OMV Petrom: Volatile tax en­vi­ron­ment, low de­mand af­fect busi­ness

Top 100 See - - Top 100 Companies - By Doinita Do­lapchieva

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 midJuly 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.

Mar­i­ana Ghe­o­rghe, CEO

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.

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