ROMANIA: TRANSGAZ SUPPORTS NABUCCO BUT FINANCING

C O N F I D E N T I A L SECTION 01 OF 02 BUCHAREST 000784

SIPDIS

STATE FOR SE MORNINGSTAR, EEB/ESC DAS HENGEL, AND EUR/CE
ASCHEIBE

E.O. 12958: DECL: 11/23/2019
TAGS: ENRG ECON PGOV PREL RO
SUBJECT: ROMANIA: TRANSGAZ SUPPORTS NABUCCO BUT FINANCING
PROBLEMATIC

Classified By: DCM JERI GUTHRIE-CORN FOR REASONS 1.4 (B) AND (D).


1. (C) Summary. Financing the Nabucco pipeline project will
present significant challenges for state-owned natural gas
carrier Transgaz, according to Deputy Director General Liviu
Pintican. While the company remains supportive of the
project and is working toward its ultimate realization,
Transgaz is simply too small to come up with its 933 million
euro (1.397 billion USD) share without relying on
state-guaranteed loans. Furthermore, completion of the
Nabucco project will likely result in delayed maintenance to
Romania's existing natural gas network, 60 percent of which
has exceeded its recommended design life. Of more immediate
concern, Transgaz is actively working to link Romania's
natural gas grid with those in neighboring countries in an
ongoing effort to ensure no supply disruptions this winter.
End Summary.


2. (C) Majority (73.52 percent) state-owned natural gas
carrier Transgaz is the sole operator of Romania's natural
gas transmission system and the Romanian representative
company on the Nabucco project. While Transgaz took pains to
highlight its support for Nabucco in a meeting with EconOff,
Pintican was candid in laying out the hurdles remaining
before the project can be finalized. Chief among the hurdles
is the sheer magnitude of Transgaz's stake in the project
given the relatively small size of the company. For a firm
with revenue of only 1.176 billion RON (411 million USD) in
2008, raising nearly 1.4 billion USD from the commercial
capital markets would be impossible without state guarantees,
which the company plans to seek. Worryingly, Romania's IMF
agreement places a limit on the country's ability to extend
sovereign guarantees, meaning that Nabucco will have to
compete with other priority projects. Provided it can obtain
a sovereign guarantee and commercial credit, Transgaz is
reasonably confident of the project's economics, projecting
an internal rate of return on capital of 13 percent. This
projection assumes that the pipeline's capacity is fully
booked at the consortium's projected tariff rate. If
unexpectedly weak demand lowers this fee, Transgaz would have
difficulty servicing its debt and achieving a return on its
investment. Pintican confirmed that a final investment
decision would not be made until the end of 2010.


3. (SBU) Of particular concern to Pintican is the precarious
physical state of Romania's 800 mile network of pipelines.
Transgaz's high regular dividend payouts of fifty percent
have starved the company of funds needed to upgrade aging
pipes, 60 percent of which have exceeded their recommended
design life. While the grid can still be safely operated,
Pintican noted that the pressure on many of the lines has
been gradually reduced, with some operating at half of their
nominal design pressures. The looming need to invest
significant sums in the transmission network places
additional financial pressure on Transgaz to score a home-run
with Nabucco.


4. (SBU) On a positive note, Transgaz's efforts to link
Romania's transmission network with Hungary's are
progressing. Most of the needed pipeline has been laid on
both sides of the border, with only the final interconnection
still to be completed. According to Pintican, Hungarian law
requires an intergovernmental agreement for construction
along the border, something which has proven difficult to
coordinate in the fluid political situation playing out in
both countries. The pipeline is designed to accommodate
bi-directional flows, but Transgaz anticipates that gas will
typically flow from Hungary to Romania. The company is
exploring an interconnection with Bulgaria, but Pintican was
dismissive of a Moldovan proposal for an interconnection with
Romania. He sees a project with Moldova as a stalking horse
for Gazprom to gain access to Romanian gas, which it would
then re-export.


5. (C) Comment. While at least on paper Nabucco is a
commercial project, Transgaz's comments illustrate the degree
of ongoing political involvement which will be required to
bring the project to fruition. If the stars fail to properly
align and Transgaz fails to obtain both state loan guarantees
and a high rate of return from shippers, Romania's
participation (and the project itself) could be jeopardized.
While the political establishment continues to believe that
Nabucco is of the highest strategic importance for Romania,
2010 will be a year of hard financial choices and Romania
cannot have it all. Constrained by the IMF agreement and
without a growing economy and easy access to external credit,
the next Romanian government will have to choose which
strategic priorities to fund. Spending more than one billion

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USD on Nabucco may be a priority, but so is replacing the
soon-to-be-grounded MIG-21 fleet and reinvigorating Romania's
aging infrastructure. Using up Romania's limited ability to
issue sovereign guarantees for Nabucco will necessarily limit
what will be available for other investments and other
projects. End Comment.
GITENSTEIN