Releasing Petrom's potential poses problems for OMV

Monday, Oct 31, 2005

The Austrians plan to invest heavily in modernising the Romanian oil group, says Haig Simonian

From the refinery at Petrobrazi, an hour from Bucharest, the risks and opportunities of OMV's Euros 1.5bn (Dollars 1.8bn) takeover of Petrom are immediately striking.

The acrid odour, rusting pipelines and acres of idle equipment testify to years of under-investment. Just down the road, at one of hundreds of local collection stations, a pump sends oil from nearby wells to the refinery. The solitary black machine dates from 1912 - six years before the collapse of the Austro-Hungarian empire.

When OMV bought control last year of Petrom, Romania's state energy group, it represented an exceptional chance to join the senior ranks of the world's oil league. The deal catapulted OMV, an integrated group controlled by the Austrian government and Abu Dhabi interests, from a provincial player into the second division of world energy groups alongside European rivals, such as Statoil or Norsk Hydro.

While Exxon, BP or Shell may be much bigger, OMV's share price, buoyed by soaring energy prices and growth prospects in its Danube region, has outshone them all. Adding Petrom's production to OMV's total has swelled output. Reserves have surged thanks to an estimated 1bn barrels of Romanian oil still waiting to be pumped. Beyond Romania, Petrom's interests extend to the Caspian Sea and Kazakhstan.

Such riches this month prompted OMV to raise many medium-term targets. Production should reach 500,000 barrels of oil equivalent per day by 2010 from 340,000 boe/d today. Refining capacity should also hit 500,000 boe/d and up to double that if further acquisitions prove successful - OMV's shopping list includes Serbia's refining interests, due to be privatised next year. Meanwhile, gas marketing is forecast to reach 20bn cubic metres from 14bn cu m at present

But to achieve these goals, OMV's management must release Petrom's potential. Petrobrazi, Romania's biggest refinery, says it all. The vast site has a notional capacity of 4.5m tonnes a year, but produces just 3.6-3.9m tonnes because of assorted bottlenecks. The plant, dating from 1934, employs 3,000 people to handle less than half the oil processed by just 800 at OMV's home refinery near Vienna. With 51,000 staff, Petrom has six-times more employees than its new parent.

The Austrians are going two main ways to meet such problems. This month, Wolfgang Ruttenstorfer, chief executive, said investment in Romania would be doubled to Euros 3bn in the next five years. Money will go on modernising decrepit equipment, improving health and safety and eliminating bottlenecks.

Improving Petrom's ability to replace its oil and gas reserves, and to lower its production costs, are top priorities. Mr Ruttenstorfer believes new technology should help Petrom raise its replacement rate from just 10-15 per cent today to 70 per cent by 2010. Other spending will ensure that capacity utilisation at refineries like Petrobrazi can be increased from 75 per cent to about 95 per cent

Cash will also be allocated to slim down Petrom's bloated workforce - although neither Mr Ruttenstorfer or his Romanian colleagues will talk numbers in public. The aim is to lower Petrom's average price per lifted barrel to about Dollars 9 from about Dollars 12.40 today.

Meanwhile, management practices are being modernised at what was once a showcase Communist company with the arrival of teams from Austria. If all goes to plan, Petrom could eventually gain group-wide responsibility for south-eastern Europe.

But, OMV could have some problems on the way. Petrom's reserves are currently being audited by Degolya McNaughton, a specialist US consultancy, with a report on the 300-odd fields due next year. If the findings suggest, as possible, that Petrom has more than the 1bn barrels assumed during the takeover, it would be a major filiip for OMV.

But any upgrading could also complicate relations with the Bucharest government, which is facing increasing public discontent about surging energy prices and windfall energy profits.

Last month, Traian Basescu, Romania's president, jumped on the populist bandwagon, suggesting the terms of the Petrom sale should be reviewed.

By HAIG SIMONIAN