(C) ROMANIA'S ENERGY SECTOR - RUSSIAN DEPENDENT

C O N F I D E N T I A L SECTION 01 OF 03 BUCHAREST 000411

SIPDIS

SIPDIS

STATE PASS EUR/FO - DAS MATT BRYZA, EUR/NCE - JANET GARVEY

E.O. 12958: DECL: 03/10/2016
TAGS: ENRG EPET EINV PREL PGOV RO
SUBJECT: (C) ROMANIA'S ENERGY SECTOR - RUSSIAN DEPENDENT
AND NOT HAPPY ABOUT IT

REF: BUCHAREST 32

Classified By: Deputy Chief of Mission Mark Taplin for reasons 1.5 (B)
and (D).


1. (C) SUMMARY. Romania, once a net exporter of energy
products, now produces 40% of its domestic oil consumption
and 60% of its gas needs, and the rates are decreasing each
year. While gas imports are based on trades at the
international gas boards, Romania imports nearly all gas from
Gazprom through two middleman agents. While Romania has
sought a greater role in European hydrocarbon distribution
for some time, the January Russia-Ukraine energy crisis has
refocused attention on the need for energy security and a
diversification of source. END SUMMARY.

Romania Reliant On Russian Gas Imports
--------------

2. (C) Romania imports 40% of its gas from Russia through
Ukraine, with the rest produced domestically. In 2005,
Romania imported some six billion cubic meters of natural gas
from Russia via Ukraine through two joint ventures with
Russian Gazprom: WIEE and Conef. WIEE is a 50/50 joint
venture between Gazprom and Wintershall, a subsidiary of the
German conglomerate BASF. WIEE imported some 4.5 billion
cubic meters of gas to Romania in 2005. In 2005, Minister of
Economy and Commerce Ioan-Codrut Seres signed an agreement
with Gazprom extending the gas supply deal until 2030. While
the terms of the contract are not public, sources inform the
Embassy that it is a flexible "take or pay" agreement by
which Winterschall may vary from the agreed upon import
amount by plus/minus 30 percent. Import totals are
determined annually and pricing is set by a negotiated
formulae. The current price of imported gas is $280 per 1000
cubic meters. Several public figures, including President
Basescu, have criticized Minister Seres for extending the
contract at prices described as above Western Europe rates.


3. (C) The other importer, Conef, is part of Marco
International, a global resource trading company with
headquarters in New York. Conef imports on the terms
established by the Winterschall/Gazprom agreement. Aside
from Conef, Marco owns a large aluminum plant, Alro Slatina,
and other metals manufacturing facilities. While the
company's ownership structure is opaque, it is widely
believed that Russian steel and iron mogul Vitali Machitski
is the true proprietor. The volume of their gas supplies
reportedly amounts to 1.5 billion cubic meters of natural gas
per year.


4. (SBU) In order to better cope with natural gas shortages
and address winter-time price spikes, Romania plans to double
its underground storage capacity for natural gas to 6 billion
cubic meters in 2007.

Domestic Oil Production on the Decline
--------------

5. (SBU) According to the Romanian National Forecast
Commission, Romania's overall energy independence will
decrease to 64.8% in 2008. Romania's oil sector is less
regulated, with four major companies, Rompetrol, RAFO, Petrom
and Lukoil, importing and refining oil based on domestic
production and open trading on international boards. Several
smaller companies also participate in the market. Rompetrol,
controlled by Romanian businessman and political player Dinu
Patriciu, has experienced a six-month slippage in its market
capital as its owners face prosecution in Romanian courts.
RAFO Oil's activities are also exposed, as its owner, Ovidiu
Tender, faces penal charges as well. Petrom, owned by
Austrian OMV, is expanding its refining capacity to match its
aggressive growth strategy. Lukoil also operates a refinery
for its imported Russian crude.


6. (SBU) At the current exploitation rate, Romania's crude
oil reserves will be exhausted in 17 years unless new
deposits are found, according to the president of the
National Agency for Mineral Resource (ANRM). However, the
Agency believes that important oil reserves may exist at
previously unexploited depths of over 10,000 meters under the
ground. A relative few (425 to be exact) of Romania's 30,000
existing oil-derricks drill deeper than 4,000 meters. Only
17 drill deeper than 6,000 meters. The average depth is
between 800 and 2,500 meters. The Agency hopes that, through
investment in drilling depth, Romania could tap a further
40-80 million tons of hydrocarbons.

Political Pressure on Energy Prices
--------------

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7. (SBU) In a populist move following last year's jump in
at-the-pump prices, President Traian Basescu met with the
four major oil companies in October 2005 to urge lower
prices. Basescu asserted that Romanian prices should be
based on much lower extraction costs for Romanian oil, at
$12.49 per barrel, since domestic production covers 40% of
Romania's current consumption. The companies rejected
Basescu's request as an attempt to induce cartel behavior.
The President stated he was concerned about higher prices
hurting consumers and negatively effecting Romania's already
strained trade and current account balances.


8. (SBU) Domestic gas prices, conversely, are regulated by
the GOR, which is resisting EU pressure to reach market level
rates by accession. The GOR negotiated an arrangement by
which it must raise domestic prices by no less than $25 per
1000 cubic meters annually. The current domestic price is
$110 per 1000 cubic meters, versus the above-mentioned $280
for imports.

Romanian Fallout from Russia-Ukraine Gas Dispute
-------------- ---

9. (C) Romania experienced a 25 percent reduction in gas
supply over the New Year's weekend due to the row between
Russia and Ukraine. Following on the heels of the Russian
cut-off of electricity supply to Moldova, the crisis
refocused policy makers on the need for greater source
diversification to improve security of supply. On January
27, Minister of Foreign Affairs Mihai-Razvan Ungureanu
pointed to the crisis as a reason to move forward quickly on
the Nabucco gas pipeline project to provide Europe and
Romania improved supply options. Prime Minister Tariceanu
has likewise expressed support for Nabucco. Romania's draft
national security strategy also highlights energy security as
a national priority. According to the text of the draft,
Romania aims to reduce dependency upon supplies from
"unstable regions or from countries that use energy as a tool
for political pressures."


Scrambling to Diversify Energy Sources
--------------

10. (C) Romania has pursued an increased role in the European
energy distribution network for some time, most recently
through the Nabucco gas pipeline project and the Pan European
Oil Pipeline (PEOP). However, the emphasis on improving
Romania's energy options has increased in the wake of the
Russia-Ukraine dispute. Among the projects currently being
pursued are:

-- Pan-Arabic pipeline: Economy Minister Seres announced
that state-owned company Romgaz will participate in the
development of a gas trading house in Egypt alongside Turkish
and Egyptian companies, which would act as a natural gas
trader for resources in the African country. The new company
would build and operate the Pan-Arabic pipeline to link Egypt
with Turkey, connecting with the Nabucco pipeline and Europe.


- Qatari Gas Terminal: President Basescu announced plans to
build a liquefied gas terminal in Constanta in cooperation
with Qatar during his February visit to the Gulf state. The
Qatari Minister of Energy was in Bucharest March 9 and 10 to
continue discussions. While no details were announced, the
terminal would reportedly supply Romania, Bulgaria, Moldova,
Serbia - Montenegro, Croatia, Hungary, Austria, the Czech
Republic, and Slovakia, targeting a potential regional market
of 86 million people. The feasibility study will reportedly
commence in the near future. No details as to how Qatari gas
would reach Constanta have been announced.

COMMENT
--------------


11. (C) Romania's interest in pursuing projects such as the
Nabucco and PEOP pipelines has only heightened following the
start-of-year energy showdown between Russia and Ukraine.
Traditionally suspicious of Russian intent, Romania is
increasingly uncomfortable with its dependence on gas imports
from the country. The GOR realizes that true options will
take some time to materialize, but is now more aggressively
pursuing energy partnerships wih third countries. Romania
is clearly in an advatageous position geographically should
one or moe "southern corridor" energy projects emerge.
Puling together complex deals, however, has not alwas been
Romania's forte. We will need to continu to demonstrate our
interest and support for Romania playing an active role in
the diversification of energy supplies across Europe and the

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Black Sea region whenever we can. End Comment.


12. (U) AmEmbassy Bucharest's reporting telegrams are
available on the Bucharest SIPRNet website:
www.state.sgov.gov/p/eur/bucharest.
TAUBMAN