Rompetrol used to be the flagship of Romania´s Oil Industry in the 1970's but then its star started to decline. What happened?
Until 1996 we had a turnover of US$100 million per year. The company was originally privatized in 1994 but the current owners, two Romanian entrepreneurs, did not take control until November 1998. Unfortunately in that particular period (1994-98) the management that was in place and the shareholders of the time, rather than reinvesting cash into the company, cashed it in without reinvesting the revenues generated into the business. When the Romanian shareholders took control they reversed that trend (we came as low as US$ 4 million turnover), and now we are back up to about US$ 85 million turnover/year. A good part of that is the Vega refinery that we had acquired in May that contributes about US$ 60 million a year to our revenue. There has been a determined effort on the behalf of the Romanian shareholders to turn the company around, basically going into restructuring. The good news is that we have continued maintaining a very strong image in the international markets that we serve.
Part of our strategy is to recapture market-share by emphasizing the business that we have continued to do especially in the Middle East and Central Asia and then, to try to re-introduce ourselves into those countries where we had a very strong image doing new assignments. For example we are very strong in Libya and Iraq. We have operations in Ecuador, Turkmenistan and Azerbaijan as well. We have re-emphasized our current work oil in Libya and Iraq and we will probably be visiting some countries that we used to do work with in such as Sudan and Iran, etc. The fact is that we continue to maintain a good reputation in these places. Often people asks us where have we been, "we liked you when you were here and we are glad to see you back". In almost every case we have been very warmly received and that is the one reason we were able to capitalize on our relationships.
We were the international face of the Romanian oil and gas industry. Petrom, the state oil company that is being attempted to be privatized, is purely organized for domestic explorations, extraction and refining. But we are the international "face", we work all over the world - we have done so for 25 years. In order to turn this around and to capitalize our strong relationships and image abroad, what the two Romanian shareholders, Mr. Patriciu and Mr. Marin, have done is to bring in Western management to lead the team. I am American with a banking background and before coming here I worked in a lot of fields dealing with the oil and gas business, now having 18 years of experience. I have encouraged to build a very strong senior management team at the company. I have people from UK, Scotland, Brazil, Russia, etc, and I am hiring several more at senior levels that are running my operating divisions. They are all either foreigners or foreign trained and they bring into the company western management, cost control and financial reporting. I have my financial statements in IAS (International Accounting Standard format), edited by Deloitte and Touche, I use outside world-class counseling for my legal matters, etc, so as you can see, we are deliberately trying to be very western in our approach to business, in our openness and transparency as far as reporting our activities.
We do want to grow, we have done so quite rapidly, and we would very much like to keep that going. We have made a number of very exciting acquisitions - the Vega refinery in particular is a very interesting asset. It is a small refinery and actually more than a petrochemicals plant because they make specialty products. In the refinery spectrum we can go from asphalt to jet fuel. We have got a very narrow portion of that but it is specialty products in monopolistic markets, so we have very strong market share and high economic margin, so for these reasons it is a very attractive asset. We have just acquired a manufacturer supplier of oil field equipment called Petros which is going to help us build up our up-stream activity since historically we have purchased a lot of oil field equipment from that company. Now that they are ours we will be able to reduce the costs and we will use it as a platform to expand some of our drilling activities overseas.
You seem to be a very diversified company, but what do you consider the main core of your activities, what do you concentrate mostly in?
We want to build a vertically integrated oil company that goes all the way from owning oil fields and producing oil all the way down to refining and selling gasoline through a retail network. We are growing in both directions. We have hired the person who formerly ran the Shell retail network here as well as Lukoil´s and who successfully built up over 65 retail stations in Romania. We are fortunate to have him in our team to build up our petrol station network. We have just opening -as we speak- one gas station in a town called Ludus. We have got three more that we have inherited from Vega so we have started with a core of 4 stations and we will be building out the network all the time, either on a stand alone basis or in partnership with some other companies. On the upstream side, we have the drilling activity. On the one hand we have this refinery that today contributes significantly on our revenues and on the other hand historically we have been known as an international drilling company. We are able to provide drilling services, construction, spare parts, etc, and we able to accept compensation in oil, gas and refined product. Basically that has been our flagship product, the international drilling. But we have now a domestic refinery and some retail stations. It will hopefully be like this as we go over time. We will vertically integrate and the company which can do all: construction, extraction of petroleum, refining, etc.
Are you concentrating mostly on the local market or are you still continuing drilling abroad?
No, It is all international. With the Petros acquisition we may do some drilling locally but all we are doing today is only international.
You are thus trying to vertically integrate, but how can you compete with all the other multinational companies when some of them are concentrating in just only one particular area? What do you offer that is different?
On the drilling side we are totally international, so I am not competing with anybody except those countries were I am present. That does not worry me. In fact with the Petros acquisition will probably be more cost effective than we were before because we will add a lot of components to our drilling activities that we did not have before. So regarding international drilling, it is just the way it has always been and I expect that with this new acquisition we will be even more competitive.
If you take the refinery, it is a specialty chemicals plant, so I am not competing with RAFO or Petromidia or any other big refinery. I saw niche markets in monopolistic situations and I receive high margins. On the retail gas-station side I think everybody has recognized the tremendous opportunity to develop petrol stations. We have heard various announcements by our competitors that think that there is an additional demand for more retail stations - I think bout 1000. We have to make a decision on how rapidly to grow in this area. We are debating ourselves whether to grow slowly on our own or to join forces with a neighboring oil company to accelerate this activity. Retail network is a cash business. In Romania it is quite interesting since the supermarket concept has not been fully developed, and a lot of people here buy some essential food products and similar things at a petrol stations. We have noticed that the most successful ones have a disproportionately large amount of retail space as compared to what you might find in Western Europe or in the US. I have the best guys to do that effort with a tremendous experience in this particular field, and we think that we can do a more efficient job than Shell does, for instance, who can afford to throw away a lot of money.
You just mentioned you have purchased Vega and Petros. Do you have any other acquisition prospects either at a local level or internationally?
We have a civil engineering division and we also have a plastic pipes manufacturer called Palplast and I think I want to marry those two companies closer together. They can make the pipes, my civil engineering can construct and we will able to do pipe construction, so we are looking at some other opportunities in the construction side that we can maybe combine. There is a lot work domestically in Romania since a lot of the infrastructures must be replaced, and in fact the World Bank is financing the infrastructure projects. We need Palplast help anyway with our Vega refinery where we have replaced the old steel and copper pipes. Basically what I am trying to do is to find additional synergies among the divisions by working together and becoming cost effective in terms of revenues. This also makes people in the company to feel better thinking that they belong to bigger enterprise. Over time I want people working with us to know that if they are working in Vega and they want to go to Ecuador, for instance, they can do that, and it is a challenge for them, and it is precisely because we have such diverse product lines that they could do it. It's good to encourage employees and to give them opportunities.
You used to be very large, but things have changed. Could you give us some figures regarding the size of your company today?
Now we have, together with Petros, about 1,500 employees. Since we do not yet own any of concessions I cannot tell you what our daily production is. Eventually we will be going in that direction, when we will own some oil fields, but I am not sure if they are going to be in Romania or abroad. In fact, it does not really matter. If we can own and produce our own oil, it does not matter if it is domestic or overseas. We just signed a number of agreements with an investments fund called Romania Moldavia Direct Fund, and they are injecting equity into Rompetrol to give us more work in capital. And even they are having some difficulties to find numbers regarding the company. In some respects we are a small company because even if we do oil fields services like drilling, we are not as fully integrated as other multinationals are. We are not just a drilling company, we are not just a refinery or just a retail network. | We are bits and pieces, but unique. The Romanian owners decided to hire western management and tried to be a lean and efficient, well run small oil company that can be extremely competitive on the oil markets. I do not think you will find another company like ours in Eastern Europe. In Hungary there is no private oil company - there is MOL - in the Czech republic and in Poland it is the same. We can say that we are living a situation which is kind of experimental.
You had some interest in purchasing or signing an agreement with Conpet and Petromidia. What was the outcome of that?
Actually that was a lot of fun. But we were disappointed twice in those deals. We do have refinery expertise and at the time we looked at the Petromidia situation the refinery was closed. We knew the Government wanted to privatize it, so we came up with the idea that the best way to privatize was is to get the refinery up and running, operating it profitably, and after this we would work with the Government to develop a business plan to sell it. It is not good to have a closed refinery, because nobody wants to buy it. We said that we did not want to buy it but we offered to operate it for a modest fee on a management contract. The government agreed but they wanted to do a tender. We agreed, we did a tender and won, but they never asked us to come and negotiate the contract. Instead they entered into an arrangement with a controversial group, backed by some interests in Russia involved with a money laundering bank in New York, and these people did not actually want to profitably manage and operate the refinery, they just wanted to supply crude oil for a fee. They did not care how efficient the refinery was. We were very disappointed part of it was becauseI think our proposal was a very solid one.
The Petromidia refinery is probably the best refinery on the Black See. It refines everything from jet fuel to road asphalt, it imports most of its crude oil from the Caspian region and sells most of the gasoline and refined products internationally so it is an export type of refinery. Our estimations were that it only needed US$ 20-25 of capital expenditures to bring it up to absolutely first class world standards. We had got Texaco, a very good client of ours, to agree to supply almost all the crude oil and to buy most of our refined products, and if we would need additional expertise, to help us run a refinery. We brought them to town, introduced them to the Government and told them that "this is a real deal and we're not just going around but have real partners. By the way, as you may know, there are a lot of foreign oil companies leaving Romania - that is very frustrating - but here is a BIG international player that wants to come in with us as a partner to run a very strategic and important asset for the country". The government just decided to go with the Russians.
The second disappointment that is even more bizarre is Conpet - the internal pipeline network of Romania. It has a World Bank loan that is in arrears, and hopefully drawn down. The loan is designed to automate the pipeline network, i.e., putting some computers and measuring equipment and make it more efficient. There is a lot of spillage, a large percentage more than normal is lost in the system. The World Bank money will go to make these thing more efficient but it will eliminate some jobs. So, the Government decided to do the same thing that it was supposed to do with Petromidia: they put a tender out for a manager - not someone to buy it, but to operate the system. It is the Government that has to want to go through the discipline of being efficient. Well, in fact, we not only did win the tender but we actually negotiated and signed the contract. Two weeks later, when the general assembly of shareholder met to ratify it, the Government representative changed its mind and decided not to ratify the contract which is bizarre. People who saw how the Petromidia deal did not fall through might say "well, bad luck", but with this one we had a signed contract.
We got accused of steeling state assets since the pipeline network is a strategic asset and it is against the oil law. I said: " Even if it is a strategic asset, it is fine" and I gave six examples of other private companies in the world that have managed internal pipelines systems. It is done all the time in Latin America and the Far East. The idea is to make it more efficient. The World Bank actually supported us because they knew that we would tighten things up. What we wanted to do with Conpet was not to run a sleepy pipeline company but to use it as a vehicle to be able to supply crude oil. There are 4-5 refineries that import crude oil in Romania. We wanted to go out on the market, buy crude oil in bulk, put it through the system and save everybody between 5-15% of the cost. We have an oil trading department. We can go out and buy thousands of tons a month and save everybody a whole lot of money. This would transform Conpet not in a transportation company but into a supplier. That is what we wanted to do.
What happened is also because of Petrom, which owes Conpet between US$ 20-40 million. When they found out that we were going to run out the pipeline network they freaked out thinking that we would completely shut them down. We were not going to do that. We could have a discussion and we reschedule everything. Part of my job, as a manager is to insure that the debts are paid. The World Bank also supported that. But despite of that they assumed that we would shut them down and close the refineries. I think that Petrom just stirred up quite a controversy up here and made people think that we are some demons that wanted to destroy the economic background of the country. In fact, the pipeline system here, like in every country, is what is called a common carrier, meaning that you must provide equal access to everybody who wants to use it on non-discriminatory basis. You cannot pick and choose. I cannot pick one company and favor it over another. As long as the pay I cannot favor anybody. That is a legal obligation, it is crazy to assume that we would do something that was not fair and transparent. Anyway, they got everybody excited and killed the deal, when it would have been a benefit for the country.
But we are involved in a new thing. The Government has been sponsoring a big oil export pipeline through Romania. As you know Romania is very strategically well located and this pipe goes from Constanta in the Black sea, through Romania, Hungary, etc. We are in a consortium with Conpet oil terminal that has loading facilities, and with Rafo and Petromidia who import crude oil. There are four of us. We are in this effort with Mr. Capitana who is the personal adviser of the President who wants this project done. This prestigious project would bring the Government US$ 2.30 million a year in term of revenues alone. We would build it and we would operate it, at least the Romanian section. So we are very keen to make this thing work. It is about US$ 7,000 day, about US$ 1 billion, which compared to some other competing projects it is not that much money, and it serves a very good market, right into Western Europe's system. We have the expertise to build pipelines and, as a banker I know how to structure and raise the finance. I have already met with the EBRD and the IFC, from whom I expect to get funds, and also from the USA Exim Bank. and probably from France, Italy and Germany to help finance it. We have just approved a feasibility study by Holsoms Engineering which is a big US technical engineering firm; this study has been financed by the USA Government (US$ 850.000) meaning that technically this is a viable project.
We have basically asked the Government to let us run the project. Normally private companies do this kind of thing. We need to form a simple little consortium and over time we would attract the suppliers of crude oil (Chevron, Exxon, Mobil, BP, Texaco) who are producing oil in the Caspian, so that we can get a consortium together. It is a great project both technically and financially. The Romanian Government has to let us form a consortium so we can get the project started and they also have to sign an agreement with Hungary and Italy basically saying that they also want to do this. Meaning that they will provide the political support, resources, harmonized taxes and laws that need to be fixed in order for the project to work as an integrated unit. But it is really a Romanian sponsored project because more than half of the pipe line goes to Romania, and Romania it the driving force behind the wheel.
What would you like to transmit to our readers?
As I said this is somehow an experiment. So far it is working quite well and we are going rapidly. In 3 or 4 years we want to do a public offer or merge with a large company that might want to rapidly expand its business in Eastern Europe. We would like to unlock the value in the company and to be an example of how business can be done in the country. We have a elite situation with Romanian ownership and western management, and I do not think that you find that anywhere in the region. We have been successful so far and we would like to show the Romanian Government and other industries that it can be done. We are still growing our business in the core areas and that is what we are focusing on, and I think that over time we could be a very good example on how things can be done reasonably, and efficiently. We have a lot of support and a very good team, in fact, I have got the best you can get for every division. There is a tremendous potential in Romania. It is a shame the country is importing crude with all the oil that there is here. |
ROMPETROL 