There is a long history of drilling for hydrocarbons in the Black Sea. After all, oil-rich Azerbaijan, and the Caspian region in general, was one of the first spots in the world to see mass-scale crude production. Yet one drilling campaign after another has brought poor results to the nations bordering the Black Sea: Turkey has failed to find any commercially viable deepwater field for more than 50 years (until its dubious 2020 discovery of a giant field), Russia has seemingly abandoned its Black Sea ambitions on the back of non-commercial discoveries, and Bulgaria is struggling to nudge its erstwhile hot prospects into the category of fields to be developed. For a long time, Romania was perceived as the most likely Black Sea country to kickstart hydrocarbon production from deepwater projects – shallow water projects have been around for a couple of decades already, albeit at low production rates. Romania was the only Black Sea country whose discoveries were openly discussed (in contrast to Bulgaria whose Han Asparukh prospect remains mired in ambiguities) by specialists and laymen alike. As much as transparency aids sustainable business, it has also backfired as Romania’s political class has added the prospect of a deepwater gas bonanza to its political armoury, sensing that it would be expedient to split the pie even before its baked.
Buoyed by the seeming plenitude of offshore discoveries, the Romanian parliament adopted the Offshore Law in November 2018. This piece of legislation has done a great deal of reputational damage to the country as it introduced a progressive windfall tax of up to 70% of additional income as well as an obligation to sell 50% of offshore gas output to the domestic market (with a full system of fines if firms are found to be not compliant). This was then further aggravated by Government Ordinance 114 in 2018 which capped gas prices sold to households, creating a situation in which companies wanted to leave the country. Devoid of a functional government structure, Romania has nevertheless managed to ease the conditions of the gas price cap, even if the Offshore Law remains unaltered, providing a fitting undertone to the past months’ developments.
First came speculation that ExxonMobil, the operator of Romania’s largest up-to-date discovery the Neptune Deep gas project, wants to quit Romania on the back of adverse regulatory conditions. This was during the spring of 2019 when the entire issue could have been settled to the mutual interest of both. Less than a year later, Exxon has now confirmed its intent to sell its stake, saying that it had already invested some $750 million and was wary of spending a further $3 billion. The Neptune Deep block straddles both the Bulgarian and Turkish maritime borders, comprising the Pelican South and Domino gas discoveries that total some 70 BCm. Tempted by the prospective hydrocarbon bounty (despite the government’s taxation plan), 3 companies have decided to bid for the Exxon stake.
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Of those 3 companies, one was the Polish national oil and gas company PGNiG, with a bit of reputation of following through with transactions that might be sub-commercial in the end. Yet even PGNiG has decided not to bid for the remaining license block, prompting the Romanian government to start conjuring up a domestic dream-team of OMV Petrom and Romgaz (the latter is partially owned by the state). Despite losing out on all international exposure and perhaps crucial financing, the state now seeks to fast-track a final investment decision on the project so that it is commissioned on time, i.e. before 2025. This is undoubtedly a long shot, as getting an FID has been problematic for 3 years already, so there are reasons to assume it will be even more troublesome with ExxonMobil gone.
The second nail in the coffin came when the second-largest player in Romania’s offshore, the Russian private oil firm LUKOIL, announced that it would leave the Black Sea country. LUKOIL has a 87.8% operating interest in the EX-30 Trident license block, just to the north of ExxonMobil’s XIX Neptune East block. LUKOIL drilled its Trinity-1X exploratory well late last year, only to discover sub-commercial deposits (interestingly, the Russian company has declared its drilling dry, whilst Romgaz claimed that the drilling was a “geological success”). The Neptune East block has already seen one discovery, in 2015 LUKOIL has spudded the Lira-1X well and accounting for its past two adjacent exploratory wells it tallied up reserves exceeding 30 BCm of natural gas. Thus, two main pillars of Romania’s offshore strategy have collapsed and the country is now entirely reliant on the financial and technological prowess of its domestic firms.
With developments like these, it is no surprise that Romania’s biggest stake in the Black Sea offshore game is the Midia gas development project that would see production from the offshore Ana and Doina fields supplied via a subsea pipeline to the shore. The 1 BCm/year capacity of the gas treatment plant demonstrates the project’s scope. Although it is reportedly able to produce 10% of the country’s gas requirements (in absolute terms it is not that much, at 1 BCm per year) once it reaches a production plateau, the output volumes will fall short of what Romania’s deepwater assets might have produced (the Neptune Deep block alone could produce 6-7 BCm, roughly two-thirds of current consumption). All things considered, the Romanian gas bonanza will not be happening any time soon – but the gas will still be there, biding its time.
By Viktor Katona for Oilprice.com
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Against this background, there is a persistent and growing scepticism about Turkey’s announcement on the 21st of August of the discovery of a sizeable natural gas field off the Turkish Black Sea coast. The discovery of some 320 billion cubic metres (bcm) was hailed as a game-changer.
There are four reasons to doubt the size and the potential of the Turkish Black Sea gas discovery. The first is the sheer size of the discovery. At 320 bcm, it is 4-8 times bigger than Romania’s Neptun deepwater offshore discovery at 42-84 bcm. ExxonMobil which is the operator of Neptun is aiming to sell its 50%-stake.
The second reason is that most of the Black Sea’s major projects (or projects which were perceived to become significant) have taken place with a consortium that would inevitably include oil majors with substantial deepwater offshore expertise. The Turkish energy company TRAO with not much known experience in deepwater exploration has spudded the well and assessed its reserves completely alone.
The third reason is that the discovery is a good story to tell to the Turkish people against a growing domestic discontent about the economic difficulties facing the country.
The fourth reason is that Turkey’s discovery euphoria is taking place against the background of almost half of Turkey’s long-term gas supply contracts running out in the upcoming year. In 2020 and 2021 a total of 24 bcm contracted capacity will expire (of this some 8 bcm per year will be Gazprom’s pipeline commitments vis-à-vis Turkish buyers) and the Turkish side would now be in a position to use its assumed 2023 startup of production from the new discovered gas field to bargain better import pricing terms for its future supplies.
I hasten to add that President Erdogan wouldn’t have rushed to announce a major discovery if nothing was actually discovered. The scepticism revolves around its size and potential and whether it is a game-changer or not.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London