14 years after the privatization and 9 billion-euro worth Upstream investments later, OMV Petrom is now a different company, which entered into a new stage. With strong numbers and based on a stand-alone strategy within the OMV group, Petrom has the opportunity to capitalize on its operational and financial fitness, as well as on its fruitful joint ventures with top of the world O&G majors. “Regional expansion means that we can add synergies from what we have learnt and developed in Romania, and also based on the footprint we have here”, explained for energynomics.ro Peter Zeilinger, member of the Executive Board responsible for Upstream.
It was a privilege to work in Petrom from 2007 to 2011, few years after privatization, and to be part of the company’s journey. Also, being out for 5 years, in New Zealand, and coming back gave me a good chance to see how OMV Petrom has actually progressed. Sometimes, when you’re so into the day-to-day business, you don’t see the progress; it is difficult, if you climb the hill to turn around and to look to how much you have achieved. But if you go out and come back, then you really can appreciate that. Would you have expected in 2004, when the privatization contract was signed, that we actually would have spent 9 billion euros in order to come where we are now? And there’s many more to come! It is a huge task behind us that we have done. It is not only the investments, but it’s also the status of the largest and most important O&G producer not only in Romania, but also in the Central and Eastern European area. We are now going to the next step, that is regional expansion.
Back in 2011, Romania was much larger in OMV portfolio than New Zealand. Romania was producing at the time over 200.000 boe and that was the majority of the OMV portfolio. New Zealand was producing much less, while the value generation from New Zealand was better. In New Zealand, once things are running, then production is great because we have offshore production and our wells were producing easily several thousand boe per day. Here, in Romania, we have many mature fields, we have integrity measures that have to be similar for all the fields, whether it is making two tons per day or 200 tons per day. Therefore, the fixed cost are higher, and also the production costs are higher.
OMV Petrom strategy talks about regional growth, not internationalization. This distinction is important for me, because it says that Romania is the core for OMV Petrom. Even before privatization, Petrom had some presence in Asia, and since 1998, we have operations in Kazakhstan. However, the core for OMV Petrom is and will remain Romania. Regional expansion means that we can add synergies from what we have learnt and developed here, and also from the footprint we have here, in countries where there are similar conditions.
Let’s take the Black Sea for example, which was highly underexplored and now we have this promising discovery (in Neptun Deep) and we are looking at the engineering. All these can be repeated from a base in Romania much easier than if we went to Madagascar, Gabon, or to any other countries that have offshore developments, but where we have no synergies, and no knowledge about the market. We have an operation base in Constanta which could be easily used and synergies can be applied for Bulgaria or in Turkey; vessels and operations could be shared, so this is more or less our natural environment.
You are right to say that OMV Petrom doesn’t have the same dominance as before in the global portfolio of OMV. But at the same time, and that is what I am really proud of, it has been very clearly established that within the Group strategy, OMV Petrom, as a stock listed and independent company, has its own strategy and its own KPI’s to deliver this strategy.
The Supervisory Board of OMV has approved that OMV Petrom would have a strategy on a stand-alone basis, complementing the strategy of OMV. Within OMV group, OMV Petrom is a special case, because of size, in terms of personnel and assets, but also because of the significance of the company for the Romanian state and for the group, regardless the production values. So the fact that OMV Petrom has its own strategy within the group is recognition of the fact that it has a very important position within the group, not only in size, but in terms of history and quality.
This is very different from before, when all was about improving the business in Romania: increasing efficiency, closing out a lot of legacy issues, improving run life of the fields, trying to stop or reduce the production decline and putting money in for modernization and efficiency improvement. The past investments went to a large extent in modernization, in repairs of equipment that was already 40 years old.
First, you always need to be able to deliver value, not only to the shareholders of the company, but also to the owners of the resources, which is the Romanian state. They want their resources being exploited as efficient as possible, thus, we still need to further increase our efficiency. Regardless where the oil price is, we are competing on the international and also on the domestic market based on our production costs.
However, yes, we are in a different stage. After we managed to protect the core of our business and to have achieved a certain stage of modernization, now we look out for growth. For me, the regional expansion means OMV Petrom needs to have its own reserve replacement strategy, and not having them absorbed in the group. OMV Petrom has as strategy to go for a 100% reserve replacement rate.
In fact, I took the learning from Romania to New Zealand, because in Romania, the acreage in the Black Sea was highly underexplored, which was also the case in New Zealand. OMV was the license holder of the acreage and in New Zealand and also this was the case in Romania. But neither OMV Petrom, nor OMV in New Zealand had experience in being a deep-water explorer or operator. So, we wanted to partner up with some of the word leaders in deepwater subsea drilling and subsea development. In New Zealand we farmed out our operatorship to Shell and in Romania we farmed out to ExxonMobil, two of the companies which are, besides Total, world leaders in deep-water development and exploration.
In the case of the Black Sea, we had the acreage and the historical knowledge about the geology, the man power and the understanding about how the market is functioning. While they brought in technology, the drive and the financial in a 50/50 partnership.
A lot goes to offshore, and yes, it is disproportionate to the current offshore production level, but besides the shallow waters production, we have the Neptun project which is really important and is close to engineering and a possible final investment decision. Most of the development engineering work is being performed in Houston, by the Operator, but we also have done our engineering evaluation . There are still a number of remaining activities to complete, most importantly those related to regulatory and fiscal stability. USD 1.5 billion were spent to date on exploration and early development work. The next phase of development would require significantly more funds than what has been already spent. Before we decide to move to the next phase it is essential for us and our shareholders to achieve certainty on regulatory and fiscal stability for making a positive full funding decision.
Yes, it important to have fiscal stability and freedom to market. The more restrictions you have, the more difficult it is to operate. Stability is paramount to enable us to make a final investment decision and be certain that the business case will remain un-changed through the life of the field. Exploration investments are money already spent, sunk costs, taking into account the risk associated with the exploration phase. The development costs on the other hand are yet to come and are estimated to be billions more. We have to consider the technical as well as the financial fiscal risks as key elements in the business case.
One should have in mind that it is not only companies that compete for resources, but also the countries as resource owners have compete for investments. The resources are in the ground and you will never get them, unless you are able to attract powerful investors. Some states do not always realize how much potential is sitting especially in deep-water and this adds to the complexity and the long timeline. In the Black Sea, we have completed the exploration phase and we can show to the regulator that there is something that is worth progressing. Next step is for the shareholders to decide on the value proposition this project brings taking into consideration the associated risks.
Production costs are somewhere around 11 USD per barrel and compared to the current international oil price, this might give the impression of a high difference to the current oil price. But on top of the production costs, there come royalties, administration costs, transportation costs and others which add up to form the lifting costs, and these are more than double compared to the production costs. Then there is also the exploration cost which is very different for offshore and onshore projects, and is also to be factored in the lifting costs. There is a competition between assets in our portfolio which are focusing on operational efficiency.
New equipment definitely helps, because it helps us automate and run facilities with lower personnel costs. We came from a large and heavy company, to a much slimmer company today.
Another example which is one of our great success stories refers to the runtime of equipment. At privatization, the run life of subsurface pumps was around 3-4 weeks; every month we had to repair or exchange either the pipes, the tubing or the pump. Presently, the subsurface pumps run life improved to 660 days, on average. This comes with much less money spent on pump repairs, on pulling them up, on the rig equipment etc. This is only an example of the things we added together to a system we call operational excellence. We talk not only about money invested in modernization, but about the technology and material improvement in recent decades, and about bringing various specialists from outside OMV Petrom to work within the company’s frame as external contractors.
Yes, for many years Romania was and still is a special case in the global oil industry, because elsewhere, the majority of projects are run in joint ventures. And that is so because joint ventures allow not only for risk sharing, but also for fund sharing. And of course, they bring in each project different points of view, shared knowledge and access to the best technology.
Our best success story in this respect is the Joint Venture with ExxonMobil, on the Neptun Deep project. Another success story is Padina field in Buzau, where Hunt Company is the operator. So, yes, joint ventures are a successful approach. Our strategy says that we need to focus, because not every field has the same potential, so we have to put human and financial resources where the most of the growth is. In 2008 we had over 200 operated fields, and we have less now, as a result of joint ventures or divestments. We go for deeper and more complex exploration wells now, and we release fields that smaller operators can do better with than we – after they taken over and invested, some of the operators had production increases. For the country also is an absolute benefit to have a larger operators base.
This is also part of our new strategy, under the new economic climate, which is based on these two pillars: focus and value over volume – to accept a lower volume in order to deliver quality and value to our shareholders, the Romanian state among them.