why does the ANRM not take into account the same base for calculating the royalty? The proposal to peg the royalty for natural gas produced in Romania to a virtual number from abroad, a number which is far higher than domestic prices, shows a lack of sovereignty and a total indifference to the manner of operation of the natural gas market in Romania".

ROPEPCA claims that the National Agency for Mineral Resources issued that Order by completely ignoring the opinions expressed by the main domestic leaders in natural gas in the public consultation that took place on February 7, 2018, and instead basing that Order exclusively on the conclusions of a study signed by a university professor of the Oil and Gas University of Ploieşti. ROPEPCA is asking the University to announce whether the point of view expressed by the author of the study is also the point of view of the prestigious university itself and whether that point of view is relevant as it completely ignores the expertise of the domestic natural gas producers.

In the public debate organized by the ANRM, natural gas producers have expressed a position which came naturally, which was also backed by independent individuals, such as university professors or journalists in the field who attended the event.

Harald Kraft said: "The reference price should be the Romanian market price. We feel that a foreign market does not represent the Romanian market. We have no connection to the Baumgarten hub of Austria. Over there, the natural gas gets bought and sold several times and that is unfair when it comes to the payment of royalties in Romania". A correct approach would be the payment of the royalties based on the market price charged by producers in Romania, not a price charged abroad, says Harald Kraft.

ROPEPCA reiterates the main arguments presented in public consultations, upon the invitation of the ANRM, and it said that it hopes they would be taken under consideration when establishing the new methodology for setting the reference price for natural gas: "In order to have efficiency and applicability, we think that it is important for the reference price for natural gas to be established based on a market calculation relevant for Romania and which reflects the actual prices charged by the upstream sector in Romania. To that end, we want to draw attention that the version concerning the foreign hubs, which is proposed in the draft order, is not applicable to the current market conditions in Romania. We feel that, the same way it happens in the international practice when the reference price is determined based on stock market indexes, the chosen index needs to be relevant to the sales of domestically produced natural gas.

Given that (i) Romania currently doesn't export natural gas, meaning it is disconnected from the European realities and that (ii) compared to other markets, the Romanian market is not liquid enough, it can't for the moment relate to the foreign hubs for the trading of natural gas, including CEGH. Also, the prices on the foreign hubs do not reflect the actual earnings of the domestic natural gas producers, which is significantly lower because of the costs for the delivery of natural gas from the reference points to the foreign hubs. As an example, the temporary fluctuations on the Romanian market compared to the European hubs could be 4-5 Euros/Mwh or even greater.

Moreover, the natural gas producers have the obligation to sell some of their domestic output on the centralized market in Romania, which makes the reference to a foreign hub even less relevant.

We feel that determining the reference price based on a market index which does not reflect the prices charged for natural gas extracted in Romania, such as the price on the CEGH hub, goes against the Law on Oil no. 238/2004, which stipulates in art. 49 paragraph (2), that "the oil royalty is set as a percentage quota of the value of the gross extracted output". It is worth mentioning that in general, the transactions made on a hub are predominantly made through intermediaries which, often times are selling the product which they previously bought from a producer. In such cases, the quotes used in that manner also include the profit of the intermediaries. We feel that it is unfair for that element to be part of the formula for calculating the reference price.

Second of all, we feel that using the Day-Ahead Market price as a benchmark is not applicable to the long term contracts, which are subject to other terms and another mechanism for the forming of prices.

Third of all, mentioning the average superior calorific power at the national level at the value of the previous year as an element used in calculating the reference price could be discriminatory for producers selling weaker gas and which have a revenue based on the low caloric power of the product.

Not least of all, we want to draw attention to the fact that by communicating a reference price which is tied to a foreign market and which surpasses the level of the domestic market, the ANRM sends a signal to the domestic market which can not be in the interest of consumers".

In the beginning of the year, our sources told us that some of the employees of the ANRM, the Oil and Gas University, the ROPEPCA Association, as well as producer OMV Petrom would have wanted the reference price to be set based on the prices of the Romanian Commodities Exchange, meaning it would have wanted the producers to pay royalties based on the prices that their transactions were made at.

According to the sources, in the beginning of November, a simulation along the new formula indicated a value of the reference price of 91.68 lei/MWh (approximately 972 lei/1,000 cubic meters), whereas in December, the main natural gas operators in Romania sold on the Romanian Commodities Exchange at a medium price of 89.38 lei/MWh (948 lei/1,000 cubic meters).