Black Sea holds muchneeded resource for Romania to secure its energy supply, increase revenues

By Nicoleta Banila

OMV Petrom is an integrated company, with activities in oil and gas production, refining, power generation, fuels distribution and gas and power supply, active in five countries – Romania, Serbia, Bulgaria, Moldova and Kazakhstan. With 4.1 billion euro revenue in 2018 OMV Petrom ranks third in the SEE TOP 100 ranking.

Christina Verchere, CEO of OMV Petrom

What are your expectations regarding profit and consolidated revenue growth in Romania for this year and what do you base your estimations on?

OMV Petrom’s results for the first half of 2019 showed strong delivery, despite difficult market conditions, with our net income amounting to almost 2 billion lei*, 53% higher compared to the same period of the previous year. We achieved these good results despite unfavourable market conditions, with the average Brent price decreasing 7% and refining margins down 44%. For the full year, we expect demand for oil products to be above the 2018 level, while demand for gas and power is expected to be broadly similar to 2018. We are forecasting $65/bbl for 2019, 4% lower than in 2018, and refining margins about 20% lower than in the previous year. We are closely monitoring developments of the fiscal and regulatory framework and how the market reacts to these changes.

What are your plans for the Upstream segment for this year in terms of new drilling campaigns and acquisitions or bids for exploration licences in Romania?

We are the largest oil and gas producer in SEE, with most of our Upstream activities being performed in Romania. In 2018, our oil and gas production amounted to over 58 million barrels oil equivalent. Our gas production covers approximately 40% of Romania’s demand, while our crude production, when refined, can ensure the supply for over 60 million car refuels. Over the last years, we have been ramping up our investments and projects. This year, we plan to drill around 100 new wells and sidetracks and to continue our workover activities at a high pace, of around 1,000 wells per year. This is considerably higher than 2016 for example, when we had less than 40 new wells drilled following the crude price crisis. We are committed to continue exploration in Romania and we expect exploration expenditures for 2019 to be around 0.4 billion lei. We recently obtained a five- year extension of the exploration period for our concession agreements in Romania. We welcome the new licensing round recently announced the by Romanian authorities. Through our efforts and investments, we actively contribute to the security of energy supply for Romania and other countries in the region.

How do you plan to further develop the Downstream sector in terms of new investment in refineries and retail chain?

OMV Petrom operates the Petrobrazi refinery-one of the most important refineries in Romania, with a capacity to process 4.5 million tons of crude per year. The Petrobrazi refinery benefited from 1.6 billion euro in modernisation investments starting 2005. Following the 2018 turnaround, we are moving from two-year cycle between turnarounds to four-year cycles, which will enable higher utilisation rates. In the first half of 2019, we completed another important investment project in Petrobrazi. We started operating the new Polyfuels unit. This unit is based on an innovative technology allowing for the conversion of LPG into gasoline and diesel. It is the third of its kind in the world. The Polyfuels unit is a good example of our strategy to look into innovation. We also aim to improve customer experience. This year, we signed a memorandum of understanding with Auchan to extend our partnership through which we plan to open MyAuchan convenience stores in Petrom filling stations after a successful pilot phase in which 15 stores were opened.

How was OMV Petrom impacted by the emergency decree enforcing additional taxes for oil and energy companies issued by the government in late 2018 and then modified at the beginning of this year?

The emergency ordinance had two key impacts on energy – additional fiscal burdens, as well as the introduction of a fixed gas price after just two years of liberalised gas market in Romania. These sudden and unexpected regulatory changes caused us to slow down our planned ramp-up of investments to understand this new context. The regulation was amended this year, liberalising 60% of the market, which was an important step forward towards returning to a liberalised market. Under these regulations, the current market is struggling to function and they continue to inhibit investment, thus threatening domestic production and security of supplies. We believe that there is a need to protect the vulnerable customers and this can coexist with a liberalised market. We look forward to returning to a fully liberalised market.

How does the current legal framework in Romania affect OMV Petrom’s investment decisions? What can the authorities do to unlock a large-scale investment in Black Sea offshore, Neptun Deep included, to offset the impact of decline in production from maturing deposits?

The Black Sea opportunities create a much-needed resource for Romania to secure its energy supply and increase revenues, the more so that Romania’s national gas production is declining, imports and gas prices are higher while interconnectivity with European markets remains limited. The fundamental prerequisites for the scale of investment required for Neptun Deep – competitive terms, a predictable and stable investment climate and a liberalised gas market – still need to be put in place. We remain keen to see the Black Sea developed, as it is an opportunity for OMV Petrom, and also for Romania.