Petroleum Industry Review no 74 75 Dec Jan 2015 EN version by Energy Industry Review

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SUMMARY

point of view 53 54

Consensus or majority? Oil prices plummeting: Russia - most likely to enter recession in 2015

interview 56 pag. 56

Tudor Gafton: Top priorities for Amromco – Increasing production, reserves and obtaining new concessions in order to continue to be a successful growing independent E&P company in Romania

review & preview

pag. 66

62 63 64 66 68

Romgaz and Transgaz to apply for EC co-financing Oltchim privatisation fails again Liberalised price of natural gas for companies The largest discovery in the last 30 years in Muntenia New investments for redevelopment of reservoirs

special focus pag. 73

Oil price and the evolution of relevant companies on the stock markets

oil & gas 82 84 86 90 pag. 85 52

The Petroleum Club Christmas Party 2014 Gas supply possible disruptions: EC concerns over the consequences for SEE countries The royalties’ odyssey: A long debated taxation system Romania’s best cards: Natural gas deposit in the Black Sea and the abandonment of the South Stream project The new case for shared services: Growth fuelling challenges www.petroleumreview.ro

point of view

Consensus or majority?

he year 2014 should have brought, among others, a new legal framework in the field of royalties for exploiting mineral resources (oil and gas), as well as a new energy strategy for the next 20 years. The exclusive attention on the electoral campaign and, as consequence, the high volatility of the political environment despite a comfortable parliamentary majority for the government, both of them have postponed the two issues for next year. The main explanation government representatives have offered is connected to the need of properly debating the two issues by the political environment and by the rest of interested institutions, among them the triad made up by the EU, the World Bank and the International Monetary Fund. According to the executive, the energy strategy and the level of royalties should be agreed upon by consensus, following public debates, in order to signal to the investors the ongoing stability and the predictability of the legal framework. Knowing the way the two issues were approached during the last year, it deserves wondering if the proposed approach is the right one or if other approaches are on hand? As we have drawn the attention in due time, consensus on such issues is commendable, as it would reduce the chances for amendments to a legal framework that needs to be stable – in case of a new parliamentary majority and of a new government. An industry that requires investments, such as the one for exploiting mineral resources, and an interval for cost recoup rather long, as the energy one, needs safety in regard to the laws and to the taxes it pays to the state, safety that these ones are not to be changed on each government shifting. From this point of view, it’s absolutely normal that debates on the new legal framework for royalties or the new energy strategy of Romania are not carried out in haste and, particularly, that the result is not the wish of a single power pole or of a sole approach. There are however several elements that raise questions regarding the opportunity of focussing on consensus. First of all we need to consider that the argument of the necessity of debates cannot overcome the one of the necessity to agree as soon as possible on a new legal framework, although no one is denying the opportunity for a larger debate. As an example of active implication for debates comes the fact that associations in line, such as ROPEPCA, carried out a continuous activity during the last years to bring arguments and to signal the need for finalising the debates by the state institutions. Right now Romania needs a new framework, suited to the new energy market realities, which is passing through reconfiguration following the changing realities

of international relations. More than that, reaching the objectives agreed upon by the entire political class, i.e. directing Romania towards becoming a regional energy hub, is impossible without a new framework. At the same time, we have to underline that the government is currently supported by a strong parliamentary majority, rather diverse from the doctrinaire/ideological point of view. We don’t want to suggest that this reality would justify the adoption of a new energy strategy and of the new system for royalties in disregard of the opposition, the civil society or the industry’s opinions. However we believe we’ve reached a moment when the government should count more on its majority in parliament than on getting consensus for the energy strategy envisaging 2015-2035 and for the new level of royalties. Thus we believe that, at this moment in time, the interest of quickly adopting a favourable new framework allowing the development of a performing industry in the field of oil and gas should prevail. By this the objective would be reached despite the lack of consensus, but based on a majority favouring the result. Last but not least, an essential issue is the predictability and the security of agreements as a prerequisite to convince the investors Romania is a reliable partner and a country worth investing in. Thus, we believe a deadline needs to be set by mid 2015 to conclude the talks about the new royalties system, so that the market would have enough time to get prepared for the legal framework in force by 2016. In order to provide fair awareness and implementation of the new legal framework the government should carry on an informing campaign regarding the changes to be in force in 2016 and their effects. Such a campaign is the more necessary as a new round for allotting perimeters for exploration/exploitation has been announced for spring 2015. Interested companies should get guarantees about the royalties system, while the public must be correctly informed on the issue in order to avoid conflicts generated by lack of knowledge. As renewable energy (wind/hydro) is still a remote perspective related to investments already implemented, however uncertain, as the shale gas adventure may become a resounding disappointment (due to the drillings’ inconclusive results and due to poor communication that had scared the entire country and had burdened prospection and explorations) and as the long term is needed for investments in nuclear energy (and the certitude regarding investors), Romania should manage carefully the industry that, for 100 years, has been the foundation of its development: oil and natural gas. by Alex Şerban, Senior Partner, Serban & Musneci Associates 53

point of view

OIL PRICES PLUMMETING

Russia - most likely to enter recession in 2015

s the oil price had fallen below the USD 80 threshold and then below USD 60 and the ‘war’ on the market seems to be just at the beginning, Russia has become one of the main victims. The latest evolutions of the oil market are not part of the US and EU sanctions against Moscow for the annexation of Crimea and its role in eastern Ukraine, but play the part in a most consistent way. The ruble fell by more than 45 percent, while the foreign capital leaving the Russian Federation was expected to reach no less than USD 125bn in 2014, according to the Russian minister of economy Alexey Ulyukayev. For 2015, expectations peak to USD 90bn. On the other hand, the estimated costs of sanctions and falling oil prices to Russia are of USD 140bn a year, Russian Finance Minister Anton Siluanov said. For Urals crude price less than USD 80 per barrel, Russia is to enter recession. From June to December the oil price has fallen by 40 percent and OPEC agreed by the end of November 2014 to maintain the level of production. As half of Russia’s budgetary incomes come from oil and natural gas exports, there’s no surprise. Rumours have become more and more real as even officials admit there is a chance of 75 percent that Russia enters recession in the following 12 months. The European Council in December 2014 adopted new sanctions against Crimea, targeting Russian Black Sea oil and gas exploration and tourism. Similar sanctions were envisaged by the US and Canada. The Russian central bank double overnight the reference interest rate to no avail, as the ruble continued to fall, leaving Russians in disarray. The Russian central bank has cut the perspective of economic growth to zero percent for 2015, while inflation is expected to remain high. The inflation 54

rate peaked to 9 percent in Q4 2014 and is expected to reach 9.3 percent in Q1 2015. But forecasts are changing rapidly. In this context, the Russian economy ministry issued its forecast at the beginning of December, pointing to 0.8 percent negative growth of GDP in 2015. In his state of the nation speech at the beginning of December, Russian President Vladimir Putin has warned Russians of hard times ahead. By offering ‘full amnesty’ for the capital returning to Russia, he indirectly confirmed the Russian economy’s poor shape and its need to financing and capital influx. Putin also proposed a four-year freeze on tax rates. Western nations want to chain ‘the Russian bear,’ pull out its teeth and ultimately have it stuffed, Russian President Vladimir Putin warned. He said anti-Russian sanctions are the cost of being an independent nation.

It’s all in the oil price? There’s much talk about a so-called war between the US and Saudi Arabia on the international oil market, involving OPEC countries, market shares, shale gas exploitations, etc. On the other hand, one should not forget the Saudi Arabia is a strategic partner of the US and military cooperation is enhanced by partnerships. Analysts say the oil war is only a smoke screen for hitting countries like Iran, Venezuela and mainly Russia, whose revenues are based on oil and are also under the sanctions’ strain. Oil-rich Gulf states have vowed not to cut crude production, blaming speculators and producers outside the OPEC group for tumbling prices. Saudi Arabia’s Oil Minister Ali al-Naimi said “the spread of misleading information and speculation” had contributed to the 40% price fall. Yet, only few were convinced by his speech. The former vice-governor of the Russian central bank Oleg Vyugin, now head of the MDM Bank board, is www.petroleumreview.ro

point of view

convinced the US and Saudi Arabia conspired to bring oil prices to USD 70 levels. “The US are about to get the edge on the market and have warned Saudi Arabia they’d better change their price policy to keep their market share.” According to Vyugin in this way the Saudis would keep their market share, while the US is bound to promote its political agenda. The perspective of recession for Russia is enhanced by the sanctions, the Rosneft, Gazprom Neft and Transneft lack of access to international financing. Furthermore, Exxon has given up exploration with Rosneft in the Arctic area, Shell Oil has given up the cooperation with Gazprom Neft, while Total the one with Lukoil. According to Moscow Times, the main issue is related to budgetary revenues and it seems the Russian state is beginning to fight its own companies for scarce resources. On the other hand, international analysts say US companies could better manage a low oil price than the OPEC countries and Russia, as the others need

revenues to balance their budgets. On the background of falling prices, turmoil is getting on the Russia companies on the domestic plane. At the beginning of November 2014 three of Russia’s largest oil companies were being investigated on suspicion that they colluded to push up domestic fuel prices, the Federal Anti-Monopoly Service revealed. State-owned oil giant Rosneft and privately owned oil companies Bashneft and Lukoil allegedly worked together to manipulate fuel prices on St. Petersburg’s commodities exchange. “This situation was one of the reasons for the rise in prices in the retail segment of the oil products market,” said Federal Anti-Monopoly Service official Dmitry Makhonin. The cost of gasoline in Russia has risen by up to 10 percent in 2014, above the level of inflation. Some wonder when social unrest will start in Russia. Others say President Putin’s days are numbered. What’s certain is that hard days are coming for Moscow. By Victor Lupu

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INTERVIEW

Tudor Gafton: Top priorities for Amromco â&#x20AC;&#x201C; Increasing production, reserves and obtaining new concessions in order to continue to be a successful growing impendent E&P company in Romania Amromco Energy, the oldest and the largest independent oil and gas producer in our country, pursues its development plans in Romania and Eastern Europe by first focusing on opportunities in Romania then expanding in the region. The company currently operates 30 development and production perimeters throughout the country, employing more than 400 personnel. Mr. Tudor Gafton, General Manager of Amromco Energy, has offered us details on the importance of setting an operational record and to keep the company in the top independent E&P, as well as details on the companyâ&#x20AC;&#x2122;s strategy in Romania and in the region, on the efforts to continue growing in 2015 and beyond. 56

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Petroleum Industry Review: As an engineer specialized in the oil and gas field you have a rich management experience in the country and abroad. What motivated you to choose Amromco Energy? Tudor Gafton: Amromco Energy is the largest independent producer of hydrocarbons in Romania. It was a unique chance to have the opportunity to manage, in Romania, an upstream operator such as Amromco and I couldn’t afford to waste it. During the 20 years I worked abroad I’ve always wanted to return to Romania and use my experience and education to contribute to the modernisation of our upstream sector. Petroleum Industry Review: You have recently taken over the company’s management (April 2014). How would you assess the activity throughout the year from the point of view of the set objectives? Drawing the line, what is your balance sheet? Tudor Gafton: The balance sheet is most certainly positive. From the very first weeks with Amromco I have been pleasantly surprised by the entrepreneurial spirit of the management team, by the professionalism of the staff, by the employees’ attachment to the company and by the team’s confidence in Amromco’s development strategy and growth. For me it was relatively easy to integrate and to take over the management of Amromco in Romania. In Amromco team I found some of my former colleagues, while among the Amromco’s contractors and partners there are many companies and persons with whom I had previously cooperated during the intervals when I worked in Romania for Petrom and Petrofac.Again I must say the balance sheet

at the end of the year reveals we have significantly exceeded the production schedule and we’ve registered very good financial results. In 2014 we also made substantial progress in implementing modern systems and procedures that will lead to quality improvements, more effective working processes, better ways of evaluating staff ’s performance leading to better motivation and reward, local regulatory compliance and full compliance with all applicable legislation. Unfortunately, as I have already mentioned on other

www.petroleumreview.ro

INTERVIEW occasions, during 2014 we haven’t succeeded in expanding our portfolio with new exploration, development or production perimeters, although we had the financial means and instruments to invest more in Romania. Petroleum Industry Review: What advantages does the company’s business model have and what were the peak performances in 2014? Tudor Gafton: Amromco is one of the few upstream operators in Romania having a business model primarily based on redeveloping of existing oil and gas fields. From this model we expand our focus to include exploration opportunities with similar geology in adjacent areas. We rely on a complete and very efficient organization capable of effectively addressing and managing the entire upstream cycle including: • participating to tenders and negotiating for exploration and production perimeters, • designing and running seismic surveys, • interpreting data obtained from these surveys, • designing and drilling of wells, • designing and installing of production facilities, • ongoing logistics, operation and maintenance. Amromco is able to identify then focus on development /redevelopment of oil and gas fields in a very short cycle, relying on a direct management system integrated with the operations, personnel quality and experience and new technologies. Amromco has placed on production 13 fields that were previously not producing. Such an organisation including 400 personnel permits Amromco to continuously develop its activity and to increase production and reserves every year to ensure long term sustainable growth and economic profitability. As far as I know, Amromco is the only independent upstream operator in Romania and maybe in the entire Central and Eastern Europe, to successfully put in practice such model. In 2014 Amromco has exceeded the oil and gas budgeted production, when compared to 2013, our total natural gas production and oil production was increased by 38 percent. We’ve achieved such performance despite not acquiring more fields. Petroleum Industry Review: Reviewing your achievable priorities for next year, what issues do you have on your agenda? Do you consider expanding your activities? Tudor Gafton: As I have mentioned, our business model dictates long term sustainable growth, which can be achieved only by constantly adding to our assets portfolio new fields as result of successful exploration or by acquiring new producing fields. Consequently, the number one priority for 2015 is to take part to the externalisation process initiated by OMV Petrom for the first lot of marginal fields and to

successfully conclude the negotiations to take over some of these fields. Additionally, we are going to take part, hopefully with success, to the next tender round organised by ANRM for onshore exploration perimeters. Another priority for us is, as always, to identify development opportunities for the fields we already produce and to implement as soon as possible the identified development programs. This means mainly to acquire 59

INTERVIEW new seismic surveys, drilling of new wells as well as new wells workover/reactivation programs. In 2015 we will also progress to the next phase for the two exploration blocks where we are partnering with Rompetrol. Petroleum Industry Review: What programs to increase the output and to maximize the recovery factor are underway and what plans do you have in sight to rehabilitate and exploit the fields? Tudor Gafton: Our production enhancement and recovery factors maximization programs are centred on three directions: • Based on 3D seismic acquisition and interpretation/ reinterpretation, we identify and put into production new hydrocarbon reservoirs or optimise the exploitation of the existing reservoirs by optimising production wells patterns. • Optimise production regimes/rates of the reservoirs once the optimum production wells pattern has been implemented. • Extend as much as possible the production life of all producing wells through implementation of technologies and procedures allowing the continuation of production with high water content, high sand content or low pressure (e.g. efficient water separation, treatment, transport and re-injection, installation of compressors at well sites or at central production facilities). In the future, for the oil fields, we are considering the implementation of secondary recovery processes such as water injection. Petroleum Industry Review: What rate of success do you have for the drilling operations and capital repairs and how do you intend to maintain a top position? Tudor Gafton: Statistically, the historical success rate for the workover operations since 2003 is 83% while the success rate for the development and exploration drillings is over 80 percent. Of course, the main merit goes to our teams of geologists, geo-physicists and reservoir engineers, however, an important factor is represented by the implementation of efficient working procedures, by the improvement of decision-making process and by the quality of works in the field. In this regard, Amromco is operating its own drilling rig (a new rig, automated, made in the US) and two of its own workover rigs. Maintaining and improving the success rate could be achieved only by maintaining and improving the quality of Amromco technical and decision-making staff, by implementing procedures meant at reducing risk factors (phase-gate processes, peer and multidiscipline reviews, ‘learning curve’, considering the experience of other 60

operators and continuous inclusion of feedback during planning and design as well as during execution). The ‘front end loading’ concept for planning and design is applied with very good results. Amromco is paying special attention to personnel improvement (presentations, workshops, lectures, seminars) and applies the newest and most efficient work processes. Petroleum Industry Review: What are the company’s strategic directions in Romania and in the region for the coming period? Tudor Gafton: Amromco’s strategy is growing in Romania by increasing its portfolio of production perimeters. One of our objectives is to double production by end 2016. Amromco is currently operating solely in Romania; nevertheless our investors’ intention is to use the structure, experience and Amromco Romania team to grow the project to other countries in Central and Eastern Europe. If enough opportunities will be on the table and the investments volume available to us will be entirely absorbed by Romania, then the development will only target Romania, alternatively the Company will expand or move to other countries in the region. Petroleum Industry Review: What could you tell us about the existing partnerships and your relationship with collaborators? Tudor Gafton: Our main partner is Romgaz. We started the cooperation with Romgaz in 2003, by setting up a joint venture Romgaz-Amromco to produce and redevelop 11 perimeters outside Transylvania – a priority area for Romgaz. With Romgaz we cooperate very well, with very good results; the cumulated production over the past 10 years is approximately 10 times higher than the one estimated in 2003, calculated based on the estimated production decline, Romgaz and Amromco equally contributing to this result. We’ve successfully negotiated with OMV Petrom the takeover of three oil fields in Moldavia and, as I’ve mentioned, our goal is to obtain additional perimeters from Petrom. We are interested in developing with OMV Petrom a similar relation to the one we have with Romgaz, however this depends on Petrom strategy. We regard as partners many of our contractors (for example Prospectiuni) and we always try to set long term business relations based on mutual interests. We believe in and promote the ‘win-win’ concept. We always try to set partnership relationships with local communities and with their representatives. Through our investments we contribute to the local community’s welfare, we contribute to the creation of new jobs, we develop local infrastructure and offer opportunities to local companies. Amromco currently operates concessions in 12 counties and more than 20 localities. www.petroleumreview.ro

Petroleum Industry Review: How do you assess the evolutions in the region regarding the development of the natural gas market, within the context of new priority measures from the European Commission for the EU members, including Romania (securing natural gas supply, interconnections stand, the reverse flow at the cross-border interconnections, transparency regarding reports on gas storage capacity, etc.)? Tudor Gafton: It is logical for the EU and Romania to consider, in the context of securing energy supply, the issue of stabilising decline and maximising domestic oil and gas production as one of the top priorities for the years to come. It’s a logic outcome that within an European Union that integrates the economies of the member states, the interconnection and integration of the national gas transport and distribution networks will need to become a reality in the near future. A common market, aiming at near perfect competition, will not be able to function efficiently and register sustainable growth without all entities active on this common market being able to access energy in similar, ideally equal conditions. The competitive advantage should come from the efficient use of resources, including energy, and not from preferential access or monopoly over cheaper energy resources. Amromco supports the liberalisation of natural gas price and the free access to the common market for all gas producers. The gas market should work freely, with no administrative constraints or procedural penalties set up by the regulator. Regarding gas storage, gas storage capacities should be available, on demand, to all gas producers on same

conditions, depending on the proportion to which the producer contributes to the total output in his geographical area. The increase of gas storage capacities should be an energy policy priority for the EU member states. Obviously, data and information regarding gas storage capacities should be absolutely transparent. Petroleum Industry Review: What opportunities and what challenges is Amromco Energy expecting to face in 2015? Tudor Gafton: In 2015 we hope to extend the scope of our cooperation with Romgaz, both in developing/ redeveloping production fields and in the exploration activity, and to successfully finalise negotiations with Petrom for more production perimeters. Another opportunity is putting in production more reserves identified by the seismic campaign completed in 2014. As until now, the challenges will be related to obtaining in due time land owners agreement and, implicitly, getting the construction permits in due time. Another challenge would be to convince Petrom of the benefits coming from the cooperation with Amromco and to maintain the positive trend in our relationship with Romgaz. The oil and gas price and the taxation system of the upstream activity will have, obviously, a decisive influence on our activity in 2015. We trust in our company’s ability to materialize all good opportunities we’ll have over the next several years and to overcome all obstacles we’ll face in the future, a future I’m convinced, will only follow an ascending trend. 61

review & preview

Romgaz and Transgaz to apply for EC co-financing

he Romanian energy companies having the state as majority shareholder have requested funds amounting to EUR 3.5 billion from the European Commission to co-finance strategic projects. The projects were included on the list of 200 projects the Romanian government has sent to Brussels in view of accessing public funds through the ‘Investment Offensive’ European facility. The companies in the gas field, Transgaz and Romgaz, have requested EUR 600 million co-financing. Transgaz submitted projects amounting to EUR 1.47 billion and requested EUR 261.7 million co-financing for: - Building of the southern corridor for natural gas to connect the transportation grids of Austria, Hungary, Romania and Bulgaria. In Romania 545 km of new pipelines would be built along with three compression stations that would ensure flows of up to 1.5 billion cubic metres of natural gas to Bulgaria and

4.4 billion cubic metres to Hungary; value of the project – EUR 560 million, co-financing – EUR 168 million; - Connecting the domestic network to the Black Sea exploitations through the 247 km pipeline from Tuzla, Constanta County, to Podisor, Giurgiu County; the value of the project – EUR 254 million, co-financing – EUR 38 million; - Building an alternative route to connect the exploitations in the Black Sea, which would use the existing pipelines, as long as they are still working, and to modernize or replace the old ones. The same project includes four new compression stations; value of the project – EUR 550 million by complete cofinancing; - Consolidating the natural gas transport grid in Moldavia region by building 800 km of new pipelines and two compression stations in Onesti and Gheraiesti; value of the project

– EUR 110 million, co-financing – EUR 55 million; - To ensure the natural gas reverse flow at Mediesu Aurit, Satu Mare County, as the transport system is connected to the Ukrainian network; value of the project – EUR 0.7 million, complete co-financing. In its turn, Romgaz is looking for European co-financing of up to EUR 340 million for its projects evaluated to EUR 440 million: - To modernize the Iernut thermoelectric power station in exchange for calling off the debts of RON 653 million of Electrocentrale Bucharest. Romgaz aims at building two cogenerating groups of 200 MW each; value of the project – EUR 300 million, co-financing – EUR 200 million; - To extend the natural gas tank at Ghercesti from 150 million cubic metres per cycle to 600 million cubic metres per cycle. Value of the project – EUR 140 million, complete cofinancing.

Gas producers, bound to sell 35 percent of the output on the stock market

he National Authority for Energy Regulation (ANRE) has published in the Official Monitor the order demanding the natural gas producers to sell on centralised gas markets in Romania at least 35 percent of the output in 2015. The obligation will be valid for the next years as 62

well in lower proportions. Without infringing the obligations provided by other normative documents and contracts, according to the current legal provisions before November 15, 2014 and expected to cease on December 31, 2014, the producers of natural gas – titleholders of oil agreements, are bound to conclude

transactions on the natural gas stock markets in Romania, in a transparent and non-discriminating way, to sell a ratio of the yearly natural gas output for the domestic consumption as follows: 35 percent in 2015, 30 percent in 2016, at least 25 percent in 2017 and at least 20 percent in 2018, the order reads. www.petroleumreview.ro

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Oltchim privatisation fails again

he privatisation of Oltchim has failed again, as no investor submitted intention by the deadline of December 12, 2014. It is for the fourth time in 2014 that the privatisation fails. The previous deadline had been June 6, 2014. The target price for the Oltchim-Arpechim package was of EUR 300 million, the agreed investor should have taken over also the environment-related obligations for Arpechim refinery. It also should have invested several hundred millions of EUR to restart all equipment of the two units. The favourite investor to take over the plant was the Chinese consortium made up of Baota Petrochemical Group and Junlun Petroleum, which requested two times an extended deadline for Oltchim privatisation. The Chinese representatives initially voiced interest in buying Oltchim together with Arpechim. Then, recently, they voided intent to buy only one section of the plant, but finally they submitted no offer. Under the circumstances the official receiver of the plant is to draw up the reorganisation plan expected to be voted upon by the Creditors’ Committee on March 10, 2015.

Until then the Oltchim SPV is to be set up. The SPV is supposed to be Oltchim 2, which would get together the plant’s viable assets, including the Arpechim refinery. The unsecured loans will remain as duty for the older Oltchim and, most probable, would be poorly recuperated. The plant entered insolvency in January 2013 and is currently working at 30 percent capacity. Although the privatisation of Oltchim Ramnicu Valcea plant has failed for the fourth time in 2014 due to lack of offers, it seems a Chinese company is still interested. The Economy Ministry has received an offer coming from a Chinese company

interested in taking over Oltchim, however the company requested for the moment an extension of the deadline, said Mihai Tudose, the new Economy Minister. “An offer was submitted to the Economy Ministry from a Chinese company interested in taking over Oltchim. For the time being it requested an extended deadline for submitting the offer. The good news is that Oltchim has reached operational profit. Nevertheless it has debts amounting to RON 700 million, but we intend to convert these debts into shares and, on this basis, the unit could become bankable and, together with an investor, we should solve the situation,” the official said.

Vikoil opens branch in Romania

krainian company Vikoil Ltd from Kyiv, specialised in underground and 2D and 3D seismic prospection, has opened a branch in Romania, the only one abroad. It is aiming business in the field of onshore and offshore prospection

for hydrocarbons, natural gas and oil, mainly from unconventional sources. For 2015 Vikoil Ltd wants to win at least three auctions for prospection. The company was set up in 2003 by businessman Sergey Ushinskiy, has 300 personnel and carried operations

in the Middle East, Russia, North Africa and Latin America, especially for shale gas prospects. It is one of the largest companies in this field in Ukraine. The subsidiary in Romania is based in Bucharest and is run by Vladimir Gryshanenko. 63

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Petrofac Romania Liberalised price of natural gas increases capital for companies

he British company Petrofac, one of the world leaders in the field of service for the oil industry, has decided to increase the registered capital in Romania by USD 3 million, according to a decision taken by Petrofac Solutions & Facilities Support. The newly issued shares have been undersigned and fully paid by partner Petrofac UK Holdings Limited. The partners of Petrofac Solutions & Facilities Support are Petrofac UK Holdings Limited with 87 percent and Petrofac Facilities Management Limited from Scotland with 13 percent. Petrofac, having a 15-year partnership with OMV Petrom for operations on nine mature deposits in Ticleni area, had increased in 2014 its share capital by USD 7 million in two tranches: the first one of USD 4 million in February and a second one of USD 3 million in June. The registered capital, increased several times during the latest years at various USD/RON exchange rates, has reached now USD 594 million. In 2010 Petrofac signed a 15-year agreement with OMV Petrom for carrying operations in Ticleni area, aiming at the increase of output by at least 50 percent by the end of 2015. According to the contract, the British company is to provide the necessary expertise and technology, as well as the necessary financial and human resources, while Petrom is to supervise the operations and to pay for the extracted oil, including by increased tariffs for extra-output. The agreement could be extended for another 10 years. In 2011 Petrofac estimated revenues of up to USD 270 million during the first five years of the contract. 64

he price for natural gas for companies is liberalised as of January 1, 2015 because the European Commission has turned down the government’s request to postpone the liberalisation process. Within his framework the price doubled during the last two years. Household consumers are to pay the same regulated prices, which are to be gradually increased until 2021. “I’ve tried to convince the EC to agree with an extended period for preparing the market, but I failed to succeed. Their reply was that Romania had to keep with the arrangement by January 1, 2015,” the former delegate Minister for Energy Razvan Nicolescu

said during a conference organised by the Competition Council. The commitment to the EC is that the price paid by the non-household consumers of domestic natural gas is to increase gradually from about RON 45/MWh in 2012 to RON 119/ MWH after October 1, 2014. After numerous warnings coming from the industry, the government issued a decision to stop the process at the level of RON 90/MWh reached in April 2014, but the decision was to be put in practice until the end of the year. Starting with January 1, 2015 the price for non-household consumers will be set on the free market.

New shareholders structure for Transelectrica and Transgaz

he Transelectrica and Transgaz shareholders structure has been modified by the government, by transferring them to the Economy Ministry from the government’s general secretariat (SGG). The transfer was given the goahead with the ordinance regulating the structure of the Ponta IV cabinet. “The European Commission has requested the separation of shareholders to producing and supplying natural gas companies from the ones of shareholders to gas transporting companies. Until now the department for Energy, which owned

the states’ shares with the two companies, was subordinated to the Economy Ministry, so the administrating tasks were offered to the government general secretariat. Now, as two distinct ministries are to be set up (Economy and Energy) the two companies are to be transferred to the Economy Ministry,” sources said. Transgaz and Transelectrica, two of the most valuable companies in the energy sector, have had their shareholders traded several times lately. In February 2014 the two companies were taken over by the SGG from the Finance Ministry (run at the time by the liberal party). www.petroleumreview.ro

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review & preview

The largest discovery in the last 30 years in Muntenia

MV Petrom, in partnership with Hunt Oil Company of Romania (Hunt Oil) announced they have discovered a new oil and gas deposit in the southern part of Buzau County, in the perimeter VIII Urziceni East. The Padina Nord I well has a depth of 2,500 metres. The deposit is placed 7-12 km away from mature deposits under exploitation for 50 years, the OMV Petrom release informs, adding that the recent discovery is the largest in the last 30 years in Muntenia region. Output tests reveal that the potential production per well could reach 1,200 - 2,100 barrels of oil equivalent - bep/day. The investments carried by OMV Petrom and Hunt Oil amount to EUR 5 million. “This is the largest discovery in the last 30 years in Muntenia region,”

Gabriel Selischi, member of the OMV Petrom management board said. “It is important that we go on with the exploration activity, as 90 percent of the deposits under exploitation are mature ones. Currently we supply approximately 40 percent of Romania’s oil and gas

demand,” he further said. The discovery was made within the exploration partnership concluded in 2010 by OMV Petrom and Hunt Oil for two onshore perimeters: I Adjud and VIII Urziceni Est, the operator being Hunt Oil.

Support for the Vertical Gas Corridor

omania, Bulgaria and Greece have requested the European Union’s support to set up a new corridor for natural gas between the three countries, after Russia’s announcement it is giving up the South Stream pipeline. In a joint statement the three countries said they support the development of a new vertical corridor to connect Greece, Bulgaria and Romania in order to ensure the non-stop bidirectional gas supply. “The three parties call on the European Commission 66

to support their initiative for closer regional cooperation and for promoting the necessary projects to build it in an efficient way,” the three countries announced, aiming at the EU’s ‘financial instruments’. Maros Sefcovic, the EC Vicepresident for Energy Union, said the EC is ready to consider using European funds “for better and sounder integration of the energy grid in these countries within the EU global energy framework.” The pipeline to cross over Bulgaria,

Greece and Romania (named Vertical Gas Corridor) is to have a capacity of 3-5 million cubic metres per year, the Greek Energy Minister said, according to novinite.com. By the end of last year, the former delegate minister for energy Razvan Nicolescu has sent to Hungary the invitation to join the initiative. The sources of gas for the Vertical Gas Corridor will be the Greek Revithoussa LNG Terminal and the Trans Adriatic Pipeline AG (TAP), which is to carry Caspian gas. www.petroleumreview.ro

review & preview

New investments for redevelopment of reservoirs

MV Petrom has announced it would implement the redevelopment project for the oil deposit in Tazlau, Bacau County, North-Eastern Romania. The project involves investments amounting to EUR 30 million in the coming period. Tazlau is a mature reservoir under exploitation for over 60 years, with a daily output below 1 percent of the OMV Petrom’s total daily output in Romania. The project to redevelop the deposit consists of 20 capital repairs operations. The project will unblock supplementary oil reserves of 3.2 million barrels (about 10 percent of OMV Romania oil output) and replace the natural depleting. By the end of 2013, eleven redevelopment projects of oil deposits were in the development stage. The planned future investments

for implementing these projects amount to EUR 500 million, while the confirmed reserves and probable reserves amount to 100 million barrels oil equivalent (boe). During the latest nine years,

the investments to modernise and consolidate OMV Petrom amounted to some EUR 10 billion. The direct and induced impact of OMV Petrom on Romania’s annual GDP is of about 5 percent.

Infringement against Romania on ensuring security of natural gas supply

he European Commission has initiated the infringement procedure against Romania for failing to ensure security of supply with natural gas, as Bucharest did not adopt a Preventive Action Plan and an Emergency Plan. The Commission had formally asked Romania to ensure fully observance of the EU rulings regarding the security of supply with natural gas. The EU Security of Gas Supply Regulation (EU) No 994/2010 aims 68

to ensure that Member States are well prepared to deal with possible supply disruptions. Member States have to enable bi-directional gas flow across borders and prepare emergency and preventive action plans in advance, a release from the EC reads. The EC also says it hasn’t been informed about bi-directional flows of natural gas. The member states authorities should have adopted, until December 3, 2012,

the preventive action plans and emergency plans. The decisions for bi-directional flows for natural gas should have been adopted until September 3, 2012. By the end of November 2014, the EC asked Romania to comply with EU rules on security of gas supply. Romania has to two months to comply with its obligations as otherwise the Commission may decide to refer the case to the Court of Justice, a communiqué read at the time. www.petroleumreview.ro

‘Petroleum Safety Authority’ visits in Douai

he Ingersoll Rand line of air winches combines the best ideas and innovations resulting from over 200 years of experience in solving the most challenging lifting, pulling and positioning applications in the world’s toughest industries. Our air winches are manufactured in either Douai, France (LS & PS gear type motor winches) or Kent, Washington, USA (FA Infinity piston type motor winches). Ingersoll Rand air hoists have been providing lifting solutions to industries around the globe since the early 1900’s. Today, we offer the broadest range of air operated chain hoists in the world up to 100 t capacity. Our range includes hoists for highspeed production applications and for the harsh environments found in mines, shipyards, power plants, cement plants, refineries and onshore and offshore platforms. We pride ourselves in our willingness and ability to take on tough applications with engineered special products. On Wednesday, September 10th, we had the pleasure of hosting six engineers from the ‘Petroleum Safety Authority’ of Norway at our Douai plant. ‘Petroleum Safety Authority’ is an independent government regulator with responsibility for safety, emergency preparedness

70 72

and the working environment in the Norwegian petroleum industry. This visit was part of a tour that the ‘Petroleum Safety Authority’ is doing in order to meet key material handling suppliers to the Oil & Gas industry in Norway to get insights on their working culture and best practices. This important visit was organized with the help of Kjell Gjerdrum at Scan Tech, an Ingersoll Rand official distributor, who was also attending this meeting. We received very positive feedback from ‘Petroleum Safety Authority’ on our products, on the Douai plant, on our engineering capabilities and our company in general. Our visitors were very impressed with our professionalism, and they were very pleased to see how much we focus on safety, as well as on product development. This visit gives us great visibility to this Norwegian government regulator, which we all hope we will benefit from in the future. A special ‘Thank You’ to Christian Kolczyk, Marketing Manager, Winch & Hoist Products, EMEA and Juan Urmeneta, Douai Operational Excellence/ Lean Leader, who played key roles in making this visit a success.

In Romania by IRCAT, authorized distributor of Ingersoll Rand www.petroleumreview.ro

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71 73

SPECIAL FOCUS

Oil price and the evolution of relevant companies on the stock markets Delayed economic relaunch of the developed economies, the US’s enhanced presence on the international oil market and the ‘war’ within OPEC all these have all led to the fall of the oil price to the lowest level of the last four years. This development is laying downward pressure on the stock market value of the companies operating in the oil and gas sector. Thus, following years when the oil and gas related stock market indices had a much better performance compared to indexes that reflect general economic evolution, the trend has been reversed. The fall of oil price to the USD 80 per barrel threshold has pulled down also the oil & gas stock market indexes during the latest part of the year, the negative trend being also sustained by reduced prognosis regarding oil demand. Despite of this far from being favourable environment to the oil and gas sector, there still were some companies that have registered a positive evolution. Among them, several Romanian companies! by Laurenţiu Roşoiu

he second half of 2014 has registered one of the most important oil price corrections on the stock exchanges and commodity markets: starting H2 this year the WTI crude oil price (the reference for the North American markets) has fallen by some 35 percent from USD 106.06 per barrel (on July 1) to USD 78.77 per barrel (on November 3); during the same interval the price of Brent crude oil (the reference for Europe) has fallen by 31 percent, from USD 110.84 per barrel to USD 84.9 per barrel (see the chart ‘Oil price on steep fall’). The oil price is thus showing an evolution defined, according to the financial markets’ terms, as a signal of entering a ‘bear’ market – term used for a strong negative trend.

DOWNWARD PRICE FORECASTS Economic analysts say the price fall is caused, first of 72

all, by the world economy’s slowdown as a whole and especially of the Chinese economy’s slowdown (the Chinese economy being one of the ‘engines’ driving world economy); this trend comes in a context in which the European Union, as a whole, is recording a continuous slowdown of its growth. Through the effects of cutting down the aggregate demand for oil, such negative evolutions concerning general economic activities are not only the reasons for the current drop of oil prices, but also the main rationale for re-evaluating the perspectives regarding output, demand and oil price for the following years; thus, OPEC (Organization of the Petroleum Exporting Countries) as well as the US Energy Information Administration (EIA – the relevant US agency) – two of the most credible entities that follow, analyse and release forecasts – have significantly cut their forecasts regarding the output and demand for oil, adjusting in the same www.petroleumreview.ro

OIL PRICE ON STEEP FALL In the second part of the year, in less than six months, the oil price recorded a fall of approximately 30%.

The chart shows the evolution of Brent and WTI crude, estimated in USD per barrel. Source: US Energy Information Administration

downward direction their estimations regarding the oil price for the following years. For example, the World Oil Outlook released by the beginning of November 2014, reveals that OPEC has cut down its oil output estimates by 1.8 million barrels per day to 28.2 million barrels a day for the end of 2017, from the current output of 30 million barrels a day. OPEC has also reduced its forecast regarding the crude oil price from USD 105.7 per barrel in real terms (price level currently calculated for the ‘basket’ used as benchmark by the organisation) to USD 95 per barrel – the anticipated level for the end of 2020 (it needs to be stressed that, as reference, the market value of the ‘basket’ used as benchmark by OPEC was, by the end of October 2014, of USD 78.67 per barrel; the lowest level of the last four years). Concomitantly, the EIA report released for October 2014 reads that the American specialists have reduced the Q4 price level forecast for WTI crude down to an average level of USD 80 per barrel and to USD 78 per barrel for 2015 – lower by USD 11 and USD 17 per barrel respectively than the previous forecasts; at the same time, price estimates for Brent oil have been cut down to USD

83 per barrel for 2015, USD 18 below the estimated price released a month before. The OPEC and EIA forecasts are confirmed and completed by the ones released by other important players such as IEA (the Vienna based International Energy Agency) or by other private financial institutions specialized in analysing such trends. Therefore IEA confirms the negative premises regarding the global oil demand for 2015 in the ‘Oil Market Report’ released by mid October 2014, estimating that its growth rate would be significantly lower than the one recorded until now; the Vienna based agency’s specialists have cut down the forecasts regarding oil demand in 2015 by 1.1 barrels per day (bpd) against the previous estimation, down to 93.5 billion bpd. The IEA anticipations regarding global oil demand were further supported by the price forecasts released by end October by Goldman Sachs, one of the biggest US investment banks: according to its forecasts, the oil price should reach the USD 80 per barrel by the end of the year (it already happened by the end of October; see the chart ‘Oil price on steep fall’) and could remain in the same area during 2015 as well. 73

SPECIAL FOCUS MULTIPLE CAUSES FOR THE OIL PRICE DECREASE The oil price evolution and the reduced forecasts for the following years are determined by several issues, besides the ones related to the slowdown of world economy growth; although the main influence is derived from the negative macro-economic evolution, the markets’ ‘nervousness’ during H2 2014 was amplified by other events too. Among them there is the rapid growth of US oil output (e.g. in 2014 the output was 4 million barrels per day higher than in 2008!) and also the significant appreciation of the American currency (as a result of the US economy advance); however, the main factor that has lead to the ‘fall’ of oil price in such a short interval, was the decision of some OPEC members to cut down the prices. Thus, during the second half of the year, Saudi Arabia (world’s main oil producer and one of the dominant players within OPEC) has set the trend to price decreases, by offering discounts to its Asian clients/partners. Following suit, Kuwait and Iraq responded to Saudi Arabia’s challenge in the same range of price cuts, and a real war has started on the market.

CONSEQUENCES ON THE STOCK MARKETS The above mentioned elements are the ones that released the first negative impulses to the companies

operating in the oil and gas field. The companies faced on short term lower incomes from oil sales and, secondly, negative development perspectives. On medium and long term (especially following the review of forecasts on demand and prices) the negative impact is given by the fact that oil & gas companies face uncertain operational activities and uncertain development investments in new projects, as most of them have development strategies based on significantly higher price estimates than the current ones (obviously a lot higher than the anticipated price for the coming period). As a result, the oil industry might be soon facing the unpleasant situation to experience a strong negative effect following the enthusiasm noticed several years ago; at the time, following an extraordinary sudden change (let’s remember that after the prices had fallen to USD 35 per barrel due to the world economic crisis during 2008 - 2009, then the oil prices registered a spectacular recovery peaking up to USD 128 per barrel in the spring of 2012) the oil companies invested huge amounts of money in new projects. Hence, according to EY estimates (one of biggest companies of financial consulting services and audit in the world) the most important companies in the energy field worldwide are involved in some 163 major projects (each reaching approx. USD 1 billion!) in the exploration and exploitation area, the total amount of their budgets peaking to USD 1.1 trillion; unfortunately, many of these projects are already behind schedule and have exceeded the budgets. As most of them were drawn up on a USD 100 per

WINNERS OF THE STOXX 1800 OIL&GAS The Spanish company Abengoa has registered the highest market price increase during the last 12 months. Nr. crt.

Company

Country

Market price November 2013

Growth

Market price November 2014

1 Abengoa

Spain

86%

1,708

3,169 EUR

2 Caltex Australia Ltd.

Australia

67%

18,54

30,88 AUD

3 Williams Cos.

USA

58%

35,23

55,51 USD

4 Inter Pipeline

Canada

39%

25,6

35,51 CAD

5 Tesoro

USA

31%

54,53

71,41 USD

6 Vestas Wind Systems

Denmark

27%

156

198,8 DKK

7 Australian Pipeline

Australia

27%

6,1

7,75 AUD

8 Inpex Corp.

Japan

20%

1170

1403 JPY

9 Enbridge Inc.

Canada

18%

45,25

53,33 CAD

Canada

18%

46,02

54,23 CAD

10 Imperial Oil Ltd.

The chart shows the first ten companies in the index, according to the positive variations recorded during November 2013-November 2014. Source: Stoxx Ltd, Bloomberg, author's calculation Note: The reference market prices according to Bloomberg during November 10 - 15, 2014; hence, there could be discrepancies against other platforms and in accordance to the transactions of the respective bonds.

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barrel forecast, the derived hazards are obvious. It comes as an enhanced pressure factor on stock exchange quotations for the companies in the field.

FALLING INDEXES A first wave following these effects, events and pressures mentioned above is already reflected in the stock exchanges indexes related both to world oil & gas industry and regional level as well: e.g. from the start of H2 the stock exchange index STOXX 1800 OIL&GAS has lost nine percent of its value – it fell from 547 points (on July 1, 2014) to 496 points (by mid November). STOXX 1800 OIL&GAS is an index calculated and disseminated by Stoxx Ltd (the biggest world supplier of related financial products) which reflects the aggregate evolution of 108 of the most important oil and gas companies from the developed countries; these companies are also included into the STOXX 1800 index, which shows the evolution of the most important 1,800 companies from the developed countries covering all sectors of activity (those being listed and traded on stock markets worldwide). Thus, STOXX 1800 OIL&GAS is a relevant indicator for the evolution of the companies active in the oil and gas industry, while STOXX 1800 is relevant for the general economic evolution of those states. By mid November 2014, only 35 of the 108 companies included in the relevant index for oil and gas of the

developed economies have registered stock markets positive developments during the last 12 months; three of them have stagnated while the rest of 69 companies registered negative developments. Among the companies with positive evolutions in top 10, according to the shares’ price increase, there were three Canadian companies, two from Australia and two from the US, as well as one from Spain, Japan and Denmark – the shares’ variation being of 18 to 86 percent (see the chart ‘Winners according to the STOXX 1800 OIL&GAS index’). At the other end, in top 10 most unfortunate evolutions on the market, there are three companies from the UK and Norway and one from Canada, the US and the Netherlands; the shares’ variation being of some -42 to -76 percent (see the chart ‘Losers according to the STOXX 1800 OIL&GAS index’).

CENTRAL AND EASTERN EUROPEAN FALLING INDEXES The negative trend for the oil and gas companies traded on the stock exchanges is more evident for Western Europe and much more pronounced in Central and Eastern Europe: during the same interval (from the start of H2 this year until mid November) the STOXX 600 OIL&GAS index lost 17 percent of its value, while STOXX 300 OIL&GAS index lost 16 percent (see the chart ‘Falling stock exchange indexes’). The negative evolutions at

LOSERS OF THE STOXX 1800 OIL&GAS The Dutch company Fugro has registered the steepest fall of market price during the last 12 months.

Company

Country

Decrease

Market price November 2013

Market price November 2014

1 Fugro

Netherlands

-76%

46,325

11,02 EUR

2 Petroleum Geo-Services

Norway

-55%

74,35

33,45 NOK

3 Aker Solutions

Norway

-52%

93,4

44,51 NOK

4 Ophir Energy PLC

-48%

354,2

185,3 GBP

5 Seadrill

Norway

-46%

283,1

151,7 NOK

6 Tullow Oil

-46%

897

485,8 GBP

7 Transocean Ltd.

USA

-45%

54,44

29,83 USD

8 Cairn Energy

-45%

269,5

149,4 GBP

9 Talisman Energy Inc.

Canada

-44%

12,8

7,19 CAD

-42%

147,5

85,55 GBP

10 Afren

The chart includes the first ten companies included in the index, according to the negative variations recorded during November 2013 - November 2014. Source: Stoxx Ltd, Bloomberg, author's calculation Note: The reference market prices according to Bloomberg during November 10 - 15, 2014; hence, there could be discrepancies against other platforms and in accordance to the transactions of the respective bonds.

SPECIAL FOCUS this index level are the result of the negative evolutions registered by the companies: of the 33 companies included into the STOXX 600 OIL&GAS index only eight have had positive evolutions during November 2013 - November 2014 (see the chart ‘Winners according to the STOXX 600 OIL&GAS index’); the rest of 15 companies have had negative evolution of the market price (see the chart ‘Losers according to STOXX 600 OIL&GAS index’). STOXX 600 OIL&GAS includes 33 oil and gas companies from Western Europe. The companies are selected from the STOXX 600 Europe general index,

trying to create a representative geographic index for oil & gas sector in Western Europe. So, the STOXX 600 index reflects the evolution of the most important 600 companies in developed Europe across all sectors of activity, listed and traded on the capital markets in Europe. Thus STOXX 600 OIL&GAS index is relevant for the evolution of the oil and gas companies of Western European economies, while STOXX 600 is relevant for the entire economic evolution of the respective region. As far as the STOXX 300 OIL&GAS index, it is made up of 26 oil and gas companies in Central and Eastern Europe,

FALLING INDEXES Following the oil price trend, in less than half a year, the indexes showing the evolution of the oil and gas companies have plummeted by 9 to 16%.

Index

Date

Value (points)

Date

Value (points)

Evolution during July November 2014

STOXX 300 OIL&GAS

01.07.2014

161,12

13.11.2014

134,89

-16%

STOXX 600 OIL&GAS

01.07.2014

374,27

13.11.2014

308,98

-17%

STOXX 1800 OIL&GAS

01.07.2014

547,53

13.11.2014

496,63

-9%

The chart shows the evolution of the above mentioned indexes during July 1, 2014 to November 13, 2014. Source: Stoxx Ltd

WINNERS OF THE STOXX 600 OIL&GAS Only eight companies included in this index have recorded positive evolutions during the last 12 months. Nr. crt.

Company

Country

Market price November 2013

Growth

Market price November 2014

1 Abengoa

Spain

74,7%

1,708

2,984 DKK

2 Vestas Wind Systems

Denmark

31,0%

156,9

205,5 EUR

3 Neste Oil

Finland

8,9%

15,67

17,06 NOK

4 Statoil

Norway

4,4%

141,2

147,4 EUR

5 Gamesa

Spain

3,9%

7,279

7,564 GBP

6 Royal Dutch Shell

2,9%

2095

2156,5 EUR

7 Total

France

2,5%

44,24

45,345 NOK

8 TGS-NOPEC Geophysical

Norway

1,3%

158

160 EUR

9 -

10 -

The chart includes the first eight companies included in the index, according to the positive variations recorded during November 2013 - November 2014.. Source: Stoxx Ltd, Bloomberg, author's calculation Note: The reference market prices according to Bloomberg during November 10 - 15, 2014; hence, there could be discrepancies against other platforms and in accordance to the transactions of the respective bonds.

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LOSERS OF THE STOXX 600 OIL&GAS The most affected 10 companies included in the index have registered losses between 32% and 79%.

Company

Country

Market price November 2013

Decrease

Market price November 2014

1 Fugro

Netherlands

-79,0%

46,325

9,719 EUR

2 Petroleum Geo-Services

Norway

-55,1%

74,35

33,37 EUR

3 Afren

-51,7%

149,2

72,05 NOK

4 Seadrill

Norway

-50,4%

283,1

140,5 GBP

5 Ophir Energy PLC

-49,1%

354,2

180,4 NOK

6 Tullow Oil

-47,2%

897

473,3 GBP

7 Cairn Energy

-45,8%

269,8

146,3 GBP

8 Subsea 7

Norway

-43,0%

125,7

71,6 GBP

9 SBM Offshore

Netherlands

-35,7%

15,21

9,782 NOK

Norway

-32,8%

43,7 EUR

10 Aker Solutions

WINNERS OF THE STOXX 300 OIL&GAS The Slovenian company Petrol DD has registered the highest market price increase during the last 12 months.

Company

Country

Growth

Market price November 2013

Market price November 2014

1 Petrol D.D.

Slovenia

31,6%

221,2

291,15 EUR

2 Transgaz

Romania

25,2%

189,45

237,1 RON

3 KoĂ§ Holding

Turkey

24,5%

9,2

11,45 TRY

4 Tatneft

Russia

19,7%

208,24

249,35 RUB

5 Transneft

Russia

11,9%

82410

92210 RUB

6 TĂźrkiye Petrol Rafinerileri

Turkey

11,6%

42,2

47,1 TRY

7 Lukoil

Russia

2,3%

2070

2117,4 RUB

8 Romgaz

Romania

0,9%

34,1

34,4 RON

9 Surgutneftegaz

Russia

0,2%

28,114

28,16 RUB

10 -

The chart shows the first ten companies in the index, according to the positive variations recorded during November 2013 - November 2014. Source: Stoxx Ltd, Bloomberg, author's calculation Note: The reference market prices according to Bloomberg during November 10 - 15, 2014; hence, there could be discrepancies against other platforms and in accordance to the transactions of the respective bonds.

SPECIAL FOCUS LOSERS OF THE STOXX 300 OIL&GAS The Polish company Serinus Energy has registered the steepest fall of market price during the last 12 months.

Company

Country

Decrease

Market price November 2013

Market price November 2014

Creştere anualizată în perioada 2000 - 2013

Serinus Energy

Poland

-52,1%

4,3

2,06

CAD

11,0%

Hellenic Petroleum

Greece

-52,1%

8,95

4,29

EUR

0,2%

Prosafe

Cyprus

-42,9%

48,6

27,76

NOK

-0,3%

Grupa Lotos

Poland

-29,6%

9,058

6,378

EUR

4,4%

Gazprom

Russia

-28,2%

9,02

6,478

USD

1,7%

Motor Oil (Hellas)

Greece

-27,2%

8,2

5,97

EUR

0,6%

MOL Hungarian Oil and Gas

Hungary

-27,1%

32,31

23,57

USD

0,0%

Unipetrol

Czech Republic

-23,9%

6,176

4,699

EUR

3,9%

Novatek

Russia

-23,6%

136

103,9

USD

3,9%

Gazprom Neft

Russia

-22,1%

22,94

17,87

USD

3,9%

selected from the STOXX 300 general index (which is made up of 300 companies from all fields of activity in this part of Europe, being relevant for the entire evolution of stock exchanges and economies in Central and Eastern Europe). Only nine of the 26 companies from the oil & gas index have registered growths during the 12 months previous to November 2014, while 17, the rest of them, have had negative evolutions of up to -52 percent (see the charts ‘Winners of the STOXX 300 OIL&GAS index’ and ‘Losers of the STOXX 300 OIL&GAS index’ respectively).

PERFORMANCE BELOW THE REAL ECONOMY The negative evolution of the oil and gas industry at regional level (in Central and Eastern Europe or in Western Europe) as well as at international level (developed economies on the whole) is shown not only by the involution of the sector indexes, but also by the weaker evolution of the oil & gas indexes compared to general indexes – those representative for the entire economic evolution of the concerned states. By mid November the STOXX 1800 OIL&GAS index had registered only a two percent growth on the previous 12 months, a three percent growth against the value registered by the end of 2013 and a 8.9 percent decrease (in less than half a year!) starting H2 2014. For comparison, 78

at the same moment in time (mid November 2014) the STOXX1800 general index (the ‘parent’ index!) had a 14 percent growth against the value registered 12 months ago and against the value by the end of the previous year, and also, unlike oil & gas index, a 7.3 percent growth during H2 (see the chart ‘Oil and gas industry vs. the economy in developed countries’). Concomitantly, for the oil and gas industry in Western Europe (whose evolution is reflected by the STOXX 600 OIL&GAS index) the problems seem to be much serious. The divergence between the oil & gas index and the one relevant for the entire economic development of the region, is much more evident: by mid November the STOXX 600 general index registered a four percent increase during the last 12 months, and had registered a 2.7 percent increase against the end of 2013; for the same intervals the index relevant for the oil and gas industry registered -7.2 percent and -6.9 percent respectively. Also, from the beginning of H2, the STOXX 600 index had a 2.2 percent decrease until mid November, while STOXX 600 OIL&GAS index had registered a more than 16 percent decrease (see the chart ‘Oil and gas industry vs. the economy in Western Europe’). Yet, by far, the weakest evolution of the sectorial indexes expressed in percentage points (as we have seen above!) as well as against the index that reflects the economic evolution as a whole, was registered in Central and Eastern Europe. This region being worst hit by the negative www.petroleumreview.ro

OIL AND GAS INDUSTRY VS. THE ECONOMY IN DEVELOPED COUNTRIES During H2 2014, STOXX 1800 OIL&GAS index fell about 9%, while the general index, relevant for the overall economies of the developed countries, grew by approx. 7%.

The chart on the left is showing the evolution, by points, of the two indexes during the last 20 years; the chart on the right reveals the variations of the two indexes expressed in percentage points, during the mentioned intervals. Source: Stoxx Ltd

OIL AND GAS INDUSTRY VS. THE ECONOMY IN WESTERN EUROPE During the last 12 months, the index representative for the oil and gas field in Western Europe has had a weaker evolution than the index representative for the economy as a whole.

SPECIAL FOCUS OIL AND GAS INDUSTRY VS. ECONOMY IN CENTRAL AND EASTERN EUROPE During the last 12 months, the index representative for the oil and gas field in Central and Eastern Europe has decreased more than the index representative for the economy as a whole.

The chart on the left is showing the evolution, by points, of the two indexes during the last 10 years; the chart on the right reveals the variations of the two indexes expressed in percentage points, during the mentioned intervals. Source: Stoxx Ltd

OIL AND GAS INDUSTRY VS. ECONOMY IN ROMANIA During the last 12 months, the index representative for the Romanian energy sector has had a constant weaker evolution than the index representative for the economy as a whole. However, in H2 the energy sector has had a better evolution than the economy as a whole.

The chart on the left is showing the evolution by points of the two indexes all over the year; the chart on the right reveals the variations in percentage points of the two indexes, during the mentioned intervals. Source: Bucharest Stock Exchange

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evolutions registered on the stock exchanges by the Russian companies affected by the US and EU sanctions. Among these companies we should mention Gazprom, whose shares had registered a fall of 28 percent by mid November 2014 during the latest 12 months; Novatek (-23 percent) or Gazprom Neft (-22 percent) – see the chart ‘Losers according to STOXX 300 OIL&GAS index’. At the other end, looking at a hypothetic top 10 of companies that registered growths on the stock exchanges (in such a standing there would be only nine of the 26 companies) there are, along with companies from Turkey, Slovenia and Russia, two Romanian companies: Transgaz, which registered a 25 percent growth of its shares’ prices, and Romgaz – with an almost insignificant advance of some one percent. As a result of the mix of evolutions revealed above, the STOXX 300 OIL&GAS index had registered a fall of 21 percent by mid November compared to the value registered 12 months ago, a 17 percent fall against the value registered by the end of 2013 and a 16 percent decrease against the start of H2; for comparison, STOXX 300 index (general index, relevant for the overall evolution of the most important 300 companies across all fields of activity in Central and Eastern Europe – Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Macedonia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine) had registered a decrease of 14 percent for the latest 12 months; STOXX 300 had also registered a fall of 10 percent against the end of 2013 and against H2 2014 (see the chart ‘Oil and gas industry vs. economy in Central and Eastern Europe’). A first conclusion to be drawn would be that, at least for the moment, the consequences of oil prices downfall for the industry are rather in the form of adjustment

of shares’ prices for the companies in the field, adjustments that have led to cut gaps (revealed by the representative indexes) between the oil and gas industry and the real economy. At least this would be the conclusion after looking at the indexes’ evolution (the sector related ones and the general ones) relevant for the developed economies. It’s nevertheless true that, when looking at the relevant indexes for Western Europe and for Central and Eastern Europe, the situation is rather different as the consequences of the oil price downfall is much more intense; both areas (thus both sets of indexes) are much more under the influence of the evolutions of Russian listed companies – companies affected by the US and EU sanctions. Irrespective of the geographical region, it’s certain that the fall of the oil prices has had as obvious consequence the gap adjustment between the oil and gas industry evolution (shown by the indexes in the field) and the one of the real economy (revealed by the general indexes). Drawing the conclusions – as, for the moment, the aggregate oil and gas industry at regional level seems to be going through adjustment and not necessarily a correction following the fall of oil prices. It is far from being a proportional correction in accordance with the oil prices downfall. On medium and long term the prospects are different: not only due to the current price of oil (low!) the changes are to be noticed in the balance sheets and in the 2015 financial results; if the anticipations regarding the price come true (no spectacular comeback above the USD 100 per barrel level – very unlikely in the current context!) these companies will be facing new and heavy blows. Such blows would affect incomes and investments and this trend has already started being included in the market prices and it will have a strong saying starting by 2015.

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The Petroleum Club Christmas Party 2014 The Petroleum Club Christmas Party that took place at the Howard Johnson Grand Plaza Hotel Bucharest on December 10th, 2014, gathered the top representatives from the oil & gas industry in Romania, honouring a tradition dating back to 2002. The theme of the party was “Mexican”. by Costin Neagu

n his introductory speech, Andrew Costin, the Petroleum Club President, mentioned the most significant achievements of the Petroleum Cub in 2014, and thanked the members and partners for their active support that helped the Association better represent the oil & gas industry. He also nominated the 15 new members that joined the Club in 2014: Marsh Broker de asigurare – reasigurare, Saltel Industries, Geoinform, RINA SIMTEX, Quest Advisors, Kraftanlagen Romania, Modpack System, TUBEX, HOTWELL, Halliburton, TIAB, Inter-Permit Group, Maloney Metalcraft, Hasel Invent, Well Completion. The contribution of the sponsors of the Christmas Party (Expert Petroleum, Prospectiuni, Siemens, HABAU PPS Pipeline Systems, LEROY & Asociatii, KPMG, Weatherford, ENERIA, Air France – KLM, VIXO) was also acknowledged. Following an initiative started in 2008, Andrew Costin, the Petroleum Club President, and Costin Neagu, the Executive Director, handed out the annual awards to the 2014 worthy winners. The “Oilman 82

of the Year 2014” was awarded to Gehrig Schultz (1), the Prospectiuni CEO and Chairman of the Board, for his outstanding contribution to the development of Prospectiuni, and his active involvement in the educational projects of the energy sector in Romania. The Petroleum Club also acknowledged his considerable and constant support of the oil & gas industry in this country, and his leadership among his industry peers. Alexandru Vidu, Sales and Marketing Manager Eastern Europe WEATHERFORD (2) collected the “Company of the Year 2014” award on behalf of his company, while KLM (3), represented by Alexandra Sinn, Corporate Account Manager Air France & KLM Romania, won the “Special Award 2014: KLM - 95 Years - The Oldest Airline still Operating under its Original Name”. The special partnership with Air France KLM continued in 2014, the popular Christmas raffle comprising Flying Blue cards, laptop bags and business trolleys, and the great prize, one round trip ticket Bucharest – Paris – Mexico City. www.petroleumreview.ro

oil & gas

GAS SUPPLY POSSIBLE DISRUPTIONS

EC concerns over the consequences for SEE countries In October, the European Commission addressed the European Parliament and the European Council on the matter of ‘Preparedness for a possible disruption of gas supplies from the East during the fall and winter of 2014/2015’, a report on the findings of the South-East-European Focus Group. By Victor Lupu

ccording to the report, one of the issues of concern is related to the interconnector between Romania and Bulgaria. “This infrastructure that receives EU financial support under the European Energy Program for Recovery was initially foreseen to be operational by the end of 2013 but has not been finalized yet,” the report reads. It further says that “information received from both Member States certainly makes it clear that urgent action is required in order to ensure that the outstanding issues of this project are resolved. However, given the apparent complications of the project, it is unlikely to be finalized for the coming winter. Nevertheless, clear political commitment from both Member States is necessary to overcome technical and organizational challenges and finalize the project in the shortest timeframe. In addition, the low pressure in the Romanian system remains problematic with respect to enabling more substantial cross-border flows to Bulgaria once the pipeline is in place but also to and from Hungary. This strongly underlines 84

the need for all regional strategic infrastructure (domestic and cross-border) to be put in place expediently.” The document also mentions the fact that Romanian national reports mention in a worst case scenario of gas disruption, a more complex supply scheme that could involve an agreement with Ukraine by which the latter allows flows from e.g. Slovakia to be directed to Romania and possibly Bulgaria through its system. In this case, the interconnector between Romania and Bulgaria is essential. As far as the connection between Romania and Hungary is concerned, the document reads that this connection is about 4 million cubic metres per day. This figure is however further constrained by internal bottlenecks in the Romanian system highlighting the aforementioned general lack of solid gas supply possibilities within these Member States. The document concludes that the SEE Focus Group Member states “remains very exposed to either a

Ukrainian transit or a full Russian supply disruption.” Among the Commission’s recommendations, it stands the one saying that “Member States in the focus group relate to increasing flexibility in production (where applicable) and increasing withdrawal rates from the underground storages, but neither measure is considered sufficient to resolve a deeper supply cut. In any event, a faster usage of storages will also have repercussions both on future availability in case of a prolonged crisis as well as physical characteristics as storage withdrawal rates drop as storage volumes decrease.” Common recommendations point to the need for more transparency, to the need to increase the bilateral and regional perspective, to the need to apply the EU market rules in consistent and proportionate manner, to the need to finalize the projects in time and to the need to ensure that fuel switching can be carried out. Specific recommendations for Romania point to several issues: www.petroleumreview.ro

1. Take all necessary measures to overcome challenges of finalizing the Romania-Bulgaria interconnector in the coming months. It is the understanding of the Commission that delays of this project have been twofold: technical issues related to the construction of the Danube crossing and problems concerning the pressure difference between the Romanian and Bulgarian systems. As has also become clear from the Romanian national report, which builds on an autarchic perspective but experiences significant shortfalls, interconnections are crucial in increasing security of supply; 2. Romania should by 31 December 2014 work out a clear definition of protected customers in line with provisions of the Security of Gas Supply Regulation. It is important to delineate this group both from the point of view of Romania’s obligations under the Security of Gas Supply Regulation as well as to allow less sensitive groups of customers to react to price signals in case of serious shortages. In view of the significant potential shortfall during the winter months it is crucial to delineate precisely which – limited – customer groups the Romanian authorities want to protect in a particular manner; 3. Investigate (as starters) shortterm feasibility of making full use of Hungarian-Romanian interconnector, potentially bridging apparent limitations within the Romanian system to allow flows reaching

capacity of the interconnector. At the same time take necessary measures to allow higher flows towards Hungary; 4. Investigate possibility of supplying Moldova via existing pipeline network in case of lack of flows from Ukraine. Romania should undertake to ensure supplies reach Moldova in the case of a gas supply emergency – on the basis of solidarity –. It has not done so in its national report so it is important that this is made clear in bilateral discussions; 5. Urgent publication of storage level data by Romgaz. EU-level transparency data on storages has proven a very valuable tool to monitor and debate EU security of supply policy. So far the Romanian storage system operator is not a member of Gas Storage Europe (GSE) nor is it providing data on gas storage volumes to GSE. Romania is thus the only Member State with underground storage capacity which is not reporting any data for which there appear to be no reasonable explanation. The South-East-European (SEE) focus group was defined, for the purposes of this stress test exercise, as consisting of Greece, Bulgaria, Romania, Hungary and Croatia. These Member States were selected particularly for their mutual dependency and subsequent reliance on one or few Member States for deliveries of gas in case of a disruption either of the Ukrainian route or of Russian supplies in general. 85

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THE ROYALTIES’ ODYSSEY

A long debated taxation system At the end of 2014, the major decision expected by all players on the oil and gas market in Romania and not only, the one concerning the royalties for oil and natural gas, was solved... by being postponed. Policy makers adopted the decision at the end of an electoral year, during which they took no chances, thus avoiding discussing a delicate issue before the presidential elections in November 2014. It’s interesting to note that the government is not going to give up the current royalties system for oil and natural gas extraction, yet it is to set up an extra-tax on hydrocarbons exploitation to replace the special tax of 0.5 percent on resources and the 60 percent tax on profit after the gas price liberalisation. by Daniel Lazar

he royalties system for the oil field will not be amended for 2015 but maintained with the same taxes, so that another formula is to be considered subsequently, said the delegate minister for budget Darius Valcov. “The current system will be extended for 2015,” the official stated, the decision is to be adopted by emergency ordinance. In September 2014 PM Victor Ponta declared the draft on new royalties for the oil field will be debated at the beginning of 2015 and a new system capable of ensuring budgetary resources at the level of European average, however not to imperil the investments by setting too higher taxes. The current legal framework is not differentiating the types of deposits, while the range of royalties is from 3 to 13 percent of the hydrocarbons output. The royalties were set in 2004 valid until December 2014, set up by the law 86

for privatising Petrom, the company being acquired by the Austrian group OMV. The executive is contemplating the setting up of a tax on profit for oil and gas explorations to replace the special taxes that expired by the end of 2014. It is extremely important that the royalties system will be re-discussed but is to be applied only to future leases. The government intends to preserve its budgetary revenues, as the two taxes were scheduled to expire at the end of 2014. Concomitantly, the authorities are working on a project meant to regulate the level of royalties, yet it is to be applied only for future leases, with no effect whatsoever on the companies already having ongoing oil agreements such as OMV Petrom, Romgaz, ExxonMobil, Chevron, Lukoil, MOL or Gazprom Neft, as the level of royalties is specifically expressed within the leasing agreements.

The current situation Currently, the royalties’ levels range between 3.5 and 13.5 percent of the oil output value, while for natural gas the range is from 3.5 to 13 percent, according to the deposits size. The level of royalties could not be amended for ten years, being specified by the Petrom privatisation contract in 2004 and becoming a constant political subject during the last decade because the state collects approximately EUR 200 million from oil and gas royalties and some companies have reported high profits by benefitting from the current level. The average level of collected royalties is seven percent of the output, while the European average level is 15 - 18 percent. The oil barrel price has fluctuated from USD 40 per barrel in 2004 to USD 147 per barrel in 2008 in order to fall just after the start of the economic crisis to minimum levels of USD 40 per barrel. Once the developed www.petroleumreview.ro

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economies regained momentum the price of oil again reached levels of USD 110 per barrel only to fall again during H2 under USD 80 per barrel due to the poor results registered by Europe and to the massive US massive output from unconventional deposits. In June 2014 PM Ponta announced that the philosophy of the new taxation system is “to collect little from much, not to collect more from little”. The Finance Ministry along with the National Agency for Mineral Resources (NAMR) are in charge with drawing up the new taxation system. NAMR President Gheorghe Dutu affirmed, in his turn, that the new royalties system will be differentiated for onshore, offshore small depths and offshore great depths. He hinted that some incentives might be set for depleting deposits. Furthermore, Ioana Petrescu, the former Finance Minister, announced the ‘pole tax’ will be cut down from 1.5 percent to 1 percent of the assets and the companies operating in the Black Sea continental platform will be exempted from the tax.

The price of petrol during the last five years In Romania the petrol price doubled from 2009 to 2014, while the diesel fuel price increased by 72 percent during the same interval due to the international price of the barrel, but also due to the increase of taxes or due to newly set up taxes by the state. Hence, the petrol price grew from RON 2.9 per litre up to an average RON 5.9 per litre, according to the European Commission data, while the diesel fuel price grew from RON 3.3 per litre to an average RON 6.1 per litre. By the end of 2014 the price has fallen, however this evolution cannot change the general trend. The prices have climbed in Romania faster than in other countries in the region, the fuels being now more expensive in Romania than in Austria – OMV’s country of origin, owner of Petrom – and in

Poland, Hungary or Bulgaria. For comparison in Bulgaria the price of petrol increased by 61.3 percent and the price of diesel fuel by 55 percent. In Hungary the price of petrol grew by 54.3 per cent, the price of diesel fuel by 50 percent. In Poland prices registered lower growths: petrol prices went up by 50.7 percent, the diesel fuel prices by 47.3 percent. Starting with 2009 the Romanian state increased several taxes: the schedule for bringing in line the excises was brought forward to the European average, while in 2010 the VAT climbed from 19 to 24 percent. Moreover, last year the government changed the excises calculation system and imposed an artificial exchange rate made up by the exchange rate valid on October 1, 2013 indexed with the average annual inflation rate. Finally, in April 2014 the executive set up a special excise of seven eurocents (EUR 0.07) per litre of sold fuel.

Extra taxes for energy companies The extra taxes for energy companies set up at the beginning of 2013 and expected to last until the end of 2014, will remain in place for another year, until December 31, 2015, as the new system of royalties has been postponed. At the beginning of 2013 the government set up several extra taxes for the companies acting in the energy field, taxes valid until December 31, 2014, during this interval a new system of royalties was expected to be approved, the current one being in place until January 2015. Thus, a tax on monopoly for electric power and natural gas transport and distribution companies was set up, ranging between RON 0.85 to RON 0.1 per MWh. Another 60 percent tax on extra revenues recorded by the companies following the deregulation of prices in the natural gas sector, as well as a 0.5 percent special tax on incomes recorded by the companies by exploiting natural resources, others

than natural gas. For the monopoly activities the government argues, in a draft law, it is needed in order to supply funds for co-financing investments financed by European funds. On the background is the fact that monopoly activities in the electric power and natural gas fields, meaning transport and distribution of electric power and natural gas, are highly profitable due to lack of competition. The government estimates to collect in 2015 some RON 245.6 million as tax on natural monopoly in the fields of electric power and natural gas, RON 743.2 million as tax on extra revenues following price deregulation in the natural gas sector and RON 114.6 million as tax on incomes from exploiting natural resources.

Conflicting statements “There are two more taxes, one is the extra-tax for natural gas due to the gas price liberalisation for the industry sector and the second one is the tax on mineral resources. Normally these two taxes should be off on January 1, 2015. The government explained it maintains the royalties. (...) These royalties can’t be changed without the agreement of all 44 licensees of perimeters. But it could change the extra-tax for gas and the tax for mineral resources. The government can keep their deadlines and increase them, as taxes are in the executive’s yard, they’re applicable to everyone without negotiations, or it can cancel the two taxes and set up a new tax to include both of them and to add something more in order to increase the budgetary revenues,” President Traian Basescu said one month before concluding his mandate. In retort, PM Victor Ponta said that, in the Finance Ministry’s view, the taxes remain the same only during 2015. The new project on royalties will be submitted for public debate at the beginning of 2015, as political consensus is needed and not a decision adopted by a majority, royalties will 87

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partly be transferred to local authorities according to the future system. “The new project will be submitted for public debate at the beginning of 2015, as political consensus is needed, not just a decision adopted by the majority. (...) It would have been irresponsible to bring up the draft during an electoral year,” the Prime Minister said. He further noted that, currently, there is in effect a solution for the state to collect more from the big companies, i.e. the special tax on extra profits of the companies in this sector, meaning two thirds of the extra-profit goes to the state budget. Victor Ponta said the current taxation system is agreed upon by the foreign partners and is to remain in place also for 2015.

How is the excise level calculated The domestic natural gas output is supplied, in almost equal ratio, by Romgaz and OMV Petrom. OMV Petrom is the only company extracting oil, according to the Petrom privatisation contract in 2004. The excises level will be denominated in RON commencing by 2015 and is to be updated in 2016 and yearly with the inflation rate, according to the draft amending the Fiscal Code. “Starting January 1, 2015 the excises level is to be set in RON on the measurement unit, on the basis of the level in use in 2014. Starting with 2016 the level is to be calculated on yearly basis updated with the inflation rate during the last 12 months, calculated in September vs. the same month the previous year, as officially delivered by the National Statistics Institute,” Finance Ministry officials said. The modification is proposed in order to prevent the fluctuation of budgetary revenues from excises depending on the RON/EUR exchange rate set by the European Central Bank on October 1 each year, as well as for preserving the real value of these revenues and for the predictability improvement for the state budget 88

and for the business environment, the institution underscored. By the end of November 2014 PM Victor Ponta said the government is not going to make any changes of excises as they are to remain “exactly at the same level as in 2014, not a penny more” although the current excises system should lead to a decrease (of budgetary revenues). The formula according to which the excises value in 2015 will be calculated is still under the analysis of a working group, Minister of Finance Ioana Petrescu was saying on October 1, 2014, without specifying if the excises would be set in accordance with the lower exchange rate announced by the European central Bank (ECB) which would lead to lower level for excises. Two weeks later the delegate minister for budget Darius Valcov said the formula was not agreed upon, but it was considered the variant of setting it in RON. The European Central Bank announced a reference exchange rate of RON 4.4093/EUR on October 1, 2014, this index used by the government to calculate the level of excises being 0.88 percent lower than the previous one – RON 4.4485/EUR. Should the excises be calculated on the basis of the exchange rate set by the ECB, then their level would be lower in 2015. For 2014 the government used the ECB exchange rate in 2012 to calculate the excises, as it had been higher than the one in 2013, which should have been used nevertheless, and added the highest inflation rate, the one in September 2013. Hence, the excises were paid at an exchange rate of RON 4.73/EUR, i.e. RON 0.30 higher than the ECB level.

Reduced royalties for oﬀshore exploitations? Royalties should be reduced for offshore explorations and exploitations, as no one is going to invest billions of dollars without incentives to recoup the investment, in this regard

a consensus with the opposition is needed so that the future system for royalties is not amended subsequently, Premier Victor Ponta said. He added that, besides combating fiscal evasion, the royalties are seen as the second magical solution to collect money to the state budget, but he reiterated the idea that predictability is needed for this field and a government issuing an emergency ordinance proves it is unpredictable. “Substantiation is needed to explain: why are we doubling them, why are we tripling them, why are we cutting them down. The World Bank study, discussed with the International Monetary Fund and with the Coalition for Romania’s Development is intended to set up such substantiation (...). For example, for the offshore explorations and exploitations we have to cut them down, because no one will invest billions of dollars without incentives to get back the money during the next 5 10 - 15 years,” the Premier underlined during a conference on economic issues. The official argued that, in the case of royalties, consensus with the opposition is needed so that the system adopted by the government is not changed subsequently. “We have to agree on how we are going to stimulate investments as well: do we want to stimulate investments especially in the energy and natural resources fields through the fiscal system, through royalties or do we want only to use the current depleting deposits,” Victor Ponta added. The decision to postpone the talks about the royalties’ level was received with mixed feelings by the actors involved. On one hand the large companies rejoice for the fact that royalties have not been increased, but on the other side of the barricade, the ones that envisaged collecting more money to the state budget, by increasing the ‘quotas’ collected from the operators on the market, are forced to look elsewhere for supplementary funds. For the time being, the royalties’ odyssey, on which a lot of ink was used for writing on paper, is going on... www.petroleumreview.ro

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ROMANIA’S BEST CARDS

Natural gas deposit in the Black Sea and the abandonment of the South Stream project Russia has recently announced it decided to stop the South Stream project due to the opposition coming from the European Commission, as President Vladimir Putin said. The abandonment of the project is good news for Romania, as now it remains on the map of possible transit routes for Russian gas to Europe. More than that, our country could be included into a future pipeline project. by Adrian Stoica

omania supported the building of the Nabucco pipeline until 2012, but the project was abandoned as it could not provide the resource suppliers. Now, as its competitor, the South Stream project, has been halted, Romania could play an important role on the gas transit market as well as gas supplier in the future, considering the reserves confirmed in the Black Sea. OMV Petrom, Exxon and Transgaz signed in May 2014 an agreement so that the natural gas extracted from the Black Sea is to be taken over by the national network for gas transportation. Transgaz has budgeted for 2013 2017 total investments of RON 1.72 billion (EUR 390 million), of which RON 732.7 million for pipelines. 90

The company underscored this is a minimum investment plan that is to be adjusted once the future needs for important projects are clarified – such as the exploitation and transport of the natural gas from the significant deposits discovered in the Black Sea and the use of shale gas deposits in Dobrogea and Barlad regions, if they are confirmed. ExxonMobil Exploration and Production Romania and OMV Petrom started in July the deepwater drilling in Neptun offshore block in the Black Sea, the area where the two companied discovered natural gas in 2012. ExxonMobil Exploration and Production Romania and OMV Petrom possess 50 percent of the deep water sector of the Neptun block each.

The most important infrastructure project in the field of natural gas Romania is to focus on the building of a EUR 230 million gas pipeline to transport gas from the Black Sea perimeters to Podisor, Giurgiu County, delegate minister for energy Razvan Nicolescu said. “The most important infrastructure project in the field of natural gas for Romania is the Dobrogea-Podisor pipeline, which is to transport the gas from the Black Sea to the Romanian national transport network (SNTGN). We are talking about a EUR 230 million project we hope to finalise with the support coming from the European Commission,” the official was stating by mid December 2014. www.petroleumreview.ro

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The Transgaz transport infrastructure for the gas in the Black Sea would cost some EUR 300 million and should be completed by 2019 when OMV Petrom anticipates it will start the commercial exploitation of the gas deposits in the Black Sea. Estimated gas reserves in the Black Sea leased perimeters by OMV Petrom and Exxon amount to approximately 84 billion cubic metres.

Transgaz losses if South Stream would have been completed

1 billion investments carried out together with its partner ExxonMobil in the Black Sea, the first cubic metre of gas being expected to be extracted in 2020, said OMV CEO Gerhard Roiss, as quoted by international media. Initially a supporter of the South Stream project, the manager of the Austrian group recently expressed his official position, saying that the exploration of the Black Sea continental plateau is a priority for the company.

Favourable conclusions The completion of the South for the AGRI project

Stream pipeline would have led to a 20 percent drop in revenues for Transgaz and to 35 - 40 percent decrease of the operational profit, an Erste Group research report reveals. Russia’s decision means Transgaz would count on yearly incomes of over EUR 60 million (RON 269 million), incomes coming from Gazprom taxes paid to convey in transit Russian gas to the Balkan states for passing Dobrogea. Transgaz’s operational profit last year was of RON 536 million. The halt of the South Stream project “is good news for Transgaz, as South Stream was regarded as a major threat for the revenues from transit fees. Furthermore, the Russian pipeline was seen as means to transport natural gas from the Black Sea to Europe, bypassing Romanian territory and Transgaz respectively,” the Erste Group Research report reads.

OMV to focus on the Black Sea OMV announced, right after the news about the South Stream project, that it would focus its attention on the Black Sea investments, of major importance for the company. The extension of the South Stream pipeline to Austria, agreed upon with Gazprom at the beginning of 2014, would have cost the Austrian company EUR 100 million, as compared to the USD

The feasibility study for the AGRI project, aiming at bringing liquefied natural gas from the Caspian Sea region to Constanta, has been finalised and the conclusions are in its favour. The four partner states are to decide in January 2015 if they will carry on the EUR 4.5 billion project. The Azerbaijan-Georgia-Romania Interconnector (AGRI) was launched in 2010, having as shareholders the state companies SOCAR (Azerbaijan), GOGC (Georgia), Romgaz (Romania) and MVM (Hungary). The representatives of the participating states to the project met in Bucharest in December 2014 to learn about the conclusions drawn by the feasibility study carried out by the British consultancy firm Penspen.

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Slovakia’s alternative to South Stream Eustream, the company that operates the pipeline network in Slovakia, has launched the idea of a project called Eastring to build a new pipeline for transporting natural gas from Western Europe via Romania to the Balkan states, in order to reduce the region’s dependence of Russian gas. Eastring would connect the current networks in Slovakia and Ukraine to the one in Romania through a new 570 km pipeline,

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allowing natural gas from Western Europe to reach the Balkans, Eustream President Tomáš Mareček said, according to international media. Eastring’s potential capacity would be of 20 billion cubic metres per year and it should also be able to transport natural gas from Russia to the Balkans or from Western Europe to the Balkans. The Eustream President estimated the costs to EUR 750 million to connect Velké Kapusany in Eastern Slovakia to Romanian border, via the Soyuz pipeline out of use in Ukraine, and further down south through Romania to Bulgaria. Our country would play a key role in this project, taking into consideration that the longest part of the pipeline is to be built on Romanian territory.

Romania’s priorities for 2014 - 2017 Romania has the largest natural gas reserves in Central and Eastern Europe, the confirmed deposits amounting to approximately 1,600 TWh. 95 percent of the total conventional natural gas geological resources, 93 percent of the certain deposits, are onshore. Considering the average annual output in Romania (11 billion cubic metres of natural gas) and the five percent steady yearly decline of certain natural gas reserves, corroborated with an 80 percent replacement rate of natural gas reserves, the current natural gas reserves would drain in about 14 years, according to the new National Energy Strategy for 2015 - 2035, recently submitted for public debate by the Energy Department. The perspectives of new confirmed resources are conditioned by the future investment volume coming from domestic producers and from international companies in the field of geological exploration, as well as by the results of the exploration works – meaning the discovery of new deposits. Just like in the case 92

of crude oil, on short and medium term, the confirmed reserves of natural gas could be augmented by implementing new technologies meant to increase the deposits’ recovery rate, while on medium and long term by implementing projects for deep drilling (more than 3,000 metres) and by exploring the onshore areas having a more complicated geological structure and the offshore deposits in the Black Sea, especially the deepwater ones (more than 1,000 metres). Considering the decline of the conventional hydrocarbons output, Romania needs to intensify the exploration and the exploitation of new oil and natural gas deposits, both conventional and unconventional. An important part of Romania’s natural gas deposits are in an advanced depleting process and are working on low and very low pressures (under 10 bars) and consequently register low output. According to the new energy strategy draft, the development plans to develop the natural gas infrastructure for 2014 - 2017 is targeting the following directions: • To finalise the interconnection project between Romania and Bulgaria and to provide the reverse

flow of the natural gas at the Giurgiu - Ruse interconnector, anticipated for the end of 2016; • To interconnect the natural gas transit network to the natural gas national network and to provide the reverse flow at Isaccea I (Tranzit I) interconnector, finalisation estimated for 2016; • To set up an access corridor between the Black Sea exploitations and SNTGN; • To develop the export capacities through the Hungary - Romania interconnector up to a capacity of 1.75 billion cubic metres per year with a 40 bar pressure. This is a joint interest project, part of an ampler project called “the Development of national transport network on Romanian territory” estimated to be finalised in 2019; • The opportunity to interconnect with TAP (Trans-Adriatic pipeline) – a project aiming at the transport of natural gas from the Caspian Sea (Azerbaijan) to Greece, Albania and to the Adriatic Sea, Italy and further on to western Europe. The National Energy Strategy is under public debate until January 10, 2015, its re-examination is expected to be finalised by May 2015. www.petroleumreview.ro

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THE NEW CASE FOR SHARED SERVICES

Growth fuelling challenges The oil and gas industry is enjoying an unprecedented growth cycle that is likely to continue for many years. But that growth brings capital, cost and capacity challenges that can be overcome by changing the way services are delivered internally.

he dramatic rise in unconventional production is certainly one of the most compelling success stories in the energy industry’s recent history. The rush to develop tight oil, oil sands and other unconventionals has increased North American liquids supply to levels not seen since the 1980s, and the trend is expected to continue well into the future. But that success comes with new and unique challenges. The growth in crude production, coupled with the extended global recession, has pushed the price of oil down to a range of USD 90 to USD 110 per barrel, tightening margins. At the same time, the need for cash continues to rise, from capital requirements to back-office expenses, with most related to the boom in shale drilling. The situation is much the same for downstream companies. Many face expensive capital requirements to upgrade aging facilities and provide a refining outlet for increased production of light crude. In addition to these margin and capital challenges is the fact that the industry’s workforce is aging and a significant talent shortage is impacting performance in key areas. The innovation and technology advances that have spurred a new “energy renaissance” in North America have left many companies struggling to manage growth. There is a very real need for sustained cost reduction and system scalability to accommodate continued increases in activity. A key challenge for energy companies today is to identify structural, long-term organizational changes that can strengthen their ability to compete in a lowmargin/high-capital capital growth market. 94

The innovation and technology advances that have spurred a new “energy renaissance” in North America have left many companies struggling to manage growth. What needs to change To remain competitive, energy companies today need to maximize cash from operations. They can achieve this in large part by lowering back-office costs, but this must be done without negatively impacting service. In addition, it will be critical for companies to keep the rate of increase of future costs below that of their revenue growth. And they must have adaptive cost structures in order to flex with constant, unanticipated change. In other words, companies must find a workable balance between staffing, costs and a high level of service for backoffice operations. To achieve this balance, companies have several talent and cost levers they can use, including: • Knowledge management • Workforce specialization • Labour arbitrage • Process improvement • Process standardization • Process automation www.petroleumreview.ro

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It will be critical for companies to keep the rate of increase of future costs below that of their revenue growth. Choosing the right operating model There are pros and cons to each of the various models for delivering back-office services - outsourcing, captive shared services or hybrid structures. However, many organizations have learned that in order for outsourcing to be an effective solution, a highly functional internal governance model is required. And once that mature model is in place, companies could enjoy the benefits of outsourcing - cost and efficiency - while using a captive shared services approach that also enabled flexibility. Consequently, there has been a trend toward insourcing among energy companies, allowing organizations to save the margins they previously passed on to their outsourcing partners. Given today’s constraints, both established supermajors and start-ups alike should take a fresh look at shared services to help them realize their cost management goals.

Maximizing the potential of shared services Historically, shared service organizations have underperformed for many oil and gas companies, for a number of reasons. Thus, discussion of expanding these operations into new geographies and new, more complex functions - such as budgeting, planning and analysis - is often met with scepticism. But there is a great deal of value to be gained by fixing and optimizing existing shared service operations, and then transitioning to new functions. Doing so, of course, requires understanding what is currently not working, and then designing and implementing corrective actions. Issues that companies need to consider and address include: Leadership support - Is company leadership tangibly supporting shared services? If executive leadership does not mandate shared services and allows an “opt-in” approach, many predictable events negatively impacting performance often follow. Functional leaders may agree to migrate certain activities to shared services but may only agree to do so as long as they can maintain control and exclusively determine the definition of success of shared services. A better formula for success is to agree upon which activities will be migrated, based on leading-practice criteria, and agreeing on a standard delivery model, along

with a cross-functional RACI (i.e., who’s Responsible, Accountable, Consulted, and Informed for each management activity) agreement. In short, a standard delivery model is needed. The minute functional leaders are allowed to negotiate changes to the standard model, future success is compromised. Branding - Typically, the biggest branding mistake when it comes to shared services is NOT branding. Without effective branding, stakeholders are free to rely on their preconceived notions of what shared services are or should be. Proactively branding the organization as a leader in global collaboration or as an innovation centre can have a positive effect. Brand drives culture and culture drives performance. Governance - Allowing your shared services governance organization to be structured as a one-way, topdown oversight organization specifically focused on shared services improvements is a very common mistake that can result in missed improvement opportunities, negativity and morale and retention problems. Frequently, performance problems originate within the shared services ecosystem, but outside of the shared services organization’s control. Examples include: • HR employee requisition and approval policies result in continual understaffing of the centres. • IT infrastructure results in slow and unreliable system response, thus handicapping productivity. • Facilities sharing policies, if not well communicated and executed, can result in second-class treatment for centre personnel, placing a drag on morale. • Internal corporate process owners place external customer contact constraints or approval requirements upon the centre, but don’t keep the work flowing by performing these additional intermediary steps they have added. Effective governance takes an arm’s length view of the entire shared service ecosystem, including the enabling organizations that provide service to the shared service organization as well as their customers.

Oftentimes, performance problems originate within the shared services ecosystem, but outside of the shared services organization’s control. Further, the governance organization should demand performance accountability wherever there are 95

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performance gaps, across the entire ecosystem. Governance should be both an advocate and a critic for all stakeholders. Ongoing, proactive, multidimensional, effective risk assessments should be incorporated into the governance process. Effective governance has to be designed. In addition to councils and accountability documents, there are many processes that should be designed and enabled. Expectations management - Shared service organizations are often burdened with unrealistic expectations. Internal customers do not want to accept a drop-off in performance during the migration period, specifically when knowledge transfer and new employee training is taking place, and where an infrastructure may not be mature. Also, customers commonly demand a performance level that has never been measured or achieved in the legacy organization. An outsourcing company would never agree to delivery on an unproven, unrealistic performance baseline, nor should a captive shared services organization. External benchmarks are helpful in understanding what is possible, especially when these benchmarks are linked to leading practices that helped these companies achieve their desired performance goals. Internal historical performance measures are also helpful, but cannot be looked at in isolation. Processes that have been migrated to a centre are different for a variety of reasons (for example, more handoffs, more workflow, more specialization) and therefore will likely result in new peak performance levels, either higher or lower. As such, committing to replicate or exceed legacy performance may be a mistake. Shared services organizations are often best served by committing to establish a performance baseline over a period of time, then agreeing to a migration period where performance will increase up to a steady state. Then, once a steady state is achieved, setting continuous improvement targets is often an effective way of demanding constant change over what is controllable and measureable. Though itâ&#x20AC;&#x2122;s not easy to accomplish, an attempt should be made to tie performance to migration timelines and milestones. Progress compared to these time-adjusted performance measures should be communicated. For example, invoice processors can commit to processing 50% of the number processed by the legacy organization by month three, and 90% by month nine. Historical training data and other pertinent facts should be used to arrive at these percentages. Just as importantly, a shared services handicap should be applied to discount the commitment number. This number is much harder to estimate, but should directly correlate to the quality and completeness of the training material, as 96

well as to any changes made to the process in order to move the work. Innovation and automation can obviously have a big impact on performance and are often the key to achieving top results. If an internal customer expects top performance, the shared services organization needs to invest in automation and/or needs some level of process ownership in order to innovate. The shared services centre cannot fix a broken process without the necessary tools. Structuring process ownership remotely with no stake in the game is a common organization design mistake. Performance measures - It is common for shared services organizations to agree to performance measures that cannot easily be achieved or in which they have no control over. Performance measures are never perfect, but they can be developed in a manner that is fair and that serves the best interests of the service organization and its customers. We have found that five types of performance measures cover most situations and should be considered for each function delivered by a shared service organization. The five are: 1. Net cycle time - This measures the time that a work product is within the control of the centre. This does not include time that the work product is sent back out for approvals, clarification, additional information, etc. This process requires time-stamps for each hand-off into and out of the centre, and timestamps generally require a technology platform. Functions that are transactional in nature, require quick turnaround time, vary greatly in volume from day-to-day and are customer-facing are good candidates for effective net cycle time tracking. 2. Net quality - This measures controllable quality by considering both the defects of each work request coming into a work cell and measuring the errors created in that work cell. Understanding the types of defects coming in as well as the errors going out and analyzing the cause-and-effect will help provide a true picture of controllable performance and end-to-end process improvement opportunities. Tracking and categorizing defects and errors can often be accomplished with a spreadsheet. However, in higher volume, more transactional functions, technology can definitely help with this tracking and measuring process. 3. Cost or efficiency - Shared service organizations often strive to be market-competitive. In order to measure their relative competitiveness, calculating cost per work unit - for example, the cost to produce an invoice - should be considered. Since investment in automation can add a cost to each unit, it is www.petroleumreview.ro

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helpful to measure the cost and benefit of such investments in automated work units separately. When comparing cost or efficiency versus internal and external benchmarks, investment in automation should be considered. 4. Strategic alignment - Process owners often make decisions that they expect shared service centres to execute. It is insightful to understand how effectively a shared service centre is carrying out the strategy, as it can have a significant impact on overall performance. Measuring progress can help force an ongoing critical review of the strategy and its execution. An example of a strategic alignment measure in the area of cash application is the percentage of autocash achieved versus the strategic goal of the order-to-cash process owner. 5. Value contribution - Back-office functions exist for a reason. One function may exist in order to help the company comply with an external requirement, such as general accounting. Another function may exist to save money. Measuring each function’s value will help ensure the focus of these groups does not shift completely to other considerations, such as efficiency, at the expense of their purpose. An example of a general accounting value contribution measure is the number of audit exceptions compared to a threshold. Companies sometimes make the mistake of not investing in a measurement infrastructure to save money, but they pay later when they are unable to manage with facts. Other companies are concerned that if they measure everything, retention will be negatively impacted because employees will feel like they are constantly being watched. What we have found is that these measures and dashboards often highlight problems with end-to-end processes outside of the centre, which allows centre employees to only be accountable for the activities they directly control.

People and organizational effectiveness - Designing a structure for how diverse human beings interact and maximize each other’s performance is not easy. Some of the more common challenges include: • Shared service centre leadership - Centre leaders need to use both the left and right side of their brains. They need to be good relationship managers (most companies get this right), and they also need to be good operations managers (this is an area many companies often don’t recognize). When customers have a problem, they invariably want to go straight to the top. The person at the top needs to understand operations at some level in order to be credible with their customers and to be able to support their people. • Career paths - Shared service centre employees from remote locations are typically highly educated and often come from the middle-upper class in their country. They have high career aspirations, and they consider a position with a shared services organization as a stepping stone - and they often have options with other companies. Leading shared service organizations take career planning very seriously. Unfortunately, many organizations figure this out too late - after employees begin leaving and performance begins to dip. Frequent, small, prescribed promotions tied to achievements can help maintain performance and enhance retention. • Talent mix - Certain skills, such as data management, become much more important in a central environment where jobs are specialized. Many companies make the mistake of staffing their shared services centres with the same mix of talent as in the legacy organization.

Cultural alignment - Declaring that “we are all one culture” and that the shared service centres are treated no differently than other internal groups may not be enough to make it so. Many things are different when work is moved to a remote location, often performed by people with much different backgrounds than their predecessors. Not achieving “cultural alignment” may adversely result in an underperforming shared service organization in the form of low morale, productivity and employee retention. There is a real business need to understand and address these differences. Inherent differences should be reviewed along with desired culture. Then specific action plans should be adopted with the ultimate goal being to attract, retain and motivate all of the people in the shared service organization. Human resources (HR) should be part of the

Cross-functional tools and enablers - Like a manufacturing plant, back-office operations need infrastructure - a way to accept and route work. They need ways to manage the quality of the requests coming in, and a defined process for handling non-standard requests. Shared services centres need to be able to collect information that helps them continuously improve, and they need to be efficient and effective with the way they handle data. Without some basic cross-functional infrastructure, centres will likely never reach the productivity of the legacy team. Acquiring knowledge to do a job proficiently, having a way to manage hand-offs into and out of the shared services centre, and effectively handling customer and policy exceptions are all needed just to enable the shared services

team that helps review how HR policies can support these endeavours.

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An effective strategy The energy industry is in the midst of a historically impressive growth phase that is putting a significant strain on cash and talent at many companies. For many oil and gas companies, a global, multifunctional, shared service centre - that includes centres of excellence in key areas - can play a strategic role in providing a competitive cost advantage and improving back-office performance. And although some oil and gas companies have experienced suboptimal performance from shared services in the past, this model can help manage growth considerations when applied correctly and with the proper design and rollout.

centre to replicate the efficiency of the legacy team. Cross-functional processes and enablers are needed to achieve baseline performance. Other infrastructure is needed to promote innovation and superior performance. When work is being prepared to shift to a shared services centre, it is common to have functional experts design processes similar to how they looked in their previous, decentralized organization. Further, processes in one function are often designed completely differently than the others, making it very difficult for shared services leadership to effectively manage. And functions often overlook critical new processes such as the hand-off of work into and out of the shared services centres. ERP integration - The most common mistake is not building the necessary infrastructure. Many organizations learn about their infrastructure needs as they march along the maturity curve, implementing point solutions as they go. The result is limited integration with their ERP. SAP recognized the market need for an integrated shared service infrastructure and subsequently designed, built and marketed their “Shared Service Framework” (SSF) offering. Although SSF does not do everything that every function in a shared services centre needs to achieve optimum performance, it integrates with other SAP offerings to provide a highly effective suite of tools.

Expanding shared services into new areas

In order to determine which functions or activities to move, the criteria of the work should be analyzed.

services centre. In order to determine which functions or activities to move, the criteria of the work should be analyzed, as illustrated below. In general, leadership, entrepreneurial, judgment-based and strategic activities that require significant industry or company-specific skills are not good candidates for centralization. In addition to looking at the activity breakdown of a function and applying a centralization criteria like the one illustrated, “core activities” should be considered. A core activities review can highlight what work is truly being performed and what skills are needed to successfully complete these activities. This additional review generally results in a more aggressive level of centralization and helps provide clarity to what skills will be needed in the centralized organization. Examples of core activities include: data management, routine analytics and judgment-based analytics. www.ey.com www.eyromania.ro

Many companies have expanded their shared services organizations beyond transactional activities, often called “business services,” into more analytical or certificationbased functions known as “centres of excellence.” Some companies have even offshored or outsourced large parts of strategic functions such as research and development. A trend with energy companies today is to move a majority of the activities in functions such as budgeting, planning and analytics or supply chain analytics to a shared 98