OMV Petrom: Volatile tax environment, low demand affect business

By Doinita Dolapchieva

With activities in exploration and production, gas and power, and refining and marketing, the OMV Petrom Group has proven oil and gas reserves of approximately 775 million barrels of oil equivalent in Romania and Kazakhstan, a maximum annual refining capacity of 4.2 million tonnes, a network of around 800 filling stations in Romania, Moldova, Bulgaria and Serbia, a 860 megawatt (MW) gas fired power plant and a 45 MW wind park. OMV Petrom was acquired by Austria’s OMV in 2004 in the largest privatisation deal Romania had seen up to that point. OMV owns 51% of the company.

Mariana Gheorghe, Chief Executive Officer of OMV Petrom

Mariana Gheorghe,
Chief Executive Officer of OMV Petrom

What are the key factors that influenced your financial performance in 2013 and how do you think they will affect your operations in 2014?

In 2013, in spite of better-than-expected economic growth in Romania, fuel consumption remained weak, with depressed demand in the gas and power sectors and an increased fiscal burden. Under these circumstances, OMV Petrom managed to deliver another strong financial performance, mainly as a result of the massive investments performed in the past nine years – adding up to 10 billion euro – across all business divisions and departments, which helped us streamline our business, reduce costs and position the company for future growth. The financial results were also supported by the international crude price environment, the main driver for the oil and gas industry, which remained above $100 per barrel and allowed us to generate the cash flow needed for our investment programme.

For 2014, we estimate the oil price to remain broadly stable compared to last year. Market demand in the gas and power sectors is anticipated to remain under pressure while the fuel market will be challenged by high international prices and the fuel excise increases which Romania enforced in January and April.

Another key factor that will affect our financial performance in 2014 is the taxation environment. Here we are talking about some measures introduced at the beginning of 2013 that are to be applied until the end of 2014 – a 0.5% tax on crude sales, 60% tax on additional revenues from gas price deregulation and – most importantly, the 1.5% tax applied to the gross value of constructions introduced on January 1, 2014. This tax has a direct negative impact on the operating costs in all segments as well as on the profitability of our investments, especially in exploration and production.

What are your investment plans for 2014?

For this year we have planned an ambitious investment programme of around 1.3 billion euro, and I can say that we are on track to deliver very good results on our strategy. In our exploration and production activity, where we will invest 85% of our investment budget, we made progress on four field redevelopment projects and further stabilised our oil and gas production with the help of new key onshore wells and the substantial investments performed in exploration and production over the past 10 years, adding up to some 7.0 billion euro. For offshore, our exploration efforts in the past few years paid off when we recently announced an oil discovery on Istria block, in the shallow water part of the Romanian Black Sea. We still think the shallow water part of the Black Sea has potential and this discovery confirms it. For the deep water sector of the Black Sea, on Neptun Block, together with our partners ExxonMobil, we resumed our activities in mid-July, with the drilling of the Domino-2. In the gas and power business, we anticipate further decrease of demand, which we will try to mitigate using our Brazi power plant’s flexibility to consolidate its position on the balancing and ancillary services market. In refining and marketing we delivered on our most important objective, the successful completion of the modernisation programme at our Petrobrazi refinery. The main target of the 600 million euro modernisation programme was the adjustment of the refinery’s capacity thus enabling it to efficiently process the entire crude production of OMV Petrom in Romania, which is 4.2 million tonnes per year.

What are your expectations regarding the drilling campaign at Neptun Deep offshore block?

In 2012, when we announced the Domino-1 discovery, we said that we need additional data and exploration drilling in order to assess the dimension and economic viability of the discovery. After the second 3D seismic on Neptun Deep block, performed in 2013, we were finally ready to resume drilling. In mid-July 2014, together with ExxonMobil, we announced the start of drilling at the Domino-2 well. We still have a long way to determine if the field is commercially developable, we need more data on the technical, commercial, regulatory and infrastructure aspects. We are, however, committed to significant investments for the exploration, development and production of offshore hydrocarbons.

What will be, in your opinion, the effect of the Russian-Ukrainian crisis on OMV Petrom’s business and on the energy sector in the region in general? Does it in any way influence your drilling plans in the Black Sea? 

We do not have any current activities in Ukraine or Russia, so there is no direct impact on our business. However, a possible gas crisis, like the ones in 2006 and 2009, might pose significant challenges to Eastern European countries. Fortunately, Romania covered with imports only around 15% of its natural gas needs in 2013 and has been further reducing this share in 2014. Still, it is in these situations that issues like energy security and energy independence become more and more important. We satisfy around 40% of Romania’s oil, gas and fuels demand and we are constantly striving for new discoveries, like the offshore oil discovery we have just announced in the shallow offshore or the Domino gas discovery in deep offshore, in order to maintain our contribution to Romania’s energy needs.

In the Black Sea, we have exploration and production activities only in the Romanian Black Sea, so there will be no impact on this sector. We are still interested in the Skifska exploration block offshore Crimea, but due to the circumstances in Ukraine, the project is currently on hold.

Petrom and Exxon have signed an agreement under which the natural gas produced from the Neptun block would be transported via the pipelines of Transgaz. How does the agreement signed by OMV with Gazprom on the development of the South Stream pipeline affect Petrom’s commitment?

We are not involved in the South Stream project. Together with ExxonMobil and Transgaz we have signed a cooperation agreement that provides the general framework for discussions on the expansion of the National Transportation System. The agreement relates to alignment on plans and schedules to achieve a timely and suitable connection between Neptun Deep and the National Transportation System. It is much too early to be talking about how the Neptun project could impact Romania in the longer-term – we do not know yet whether the project will prove to be commercially developable or not. Still, in case Neptun block’s commerciality is confirmed, the main destination for the potential gas would be the Romanian market.

What are the main challenges OMV Petrom is facing in the medium term?

I would say that our challenges come from four directions. Firstly, the structural changes of the global gas and energy market which will impact all parts of our business. Secondly, the context in which we operate and I would mention here the volatility of the fiscal and regulatory environment in Romania. We will continue our discussions with the Romanian authorities to achieve a long-term, stable and investment-friendly taxation and regulatory framework. This is crucial for our industry because we have a very long investment cycle of three to five years for onshore projects and ten to fifteen years for offshore. Thirdly, there is the depressed market for gas, electricity and fuels in Romania, our main market. We will try to mitigate this by optimising the gas value chain, among other measures. Furthermore, our portfolio is composed of mainly mature fields that exceeded their production life, with a natural decline of production around 10-12% per year. However, the investments we made paid off and in 2013 we managed, for the first time since the privatisation, not only to stabilise production, but to even increase it slightly. Going forward, to further stabilise production, we will continue to implement field redevelopment initiatives, which aim to increase the oil and gas recovery by using the latest technologies and we will explore deeper for hydrocarbons, both onshore and offshore.