Romania Petrochemicals Report Q3 2008

The future of the Romanian petrochemical sector has become uncertain following rumors about alleged threats to re-nationalise Petrom amid controversy over the level of tax the company is paying. The uncertainty has led to a downward revision in BMI’s petrochemicals business environment score to 51.9 points out of 100, 1.3 points down over the previous quarter. Nevertheless, in its latest Romania Petrochemicals Report, BMI states its belief that the country’s score will steadily improve with the expansion of petrochemicals production capacity and improvements to the overall regulatory environment, which should support a positive business environment. Petrom’s prospects have changed for the better with the advance in privatisation and the arrival of strategic investor/partner OMV. On its own, the company looked vulnerable. Backed by OMV, which could eventually merge its entire Romanian portfolio into Petrom, the future looks considerably brighter.

The company’s strategic objectives for 2010 involve a significant increase of investments of up to EUR1.5bn per year. It maintains that, as an integrated company, high oil prices have both positive as well as negative effects and will not affect its overall performance over the next three years. In terms of its refining business, Petrom is focused on increasing efficiency, expanding refining capacity of Petrobrazi to 6mn tpa from 4.5 mn tonnes per annum, improve product yield and significantly reduce own crude consumption. The modernisation of refining activities will be completed in 2011 and the full benefits are expected in 2012. In Q108, Petrom’s financial results were positive, indicating the positive effect privatisation has had on the company’s performance. EBIT was up 161% year-on-year (y-o-y) to RON1.03bn (US$450mn), net income was up 156% y-o-y to RON977mn (US$426mn) and turnover was up 35% y-o-y to RON3.72bn (US$1.62bn).

Investments almost tripled to RON2.05bn (US$895mn), confirming the commitment to Petrom’s long term developments. Despite Petrom’s success, since the centre-left lost power in 2004, the Romanian government has been critical of Petrom, accusing it of refusing contract modifications, particularly the level of taxes paid by Petrom on the use of the country’s oil reserves. At present, Petrom pays 6% tax on oil and gas exploitation, which is half the EU average. There were allegations that the government has threatened to re-nationalise the company and suggestions that Petrom could reduce the fuel price by 5-10% without recording losses. It has suggested that Petrom’s contract could breach EU legislation as the low level of tax compared to the EU average could count as state aid. The threat to review Petrom’s privatisation comes amid soaring energy costs, which have impacted badly on the Romanian poor, many of whom are now unable to afford winter heating. Yet, even the threat of re-nationalisation could reverse some of the positive gains seen since privatisation and risks hampering the company’s long-term investment programme.

Source: www.companiesandmarkets.com

Is Romania to open doors to Gazprom pipeline?

Romania is open to investing in the Gazprom pipeline South Stream, not just the EU Nabucco project, designed to reduce energy dependency on Russia, Romanian minister of economy Varujan Vosganian (Liberal) said last Thursday, EU Observer informed.

A Gazprom delegation is expected in Bucharest this week, just a month ahead of general elections.

"Romania is ready to support any EU project, both Nabucco and South Stream," the Liberal minister, whose party is at odds with the country's conservative President Traian Basescu, said, newswires report.

Recently, Mr Basescu renewed his calls on the European Commission and EU member states to "accelerate Nabucco," in order to decrease the EU's energy dependency on Russia.

Earlier this month, director of Gazprom Alexey Miller has conducted a series of talks in Moscow with the leaders of the Romanian companies “Transgas” and “Romgas” for supply of gas to Romania till 2030 -- Russian business daily Kommersant reported on October 20.

According to the edition the possibilities for attracting Romania in the “South stream” project as well as the possibility the country to substitute Bulgaria have been discussed.

A source from the Russian ministry of energy confirmed to “Komersant” that the possibility Bulgaria to be substituted by Romania in the project was being explored (in this case the route is shortened with 100 km), but refused to give details.

Initially Romania was seen as an alternative to Serbia. However, in the last half year all legislative hurdles in the relations between Serbia and Romania within the “South stream” project were cleared up.

The arrangements for the gas pipeline with Sofia, Budapest and Belgrade were reached in 2007. However, the Bulgarian authorities insist on the part of the pipeline which crosses Bulgarian territory to be property of the state, while “Gazprom” wants it to be Russian. Similar problems emerged in Serbia and Hungary.

Apparently the main problem for the realization of the “South stream” project is not the impossibility for negotiations with the East European countries but the general mistrust of the European Union towards Russia and “Gazprom”.

On the EU summit on 1 September this year the European leaders unanimously decided to distinguish the sources of energy supply. At first they will concentrate all their efforts in the implementation of the “Nabucco” project, which is a direct rival of “South stream” and should supply gas to Europe from the Caspian region by eliminating Russia.

The Romanian company “Transgas” and the Bulgarian “Bulgargas” are shareholders in the “Nabucco” project. This is why the aim of the talks with Romania is to persuade Sofia or Bucharest to participate in “South stream” and not “Nabucco”.

Gazprom is now negotiating a new long-term deal for gas supplies to Romania and chief executive Alexey Miller met Romanian ambassador in Moscow Constantin Grigorie, as well as the heads of two Romanian state-owned gas companies, the previous week, the daily said.

The meeting was focused on prospects for developing and creating new transit capacities, as well as co-operation for storage of gas underground,Kommersant quoted Gazprom as saying. Talks will continue in the near future with Vlad Rusakov, the head of Gazprom's strategic development department, scheduled to visit Bucharest.

If they go well, Gazprom could redirect South Stream to pass through Romania, a source familiar with the talks told Kommersant. Another source in Russia's Energy Ministry has confirmed for the newspaper that the prospect of replacing Bulgaria with its northern neighbour was being discussed, but declined to give more details.

Gazprom is likely trying to persuade gas operators Bulgargaz in Bulgaria and Transgaz in Romania to ditch their stakes in Nabucco, the European Union-backed gas pipeline that would link gas fields in the Caspian Sea to Central Europe, passing through Turkey and the Balkans. Nabucco is seen as a direct competitor for South Stream and the EU has recently stepped up efforts to build the pipeline to diminish its dependency on Russian supplies.

Redirecting South Stream to Romania would also cut down the costs of construction, since it would shave off about 100km of the underwater section of the pipeline, saving up to 12 per cent of the estimated $10 billion needed to build it, according to the head of East European Gas Analysis consultancy, Mihail Korchemkin, quoted by the newspaper.

Earlier in October, Russian business daily Vedomosti reported, quoting a strategy paper outlining the development of the gas industry in Russia, that South Stream faced a delay of two years and would become operational in 2015. By 2024, it would reach its full capacity and pump 31 billion cu m of gas annually.

which owns the project together with Italy's Eni, plans to finish the business plans for each individual country that the pipeline will pass through in the third quarter of 2009, the newspaper said.

Russia has already secured agreements with Bulgaria, Serbia and Hungary for the transit of South Stream.

Romania's Foreign Debt Cut to Junk by S&P Amid Financing Woes

Romania's foreign-currency debt rating was lowered to junk by Standard & Poor's, Bloomberg reported today.

The rating was cut to BB+, one step below investment grade, from BBB-, with a ``negative'' outlook, S&P said in a statement from London today.

“The downgrade reflects the mounting risks to Romania's real economy due to high and rising private-sector leverage and the related dependency on an increasingly uncertain external financing channel,” the ratings company said in the statement.

Just weeks ago, Romanian Parliament passed a bill stipulating a 50 percent income increase for the employees in the public education system. Last Monday, the Romania’s Central Bank (BNR) governor said that BNR successfully deflected an attack against the country’s currency (‘leu’) -- attack allegedly performed by international speculators.

Economists have said repeatedly that Romania is risking major economic problems if the trade deficit will not back down, as the country will become vulnerable to any liquidity shortage on international markets.

Romania Report

IMF improves estimates about Romania’s economic growth on 2008

The International Monetary Fund (IMF) estimates that Romania will report in 2008 a real growth of the Gross Domestic Product (GDP) of 8.6% after a 6-percent growth in 2007, reads the latest report pertaining to the outlooks of the world’s economy, published on October 8 in Washington.

The new estimates included in „World Economic Outlook” shows that the Fund significantly improved the estimates referring to the economic growth pace registered in Romania this year, considering in April the Fund staked on an economic growth of only 5.4%.
The fund warns, however, that next year Romania’s real economic growth will slow down to 4.8%.

As regards the inflation at the end of the year, the International Monetary Fund stakes as regards Romania a rate of 7.9% in December 2008.
Allowing for the average inflation rate, the International Monetary Fund forecasts an average inflation rate for Romania worth 8.2% in 2008.
The current account deficit will draw near this year to the level of 13.8% of the GDP, down compared to 14% of the GDP in 2007. In the outlooks made public this spring, the International Monetary fund anticipated a current account deficit of 14.5% of the gross domestic product in 2008.

In June 2008, the regional representative of the International Monetary Fund for Romania and Bulgaria, Juan Jose Fernandez Ansola announced that the International Monetary Fund would positively revise Romania’s economic growth, which will be significantly higher over the previous year.

Comanescu: EU should assume top role in solving Transdniestr conflict

Following Romania's urgent requests the European Union has sent on Monday (Oct 13) on the occasion of the General Affairs and External Relations Council (GAERC) meeting, a very strong message on its availability to get engaged in bringing the Republic of Moldova closer to the EU and in finding a solution to the conflict in Transdniestr, stated the chief of Romanian diplomacy, Lazar Comanescu.

"The substantial conclusions adopted today by the EU foreign ministers convey several strong messages. First of all, that the EU is ready to start negotiations upon a new and more ambitious agreement with the Republic of Moldova.

Secondly, the document underlined that this agreement's objective is to bringing the Republic of Moldova closer to the European Union - which, we hope, will lead in time to an association formula. And, thirdly, it emphasized the EU engagement in solving the conflict in Transdniestr", announced Minister Comanescu in front of the Romanian press.

Romania has insisted, mainly in the past months, after the war broke out in Georgia, that it is essential for the European Union to get more actively involved in finding solutions to the frozen conflicts, especially to the one in Transdniestr, on the territory of a country in its immediate neighborhood.

"The crisis in Georgia shows that the premise that time might solve all frozen conflicts is a completely wrong one and such a conflict can evolve anytime from a "frozen" to a hot one.

Therefore, the EU must pay an enhanced attention and find new mechanisms and means for solving such conflicts in the aim to ensure stability and security in the zone, Europe's security and the world's security, in general.

EU should assume a top role all the more so given that this is a frozen conflict on the territory of a state in its immediate vicinity", underlined the Romanian diplomacy chief.

As well, the document referring to the Republic of Moldova, adopted on Monday by GAERC, reaffirms the EU confidence that the "5+2" negotiations format (Russia, Ukraine and OSCE as mediators, EU and USA as observers) represents the "sole guarantee for the needed transparency and legitimacy in finding a durable solution" and reaffirms the "EU attachment to the Republic of Moldova's sovereignty and territorial integrity".

The EU foreign ministers did not overlook to remind to the authorities in Chisinau that the "nature of relations between the Republic of Moldova and the EU will be influenced by the "reform pace and quality" in this country.

In this context, the Moldovan authorities are encouraged to make every necessary effort "to consolidate the rule of law and to implement its pledge to protect human rights and fundamental freedoms".

The EU underlined, at the same time, the "special importance it attaches to the running of parliamentary elections in the Spring 2009 in a democratic manner".

The conclusions adopted today by the EU foreign ministers will be submitted to the heads of state and government, at their summit on October 15-16, which - most likely - will adopt them in the form presented by the foreign ministers.

Romania Looking to Modernize its Forces

Romania certainly isn’t one of NATO’s bid senders in absolute terms, but it is one of only 4 NATO countries to approach or exceed the accepted defense spending commitment of 2% of GDP. At Black Sea Defense & Aerospace 2008, Romania’s Curierul National interviewed Defence Minister Teodor Melescanu regarding Romania’s future plans. Among other things, the recent official request for a used and new American F-16s does not appear to be the end of the competition to replace its upgraded MiG-21 Lancers. From the interview:

“The six strategic programs refer to the purchase of the new multi-role planes and of the multirole systems and ground-to-air long-range missiles for the Air Force, the purchase of 4 multifunctional corvettes and 4 mine-hunter boats for the Naval Forces, respectively to the acquisition of some armoured personnel carriers (8×8 and 4×4) and some armoured and non-armoured off-road vehicles for the Land Forces. These purchases are absolutely necessary for the Romanian Army, whose technique is obsolete in a proportion of 90%.... the total is 13 billion euros, indeed, but I want to emphasize that we do not have this money… ready to spend it when necessary. However, the executive has given us the possibility, by Emergency Ordinance no. 111/2006, which allows ministries to contract loans on the international banking market, we can employ such loans up to the limit of 2.38% of GDP…. in a predictable financing line for the period 2009-2013. We also consider achieving these acquisitions with the participation of internationally prestigious companies, which we would attract in the modernisation and privatisation process of the defence industry.”

Indeed, the MiG 21s will deplete their flight resource by 2010-2011 and therefore we must absolutely start the programme of purchasing a multi-role plane…. The issue is the purchase of 48 planes, the budget effort exceeding 3.5 billion lei… financed by foreign loans, using the mechanisms of Emergency Ordinance no. 111/2006…. As there appeared some information about the purchase of second-hand planes, too, I want to emphasize that, personally, I think we are too poor to buy cheap, used things. I do not think that the solution of second hand devices is the best option and therefore I feel inclined to the purchase of new aircraft. And I insist on the human resource. We have valuable pilots and we cannot waste this value we have…. As I have said, there are five models of multirole planes that meet the technical-operational requirements set up by the specialists of the Romanian Air Force. We are considering the F-16 plane… the JAS-39 Gripen… the Eurofighter Typhoon… the F-18… and the Rafale [the F-35 was eliminated].

....To take a decision based on real and as complete as possible data, the Ministry of Defense has conducted information activities during the recent years, which have included working visits of delegations of specialists, organisation of presentations and sending requests for information to potential producers, suppliers and users of multi-role aircraft. As a result of these activities the 5 types of airplanes I mentioned above were identified. But no decision has been taken yet.”

President Basescu: Wages in our education system is not the actual problem, instead the lack of an income law for all the jobs in the public sector is

"I would like to prove to you, with all my responsibility as a president, that the Romanian banking system is sound, thanks to the policies provided by the Central Bank. However, as solid as the local banking system would be, it currently acts within a complex international financial environment and must be treated with maximum cautiousness. Lack of prudence in our Government and Parliament might bring the crisis in our home", president Traian Basescu said.

In his opinion, the "competition" between the Government and the Parliament (competition in promising increased incomes just before the general election in November) triggered the decline of the national currency. "These structures mistook the state budget with the electoral campaign budget", Basescu added.

President Basescu also stated:

- “The teachers, the retired elders and some 530,000 Romanians that have contracted bank loans of over 20,000 Euros each are likely to be the most exposed to the financial crisis”;
- "The solution I suggest means responsibility. The Cabinet in place (with only 20% parliamentary support) cannot engage fiscal burdens on behalf of the future Government";
- “We have minimal chances to be affected by the crisis in case we act responsibly and cautiously”;
- "As a personal observation: our true problem in this moment, in as for the dispute between the Government and the labor unions, is not the wages in the education system but, instead, it is the lack of a law regulating the wages in the entire public sector";
- "Wages in the state agencies are the image of greed and callousness, The Government tolerates the situation in order to satisfy its political clients".