ROMANIA'S DRAFT ENERGY STRATEGY - A MIXED BAG

C O N F I D E N T I A L SECTION 01 OF 04 BUCHAREST 000655

SIPDIS

SIPDIS

STATE FOR EUR/SCE - MBRYZA; EUR/NCE - AJENSEN
STATE PASS USAID

E.O. 12958: DECL: 06/04/2017
TAGS: ECON ENRG EINV RO
SUBJECT: ROMANIA'S DRAFT ENERGY STRATEGY - A MIXED BAG

REF: A. 06 BUCHAREST 411


B. 06 BUCHAREST 1653

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

SUMMARY
--------------

1. (C) The Ministry of Economy and Finance released a draft
of the national energy strategy for public comment on May 18.
The draft strategy outlines the GOR's priorities in
developing its energy profile (e.g. nuclear, thermal, hydro,
renewable),privatizing remaining state-owned energy assets,
and participating in international energy projects. While
the strategy lays out a reasoned approach to increased energy
independence and proscribes certain positive policy changes,
particularly in the field of natural gas market regulation,
the bulk of the strategy leaves much to be desired, and in
some instances increases opportunities for corruption. Other
aspects represent short-sighted political overtures to labor
and other interest groups, such as calls to grant further
debt relief to wasteful state-owned power generators and
bundle inefficient thermal producers with low-cost hydro
plants. Such items may face scrutiny from European
Commission entities, including the Directorate General for
Competition. Government insiders indicate that there was
little inter-agency coordination of the document. Early
public reaction has been largely negative. Minister of
Economy and Finance Varujan Vosganian has pledged to meet
with stakeholders to "improve" the document. END SUMMARY.


2. (U) Like much of Europe, Romania faces continued depletion
of its domestic oil and gas reserves. In addition, a large
percentage of Romania,s current power infrastructure
requires capital investment for upgrades or replacement,
particularly in the coal-based production sector. Current
estimates are that gas reserves face depletion by 2040 and
oil reserves by 2070. Romania's draft energy strategy calls
for increased emphasis on nuclear and hydro power, increased
investment in renewable energy, and improved energy
efficiency. The draft envisions an increase in the national
share of nuclear to 15% and hydro to 30% in 2010. Romania
relies on Russia for all gas imports, which currently
approximate 40% of demand. Estimating that reliance on
imported gas will increase to 53% in 2010, the draft strategy
recognizes the need to diversify supply options, specifically
mentioning the Nabucco pipeline project.

INTERNATIONAL PRIORITIES
--------------

3. (U) Romania's draft national energy strategy identifies
several prominent international projects as national
priorities. Included among these are the Nabucco natural gas
pipeline and the Pan-European Oil Pipeline (PEOP). The
Nabucco pipeline would deliver Caspian Sea gas reserves to
Central Europe via Turkey, Bulgaria, Romania, Hungary and
Austria. PEOP would serve as a Bosporus bypass for Caspian
and Central Asian oil, running from the port of Constanta in
Romania to Trieste in Italy via Bulgaria, Hungary, Croatia
and Slovenia.


4. (C) The draft strategy also calls for completion of a
feasibility study for an LNG terminal on the Black Sea coast.
This project appears to be an extension of GOR discussions
with Qatar to provide Qatari gas to the regional market.
However, the project hinges on the ability of LNG tankers to
traverse the Bosporus, a scenario complicated by required
Turkish permission. Other projects include increased use of
LPG to level consumption spikes and completing a high
capacity electrical cable connection under the Black Sea to
Turkey.

APPROACH TO OIL AND GAS
--------------

5. (U) The draft national energy strategy calls for
application of more transparent market rules in the natural
gas sector. This process was begun in April 2007 with the
merger of the Natural Gas and the National Energy Regulatory
Authorities. In theory, the gas sector will be subject to
supervision and monitoring methods applied in the energy
market.


6. (U) However, the plan makes no mention of a price approach
to domestically produced natural gas, currently maintained at
well below import prices. The GOR has made prior commitments
to both the European Commission and the International
Monetary Fund to move to market-based pricing for domestic
gas. The lack of a specific timeframe is at odds with this
commitment.


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7. (U) In a positive move, the strategy calls for
transferring ownership of local oil and gas pipeline networks
to the operators, reversing a decision taken in 2001 that has
resulted in discontent among operators and their investors.

STRATEGIC ENERGY ASSETS TO REMAIN STATE-OWNED
--------------

8. (U) The draft strategy identifies certain state-owned
energy assets as strategic, and not subject to privatization.
These include Cernavoda nuclear power plant reactors one and
two (future reactors may be developed as part of a
public-private partnership) and hydro power plants on the
Danube (i.e. the Iron Gates complex) and two other major
rivers (the Olt and Lotru).


9. (C) The strategy also identifies state-owned natural gas
producer Romgaz as strategic. While similar companies in the
oil and gas sector such as Petrom/OMV have already been
privatized, the GOR is hesitant to fully relinquish control
over gas resources. Minister Vosganian envisions
transforming the company into a state-owned regional player
in the same mode as the Czech Republic's CEZ or a Gaz de
France. However, as a GOR-controlled company, Romgaz is
subject to political patronage positions, often resulting in
poor management decisions. Certain GOR officials have
expressed concerns over increased Russian presence on the
domestic energy market and Gazprom has already raised its
interest in acquiring the company.

PRIVATIZATION PROGRESSING AT A SNAIL'S PACE
--------------

10. (C) While certain assets will remain state-owned, the
draft energy strategy calls for privatizing major energy
assets, including the Turceni, Rovinari and Craiova
coal-fired thermal energy complexes, by the end of 2008.
These three complexes and others have been subject to
privatization discussions for several years now. European
Commission pre-accession reports repeatedly called for the
Romanian state to conclude the privatization process to allow
for much needed capital investments. The state has remained
hesitant to do so, in part due to the loss of cozy electrical
energy contracts at low rates for politically-connected
companies and for fear that private owners would drastically
reduce employment.


11. (C) Due to the heavy investments needed to bring the
plants up to European environmental standards, legitimate
international companies would be unlikely to pay more than a
symbolic price for the state-owned assets on offer. However,
in a touchy political environment, GOR officials worry that
they will expose themselves to accusations of giving away the
patrimony should the sales price be too low. This concern
has been at the heart of delays, and may result in either a
failed privatization process or privatizing to unhealthy
entities. However, in the absence of significant private
investment, the facilities could face closure for
non-compliance with European environmental standards.
Romania negotiated an extension on environmental standards to

2013.

DEBT FORGIVENESS OR INSOLVENCY?
--------------

12. (C) Another concern outlined in the draft strategy is
settlement of historic debts for the three energy complexes
and for the heavily indebted coal and gas-based power plant
operator Termoelectrica. In its plea to the EC, which must
approve such state aid, the GOR claims that the alternatives
for Termoelectrica are debt forgiveness or insolvency. While
debt forgiveness may be a necessary condition for
privatization, the GOR has yet to convincingly commit to this
approach. Debt forgiveness without privatization would
merely enable the cycle of continued inefficiencies and
re-accumulation of debt.

MINING-RELATED SOCIAL CONCERNS
--------------

13. (U) The Jiu Valley in southwestern Romania is the source
of coal for much of Romania's thermal production and a
politically sensitive region. The draft strategy
specifically addresses concerns that private investors would
import cheaper coal to the disadvantage of the inefficient
mining companies in the Jiu Valley, and suggests imposing a
requirement to source coal domestically. Past mine closures
have resulted in disruptive strikes, and even a miner's march
on Bucharest in 1999 that resulted in street violence. The
release of the draft energy strategy has already resulted in
strikes in all three facilities involving over 15,000
employees.

THE DEVIL IN THE DETAILS

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14. (C) Such political concerns have resulted in some
problematic suggestions. The draft strategy suggests
unnaturally bundling mining, thermal and hydro power plants
into the state-owned hydropower producer Hidroelectrica.
Such a move would result in hydropower subsidizing
inefficient mining and thermal power generation most of the
year. Mixing low-cost hydro and higher-cost thermal
production would also further decrease market transparency by
masking the actual cost of production in energy contracts and
obscuring inefficiencies in the thermal sector. The World
Bank and EC recommend relying on "natural consolidation" by
bringing facilities to market individually. Market operators
could purchase those facilities that fit most naturally into
their production basket based on regional and cost criteria.


15. (C) The draft strategy also identifies a need to secure
power supply to energy intensive industrial consumers. Many
such consumers already benefit from sweetheart arrangements.
The largest energy consumer in Romania, Russian-owned Alro
Aluminum, secretly concluded a market-distorting, exclusive
arrangement for low-cost hydropower until 2013. Western
investors in regional power companies have called for an end
to bilateral contracts concluded outside Romania's energy
exchange. The strategy's language on guaranteeing large
consumer's power supply appears to be a defense of the status
quo.

FUTURE INVESTMENTS IN NUCLEAR AND CLEAN COAL
--------------

16. (C) The draft strategy calls for increased underground
gas storage capacity through new sites in Northeast Romania
(Margineni) and in areas adjacent to the Nabucco project.
(Note: Gazprom expressed interest in the Margineni project,
but has balked at financing start up costs.) The state also
plans to construct two additional nuclear reactors at
Cernavoda, and has already sought letters of interest. Such
a move could potentially bring the share of nuclear-generated
power to 30%, further increasing Romania's energy
independence. Increased use of nuclear power would alleviate
pressure on Romania's dated coal-based power generation and
facilitate greater exports. However, the GOR has yet to
determine the method by which it would provide co-financing
and the terms of the public-private partnership. Several
domestic firms, including Russian-owned Alro Aluminum, have
expressed interest and are salivating at the idea of
dedicated cheap energy. The GOR also plans public-private
partnerships in a new clean coal-based power plant in Braila
and in the five power plants that supply power and heat to
Bucharest and its outskirts. Other areas generally
identified for investment include biofuel, wind power, and
small hydro facilities.

GARBAGE IN, GARBAGE OUT
--------------

17. (SBU) Initial response to the strategy has been critical,
and reflects the sequestered nature in which it was
developed. GOR contacts who should naturally have been
involved in the process were not. There has been little
consultation within the Ministry of Economy and Finance and
among other relevant Ministries, let alone with political
parties outside the governing coalition. A consultative
commission established by the Prime Minister met only once,
and was not involved at all in directing the project. Both
labor and business groups have voiced serious complaints and
the main opposition Social Democrat Party (PSD) has rejected
much of the plan. However, the Ministry has announced only a
brief comment period until May 25, well short of the 30-60
day requirement under Romanian law. Minister of Economy and
Finance Varujan Vosganian has pledged to meet with
stakeholders to discuss concerns.

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

18. (SBU) While containing many sound policy prescriptions,
Romania's draft national energy strategy remains a flawed
document, with political considerations playing a too central
role in its final formulation. Elements of the strategy
ignore market realities and pander to labor concerns in the
dying coal-mining districts. Other elements, such as
recommendations to bundle high- and low-cost energy
production and dedicate secure power to large consumers, are
non-transparent and open the door to corruption
opportunities. Such policies amount to continued subsidies
to Romania's energy-intensive dinosaur industries, the vast
majority of which are owned by local oligarchic interests.
Public reaction has been largely negative, necessitating
likely further revisions. The document is largely a product
of the governing National Liberal Party (PNL),raising
serious questions about its staying power should there be a

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change in government. If Romania wishes to play a role in
Europe's energy strategy formulation, as it attests, the
current draft strategy is not the best basis from which to
work.
TAUBMAN