Although the authorities have been talking since last year about changing royalties and even about setting different values for offshore production and for onshore production, the CEO of Petrom says so far she has not seen any concrete proposal for a new taxation of mineral resources.
“We have not seen a strategy or a proposal for taxation of mineral resources. We are waiting to see the strategy,” Mariana Gheorghe said.
Currently royalties for oil companies, not just for Petrom, are between 3.5% and 13.5% of the value of production. At the time of Petrom’s privatization, one of the requirements of majority shareholder OMV was for these provisions to be kept in place for ten years.
Next year Romania should have a new royalty system, but despite the many political statements in this regard, Mariana Gheorghe says she has received no concrete proposal from the Romanian state so far.
Negotiations on the new royalties come as the Black Sea is starting to confirm its deepwater hydrocarbon potential, while already 16% of Petrom’s annual production is extracted through offshore operations conducted in less deep waters.
After Petrom and ExxonMobil dug their first well, Domino-1, the two companies announced they had found a natural gas accumulation of between 42 and 84 billion cubic meters of gas in the Neptun block of the Black Sea. This means resources worth around $20 billion, which could cover Romania’s four-year consumption needs.
The two companies will start a new drilling campaign either at the end of this year or at the beginning of next year in order to get a better idea of what lies deep in the Black Sea.
Romania has priority, but…
Apart from this, the two companies have already started talks with Transgaz, the national gas transmission company, in order to test the capacity of the national system to take over potential amounts of gas released from the Black Sea.
“We are already in talks with Transgaz to see the capacity of the national transmission grid to take over amounts from the Black Sea. The Romanian market is the closest one and our interest is to sell to the closest market, but can anyone say what demand will be in Romania that year?” says Petrom’s CEO.
Production on the Neptun block, if the discovery proves attractive from a commercial point of view, could start as late as at the beginning of the next decade.
In the first half of this year consumption of gas in Romania declined 8%, with local demand being covered almost entirely from internal production. This is already the second year of a decline in gas consumption in Romania, after demand fell by 4% in 2012 against 2011.
The Black Sea is not the only source that could contribute to the release of gas reserves, with US Chevron starting shale gas exploration in the Moldavia region (NE Romania).
“We’ll have to see what we can do with Black Sea gas. See the level of demand and what the transport logistics will be. Our priority is the closest market, i.e. Romania,” says Mariana Gheorghe.
Changes on the market
The reduction of gas consumption is not specific only to the local market, with all of Europe experiencing this trend.
The problematic fact is that many players, including OMV, based their growth strategy on a rise in gas consumption, especially thanks to the use of gas in energy production. The premise of these expectations was that coal, which has a major environmental impact, would be replaced with natural gas.
But with the revolution of shale gas in the US, many of Americans’ power stations that used to run on coal shifted to gas. The amounts of coal released ended up in Europe, at low prices, which made production of gas-based energy unprofitable.
A relevant example is one from the beginning of March, when E.ON, the largest German utilities group, announced it could close down a gas-fired thermal power station in which it had invested EUR400 million after only three years of functioning because it was losing too much money, while operating coal-fired plants was more profitable. On top of this comes the decline of energy prices and of demand.
In the case of Petrom, the timing of this change is very bad. The company finalized a EUR530 million investment last year in a new gas-fired plant with a capacity of 860 MW, larger than one nuclear reactor of Romania’s power plant in Cernavoda. In the first half of the year, the price of spot energy fell to 140 lei per MWh, 36% lower than in the first half of last year.
“We could not have imagined this price a year ago,” said Cristian Secosan, a member of Petrom’s directorate, in charge of gas and energy activity, at the conference where Petrom presented its half-year results.
In fact, the energy and gas segment, the second most important one in the long-term strategy, until 2021, announced by Petrom, made an EBIT of RON105 million in the first half of the year, below that reported on the refining and marketing segment, of RON167 million.
“Our investment in energy is long-term. We are neither enthusiastic, nor are we depressed about some of our short-term results. We currently face major challenges, but we will do increasingly more on balancing and on network services. We are looking at these assets long term,” explains Petrom’s CEO.
About the refining and marketing segment (sale of oil products), Mariana Gheorghe says volatility is still there. Anyway if you want to make a profit, you have to invest and we have a EUR600 million budget for Petrobrazi [refinery]”
Despite Petrom closing down the Doljchim plant and the Arpechim refinery, selling non-core assets and laying off more than half of the 50,000 employees it had when the company was privatized, Mariana Gheorghe says there is still room for more efficiency both in Romania and on the external markets where Petrom operates.
Petrom reached a net profit of RON2.39 billion (EUR545 million) in the first half of the year, up 18% against the similar period of last year, with the surprise of the first six months of this year being the positive evolution on the refining and marketing segment (sale of oil products).
Petrom’s consolidated sales in the first half of this year fell 5% to RON11.5 billion (EUR2.6 billion) against the similar period of last year. The price of Petrom shares went up by around 2% last week after the announcement of financial results for the first half of the year, with the company’s capitalization amounting to RON25.5 billion (around EUR5.7 billion).
(English version by Daniela Stoican)