Musat & Asociatii has been among the first, if not the very first, law firm in Romania with a department of lawyers specializing in energy and natural resources. This has led to attracting an impressive client portfolio in the field and creating a landmark in specialized legal consulting.
In our discussion with Iulian Popescu – Deputy Managing Partner, he revealed the most important projects the team has been lately involved in, but also his views on the energy market evolution in Romania.
Dear Mr. Popescu, what is the business area of Musat & Asociatii law firm and to whom are the services provided by it addressed?
Iulian Popescu: Musat & Asociatii is a ‘full service’ law firm and we already have a tradition in being a single point of contact for our entire range of legal services necessary for business initiation, development and protection. Without being too theoretical about this, I believe that, given the training level and experience of our lawyers, as well as the openness we show towards the market, we address a very wide range of clients, from start-ups in various technological and innovation fields to multinational companies, traditional investment funds and institutional investors focused on certain large investment projects. In particular, our practice area with a focus on the energy market has been a traditional resource of our firm, focused on most market players. During the 30 years of existence we have assisted both private investors such as local, multinational or private companies as well as institutional actors such as banks, investment funds etc., in the process of privatization, liberalization and modernization of the energy market.
Our experience covers the entire spectrum of legal issues related to the commercialization, production, distribution, transmission and supply of energy, licensing, as well as trading of emission allowances and renewable energy. The practice is also focused towards the main utilities providers in the Romanian energy sector, in structuring complex transactions, as well as on issues generated by the continuous liberalization of the market, including the legal and functional unbundling of operations.
Our team of lawyers has also built an excellent reputation by providing legal assistance services in relation to a large number of projects in the oil and gas sector, as well as mining, which involved consulting granted both to the upstream and the downstream sectors, including on concession and licensing, exploration, drilling, storage, transmission, distribution, refining, pipeline construction, pumping stations and marketing.
What are the most important projects carried out in the field of energy and natural resources?
Iulian Popescu: Historically speaking, I don’t think I’m wrong to say that Musat & Asociatii has been among the first, if not the very first law firm in Romania with a department of lawyers specializing in energy and natural resources. This has unavoidably led to attracting an impressive client portfolio in the field and creating a landmark in specialized legal consulting.
The transactions in the field of energy and natural resources that record Musat & Asociatii storyline are notorious for those with genuine market knowledge, whilst the plethora of prizes won and distinctions granted to our teams of lawyers over the years are making, once again, proof of the firm’s standard of excellence in this field.
Amongst the projects in which our team has been lately involved, I can mention: (i) assisting an international leader in the field of energy infrastructure in connection with its participation in the selection procedure organized by the Romanian state for the construction and operation of an important hydropower plant; (ii) assisting a global player in the electricity and natural gas sector, in connection with the acquisition, development and construction in Romania of a large wind power plant; and (iii) assisting an international consortium, led by a multinational oil and gas company, on the construction of an important natural gas pipeline.
As a lawyer specializing in energy, how do you estimate the energy market and the business environment in Romania?
Iulian Popescu: Overall, I would say the business environment is characterized by stress, this being mainly due to the lack of legislative predictability, hence its instability; factors that have hindered businesses in making investment related decisions to their real potential. The effects of Ordinance 114 have been visible throughout the entire spectrum of the energy market and particularly in the evolution of prices.
Even if, compared to past years, the level of business attractiveness in the energy sector and the related market has downgraded, we are still frequently engaged by the traditional clients in the production, distribution and utility supply areas, as well as by new innovative companies and investment funds, to provide specialized legal assistance and representation services in energy projects of a smaller or larger scale, depending on presented opportunities.
In terms of such opportunities, they are quite different and remain considerably polarized depending on the market, respectively the electricity market, the oil and gas market, renewables market etc. For example, the O&G market, especially the upstream segment, has remained somewhat dormant over the past few years, being deeply influenced by the decrease of the oil price, and investments in mining have been insignificant, despite the considerable potential in the field of mineral resources, especially resources of salt, gold, silver, ferrous/non-ferrous metals, but also more exotic materials such as cobalt, sapropelic mud etc.
In the electricity sector, against the backdrop of a highly localized market, with a minimum international openness, the investment base is represented by the electricity distribution network, where works are aimed at refurbishing and improving the quality of the service, as well as works for expanding the networks. In a positive way, the future significant investments will focus on the area of smart metering and digitization systems, the only avenues able to streamline processes and create an operational model that responds to current needs.
In the context of important regulatory changes and unpredictability of legislation, how would you describe the attractiveness of the energy sector? Do you still see an interest from investors in Romania?
Iulian Popescu: Regarding the electricity market, the impossibility to store energy and the need for permanent balancing compels to reliance on viable transmission corridors, which are however poorly developed so far, and in absence of which international market exposure has been and remains restricted. Thus, although in recent years there haven’t been important electricity exchanges, the future tends to depend more and more on connections with neighbouring states for such electricity transfers (especially imports).
At the same time, amidst the reduction of production capacities and growing consumption, a deficit between production and consumption is expected to be created and amplified in the market, resulting in an increase in average electricity prices in the following 5 years. A reduction of capacities is predictable to a great extent due to reaching the end of the production life of coal and gas-fired power plants and the high operating costs (including those related to carbon emissions), whilst a recovery of production is uncertain until the commissioning of the two new units planned at Cernavoda nuclear power plant.
Added to this landscape is legislative instability, strongly highlighted this year by the apparition and later amendment of the infamous GEO 114. This state of affairs has led to increased imbalances and repositioning of several players in the field, regarding their future investments and even their presence on the Romanian market. Currently, international utilities suppliers, such as CEZ, E.On and Engie, assess the economic pertinence of their presence in Romania and a potential withdrawal of the largest private energy investor in Romania – ENEL – is in sight.
On the other hand, the exit of some players (in the context of increase in demand and prices) could make room for other investors, either international, regional or even domestic. The sector is thus currently quite active, boosted by the presence of strong state-owned companies, and investor interest is growing.
Musat & Asociatii Energy Law team is permanently connected to these trends, being involved together with our clients in the most important flows on the energy market. As such, we believe the market will witness in the following period possible significant changes, anticipating the apparition of new key investments in Romania and the adjoining regions, both from the EU and overseas investor area, regarding nuclear and renewable general capacities.
How is the development of investments in the Black Sea oil and gas sector seen from the position of a business lawyer?
Iulian Popescu: Black Sea oil and gas extraction has a phenomenal potential and must become a major focus in our energy strategy. The success of investments in this sector can actually reposition Romania on the strategic map of the area and it will also help replace the polluting electricity production based on coal and lignite, significantly contributing to the reduction of carbon emissions per energy unit.
We still need to take into account that offshore projects have a special risk profile, being affected by the lack of specific offshore infrastructures and involving high exploitation risks due to geological and technical uncertainties. The lifespan of projects is far greater than other extractive areas and consequently it is necessary to ensure and reconfirm legislative and fiscal stability.
Lately we have witnessed heated debates on the offshore legislation, a framework necessary to ensure adequate conditions for making investments in exploitation. Both the Romanian state and the interested investors have understood that to exploit natural gas discoveries, as well as to continue prospecting operations/exploration of new hydrocarbon resources, especially in the deep area, huge investments and an attractive and predictable investment and legal environment are necessary.
Despite some legislative gaps and a slow and often fluctuating pace of investment encouraging policymaking, the interest and dynamics of clients and other players focused on this area have increased lately.
This trend is dependent and will significantly be influenced by the new draft offshore law, which is aimed to improve the tax system and allow the direct sale of gas, thus trying to adapt legislation to the specifics of Black Sea projects.
In this context, the signals received indicate that the scale of investments will increase only if the new legislative framework manages to provide attractiveness and especially stability of the fiscal and royalty system, so that it offsets from an economic point of view the investors’ obstacles relating to the risks specific to offshore investments, the significant investment costs and the long duration of project implementation.
What do you think about the development of renewable energy capacities? Is there still interest?
Iulian Popescu: Certainly the subject of renewable energy is and will remain a hot potato, especially when the inventory of greenhouse gas emissions shows that, in Romania, approximately 70% of total GHG emissions are generated by the energy sector. Research shows that adoption of renewable sources, together with energy efficiency measures, is the most sustainable alternative to reduce such GHG emissions. Moreover, the current national strategy on climate change mentions the need to reduce these emissions by approximately 50% by 2050 compared to levels recorded in 1990, and Romania is one of the countries with great natural potential for the development of renewable energy sources.
Our clients in this area are interested in the effects of streamlining the new technological generations in wind and solar production and expect their costs to decrease in the future, in order to increase competitiveness in relation to conventional production sources. We stay behind them in supporting the implementation of PPA tenders for the large end-consumers and working towards reducing the administrative and technical requirements for network access.
We believe that wind and solar energy remains in the top of the production sources, given the evolution of efficiency and cost related to these technologies. Moreover, specialists expect the added value of such projects to increase in the next period. Unfortunately, recent years have brought a downturn for investors, the main factor being related to the multiple legislative changes that this sector has gone through and the reduction of state involvement in supporting investments.
However, the market expects the state to become active again, in order to help unlock the potential of production from renewable sources, thus accelerating transition to an energy system with a high share of RES and a better integration thereof in the National Energy System. Elements such as smart metering and network digitization, as well as efficient investments in the transmission network (including interconnections with the neighbouring countries) and the development of storage capacities are merely some of the possibilities of state intervention with beneficial effects for the development of the sector.
How do you think the actors of the domestic energy market can get involved in order to overcome obstacles and ensure a functional market?
Iulian Popescu: It has come to my attention that lately, players in the field have ‘closed ranks’ by organizing, somehow better and more vocal than in the past, around professional organizations, chambers of commerce and on the occasion of events dedicated to the industry. Improved and wide-scale dialogue and finding common solutions are probably the best ways to ensure a truly functional market. Dialogue should, in the next period, focus on the Energy Strategy of Romania 2019-2030, the Integrated National Energy and Climate Plan (NECP) 2021-2030, the Directive (EU) 2019/944, as well as on the conditions of Regulation (EU) 2019/943 on the internal market for electricity.
As a lawyer but also as a member of the board of the American Chamber of Commerce in Romania, I have supported and continue to support organizational efforts of industry actors to exchange opinions, ideas, concepts and to submit ‘position papers’ to the competent authorities in order to signal the possible political and economic slippages and to help the decision-makers to take into account the experience and the solutions of the business environment.
What are, in your opinion, the most important assets of Romania as regards its positioning on the regional energy market?
Iulian Popescu: I would mention here, first of all, the geostrategic position of Romania. An overused and possibly obsolete presence in public discourses, this genuine Romanian asset is mentioned more for laudatory purposes rather that to lead to an actual economic result. In other words, this ‘geostrategic’ position has turned from an undeniable advantage into a field of disputes for political pride and petty economic interests. I believe Romania’s policy must firmly aim at increasing the number of energy interconnections, the BRUA example being one of the steps to strengthen regional security and open up the Black Sea fields to the western market. I also deem important to use this positioning for the construction of network balancing and energy storage facilities that will serve the wider Carpathian and Balkan region and to enhance production from renewable sources. Such storage facilities, together with an opening of the energy market to the East, for example through the creation of an underwater interconnection, may altogether represent determining factors for enhancing the business environment in the energy sector and strengthening the strategic positioning of Romania in Europe.
A second asset, unfortunately also not sufficiently capitalised in my opinion, is the opening to the Black Sea, as well as the river access to the ‘mouths of the Danube’. Undoubtedly, a country with an opening to both sea and large navigable river should make better use of these assets. At the gaming table of the EU countries, Romania has finally understood that it must play its card concerning the Black Sea privileged position. Unfortunately, the long-term effects of the period when Romania was less experienced in the ‘card game’ will continue to take its toll on the lag in energy policy for the medium and long term. A policy of repositioning national interests, obviously, within the limits of the agreements to which Romania is a party, could change the balance in favour of our country and could open up the river/maritime energy production and transport potential.
A third asset is the newest find on the enormous potential (hundreds of billions of cubic meters of gas from offshore fields) of Black Sea gas exploitation. Using this asset is within our grasp, though for the success of this approach the Offshore Law must be improved. This can only be done by taking into account the voice of the investors and the specificity of the deep resources at the Black Sea. If we consider the Norwegian model in the North Sea a successful one, then we must find the way to adapt this model to our natural and national landscape.
How about the chapters in which Romania has weaknesses?
Iulian Popescu: The irony is that Romania’s biggest strengths seem to be the areas with the deepest deficit. In addition, with the risk of repeating what the entire market has continuously complained about, as a legal professional, I cannot help stressing once more the lack of legislative coherence and predictability.
Although most of the informed voices on the market have raised flags to authorities that the often and unpredictable legislative changes, made in many cases in a ‘hand-waving’ manner, without substantiation, have shattered the confidence of both local and international and institutional investors, it seems that we largely failed to learn from these mistakes.
Moreover, I notice that we are perpetuating a mistake which, to some extent, sooner or later, could lead to what, more recently, the press calls ‘new socialist capitalism’. This new current takes shape in the context of possible reversals of privatizations in the Romanian economy (the well-known privatizations made in the years 1990 – 2000), and I refer here mainly to the latest information in the industry according to which the giants CEZ and ENEL have publicly declared their interest in exiting the Romanian market, which, in conjunction with the intention of one of the largest state-owned companies in the energy field to purchase those operations, may lead to the idea of re-nationalization of the utility companies. Without commenting on the opportunity of such re-nationalizations, with their particular advantages and disadvantages, I cannot help, but emphasize, that they are, inter alia, the consequence of a very volatile and effervescent legislative framework which, at first, seems to be at odds with the desire for stability of investors, from all fields.
What would you change, if you could, on the Romanian energy market in terms of development strategy, investments, legislation?
Iulian Popescu: I would change our internal perception from that of a defeated to that of a victor, enhancing the future of our international positioning and potential of the Romanian resources. It seems abstract, but the future means energy in flow, digitized, broadly interconnected, stable and predictable, and especially with zero carbon emissions. Such future can be built from now on, gradually and in a balanced manner, through a subtle, modern and economically-strategically based legal framework to encourage the use of best practices and technologies for the retrofitting of energy production, to encourage domestic consumption under conditions of energy efficiency and, last but not least, to encourage and facilitate the net export of energy to neighbouring countries.