Q: Romania again is at a point when it plans to either sell or restructure some of its major large assets, including from the energy industry. Considering your experience while restructuring Petrom, which are the main measures a CEO should take in order to restructure a state-owned company? Which are the main threats and drawbacks and what should any government in Romania in the current context regional economic be careful about?
Mariana Gheorghe: I cannot speak about other companies but as Petrom CEO, I can talk about the measures taken in the restructuring of Petrom. Looking back, we had a long way to go in order for the company to achieve today’s position; we faced the inherent difficulties involved by such a challenging process, we put all our efforts and teamed up with the colleagues from OMV to implement the best solutions, we used the best practices in the field, we had the best consultants and we had all the necessary financing to support all these. I am proud of being part of the team who successfully transformed a state owned company, with an uncertain future and debts, into one of the most valuable players in the Romanian energy sector. This was for sure the largest restructuring process in Romania and probably one of the most complexes in the region. You need to remember the base on which we started to work; as a state owned company, Petrom faced serious challenges starting from lack of investments, mature assets, outdated equipment, operational inefficiency, bureaucracy, extended organizational structure, over-employment, major deficiencies in work safety procedures, and most of all, political influence over commercial day to day decisions. An industrial colossus, employing around 50,000 people, on the edge of its collapse! So this was the base to which we brought a new management, a new vision and a new business approach. The restructuring was not only a process, but the beginning of the new era for the company.
You can imagine that such a complex and fundamental transformation cannot be synthetized in a few sentences; it took us seven years and approximately EUR 7,7 bn to finalize the turnaround process and there are still some projects to be completed.
However, there are several elements, besides the already mentioned ones, which are of paramount importance in any profound transformation. I would mention the profound understanding of the company and of its business environment based on a detailed assessment. Also it was crucial to develop a medium term strategy – which was very bold in terms of objectives, in order to ensure the company’s development on sound principles. The financing was also decisive, because we needed the money to implement that strategy. During this restructuring important steps were made regarding both the business approach – sustainable company, modern, profitable, acting in observance with European standards and practices, as well as the structure and quality of the management, organizational culture and, not least, the operational approach. Radical decisions were needed, some of them difficult, but absolutely necessary in order to be able to speak about success.
Q: Romanians have less money to spend on fuel for their cars, as they have less money to spend in general. What has caused the high price increases for cars fuel this year and what is your forecast for the coming period at least in terms of price-forming mechanisms if not also in terms of higher or lower prices?
Mariana Gheorghe: Fuel price is a hot topic not only in Romania, but also around the world. And in order to understand the mechanisms which influence the fuel prices, we have to accept the fact that Romania is not an isolated island, but part of the European unique market, as an EU member. The same rules governing the price formation in Europe are applied in Romania as well. Our pricing policy is influenced by three factors, same as in all European Union countries, meaning: the international quotations for gasoline and diesel, taxes (which in Romania represent around 50% of the pump price) and local competition.
Petrom has a moderate pricing policy and this is evident if we look at the developments from the beginning of this year: the international Platt’s quotations for gasoline and diesel (monthly average, expressed in RON) increased by 20% and 15%, while the prices for gasoline and diesel increased by only 14% and 11%. From this comparison it is visible that we did not transfer the whole increase of the international quotations in our final price.
The price paid for fuels covers the operational and investments costs of the company related to the respective products and 50% taxes (excises and VAT). And when we talk of the investments costs these include the entire production chain, starting with crude, refining and ending with distribution. Therefore, all the taxes for these activities are paid in Romania and not in other countries such as when the crude and products are imported. In addition investments create further economic benefits such as securing jobs, contribution to GDP, contribution to the state budget etc.
In the coming period, what we can say is that we will continue our moderate pricing policy with its three components mentioned above. However, we cannot make any predictions related the fuel price level, if this will be higher or lower, due to the fact that the international developments of the fuels quotations cannot be anticipated.
Q: Why are gasoline prices in Romania almost at the same level as in the countries that don’t have oil fields? Why are Petrom’s gasoline prices almost identical with those of Rompetrol and Lukoil, which import oil from Kazakhstan and Russia and almost on par with fuel pump other European states' car fuel prices?
Mariana Gheorghe: As mentioned above, Romania is a member of the European Union and part of the European single market, where the fuel price are influenced by the international quotations for fuel products, taxation and local competition. On a single market, you cannot see significant differences for the same product.
Having said that, Petrom operates in view of the international context, thus avoiding a potential distortion which would be contrary to the European competition legislation and would prejudice the Romanian consumer. In EU we also have the example of Denmark and the United Kingdom who have some of the highest fuel prices despite being oil producers.
Besides, Romania is a net oil importer and a diesel importer; 60% of the oil refined in Romania is imported, while for the diesel the percentage is around 30%.
Nevertheless, Romania is among the countries with the cheapest fuel prices. According to the EU’s Oil Bulletin, dated September 24, Romania has the second lowest gasoline price in the EU and the third lowest diesel price.
Q: You have previously mentioned that Romania needs to invest EUR 3bn to EUR 4bn per year in order to reduce its energy imports. How do you think this money should be invested and what measures should any government take to stimulate investors? What should be, in your opinion, the priority directions of investments: gas-fired power plants, coal-fired plants, or renewable energy?
Mariana Gheorghe: As we have said in our 2021 strategy launched in June, oil and gas consumption will continue to grow and account for 60% of energy demand in Romania by 2021. With a current share of imports of 20-30%, Romania’s relative energy independence is likely to decrease, with imports expected to increase to 40-50% by 2030 due to higher primary energy demand and natural decline in domestic hydrocarbon production. However, Romania has a large energy supply potential, which can be unlocked with significant investments, out of which, only to unlock the hydrocarbon potential over EUR 20-35 bn are required by 2030.
In order to stimulate investments in the energy sector, we believe strong market fundamentals and a predictable and competitive regulatory framework is required, in order to to allow potential investors to develop and implement their medium to long term strategies.
Q: Which are the major threats in Romania’s current energy structure and what strategic decisions do you think it should take?
Mariana Gheorghe: Romania has a number of advantages in the energy sector, such as a balanced energy mix -gas 33%, oil 28%, coal 20%, renewables (incl. hydro)12%, nuclear 7%, a lower energy dependence compared to the EU average (22% vs 55%), gas storages, functional electricity market operator, etc. However, Romania has to be prepared to face a series of challenges due to obsolete infrastructure and high need of investments in the energy sector. Therefore, I think that a key measure would be to develop a long-term strategy for the energy sector, in line with EU energy policies and with periodic consultations with all stakeholders. Of course, coordination between various Government bodies is critical for its successful implementation. In addition, in order to attract investments, a transparent and predictable legal framework is needed.
Q: Petrom announced it will invest up to EUR 1.2bn per year until 2014, mainly in the upstream sector. Which areas within this sector do you think will generate you the most revenues and why?
Mariana Gheorghe: In our strategy we estimated investments of EUR 0.8 – 1.2 bn/year in the next 2-3 years, in the conditions of an investment-friendly environment with predictable, fair and transparent fiscal and regulatory regimes. Of these investments, around 80% will go to the upstream sector, which will continue to form the backbone of our company.
In E&P the focus over the short-term will be on stabilizing conventional production to largely offset natural decline and on achieving operational excellence. For this purpose we will continue with the field redevelopment projects, explore and develop near field opportunities, apply state of the art technologies and optimize our E&P portfolio through partnerships. To enhance the value on the medium term, we will continue with activities to increase the ultimate oil and gas recovery, exploration, appraisal and development of the Neptun gas discovery in the Black Sea, if commercial viability is confirmed and also with the exploration of deeper and frontier hydrocarbons.
On long term in E&P, we will strive to position for long-term growth by exploring the neighboring Black Sea region and unconventional opportunities. And we already made an important step in this direction, by participating in a bid in Ukraine. Petrom is a member of the group of investors led by ExxonMobil. The group was selected as winner of the tender for execution of a production sharing agreement for development of the hydrocarbons within the offshore Skifska block. The focus is now on successfully negotiating the production sharing agreement.
Our focus on downstream is the modernization of Petrobrazi refinery to process economically 100% of our domestic crude production, respectively around 4 mn tons per year.
Q: How much did Petrom and its parent company OMV spend to date with renewable power projects in Romania? Do you consider that to be enough for the past period? What additional investment plans do you have regarding renewable energy? Will renewable energy gain more momentum in Romania for Petrom and OMV?
Mariana Gheorghe: Petrom entered the renewable energy field in 2010, when we acquired a wind power project in Dobrogea and we started commercial operations at the Dorobantu Wind Park in October last year. The total investments amounted to around EUR 90 mn.
As for future renewable energy projects, we are considering exploring opportunities in the field on the medium to long term; there are no specific plans in the near term. We need to understand the development and dynamics of this market and what could be the role of Petrom taken into consideration its integration strategy.
Q: What changes do you plan to make at the Petrobrazi refinery?
Mariana Gheorghe: Petrom is an integrated company and the primary role of our refining business is to process domestic crude production. In order to enable our Petrobrazi refinery to process the 100% of the domestic production and in order to increase its efficiency, we have planned investments of EUR 600 mn until 2014. Out of this amount, approximately EUR 400 mn was already invested. The latest important achievement in the refinery modernization was announced this year in June, respectively the commissioning of the modernized crude vacuum distillation unit in Petrobrazi refinery. This was a EUR 100 mn investment, which will allow us to process the entire domestic crude production and will lead to increase of the middle distillates yield in the product mix and improve the energy efficiency. The next steps in refinery modernization target further increase of the diesel output.
Q: Your high-yield gas-fired power plant near your Petrobrazi refinery went online this year. How big a success do you believe this new, modern power plant is for OMV-Petrom in Romania and why?
Mariana Gheorghe: We took the decision to enter the power market in 2007, in order to expand the value chain of gas by producing electricity. The context was also an opportunity, taking into account the existing aged capacities as well as the environmental regulations to be imposed starting 2013, which may lead to an electricity deficit on the market and also a commercial opportunity.
Our Brazi power plant is the largest Greenfield electricity generation project in Romania in the last 20 years, developed in observance with the European energy strategy. With a nominal capacity of 860 MW, the plant includes the best technical solutions in the field, in observance with European environment standards. It has a high efficiency of around 57%, almost double as compared with current thermal power plants in Romania, which have an efficiency of around 30%. Another important benefit of the power plant that needs to be reminded is that its high flexibility allows the installation of additional wind power capacities of over 700 MW.
I would say that Brazi is not only a relevant achievement for the company, but also for Romania, due to its positive contribution to the sustainable and competitive development of the energy sector, due to its contribution to the security of supply as well as due the benefits it can bring to the consumers in Romania and to the Romanian economy. The annual results of the power plant aim at significant economic effects, through contribution to GDP, additional income to the state budget and by creating new jobs. Also, the plant contributes to the increase of Romania’s energy efficiency and the reduction of carbon emissions, while ensuring the security and flexibility of power generation in Romania.
Q: How profitable do you expect that your new power plant will be after the end of 2014 if until then Romania will not completely and "de facto" liberalize the natural gas market? Please explain.
Mariana Gheorghe: The revenues of the Brazi power plant will depend on a number of factors such as market conditions, which include the electricity price, the demand on the market and of course the applicable legislation. Anyway, as a commercial and even more, a private company, we have to be prepared to manage market risks, based on legal and commercial principles. We strongly feel that the current structure of the electricity sector in Romania, which is populated by aged and inefficient power plants, will benefit from the flexibility of the Brazi power plant and its state of the art technology.