OMV Petrom: Reaching the 12 billion Euro investment mark
This year, OMV Petrom will invest one billion Euro, even if its first-half result was deeply affected by the steep descend in oil prices, the company`s CFO Andreas Matje tells The Diplomat - Bucharest. The company's net profit dropped about 25 per cent in the first six months of 2015, and the Capex (Capital Expenditure) is expected to fall by 30 per cent this year.
By Alexandra Cioboata (Lopotaru) & Bogdan Tudorache
Nevertheless, OMV Petrom's investments will continue: since the privatization in 2005 and until 2014 the company has injected into Romanian activities about 11 billion Euro, and is poised to reach an overall 12 billion Euro mark by year's end.
The Diplomat - Bucharest: What was the impact of the drop in international oil prices on your activity and the local energy market?
Andreas Matje: Oil prices have fallen dramatically over the past year, with crude oil being traded today at less than half of the last year average price. The upstream business around the world is under pressure, within a prolonged low crude price environment; therefore, major companies announced cost-cutting measures, divestments and portfolio changes, streamlining of activities, re-phasing and deferral of projects, redundancies.
Also we moved quickly to respond to this challenging context by reducing our capital spending and costs, while delivering on our strategy. We maintained hydrocarbon production stability in the first six months of 2015 versus the first six months of 2014, however, we expect a drop of up to two per cent in production for the full year versus 2014, due to planned operations at key wells and CAPEX reduction. Nevertheless, despite the approximately 30 per cent CAPEX decrease estimated for this year, our project in the Neptun Deep block will continue as planned.
In addition to the prolonged crude price environment, in Romania we have to face additional challenges due to production specifics, such as mature fields, with an average natural decline rate of approximately ten per cent per year.
On this background, we aim for a stable, predictable, and investment-friendly regulatory and fiscal framework, which is a prerequisite for future investments.
The consumption trends in the markets for energy products have been very different in the first six months of 2015. According to our estimations the demand for fuels increased by 12 per cent, the demand for power increased by two per cent, while the demand for gas continued to be under pressure, with a seven per cent decrease over the same period last year.
Based on what we saw in the first six months, we can say that the gas and electricity markets are going through a number of structural changes. For the first time in many years, Romania's consumption could be fully covered by the domestic production, as the demand continued to decrease while the gas production remained stable.
On the electricity side, increased production from renewable energy puts serious pressure on the prices, which were lower than last year. This in turn impacted our electricity output, reflecting a significantly lower production from our Brazi power plant, in the context of negative spark spreads. Nevertheless, our Brazi plant did have a significant contribution to balancing the market, which proves we have a solid asset that can have a relevant contribution to Romania's security of power supply.
The Diplomat - Bucharest: Which were the main factors that caused the drop of petrol prices? How did they influence the local economy and OMV Petrom`s results?
Andreas Matje: It is fairly difficult to pinpoint the main factors that caused the drop in oil price. First, we are talking about oversupply, and this is linked to both the decision of OPEC to maintain a high level of crude production, despite lower crude prices and the shale revolution in the United States, which led to huge increases in US output over the past years. On the other hand, we are talking about a weak demand, driven by China, the largest consumer of crude and oil products, which had a steady decrease in oil consumption. Besides these factors, Iran will also probably enter the market with additional quantities once sanctions are lifted.
Lower crude prices are beneficial for the consumers and this was seen in the increase in demand for fuel products, not just in Romania but in the entire region where OMV Petrom operates, where we estimated an increase in demand for oil products of five per cent in the first six months of this year.
For us this is helpful in terms of Downstream business, but very challenging for the Upstream sector. Our results for the first six months saw a decrease in net profit of 25 per cent, mainly because of the lower crude price. In response, at the beginning of the year we moved swiftly and announced a number of measures to adapt to the new crude price context and optimize our costs.
We estimate that crude prices will continue to remain low this year, our estimates put the Brent crude price in the 50-60 USD/barrel interval, so across the entire organization we are looking at spending less while maintaining performance and we will continue to identify opportunities to improve our efficiency.
The Diplomat - Bucharest: How about the first half results as compared to the previous year's? What will be level of investments planned for 2015?
Andreas Matje: Our performance in the first six months of this year was negatively impacted by the low crude price environment, where we saw a 50 per cent decrease compared to the first semester of last year.
The Group Clean CCS [current cost of supply] EBIT [earnings before taxation and interest] decreased by 52 per cent to 1,251 million RON (around 281.7 million Euro), significantly impacted by the unfavorable crude price environment. On the positive side I would like to remark on the good development of our Downstream business, which has an increased contribution, due to the fact we were able to capitalize on our integrated business model. The favorable result in Downstream Oil is attributable to good refining margins combined with increased sales volumes.
Despite this challenging environment, we focused on ensuring sustainable and profitable business and implemented the measures described to reduce operating costs and increase the efficiency of our operations. This year we expect to invest around one billion Euro, of which 85 per cent will go to the Upstream segment, as we have done in the previous years.
For all our business segments we will pay close attention to financial discipline, with focus on cost efficiency and business optimization, in order to adapt to the international challenges in the industry.
The Diplomat - Bucharest: The company is going through a restructuring process in order to become more efficient. How has the process gone so far and how long will it last?
Andreas Matje: Starting with the privatization, back in 2005, the company embarked on an extremely ambitious restructuring and modernization plan, which was unique in South-Eastern Europe in terms of scope and magnitude. We probably achieved the most complex and successful transformation of a state-owned company; going from a traditional state-owned company - with specific challenges such as underinvestment, obsolete assets, inefficiency, bureaucracy and debts, just to mention a few - to a sustainable, high performance company, relevant indeed for Romania and the region.
There has been an enormous amount of change, to get the best out of our assets, align ourselves with best practices and industry trends and be leaders in the way that we develop our people. This ambitious process was supported by massive investments of more than 11 billion Euro during the period 2005-2014.
We are now in a much better position to face new challenges, now coming from outside the company, challenges in terms of crude price environment, rapid development of new technologies and competition. It's a continuous process of improving efficiency.
The Diplomat - Bucharest: What other business objectives and projects does OMV Petrom have for the coming years?
Andreas Matje: Our strategy aims to deliver value by being an integrated company. Having a refinery in Romania using the entire crude production is offering us a natural hedge against low crude prices.
However, as I have said, we started a prioritization of our investment projects in order to ensure value generation.
In Upstream, we announced that part of the projects will be re-engineered or delayed. At this moment, 14 of our field redevelopment projects in the development phase will continue this year and they will allow us to continue to access oil and gas reserves of 130 million boe (barrels of oil equivalent). This is roughly the equivalent of twice OMV Petrom's production from the year 2014.
Out of the 17 field redevelopment projects that were in appraisal phase last year, we decided to progress with only four of them, while the others will be re-engineered. Still, our flagship project in Upstream, the exploration drilling campaign of the Neptun block, in partnership with ExxonMobil, will continue as planned throughout this year to enable assessing the potential for commercial development.
On our Downstream segment, we will further capitalize on the successful completion of the Petrobrazi refinery modernization and we will continue economic efficiency improvements, while the fuel terminal network optimization program will progress with the reconstruction works at the Cluj terminal, expected to be finalized by the end of 2015.
For the gas business we expect to maintain our position as a key supplier for large industrial gas consumers, while pursuing opportunities in all gas sales channels, including centralized markets. At the same time, we look to increase the role of the Brazi power plant within our gas value chain, a significant part of the power production capacity being sold forward for Q3-Q4 2015.
The Diplomat - Bucharest: Based on your expertise, how ready is Romania for gas liberalization and what are the main effects in long term?
Andreas Matje: OMV Petrom has always promoted free market principles and therefore we welcome the authorities' efforts to ensure complete deregulation of the gas market for the non-household sector as of the beginning of 2015 and the new commitment from authorities to adjust household gas prices to the market levels by 2021. A fully-liberalized gas market would allow all players on the gas market to improve their competitiveness.
In addition to price liberalization, other steps need to be taken towards the development of a modern gas market in Romania. Particularly, the development of gas interconnectors - a key element for the security of supply - and the establishment of a predictable fiscal and regulatory framework should be ensured. This way, Romania will be able to unlock its energy potential, triggering higher investments in the gas business with additional positive effects in the economy, including job creation and increased revenues to the state budget.