Higher taxation of gas, necessary, but without the deepening of poverty

by Dumitru Chisalita

The higher taxation of gas, a historical correction, shouldn’t limit exclusively to satisfying the current generation, but should also allow the future generations to benefit from gas discovered more than a century ago. At the same time, it is necessary to stop the action through which the higher taxation of gas is only a tool to get more money from people’s pockets. These days there are heated discussions on a draft law on the approval of Government Emergency Ordinance no. 25/2017 amending the content of the annex to Government Ordinance no. 7/2013 on the establishment of the tax on windfall gains obtained as a result of price deregulation in the gas sector. I searched without success this draft law to be able to express my opinion pertinently. I was surprised to notice that it does not exist in the public space, proving the secrecy around this draft for a law with public nature. As someone reported, you can obtain secret protocols faster than this draft law! Managing in the end to read this draft law, I was able to notice that its intention was as correct as possible. Thus, soon we will celebrate 110 years since the discovery of natural gas on the current territory of Romania. The foundations of the gas industry have been laid more than a century ago, and the peak activity for the development of this industry took place in 1960-1980. Thus, we are today in the situation of benefiting from the work and investments of our parents and grandparents, ripping the benefit brought by these generations. This situation determines a difference between the production cost of “historic” gas and the selling price of gas on the wholesale market in the recent period. Thus, in my opinion, the citizens of Romania should absolutely correctly be the ones to benefit first from this difference between the price of gas established on the market after gas market liberalization (2012) and the production cost, for “historic” gas. But, at the same time, the future generations should also benefit from this capital achieved by our predecessors. From this point of view, the draft law has shortcomings. My opinion is that the current draft makes a historical correction, but it is limited only to satisfying the present generation, through this higher taxation of gas.

The higher taxation of gas can be accepted as a historical correction, but it shouldn’t limit to satisfying the current generations, but the future generations as well.

Another important element of this draft law is the diversion of the purpose underlying GEO 7/2013, i.e. the creation of a fund for vulnerable consumers. Although the concept of vulnerable consumer has been defined by law for 6 years, although we have had for 5 years a legislation for the establishment of a financial basis for reducing energy poverty, although the overcharge base has increased in the recent years, although we are in the phase of legislating new overcharges, although the number of vulnerable consumers has increased substantially over the past few years etc., we still lack the interest of solving this important problem of vulnerable consumers. Another element introduced by this draft law is linking the higher taxation to the price on the Vienna exchange. It is a second signal this year, this time much stronger, of forcing an alignment of gas prices to the price on Vienna exchange. Adopting the decision for the Vienna exchange to be the exchange for trading Romanian gas is an option, but it must be assumed and presented specifically to the public and not be carried out in a non-transparent manner, as the facts prove: the price at which the royalty owed to the state is calculated is the price on Vienna exchange, collaboration between BRM and the Vienna exchange for the joint development of certain products, the draft law on the higher taxation depending on the reference price established on the Vienna exchange etc.

The option to align the Romanian gas market to the Vienna exchange must be assumed publicly, especially that the steps in this regard are visible.

But assuming this direction must be presented correctly with its pros and cons, as well as with the strengths and weaknesses it brings. The example of European countries that have joined an exchange from a different country is large enough to show that it is not a utopia. But this direction must eliminate permanently the antagonistic directions, included in a populist manner in various programs and strategies: Romania – Gas Hub, Romania – Energy Independence etc. What’s serious is that lies, misinformation, fake news etc. are used in this draft law to support it.

Thus:

• misinformation according to which the price of gas on the Vienna exchange is higher than the price in Romania is a serious lie by omission, in fact knowingly comparing the average price on the Vienna exchange with the intra-day market price, instead of comparing the average price on the wholesale market in Romania with the average price on the Vienna exchange.
  • In accordance with the Natural Gas Price Bulletin in Romania, Q3 2018 (https://romaniascout.ro/natural-gas-prices-quarterly-bulletin-vol-v-24-09-2018/), the average price of natural gas sold on the wholesale market in Romania through BRM in Q4 2018 – RON 80.67/MWh, and the price of gas on the Vienna exchange in Q4 2018 – RON 134.89/MWh.
  • Applying the elements from the draft law would determine a producer for these data to actually collect RON 80.67/MWh and pay to the state RON 79.70/MWh (taking into account the cost elements presented by the Oil and Gas Employers’ Federation http://e-nergia.ro/statul-creste-din-nou-taxele-pentru-petrom-si-romgaz-si-impozitul-suplimentar-pe-productia-de-gaz-se-plateste-la-pretul-de-la-viena/)
• the high production cost for marginal fields, which are in a large number in Romania, would determine the closure of these fields, with a major decrease in gas production in Romania and increased reliance on gas imports.
• the high degree of concentration on the gas market and the inelasticity of natural gas demand in Romania, as the history of the recent years proves it, determine the full transfer of any “costs” to the end-customer. This situation overlaps the authorities’ tendency to relate and align to the Vienna exchange, which can be interpreted even as an invitation to producers to align with the Vienna exchange, to be able to continue to operate. Thus, taking into account the previously presented prices, there is a possibility for the gas acquisition price to suffer after the approval of the draft law on higher taxation an increase by up to 30%.

Summarizing the effects on gas price increase, after the application of the new draft law on higher taxation of natural gas, but taking into account the price increase that should have taken place in October 2018, postponed for 1 April 2019, we can estimate that the price of gas will suffer an increase by up to 40%. What’s worrying in this form of the draft law is the price to be paid for gas by Romanians within 5-10 years.

Translation from Romanian by Romaniascout.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net