Energy 20 July 2023, 9:41am

Hungary could also receive gas from the Neptun Deep project in Romania

Major András

Hungary moved a step closer to reducing its dependence on Russian natural gas with Romanian gas from the Black Sea within a few years after OMV Petrom and Romgaz, who are leading the Neptun Deep project, announced they will invest up to €4 billion in the extraction phase of the project. Production is scheduled to start in 2027 in Neptun Deep, a project of strategic importance for Romania, and is expected to bring 8 billion cubic metres of natural gas per year to the surface for a decade. The inclusion of up to 1-2 billion cubic metres of Romanian gas per year could significantly contribute to the diversification of Hungarian import sources.

A story with twists and turns

OMV Petrom announced the final investment decision at the end of June, opening a new chapter for the Romanian energy sector, according to CEO Christina Verchere, as quoted by Euractiv. Neptun Deep is the largest natural gas project in Romanian Black Sea waters, with an estimated total extractable reserve of around 100 billion cubic metres. Once production starts, Romanian gas production will double and

the country will become the largest gas producer in the European Union, with the hope of becoming energy independent.

OMV Petrom and state gas producer Romgaz each have a 50% stake in the project, which will be operated by the former.

Despite the landmark final investment decision, the relationship between the foreign professional investor (the Austrian parent company owns more than 51% of OMV Petrom's shares) and the Romanian state is not without problems. Earlier this year, OMV Petrom lodged a complaint with the ICC International Court of Arbitration in Paris against the Romanian state and the local mining agency (the National Agency for Mineral Resources, ANRM) over the regulation of the sale of gas from the Black Sea. The claim, which OMV Petrom has not announced publicly or on the website of the Bucharest Stock Exchange, is also against a subsidiary of Romgaz, which jointly operates the Black Sea field with OMV Petrom and which the state gas producer bought from ExxonMobil after the US oil company decided to withdraw from the project in 2019 due to an unfavourable regulatory environment.

The law on offshore hydrocarbon extraction passed in 2018 set strict financial limits, including price and export restrictions on the gas to be extracted, which halted the development of the field and led one of the largest professional investors, ExxonMobil, to opt out. The Romanian government and parliament decided in spring 2022 to make regulatory changes to better reflect investor interests, largely in response to an energy crisis that has cast uncertainty over gas supply prospects.

The new law allows for the free sale of all gas produced,

whereas the previous version required half of the gas to be sold on the domestic market. However, under the new legislation, in the event of an energy crisis or market distortion, the government may decide to grant a greater role to domestic sources to secure supply.

Romania covers its annual consumption of around 12.5 billion cubic metres of natural gas from domestic production of 8-9 billion cubic metres, with the remainder coming from Russian imports - despite its large reserves. According to Romanian Foreign Minister Bogdan Aurescu, the exploitation of Romania's deep-sea gas resources in the Black Sea could be a game changer not only for the country but for the whole region.

Hungarian thread in the story

The project, which has had a turbulent history, and the

inclusion of the gas from it in the Hungarian supply, has been a long-standing hope of the Hungarian government.

In 2018, Prime Minister Viktor Orbán expected that

We will reach a point within moments to sign an agreement that will allow for the next 15 years the imports of over four billion cubic meters of gas from Romania.

The Prime Minister expected that this would end the era of the Russian gas monopoly in Hungary from 2021-22, but Romanian domestic political developments and the Romanian offshore law, which was partly designed to restrict gas exports, changed the plans.

Around 85% of Hungary's annual gas consumption of around 10 billion cubic metres is covered by imports, mainly from Russia. The Hungarian government (and Hungarian Electricity Works) signed the new 10+5-year long-term Russian gas contract in autumn 2021, which gives the option to modify or even reduce the purchased volume after ten years. The contract covers the purchase of 4.5 billion cubic metres of gas per year. Gazprom will deliver this volume to Hungary via two routes: 3.5 billion cubic metres from Serbia via the northern branch of the Turkish Stream and 1 billion cubic metres from Austria.

The Hungarian government has been negotiating the involvement of several new sources in recent years, but to date, only the Croatian LNG terminal has been the main source of 1.5 billion cubic metres per year of alternative supply. (The annual receiving capacity of the Krk terminal will jump from 2.9 billion cubic metres to 6.1 billion in 2025, but the extra capacity is not expected to be tendered until 2024, and capacity constraints currently hamper the increase in imports from this direction in the Croatian-Hungarian interconnector.) There is also talk of possible LNG imports from Poland, and of additional Azeri, Omani, Algerian and Turkmen sources, but no specific start dates for these are known at this stage - as well as for the more significant potential imports of Romanian gas.

In many cases,

the lack of infrastructure development in other countries is also an obstacle to the import of new resources,

and this is still the case for Romanian gas imports, but the necessary pipeline and interconnector developments have already started on the Romanian side. Indeed, the Hungarian side would like to see an even more significant expansion of the Romanian-Hungarian cross-border capacity. In Hungary, the technical conditions are essentially already in place.

According to the National Energy Strategy, Hungary's total gas consumption could fall from the current 10 billion cubic metres per year to nearly 8.7 billion cubic metres by 2030, and to below 6.3 billion cubic metres by 2040, but import exposure could remain high at 80% even under the revised strategic targets. In other words, the inclusion of up to 1-2 billion cubic metres of Romanian gas per year could contribute significantly to diversifying import sources.

The investment decision by OMV Petrom and Romgaz has also been heavily criticised by NGOs, who say it runs counter to Romania's and the EU's commitment to tackling the climate crisis and endangers the Black Sea's wildlife, and that the EU and its member states should focus on replacing fossil fuels with renewables. The project is backed by EU funding: the pipeline connecting the Neptun Deep gas field to the Romanian gas grid received a €150 million loan from the European Investment Bank in 2018, followed by a further €80 million from the EU's Modernisation Fund.