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Does it take $200 million out of consumers' pockets to implement European Directives?

Does it take $200 million out of consumers' pockets to implement European Directives?

 Comments of InfoMarket Agency

There are some changes planned in Moldavian legislation which will force importers to incur additional costs, it can greatly reduce the number of market operators and it will lead to an increase of fuel prices.

Moldova accepts the obligations intended for the EU countries-members under the pressure of international partners. Moldova has not grown to become a European country-member but the laws have often taken without paying attention to the specific needs of the domestic market. Moldova adapts its legislation to the EU Directives, however, there are not repealed the regulations the EU does not accept in the market economy.

There was passed a bill "Establishing and Maintaining the Minimum Level of Petroleum Products" for a public discussion at the end of last year. The document refers to the EU Directives dated as of 2009 year, it stipulates the country's fuel reserves during 90-days period of the import’s index or 61 days of consumption index.

Indeed, there is a need to provide the minimum availability of petroleum products to maintain the energy security of the country. Moldavian market of petroleum products is more similar to Japanese economic model, currently; Japan does not spend funds for the creation of storage tanks, preferring to work on demand. There are hard conditions of contract deliveries, precision and punctuality of work throughout the production chain, it can significantly reduce the cost of production which is very important for Japan, having in mind the high cost of the yen, this makes the export expensive and less competitive.

Moldavian oil products operators are also working on demand. The size of the country and Romanian refineries allows to work this way but there are some reservoirs in the market as well.

According to the report of the National Agency for Energy Regulation, the stocks of gasoline in the country amounted to 15.1 thousand tons and diesel fuel 29.5 thousand tons at the end of 2015. In fact, the average fuel consumption per day was 650.1 thousand liters of petrol and 1866.9 thousand liters of diesel fuel last year. Simple calculations show that there was enough gasoline in the country only for 22 days, diesel fuel for 15 days. The data for the first 9 months of 2016th shows an increase in petroleum products consumption in the country by 10.6% for gasoline and 3.2% for diesel fuel.

The bill provides a gradual increase (within three years) of petroleum reservoirs: 30-days average daily import or 20-days average daily gasoline consumption up to December 31st, 2020; 60 and 40 days until December 31st, 2021; 90 and 61 days respectively until December 31st, 2022.

If the European Directives effective from the beginning of 2017, then the average daily gasoline consumption in the country would be not less than 45 million liters of gasoline and 118 million liters of diesel fuel.

There are less than dozens of storage tanks in Moldova, the volume of which varies from 4 to 10 million liters. The total capacity of the oil storage tanks is estimated by experts around 80 million liters. However, many oil depots were built during the Soviet era and they are no longer functional. There are additional fuel storages at gas stations, those are more than 700 tanks. It is estimated an average capacity of one gas station which is 15 thousand liters of fuel; the total number of all gas stations in the country give another 10-12 million liters of fuel reserves (the data is approximate, because the exact calculations have never been done, the real situation can be found only after a "Census").

Meaning, it will be necessary to build new tanks to store additional 60-80 million liters in order to meet the requirements of the bill. It is a huge investment, it will be included in the cost of fuel and ultimately fall on the shoulders of consumers. The storage facilities should be built within 3 to 5 years.

At the same time, it’s not a secret anymore that the maximum retail prices of petroleum products set by the National Agency for Energy Regulation every two weeks, since the middle of last year, and profitability of the operators is minimized to the limit at the petroleum market. How can importers allocate money for the construction and modernization of new storage tanks within strict budgetary conditions? Will ANRE take into consideration the expenses? The project involves tens of millions of dollars.

"LUKOIL-Moldova" company has announced the commissioning of gas terminal reconstruction in Socoleni two years ago, the cost amounted to $2.5 million. Based on this, it can be assumed that the investments in new oil storages across the country will be at least $40-50 million.

The bill has another aspect: a company which will not meet the requirements for the storage of particular volume of fuel could be deprived of the license. None of the operators will store more fuel than it is required by the law, therefore every importer will have to bear costs associated with new petroleum storages. Do the storages or leave the market!

Few people remember the late 1990s, there was a similar experience in Moldova; the state has forced importers of petroleum products to have the storages in the amount not less than 10 million liters. This led to the "sterilization" of the market, only four importers met the requirements, those were "Arch-Petrol", "LUKOIL", "Valiexchimp" and "Tirex-Petrol". The requirements have been canceled after two years as the market was in need of liberalization to avoid the threat of cartel collusion.

What’s next? The most prepared operators to comply with the requirements are 3 to 5 large companies, they have their own large petroleum storages. The rest of the 28 licensed operators will be required to get new storages. Thus, importers of petroleum products, if the bill is passed in its current form, will have to spend millions of dollars to build new storages. We are talking about $150 million liters of fuel amount "freezing" (petrol and diesel) for the sake of ensuring the energy security of the country in accordance with the European Union Directives.

The market is actively rumored that this law was adopted under the needs of specific businesses. Some people really want to enter the market of petroleum products to be engaged in the import and "collect the exaction" from the incumbent operators, fuel is like bread, it will always be in demand. Having some free funds resources, you can build a tank farm and offer storage services to those operators who will not be able to comply with the requirements of the legislation. The return of the "investments" will take place at the expense of the incumbent operators, because, if this is true, then such "investors" will qualify for a substantial share of the market and will be able to dictate prices. Will ANRE take into account these costs calculating the minimum price or not? Who knows…

On the other hand, the EU making a government to meet its requirements then usually offers something in return. For example, the state pays for fuel storages on commercial basis at the oil markets in other countries, some countries offer tax holidays, etc. The energy security of the state is shifted to the shoulders of local businessmen in our country or… Is it an opportunity for someone to create his own business?

If the bill is passed in its present terms in accordance with the European requirements, it will force importers to spend $200 million. It would be difficult to call these costs - investments, because it will not bring a profit - on the contrary, it will increase fuel costs. The number of operators can be reduced at the market and the expenses incurred will be placed on consumers, the fuel price in the Republic of Moldova will fit European standards - 1.5 euro per liter of gasoline. Can it be said that the bill will raise the standards of living in the country and it will not lead to higher prices?! // 23.01.2017 - InfoMarket.