No shale gas in Eastern Europe, after all: implications of Chevron’s exit from Romania

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gas pipes in a courtyard in Bucharest (photo Matthieu Dalmasse)

gas pipes in a courtyard in Bucharest (photo Matthieu Dalmasse)

Chevron’s decision to give up on Romanian shale gas exploitation, after earlier having departed from Poland and Lithuania, marks the final departure from the US company’s Eastern European shale gas adventure. According to Anca Elena Mihalache, Senior Analyst with the Bucharest-based Energy Policy Group, Chevron’s exit makes it clear that there is little hope for successful shale gas development in Central and Eastern Europe. She hopes that policymakers will finally wake up to the necessity of taking action to develop conventional resources and improving the investment climate generally.

American Energy Company Chevron announced, on February 20, its decision to renounce shale gas exploration in Romania, in what was described by company representatives “a business decision” following evaluations of the Romanian project, which is at this point unable to compete with other more favorable investments in the company’s global portfolio.  Chevron made the decision after finalising exploratory drilling in 2014 in the Bârlad perimeter (Vaslui County, East Romania), as well as a 2-D geophysics study on two of its three Dobrogea region concessions. The US company had earlier given up on shale gas activities in Poland in January 2015 and in Lithuania in 2014.

In 2013, the United States Energy Information Administration estimated Romania’s shale gas potential at 51 tcf (1400 bcm) of technically recoverable shale gas (the third largest deposit behind France and Poland) and 0.3 billion barrels (BBL) of shale oil and condensate, with the figures raising high hopes both among investors and local officials and experts. However, the figures were derived from a theoretical model, based on a structural comparison between North American and European shale geology and were, thus, just a rough estimation. Yearly gas consumption in Romania is around 13 bcm, most of which comes from domestic supply. Russian gas imports have been steadily declining from a peak of 23% of overall demand in 2008, to 0% in April 2015, on account of an industry slowdown and some energy efficiency investments.

No proper information campaign to reassure the population on safety procedures was ever undertaken by either the company or the government

The news of Chevron’s exit did not come entirely as a surprise, and was somewhat expected after a statement last year by Prime Minister Victor Ponta during his presidential campaign, explicitly saying that there was no shale gas in Romania and all the fighting about it had been for nothing. Though at the time the statement could easily be interpreted as just a political message meant to take the contentious issue of shale gas off the campaign agenda, Ponta’s words now ring true – for all their disregard of Chevron’s own communication strategy.

Outright protests

Indeed, the story of shale gas in Romania has somewhat been that of a fight. Chevron has had to deal with public opposition and outright protests, including clashes with police; mis- and dis-information and lack of understanding among public and policymakers about the fracking procedure and its risks; overwhelming bureaucracy and a highly confusing legal procedure when it comes to unconventional gas drilling in the country, even though Romania never officially adopted a moratorium like in neighboring Bulgaria.

Romanian legislation does not differentiate between conventional and unconventional gas in terms of authorization procedures to be undertaken prior to operations. Instead, it grants the National Agency for Mineral Resources (ANRM) decision power over the schedule, technology and methods to be used in each drilling operation, on a case-by-case basis. Given the lack of comprehensive legislation which would take into account more than the few scenarios that the ANRM has grown accustomed to, micro-management procedures were used which stalled the process and left it vulnerable to ad hoc interpretations.

Operations were further delayed by the bad reputation that shale gas and fracking quickly gained in Romania. This was made worse by several factors. For one thing, shale gas was used as a political tool during the general elections of 2012, when some Social-Democrat candidates for Parliament promised to ban fracking should they be elected. However, it was precisely the Social-Democrat government of Victor Ponta that gave the green light for fracking just the next year, causing a lot of resentment and disappointment, even urging requests for Ponta’s resignation.

The main problem appears to be the lack of commercial volumes available for extraction with current technology, and in the current financial market

Another factor that played a role was a stalled gold-extraction project at Roşia Montană, in Romania’s Apuseni Mountains, by Canadian Company Gabriel Resources, which had been faced with environmental protests for years on account of the company’s intention to use cyanides. The project got a lot of publicity lately, although it has been dragging on for over a decade. No proper information campaign to reassure the population on safety procedures was ever undertaken by either the company or the government, and when the company finally started communicating with the public, it did so though an advertising campaign, talking about the benefits of gold extraction for the local community instead of addressing safety concerns. This was perceived by the public as misleading and ended up causing more harm than good to the project’s image.

No public national information campaign was undertaken in regard to shale gas or fracking either, though Chevron did eventually carry out a campaign. However, this was only after protests had already begun and only at a regional scale. The government chose to stay away from the issue altogether, while think-tanks trying to inform the public had only limited reach, and definitely not in the rural areas where Chevron was operating.

There was much speculation about the origin of the public protests and of the overall anti-shale gas campaign, whether they were local, or directed from the outside. Chevron encountered similar opposition in each of the Central and Eastern European (CEE) countries it operated in, which would lend credence to the view that protests were organized from the outside and were not just a product of domestic environmental activism (which is rudimentary in Romania anyway).

However that may be, what really matters is that neither the government nor the investor was sufficiently prepared to handle the public’s reaction, a weakness that both actors would do well to address if they ever want to take up shale gas exploration.

None of this is meant to suggest that public opposition was the main reason for Chevron to pull out of Romania, or earlier out of Poland and Lithuania, but it is likely to have played a role in the company’s cost/benefit calculations, especially in the current bearish market environment caused by the oil price slump.

Still hope

Though Chevron’s exit is not necessarily a verdict on the long-term potential of shale gas in the region, Romania’s included, it does prove right European shale gas sceptics, though not for the arguments they usually put forward: the pressures of population density, lack of water supply, issues of land ownership, etc. The main problem appears to be the lack of commercial volumes available for extraction with current technology, and in the current financial market.

gas pipes going to houses in Romania (photo Royston Rascals)

gas pipes going to houses in Romania (photo Royston Rascals)

Chevron in particular has had to cope globally with an increase in its failure rate in 2014, representing 30% of all drills last year, as opposed to just 18% in 2013, with profits also falling 30% year-on-year in the fourth quarter of 2014 to $3.47 billion, the lowest level of the past five years, because of the low oil prices. Overall 2014 net profits dipped 10.3% to $19.2 billion, with investments to be reduced 13% in 2015, after a mere 3.7% cut in 2014 from 2013 levels.

With Chevron´s decisions based on the company´s specific financial calculations and on the geology of the Central and East European countries where drilling was undertaken, there is still hope for European shale gas development, albeit not in this region, at least not in the short term, and certainly not at the US level. The United Kingdom is now the flag bearer of European shale gas, with Germany also considering legislation to allow commercial shale gas fracking at depths of over 3,000 meters.

The move might serve as a very welcomed wake-up call for the Romanian government. It will hopefully focus their attention and efforts on the Black Sea offshore projects, where considerable reserves have already been proven

As for Romania, Chevron will release the results of proceedings to the ANRM, which are to remain confidential, in accordance with Romanian legislation. The details of the company’s exit remain to be worked out, including the fate of the licenses that Chevron was granted. It remains to be seen whether other companies will be interested in investing, with no candidates in sight yet. Shale gas hopefuls have continued drilling, for instance, in Poland, even after Chevron’s exit, however, with disappointing results. In February, Polish oil company PKN Orlen and state-controlled oil and gas company PGNiG gave up one and four concessions, respectively, in their home country, citing technological and geological difficulties.

Wake-up call

So what is next for Romania? Certainly Chevron’s departure is no cause for celebration. Romania’s Vaslui County, where Chevron was drilling, and, for that matter, the country’s entire Eastern parts, are very poor, with little chance of economic growth in the foreseeable future. Chevron’s operations, therefore, would have been a real blessing, with the company already employing local staff at what were perceived as highly competitive salaries for the region. Chevron also temporarily revived local businesses by outsourcing many of its activities. Moreover, it employed domestic drilling companies, which not only made a profit, but also benefited from Chevron’s know-how. Chevron’s exit is also a loss for the country in general, since shale gas hopes had even managed to seriously put the idea of Romania becoming a regional gas hub on the political agenda.

However, the move might serve as a very welcome wake-up call for the Romanian government and politicians in general, who should now be able to better understand the conditions that international investments require (transparency, speedy resolution of problems, political stability, etc.). Moreover, it will hopefully focus their attention and efforts on the Black Sea offshore projects, where considerable reserves have already been proven, but where significant action is still necessary in order for them to become commercially viable: building the pipeline infrastructure to transport the gas into the national gas network and from there onwards to exporting points and deciding upon a reliable, profitable, yet commercially-attractive royalties system for oil and gas companies. If losing Chevron will cause decision-makers to focus more on what they can do to stimulate investments in the Black Sea, the entire Chevron experience will not have been in vain.

Editor’s Note

Anca Elena Mihalache is a Senior Analyst with the Energy Policy Group, a Romanian think-tank specializing in energy security. Prior to this she worked for three years as an Adviser in the Department for Strategic Affairs and International Security within the Romanian Presidential Administration, where she conducted research and analysis of political and economic issues, with focus on the European Union, the Wider Black Sea Region and Central Asia. This article was first published by Natural Gas Europe on 30 March 2015 and is republished here, in a slightly edited version, with kind permission from the publisher and author.


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