European statistics show that demand for oil products went down by 10% in the same period, and many companies blamed the difficult market for their losses. On the other hand, companies that make significant profits and international giants like SOCAR and Gazprom have medium-term expansion plans worth EUR200 million. How can this be?
“The interest of companies like SOCAR and Gazprom in the local market shows their perception of the future potential of Romania’s fuel market,” says Andrei Cretu, management consulting service manager with PricewaterhouseCoopers Romania.
Eurostat data show a 10% decline in demand for oil products in Romania in 2007-2011, and another 3% in 2012, according to the data provided by the companies in this business. The market does hold medium-term opportunities, though.
“Car penetration in Romania will increase in the coming period, considering it is now about half of the European average and this will unavoidably lead an increase in fuel consumption,” believes Alexandra Negut, assistant manager management consulting services with PwC Romania.
Back in 2010, there were 201 cars per one thousand people, while the European average was 398 cars. A rebound of the car market does not appear to be anywhere near, with decline in sales of new cars close to 30% in the first half.
Consumer preference is shifting towards gas stations that sell other services and products besides fuel, and since 15% of the 2,000 gas stations active in Romania are held by private investors with little financial strength, the market provides opportunities for future consolidation.
An early example of such consolidation is the entry of Azerbaijan’s SOCAR, which started operations in Romania by acquiring a local business, Romtranspetrol. Russia’s Gazprom, which is now operating nine stations in this country, started out by buying independent filling stations.
The results of the already established players vary from one company to another if looking exclusively at their divisions selling oil products alone.
MOL Romania, which accounts for 13% of the market with its 138 gas stations, posted EUR17 million net profit last year, after the EUR3 million loss of 2011. The loss was due to a fine from the Competition Council in a case penalizing all the major oil companies in Romania.
“MOL Romania has always been an efficiency oriented company,” says Kinga Daradics, chief executive officer and country chairman MOL Romania. The efficiency showed in higher sales volumes, filling station network expansion and raise of pump prices, like the other operators on the market did.
OMV Petrom Marketing, the retail unit of the largest local company OMV Petrom (SNP.RO), ended the year with about EUR57 million in net profit, almost double the EUR29.5 million of 2011. On the other hand, Rompetrol Downstream, posted EUR33.6 million loss last year, while Lukoil Romania posted EUR50 million loss in 2011. Why the different results of these companies in the same business?
“An instrument companies often use is transfer prices,” said Istvan Kocsolade, manager with Accenture’s consultancy division. If a company is part of an integrated oil group, where products move via transfer pricing mechanisms, profits stay in the most convenient area for the company financially or tax-wise.
Kocsolade has one more explanation that has to do with the pre-crisis behavior of the oil companies.
Some companies optimized their gas station chains starting 2005 by closing unprofitable stations, by making investments in the stations they had and by exchanges with other players for a better coverage and cost optimization purposes.
Despite the dwindling oil product demand, imports have been increasing and now account for a quarter of domestic consumption or EUR1.2 billion, 2.5 times more than in 2007. Romania closed seven refineries in 2007-2012, the highest number of such closures in the whole Europe.
While Romania lost its refineries, the last in this line of shutdowns being Petrom’s’ Arpechim in 2011, other countries are investing in oil processing facilities. One such example is the EUR5 billion investment SOCAR wants to build in Turkey.
“The refining industry is very capital intensive,” says Accenture’s Kocsolade. Fixed costs are very high and a way to cut them is to produce large volumes. This is the trend in the refining business.
While big refineries in Romania have a capacity of 2.5 million to 4.5 million tons a year, the recently built facilities are ten times larger, are located on the seashore for easy supplying and are more profitable, he added.
Romania’s only refinery that underwent expansion is Petromidia, which is also the only such facility on the Black Sea coast. It is now owned by KazMunayGas. Petrom closed Arpechim in 2011 saying it was too small and landlocked and dropped plans to expand Petrobrazi.
PwC officials have a few explanations as to why they believe the chances of the local and European refining industry of attracting investment in the future are slim.
Their explanations are the dwindling fuel consumption, the decline in production in the North Sea, which forces European refineries to import fuel from far away, and the refining industry infrastructure. More than 50% of refineries are equipped to produce gas, even though diesel consumption is rising fast and now stands at 75% of fuel consumption in Europe.
On top of this come the significant costs needed to upgrade the existing production facilities to meet environmental safety requirements and the changes in demand from the market. The high level of such costs makes producers choose to close refineries in most cases instead of upgrading them, PwC officials say.
(English version by Loredana Fratila-Cristescu)