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