BLACK SEA BLOG: Romania's continuing gas soap opera

By bne IntelliNews September 14, 2009

Jiri Kominek in Prague -

For Sterling Resources, its license to develop substantial hydrocarbon reserves off the shores of Romania has pulled the Canadian-listed independent oil and gas explorer into the vortex of a heated political debate amongst the country's rival parties in the lead-up to the presidential elections, tentatively scheduled for November.

The politics are proving murkier than the deep waters of the Black Sea when it comes to determining who will ultimately seize the spoils of exploiting the estimated 70bn cubic metres of natural gas and 12 tonnes of crude situated in a 9,700-square-kilometre offshore zone that, until earlier this year, was the subject of a territorial dispute between Romania and Ukraine.

In 2004, Romania brought a case before the International Court of Justice (ICJ) in a dispute concerning the maritime borders between the two states - specifically, over a tiny "insular feature" known as Serpent Island and the surrounding territorial sea, which contains the significant oil and gas deposits. The ICJ deliberated on the dispute for years but finally reached a decision February 3, awarding four-fifths of the territory to Romania with the rest going to Ukraine.

The license to develop the oil and gas field in the waters off Serpent Island was fully held by Sterling Resources and this court decision made that license significantly more valuable. Then the murky politics of Romania intruded.

Deep-water probes

On July 20, Sterling rejected the findings of a parliamentary commission headed by Iulian Iancu of the Social Democratic Party (PSD), a member of the current ruling coalition. This commission has been set up to investigate the legitimacy of the license to explore the Black Sea region issued by the Romanian National Agency for Mineral Resources (ANRM) under the previous centre-right government headed by former prime minister Calin Popescu Tariceanu of the National Liberal Party (PNL). The Commission charged that the ANRM introduced changes to the original agreement with Sterling on exploration to also include exploitation without holding a tender. Experts say it is ridiculous to expect a company to spend its own money on exploration and then once they find something, to then issue a tender to determine who actually gets the spoils.

Jumping on the bandwagon is the current Romanian economy minister Adriean Videanu of the Democratic Liberal Party (PD-L), which leads the current coalition, who has also called for a review of Sterling's license.

Romanian political observers say that Videanu's stance stems from the fact he hails from the same party as President Traian Basescu, who has old political scores to settle with Tariceanu from previous years. However, Romanian and western energy experts, as well as sections of the media, contend privately that Iancu has for a long time been associated with the Romanian state-owned energy sector, including companies such as Romgaz, which could benefit if the current license arrangement is changed. Several members of the coalition have called for Romania to take a direct stake in Sterling's license through Romgaz.

However, experts note that Romgaz might not benefit even if the license agreement were to be changed, because the firm suffers from the same shortcoming as critics of the current arrangement level at Sterling - that it lacks the size and know-how to develop the project properly. "It is doubtful that Romgaz would be brought into the picture as a strategic partner since it too lacks the necessary personnel, funds and technology to tackle the project," says Romanian energy expert Catalin Dimofte of Osprey Partners.

While not a massive find so far, the oil and gas discoveries as they stand could cover Romania's natural gas needs for up to five years, and one year's worth of crude consumption with further discoveries on the horizon. The question is whether Sterling is up to the job of developing the project under the current arrangement.

A number of Romanian oil and gas sector experts have told bne that Sterling, though a competent outfit, is far too small with its limited core staff to take on a project of such scope and complexity. Although the current finds are situated on the continental shelf, they are nevertheless at considerable depths and approximately 40 km offshore, necessitating the construction of an undersea pipeline which is both costly and technologically demanding. "There is no way a company of the size of Sterling will be able to single-handedly undertake this task, despite the quality of the company and the quality of its current partners," says Osprey's Dimofte. "Sterling will need to engage a large global player that has the human resources, the ability to secure proper financing and bring to bear the required technological expertise to extract the gas from the sea bottom."

Sterling has already taken steps to assuage critics by bringing in other partners to help develop the Pelican XIII and Midia XV Blocks in the Black Sea in the form of Melrose Resources, which also holds a 32.5% stake in the project, along with Gas Plus International (15%) and Petro Ventures Europe (20%). Sterling controls the remaining 32.5%. "At this stage, we have all the resources and expertise we require to deliver the project and are not looking for additional partners in the license," Sterling Resources spokeswoman Ana-Maria Timis tells bne.

However, Timis says that this doesn't "preclude interested companies approaching us if they feel they can bring something to the project."

Informed local and western energy sources have told bne that a number of global players including E.On Ruhrgas, Total, Exxon Mobil, Lukoil and Wintershall are said to be interested in participating. E.On Romania wouldn't comment to bne, but the company's managing director Frank Hajdinjak confirmed to media in February that his firm has been engaged in talks with Sterling since late 2008.

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BLACK SEA BLOG: Romania's continuing gas soap opera

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