Upetrom group through Petromar Resources Company, which signed a partnership with British firm Melrose Resources, will be able to drill in Romanian Black Sea shelf in search of the black gold.

“Upetrom Group by Group Services and Petroleum Petromar Resources becomes an integrated company in the oil and gas field in the Black Sea. We want to use the oil rigs that we already have in the Romanian Black Sea continental shelf”, Director of communication within Upetrom Radu Petrescu said. Radu Petrescu stated that Upetrom’s plan is not to become an oil producer, but that the company entered this consortium so it would be able to drill in Romanian Black Sea continental shelf.

“We do not plan to become an oil producer. That is not the business we do. We seek oil and we should not forget that we own 20% from this partnership, not a majority shares package,” the Upetrom Group official explained. Petromar Resources Company participated in the last auction held by National Agency for Mineral Resources (NAMR) in consortium with British Company Melrose Resources and holds no more than 20% of that association. The consortium was declared winner over the Cobalcescu and Muridava perimeters.

Petroleum Services Group Company is indirectly owned by businessman Gabriel Comanescu, from Constanta, through Upetrom Management Group, which controls 90% of titles. Other shareholders are RCI Consulting Group, with 5%, Aquafor International and Upetrom Trading & Engineering, each with 2% of the shares.

The two oil extraction sites are part of those five won by Romania at the International Court of Justice in Hague, following a trial with Ukraine. Upetrom trough Petroleum Services Group owns five oil drilling platforms and has invested in upgrading them about USD 200 million.

An oil deposit called Olimpiskyi was discovered, after drilling works completed sometime in 2001, in one of the two perimeters leased by Melrose and Petromar, according to media in this domain. Oil Company Melrose Resources has already announced it will invest GBP 40 million (nearly EUR 50 million) over the next three years in the two perimeters won in the Romanian Black Sea continental shelf.

Melrose Resources also activates in the United States, in Texas and New Mexico, and now considers selling them to focus on the explorations in Romania, Bulgaria, Turkey and Egypt.

“We are delighted that we are successful for two offshore blocks of high quality in Romania. This represents a turning point for the company, as we wish to have a long-term stay in this country,” Chief Executive of Melrose Resources David Thomas said. Moreover, in these blocks has been found oil, but has not yet been extracted, according to Melrose officials. NAMR held a round of bidding for new concessions, in which were auctioned five maritime areas that Romania won at the International Court of Justice in The Hague. Two of them were assigned to the Vanco-LukOil consortium, while the association of Petromar Resources with Melrose Resources gained two more blocks. The fifth perimeter remained open and will be auctioned in the next round.

Bids were reviewed on June 30th, 2010. What will follow from now on?

Consortium officials would negotiate petroleum agreements clauses that would further take effect early next year, but not before being legislated by government decision.

Romania has oil only for the next 14 years

If Romania will maintain the current level of oil production, its reserves will be exhausted within the next 14 years, while on a global level oil reserves would provide consumption for the next 45 years, reveals the latest report on global market energy resources released by British Petroleum. Regarding the global natural gas reserves in the current context, they would be sufficient for 62 years.

Data contained in the British Petroleum report show that Romania has oil reserves totalling approximately 0.5 billion barrels, which means 0.037% of total world reserves. Not taking into account Russia, on the European level only Norway, Britain, Denmark and Italy still have reserves, all these countries exceeding Romania in this chapter. Regarding natural gas reserves, in Romania’s subsoil could still be found about 630 billion cubic meters, representing 0.3% of the planet’s total, which could be enough for the next 57 years. These reserves place our country in the third place in Europe, after Norway and the Netherlands, followed by Britain, Germany, Denmark, Italy and Poland. Annual production of natural gas, provided by Romgaz Medias and OMV Petrom, is about 12 billion cubic meters.

Romanian authorities say that the prospects are promising, since Romgaz already obtained encouraging results in the perimeters that it explores. Also, Romania has recently leased a number of offshore and inshore oil extraction sites with good potential and the entrance of these potential reserves in the commercial exploitation would bring more energy security. According to Romania’s Energy Strategy for the 2007-2020 period, Romania's oil reserves will decrease by the year 2025, by 6.6 times, reaching 12 million tons compared to 80 million tons in 2006 and the natural gas will be reduced by 3.4 times, being estimated at 50 billion cubic meters, compared to 170 billion cubic meters in 2006.

Romania’s oil, coal and natural gas reserves

At the end of last year, official data of the National Agency for Mineral Resources (NAMR) indicated that in Romania there are underground reserves of 185 billion cubic meters of natural gas and 74 million tons of oil. Coal reserves were about 755 million tons, of which only 100 million industrial exploitable. Practically, Romania has, in the extraction conditions nowadays, oil and natural gas reserves for 15 years, while coal reserves would be enough for about 30 years. OMV Petrom, the only oil producer in Romania, had a reserve replacement rate of 70%, maintaining the same level as in 2008, given that the company had a reserve replacement rate of about 13% in 2006.

The richest countries in hydrocarbons

Saudi Arabia remains the country with the largest oil reserves in the world, respectively 264 billion barrels, followed by Venezuela. Russia holds the supremacy for natural gas, with reserves of 44,380 billion cubic meters, followed by Iran on the second place.

After the success in the 10th Round of bidding for petroleum concessions perimeters on shore, and also on the continental shelf of the Black Sea, the National Agency for Mineral Resources (NAMR) announced that for this fall prepares a new auction, and that for the next year the offer for investors will include 10 large perimeters.

NAMR announced that this fall will hold a new tender for the concession of oil extraction sites. It is about 20 oil and natural gas operating sites, with an area of 1-2 sq km each, perimeters that are part of the eleventh round of auction, Deputy General Director of NAMR Mihai German said.

NAMR will lease 20 operating oil and gas extracting sites

The 20 perimeters which will be leased represent marginal deposits, located on the land side of the country and belonged to Romgaz and OMV Petrom. Therefore, they have already produced hydrocarbons. Now, they are of interest to small businesses. The public offer competition will be published in autumn in the Official Journal of the European Union, Mihai German said.

Originally, NAMR estimated, early this year, that the auction for Round XI will take place in May, but this could not happen because there are few people in the agency working on these auctions. Regarding the tenth round, on the exploration of onshore oil extraction sites, but also in continental shelf currently NAMR already announced the winners, among them being companies such as Lukoil Overseas & Vanco International, Melrose Resources & Petromar Resources Petro Ventures BV, Audax Resources Ltd, Fortune Energy Inc., Clara Petroleum Ltd., Moesia Oil & Gas PLC, MOL & Expert Petroleum SRL, Universal Premium SA etc.

New oil perimeters in the Black Sea and Dobrogea

NAMR will lease out for the second time ten oil perimeters that were not auctioned in the tenth Round, of which six perimeters are on the Black Sea continental shelf, and four in Dobrogea. “They will be leased next year most likely. A separate auction from the Round XI will be held, as it is expensive to organize a round with few perimeters and, however, the ten perimeters are much bigger than those leased through Round XI. We risk that no one will bid”, NAMR General Director Alexandru Patruti declared. Also, among the perimeters on the continental shelf is one of those five which was won at Hague.

MOL and Expert Petroleum will start explorations in the west of the country next year

Hungarian oil company MOL, together with Expert Petroleum announced that next year they will begin explorations in the three oil perimeters in the Pannonian Basin, won in the tenth Round organized by NAMR. “Based on the assessments made, MOL and Expert Petroleum decided to select and bid for the three perimeters of the Pannonian Basin (Ex-1, EX-5 Ex-6), those three perimeters in the west of Romania totalizing 3,434 kilometres,” a press release issued by the MOL Company states. The first phase of exploration operations is planned to start in 2011, preliminary calculations reveal that the perimeters have an “oil and gas potential, some of them having even unconventional resources,” the MOL representatives asses. “Expanding the working field of MOL in Romania with Upstream activity is a key pillar of our development strategy. Integration of new activities besides those which MOL Romania already operates – gas station networks, sales to legal entities through fuel cards and en gros solutions, along with petrochemical products and lubricants sales - is a challenge and a motivation for our subsidiary,” Country Chairman of MOL Romania Szabolcs Ferencz said.

LukOil and Melrose, the big winners of the Black Sea deposits

Also in the tenth round of auctions, the Russian-American group LukOil Overseas & Vanco International and British-Romanian group Melrose Resources & Petromar Resources received the right to exploit some of the Black Sea continental shelf, which represents almost half of the rich in oil and natural gas area Romania won in the detriment of Ukraine, in the lawsuit mediated by the International Court of Justice. The two groups are the winners of the procurement notice launched by NAMR by the end of 2009. LukOil-Vanco and Melrose-Petromar have the right to operate four perimeters (two each), with a total area of 4,000 square kilometres.

Pipeline belt to Europe and the involvement of Romania

The Russians have reasons to be pleased. Their projects, North and South Stream, are on schedule, and Russia can maintain its dominance of the European market in the future. Regarding the Nabucco gas pipeline, the project is in the impact studies phase.

Recently the German newspaper Handelssblatt published information that Vice President of Gazprom Alexander Medvedev contacted Bimbaum Leonhard, responsible for strategy and acquisitions from RWE, to propose the participation in the South Stream project, the direct competitor for Nabucco. Although the information was not confirmed by any of the sides, it disgruntled the Nabucco project officials, given that RWE is one of the six companies involved in the Nabucco consortium.

No comments

So far the consortium representatives abstained from any comment, preferring to take a very diplomatic position. “Nabucco does not comment on speculation and rumours. No other Southern Corridor project can claim that it is a competitor in this regard or that is in an advanced stage as is Nabucco,” pipeline officials have said. “Nabucco has signed an international agreement ratified in all countries of transit and has already started to study social and environmental impact. The pipeline negotiations are being carried out with major banks EIB, EBRD and IFC. All six shareholders are determined to complete the pipeline and to promote the project,” consortium officials said. South Stream project, wanted by Russia, involves an investment estimated at USD 20 billion and if it would be done at the expense of Nabucco, would enhance Europe's energy dependence on Russia. Russian pipeline is supported by European countries such as Bulgaria, Italy, Serbia, Greece, Austria and Hungary. The Nabucco project, launched in 2002, is to become operational in 2014, after a total investment estimated at EUR 7.9 billion. The pipeline is designed to carry annually 31 billion cubic meters of natural gas from Central Asia to European Union countries, avoiding Russia. The main countries supplying gas to Nabucco envisaged would be Azerbaijan, Turkmenistan and Kazakhstan.

Ukraine financial objects to South Stream

Ukraine, the main transit route for Russian natural gas delivered to Europe, is disputing South Stream gas pipeline profitability, which will run under the Black Sea, around the Ukrainian territory, the Ukrainian Foreign Minister of the State Konstantin Griscenko said, according to Russian media. Gazprom announced that it is ready to begin pipeline construction in 2013. “South Stream project is not essential, involving excessive costs without added value, since it doesn’t provide access to a new source of natural gas,” Konstantin Griscenko said at a press conference in Kiev. In his opinion, Ukraine's pipelines are able to ensure reliable natural gas supplies to Europe. Finnish counterpart, Alexander Stubb, at the same press conference said that his country stands for energy diversification. “We support the North Stream and South Stream pipelines, and also Nabucco, but in short term, as the importance of natural gas will decrease,” said Alexander Stubb. The decision of the authorities in Moscow to build a pipeline that will bypass Ukraine is a logical reaction to the gas conflict with Ukraine, initiated in 2005-2006 and 2008-2009 winters. Ukraine, which is transited by 80% of Russian natural gas destined for Europe, tried to persuade Moscow to abandon the South Stream project. To this end, the Kiev authorities have proposed to Russia and to the European Union (EU) to set up a joint company which will build a new pipeline across Ukrainian territory with a capacity of 50 billion cubic meters of natural gas per year. The flow of this pipeline would be comparable to that of the South Stream (60 billion cubic meters), but Russia and the EU have not yet responded to this proposal.

Bulgaria has agreed to participate in South Stream project

After several delays, Bulgaria has agreed to participate in South Stream project. To obtain consent from Sofia, Bulgaria was warned by the Russian side that if it delays to sign this document, his place will be taken by Romania. Finally, the document for South Stream was signed in Varna by the Bulgarian Minister of Energy Traicho Traikov and his Russian counterpart Sergei Smatko. Bulgaria's change of attitude was rewarded by the Russians with a lower price for imported gas. According to the signed document, the joint Bulgarian-Russian company project will be established in February 2011. South Stream gas pipeline segment in Bulgaria will cost USD 835 million. A quantity of 17 billion cubic meters of gas, out of 63 billion cubic meters of gas, will be transported through existing pipelines in Bulgaria. The rest will pass through a new pipeline in east-west direction. Pipelines will be constructed as part of South Stream gas pipeline project, while Bulgaria will have 50% ownership.

North Stream arrived in Germany

The first branch of the North Stream pipeline came ashore in Lubmin town on the coast of Germany, the North Stream project operator announced. According to the Project Manager of the North Stream AG in Germany Georg Nowack the land connection was made on July 3rd, exactly the scheduled time. “This phase of construction was important for us, not only in terms of technology. It also has a symbolic importance, given that the North Stream pipeline has now reached the European continent for the first time,” he said. According to Georg Nowack, pipeline construction will be about 24 metres per hour.

“Starting the autumn of 2011, natural gas from the North Stream pipeline will be transported to the transfer station built in present time,” the company said in a statement. North Stream project led by Gazprom and designed to bypass Poland and the Baltic states would connect Vyborg, Russia, to Greifswald, Germany, over a distance of 1,220 kilometres, passing under the Baltic Sea through Russian, Finnish Swedish, Danish and German sea territories.

Egypt wants a Nabucco connection

Egypt is investigating the possibility of connecting a pipeline, which will transit several Arab states, to the Nabucco pipeline, in order to sell Egyptian natural gas to Europe, Minister of Petroleum in Cairo Amin Sameh Samir Fahmy said, quoted by Azerbaijani media. “We are one of the parties which will collaborate on this project,” the Egyptian official said during a visit to the Azerbaijan capital of Baku, adding that Egypt has held talks with partners in the Nabucco project. The pan-Arab gas pipeline will transit through Egypt, Lebanon, Jordan and Syria. Moreover, Egypt has already signed an agreement with Turkey, Georgia and Azerbaijan, in May, on speeding up construction of pipelines in the area, including Nabucco and the European Union is willing to devote a few millions to this project.

Important negotiations in Bucharest

Russian group Gazprom Chairman Alexei Miller will perform a visit in Bucharest for further discussions on a number of energy projects with the Romanian authorities. “Miller will be in autumn in Bucharest,” Minister of Economy, Trade and the Business Environment Adriean Videanu said. An important point in negotiations between Romanian authorities and representatives of Gazprom is the natural gas storage facility at Roman-Margineni. During his visit in autumn, the Russian side would present the results of a feasibility study to consider the involvement of Romania in South Stream. In June, Adriean Videanu said, regarding the participation of Romania in the South Stream pipeline, that Gazprom will receive in August the Romanian authorities’ feasibility study data.

Romania remains a supporter of Nabucco

President Traian Basescu said that Romania will maintain its position on Nabucco, as it is the best option for our country in terms of energy supply, stating that there will not be a balance between Nabucco and South Stream. “Currently, if you talk about European energy projects, you discuss about South Stream and Nabucco. Nabucco is the only option for diversifying gas sources and Romania will remain a strong supporter of the Nabucco project and will not swing between South Stream and Nabucco pipeline,” President Traian Basescu underlined.

The first Lufkin factory in Eastern Europe

US company Lufkin Industries, a provider of oil industry equipment and services, has scheduled to start building a profile factory in Romania, namely near Ploiesti. The investment is estimated at USD 126 million, and the factory in question is expected to go into production starting the year 2012.

„Lufkin Industries announces the intention to build a production facility near Ploiesti. The unit will produce equipment for the Oilfield and Energy Transport divisions,” is shown in a recent company statement.

The factory, which will be built on a 82 acres land plot (33 hectares), will require initially over 300 people.

The factory is going to be built in West Park, industrial park developed by businessman Petrica Usurelu, owner of Piritex and Belgian group Alinso. Salans law firm is the one who advised Lufkin on both the industrial park land acquisition and obtaining state aid from the Romanian state.

Lufkin will not be all alone in its endeavour to build a factory of such magnitude in our country. Precisely, the company headquartered in Texas will receive from the Romanian Government, through the Finance Ministry, development incentives and financial assistance of EUR 28.1 million, equivalent to almost 30% of the facility cost.

Pro Romania arguments

According to public statements made by Lufkin officials, the reasons for choosing Romania as a destination for this investment, were easy access to raw materials, good transport routes and well-trained workforce of the oil field.

“The Romanian operation represents an important step in our geographic expansion strategy. This operation will enhance our position in growing markets in the Eastern Hemisphere. The Romanian business will serve as a strategic hub for the European market, and to facilitate exports to Russia, Central Asia, North Africa, Middle East and East Asia. Placing the operation in Romania brings many advantages. In addition, Romania provides access to local raw materials for Lufkin,” Lufkin Industries General Director Jay Glick stated.

“This business is a good development for Romania and the national economy, because it will create jobs, will transfer modern technology and will boost exports to the Eurasian, Middle East and North Africa, also using natural resources to bring revenue to the state budget,” Finance minister Sebastian Vladescu appreciated at a meeting with the Lufkin executives. “Lufkin decision means for us a sign of trust in the national economy, the workforce and Romania’s history in the energy sector,” Sebastian Vladescu explained. Lufkin has over 2,800 employees worldwide. The company sells and provides services, among others, for oil and natural gas exploitation pumping units and for automated systems and equipment for electricity transmission. Lufkin owns factories in the US, Argentina and France, and the one from Romania is going to be the first factory in Eastern Europe.

The unit will be located near Ploiesti and will produce equipment for both the oil industry and the transport of electricity, but the petroleum equipment production will be the main activity. This investment is expected to attract more investments in the area.

The Texans from Lufkin are not strangers to the Romanian market, having contracts for a period of time, with OMV Petrom, Romania’s largest company. Ploiesti and adjacent areas have a particularly attractive capacity for oil investments. No further than last year, Cameron, another company with the same profile, a USD 6 billion business group, completed an investment of USD 80 million in a factory producing equipment for the same oil and natural gas industry.

In the next issue, we will return with details about the future Lufkin factory.

The beginning of a new road

A report from the European Association for European Energy placed Romania, late last year, at rank 23, out of a total of 27, in the European Union (EU) in terms of wind energy production capacity. The concept of green country is still one too little known in our country, and the authorities show no signs that they care too much about what other European countries do in this matter.

Romania is at the end of 2009, ranked 23 among the 27 EU countries, in terms of wind energy production capacity, with a total of 14 MW, increase of three MW over the previous year, a study conducted by the European Wind Energy Association/EWEA/. After the period of 1998-2002 when the wind energy capacity was zero, the first MW was recorded in 2003. Later, wind plants have multiplied so that at the end of 2009, the full capacity in this energy sector reached 14 MW. In the EWEA rating, in 2009, Germany had the supremacy, with 25,777 MW, followed by Spain with 19,149 MW, and Italy, at a considerable distance, with 4,850 MW. After Romania came states like: Slovakia with a wind production capacity of 3 MW, Slovenia, Malta and Cyprus - with no installed wind capacity. On the other hand, Bulgaria ranked 17 in the same ranking, with an installed capacity of 177 MW. According to the study cited, at the EU-27 level, in 2009, the installed wind capacity was 74,767 MW. During last year, in the EU countries, EUR 13 billion were invested in wind parks and over 10,000 MW were installed, the equivalent of 15 reactors like the ones from Cernavoda. Most European companies from the wind energy production sector originate from: Germany, Spain, Denmark, Italy, France and Great Britain. These companies provide over 100,000 jobs. In Romania, CEZ Group is building, in the Dobrogea area, Constanta County, the largest onshore wind park in Europe with an installed capacity of 600 MW, approximately twice the installed capacity of the current largest operational park (Whitelee wind park, Scotland, 322 MW).

CEZ Company secured financing for the project, while assistance in building and equipment were provided by EnergoBit, Viarom, GE Wind Energy, Areva and Emon. In total, the investment in the two cities will rise to EUR 1.1 billion, at the end of the work, are expected to be installed in all 240 wind turbines with an installed capacity of 600 MW, almost as a nuclear power reactor at Cernavoda/southeast/. OMV Petrom announced this spring that enters wind energy production by buying the company Wind Power Park, planning to invest EUR 100 million, an amount that includes the acquisition price and the wind farm development. Construction of the OMV Petrom wind power plant will begin this year, and will come into production in mid 2011.

Examples to follow

Reader's Digest Company has recently released a study on how European countries understand to promote green energy. Analysis reveals that there are big differences between environmental commitments of the 27 Member States of the European Union (EU) and if most countries see an opportunity in ecology, some have to be pushed by the draconian directives established in Brussels. Reader's Digest looked at a number of international reports and selected five leading ecological indicators and based on them the greenest country in Europe (understood as the EU plus Norway and Switzerland) is Sweden, followed closely by Switzerland. Swedes have an air-conditioned hospital which in summer uses snow gathered in the winter and offices air conditioned with seawater. Their military trucks and forestry tractors have hybrid engines, and the E14 motorway, 500 km, which crosses Sweden, is to become a “green highway” after being equipped with biogas fuelling stations, ethanol, rape diesel and electricity. Swedish wood from sustainable forests provides heat and light, but there is an innovations program that aims to obtain from raw material provided by trees, over 2,000 products that were made from oil. Few people today know that cellulose is used as binding agent in the composition of pills for headaches, textiles and even sausage casings. Half of the energy production will be renewable, in 2030 cars will not run on gasoline and diesel, and in 2050 the country will emit no carbon dioxide.

In Switzerland, the railway network is so good in Zurich, that only one third of the commuters use cars. The City Hall, a hotel and airport are heated and air conditioned cheaper, by underground facilities. The Swiss Pavilion at the International Exhibition in Shanghai this year is surrounded by heavy curtains of hanging lights that are powered by solar energy.

Euro green energy

According to the study the ability to produce clean electricity will be the main factor that will keep Europe ahead of the race for environmental protection. This could be the third industrial revolution. The first was fed with coal, the second with oil, and now the third with renewable energy sources like wind, sun and waves. In ten years, an electric network of EUR 30 billion will connect more renewable energy sources in nine countries around the North Sea, including Ireland and Luxembourg. Hundreds of kilometres of undersea cable will connect the wind parks on the shores, battered by wind, of Great Britain with the Belgian energy plants with energy obtained from waves, with hydropower plants in Norway and solar panels from Germany - all feeding a giant ecological system. Pioneer of this revolution is Germany. The Chernobyl disaster and toxic discharges into the Rhine River from the 80’s quickly turned Germany into a supporter of environmental protection and ecology promoter for commercial opportunity. It has more windmills per capita and is the largest producer of solar energy. It declared 2010 as the Year of Energy, and the government invested EUR 620 million in energy research. Oil-based industries are considered obsolete, and the European Commission invests billions in the new vision.

In 2009 CO2 emissions have stopped increasing

Carbon dioxide emissions worldwide remained stable in 2009, slowing the industrial activity in rich countries but is compensated by an increase in China and India, the Dutch environmental assessment agency (NEAA) said, quoted by international media. The report said 2009 is the first year after 1992 when there was zero growth in CO2 emissions.

One of the world’s leading manufacturers of power plant technology, China’s Donfang Electric Corporation, concluded a deal with the EFT Group to build the Stanari thermal electric power plant in Bosnia and Herzegovina. The deal is a first of its kind in Europe for Chinese manufacturers, and signals a major new development in the European energy sector.

“EFT negotiated with four manufacturers of power plant equipment for the Stanari project, but Dongfang’s offer was by far the most competitive. The Chinese manufacturer will build a 300 MW plant on a “turn-key” basis in a 45 month period. The plant will have a high level of efficiency and will operate in line with the EU emission directives. The total value of the project is EUR 500 million, of which EFT will finance 25% from own equity and the rest will be covered from credit by a consortium of Chinese and European banks”, said EFT Group Chairman, Vuk Hamovic.

Hamovic added that the arrival of a reputable Chinese manufacturer at this time is an excellent development for the regional energy sector. “With the onset of the global financial crisis and the resulting drop in energy prices, the cost of technology unfortunately did not follow this trend. This has deemed most new energy investment in the region less feasible. The ability of Chinese manufacturers to offer their technology at more competitive prices is a very important development for the realisation of the regional investment cycle”, said Vuk Hamovic.

Dongfang’s President Wen Shugang said the Stanari project was “an important step in establishing Dongfang’s presence in Europe, as it will be an important reference for the company’s future projects on the continent”. Dongfang is one of the world’s leading producers of energy equipment. In 2009 it installed plants with the installed capacity of 30 000 MW, and achieved a turnover of EUR 3.7 billion. The company operates in 22 countries and employs 24,000 people.

EFT Group is the leading energy trader and investor in central and south East Europe.

The Arena of Tailored Solutions for the Gas Industry

The second edition of the “Romania Gas Forum” event, organized by Industry Media Vector – the publisher of the Petroleum Industry Review - and Petroleum Club of Romania in Bucharest in early June, brought together once more high representatives of the gas industry in Romania and abroad, and of related areas.

The event was supported by the Petroleum-Gas University of Ploiesti, the Society of Petroleum and Gas Engineers, the Romanian National Committee of World Energy Council and the Chamber of Commerce Bucharest - as official partners; as well as by Prospectiuni, OMV Petrom, Siemens, INCD Turbomotoare Comoti, BRD-GSG, Atlas Copco, IAT Global, PricewaterhouseCoopers - as sponsors and Transgaz as a partner.

The 2010 Edition of “Romania Gas Forum - The Arena of Tailored Solutions for the Gas Industry” held over three sessions, included the following specific topics: natural gas exploration prospects in Romania (vision of Prospectiuni company);OMV Petrom project for developing the potential of natural gas production; Siemens solutions for oil and gas industry; network code for natural gas transport system (Transgaz); development of screw compressors with discharge pressure up to 50 bar (INCD Turbomotoare Comoti); Romgaz perspective on developing natural gas exploration and production; a comparison between financing projects and corporate finance - opportunities in oil and gas industry (BRD-GSG); fiscal challenges in the natural gas industry (PricewaterhouseCoopers Romania); ensuring investments in natural gas sector with real guarantees - the impact of the separation of property according to the third legislative package (Stoica & Associates); solutions provided by Atlas Copco for the oil and gas industry, project management in the oil and gas industry (IAT Global), security of supply despite the economical crisis (GDF Suez Energy South-East Europe); optimizing the LNG value train (Siemens Romania); stability of the gas supply to Europe - Romania's role (Tecon Engineering); maintenance strategies for natural gas transportation pipelines (Petroleum-Gas University of Ploiesti).

The Forum was attended by experts in the oil and gas sector, top managers, academics and representatives of companies active in the field or in related areas such as OMV Petrom, Romgaz, Transgaz, Prospectiuni, Siemens, Schlumberger, Atlas Copco, INCDT Comoti, IAT Global, Weatherford, GDF Suez, Tecon Engineering, Silcotub, Eneria, BRD-GSG, PricewaterhouseCoopers and others.

Plans imposed by OMV at the Petrom takeover were too ambitious, especially with the coming crisis which caught the largest company in Romania in a not quite favourable position: money from the capital increase, made at privatization, had ended and then credits started to roll. With very few exceptions, none of the targets set by OMV to be achieved in 2010 by its subsidiary in Romania have materialized. Even more, the company was forced to print a different pace of restructuring, although two revisions of the 2010 strategy were made meanwhile: first - in June 2008 and the second (just outlined) - in December 2009. At the second review, the company seriously began to put in one way or another issue of waiver to all assets that do not produce profits, but more losses and at the same time to far too costly investments, such as the one in Russia. So, OMV Petrom has set new targets for a new period: 2010 - 2015, renewing for five years completing its restructuring.

What does the biggest company in Romania want to become in 2015? OMV Petrom, the largest oil and gas producer in South-Eastern Europe, had its 2015 strategy prepared to become an integrated energy leader in South-Eastern Europe, so calls the announcement made by the company officials. What was the OMV Petrom strategy for 2010, drawn in 2008, and what does the company want now for 2010-2015?

Main targets were aimed, as normally is, to all spheres of activity. In Exploration & Production (E&P) goals were to stabilize production in Romania to 210,000 boe/day and reducing production cost to about $ 15/boe, an international production from the Caspian region revised to 20,000 boe/day(amid a reassessment of the acquisition cost potential in the region), and the objective for the reserve replacement rate remained unchanged, 70% by 2010.

Main targets are now more vague for 2010-2015 and for E&P, the company covering the offset natural decline and reaching the potential on the exploration and production segment. In 2009, OMV Petrom’s average production of oil and gas was slightly over 187,100 boe/day, while the domestic production cost was slightly above the 180,800 boe/day and the cost of production in Romania in first three months of this year was of $ 15.96 per barrel of oil equivalent (boe) extract, i.e. RON 47.48 per boe, while the reserve replacement rate in the Group in 2009 was 73%, three percentage points over the level achieved in 2008 (reserve replacement rate in Romania was 70%, maintaining the same level as in 2008).

For 2010-2015, the company aims to focus its exploration and production activity on ensuring oil and gas supply on the long term and on developing activities in the Caspian region. Meanwhile, the plan is to fully leave Russia, as stated above.

Regarding refining activity, 2010 strategic objectives aimed: business efficiency, expansion of refining capacity of Petrobrazi to 6 million tonnes per year (from 4.5 million tonnes), improving product mix and significantly reduce its own oil consumption; refinery modernization activities will be completed in 2011.

For 2010-2015 in R & M, the strategy aims to “integrate and improve the fuel market position” and thus Petrobrazi refinery would be upgraded and adapted to suit the needs of OMV Petrom to process in proportion of 100% the domestic oil production and the capacity production. Only that in the new market context, the initial investment plan was amended and Petrobrazi capacity will be reduced (not increased as initially predicted) to 4.2 million tonnes/year in order to meet the needs of OMV Petrom to process oil from domestic production. Moreover, Arpechim, other OMV Petrom refinery will be sold and if solution cannot be found, it will be closed by 2012.

Today, the modernization process aims at reducing energy losses from 10% (from 14% in 2004), increasing the share of diesel and fuel used in aviation at about 45% (from 30% in 2004) and reducing the percentage of oil to about 7% (from 15% in 2004) from the mix product structure. Currently, marketing activities in Romania are consolidating into a single entity, OMV Petrom Marketing SRL, in order to optimize processes, which will generate an increased efficiency of the administration costs.

Regarding fuel market presence in Romania, OMV Petrom aims to increase average annual sales by approximately 5.2 million litres (from 4.9 million litres in 2009) through gas stations, while the target for 2010, scribed in 2008 was 3.9 million litres per year.

On the Gas and Power segment (G&P), the company wants to be the leader on the Romanian gas market in 2010-2015 and to have a significant position on the electricity production market. Moreover, in the gas field, “one of the relevant objectives refers to the convergence of the domestic gas price to the import gas price”, and the company also aims to extend the gas sales business in neighbouring markets, but that depends on connecting the Romanian transport system at the European one, and also considers “evaluating locations, for entering the gas storage market, including for supporting the Nabucco project.”

In the energy sector, the 2010–2015 plan is aiming to position as a key player in the electricity generation sector and achieving a market share exceeding 10%, through diversification of activities in this sector. In June 2008, when the strategy drawn up in 2005 was revised after taking over the former state company, the OMV outlined objectives for OMV Petrom were to increase sales volume this year to about 7 bcm/year and developing a capacity for its own gas storage. Furthermore, the company aims to become in 2010 “a major player in the energy market, both by exploiting the complementarity of natural gas and electricity, and also by addressing alternative energy projects.”

Now, one of the targets turned into “Recovery leadership on oil and gas market in southeast Europe in order to convert into a major player in the electricity market.” OMV Petrom has not become, nor is likely to become an important player in this market in 2010, although the company has made moves in this regard and began building a natural gas power plant of 860 MW and bought a wind park project of 45 MW from businessman Emmanuel Muntmark. Results are expected to occur in mid-2011.

But what does exactly comprise the strategy for the period 2010-2015?

Exploration and Production (E & P)

Main targets: offsetting the natural decline and realizing the potential of the exploration and production segment.

1. Exploration and production activities will focus on ensuring the provision of oil and gas on the long-term and development activities in the Caspian region.

2. In Romania, the optimization of oil and gas production will be done both by applying cutting-edge technologies and also by partnerships with other selective deposits operators.

3. Major projects aim at redevelopment of six to eight major deposits, completing and upgrading infrastructure projects in about three to five fields, decongestioning gas systems and installing gas compressors.

4. On the first offshore drilling at great depths estimated for 2012, the company aims by 2015 to complete the assessment phase and to begin development.

5. To maximize synergies between the E & P and E & P Services, the two activities shall be integrated; the process will be completed in 2012.

6. In Kazakhstan, the focus will be on increasing Komsomolskoe deposit production (this year) and starting production of deposit Kultuk.

Refining and Marketing (R & M)

Main targets: capitalising the integration and improving the position on the fuel market.

1. Petrobrazi refinery will be modernized and adapted to suit the needs of OMV Petrom to process the local production of oil 100%. The modernization process aims at reducing energy losses from 10% (from 14% in 2004), increasing the share of diesel and fuel used in aviation at about 45% (from 30% in 2004) and reducing the percentage of oil to about 7% (from 15% in 2004) from the mix product structure.

2. Increasing average annual sales by approximately 5.2 million litres (from 4.9 million litres in 2009) through gas stations.

3. Currently, marketing activities in Romania are consolidating into a single entity, OMV Petrom Marketing SRL, in order to optimize processes, which will generate an increased efficiency of the administration costs. The company will focus on OMV Petrom and OMV, the PetromV gas stations will go through a rebranding phase, part of them with the OMV brand, and some with the OMV Petrom brand.

Gas and Power (G & P)

Main targets: gas market leader in Romania and significant market positions in electricity production.

1. Convergence of domestic gas price to imported gas price.

2. Gas sales business expansion in neighbouring markets, which depends on Romanian transport system connecting to the European one.

3. Evaluating locations, for entering the gas storage market, including for supporting the Nabucco project.

4. In the electricity sector, OMV Petrom aims to achieve a market share exceeding 10%, through diversification of activities in this sector.

5. The company designed a diversified portfolio that includes both gas capabilities which are using alternative sources, especially wind, thus benefiting from the advantages of both technologies.

6. High investment for sustainable development and business growth.

Dr. Robert M. Cutler is Senior Research Fellow, Institute of European, Russian & Eurasian Studies, Carleton University, Ottawa. Educated at Massachusetts Institute of Technology (BSc, Political Science), Geneva Graduate Institute of International Studies (Gallatin Fellow, History and International Politics) and University of Michigan (PhD, International Relations), and having held appointments in the United States, Canada, France, Switzerland and Russia, he now also consults with international institutions, NGOs, think tanks, governments and the private sector notably in the fields of international energy security & geo-economics, organizational design & decision-making analysis, and immigration & human rights. As well, he has won numerous competitive grants and fellowships, and also served on a half-dozen academic-journal and policy-review editorial boards in addition to executive committees of professional scholarly and policy research organizations.

by Lavinia Iancu

Petroleum Industry Review: In your opinion, how will the international energy market change, given the high energy demand (in the EU and the U.S. energy consumption increased by more than 40% since 1970, in Japan it doubled and in China it is more than four times higher) but also the decrease of the world hydrocarbons resources?

What is your opinion concerning alternative energy sources? Is renewable energy a solution for the world economy during this time of crisis? Is it a solution for the future?

Dr. Robert M. Cutler: Any increase in energy prices will only provide incentive to increase oil exploration and development (including nontraditional such as shale oil). Natural gas will slowly increase market share. Nuclear and hydro will continue. Coal will continue to be used where it is inexpensive, notwithstanding ecological dangers. Alternative energy sources should be explored and developed even though their overall market share will be limited for the foreseeable future (with niche exceptions).

PIR: Lately, there have been many discussions about a common European energy policy. What are the first measures to be taken in order to insure energy security in the region, but also a fruitful collaboration between EU member states?

In the current international circumstances, “the gas crisis” brought about by the divergences of opinion between Russia and Ukraine at the end of 2009 showed the dependence of the European countries, especially of those in Central and Eastern Europe on energy imports. In what concerns natural gas, the European Union’s dependence on imports from Russia currently accounts for 40% of the needed quantity, and it is estimated that it will reach 60% by 2030. What is the solution to this situation?

Dr. Robert M. Cutler: The solution is to strive to circumvent not only Russia as a transit country, but insofar as possible also Turkey, which has demonstrated lately a convergence of interest with Russia especially on energy issues related to Europe. Just as Turkmenistan wisely seeks to avoid being squeezed between Russia and China and seeks third markets (including Europe), so Europe should SEEK TO avoid being squeezed between Russia and Turkey and should seek third suppliers. White Stream, which is officially integrated as a part of the EU's Southern Corridor strategy, is one example: also AGRI and other trans-Black Sea projects. More generally, EU member states should avoid seeking to achieve one-sided advantage that comes from favouring non-members over other members: this is a tendency that reflects 19th-century Machtpolitik mentality and is not appropriate to the present day.

PIR: At the April 2010 meeting in Oran, the Gas Exporting Countries Forum decided to fight for the stabilization of prices, after the drop of the demand for this product by 40% over the past years following the increase of the U.S. production of alternative gas. Do you consider the rating of the gas prices according to the model of oil prices appropriate? Dr. Robert M. Cutler: It is becoming less appropriate as time goes on, but in some parts of the world there is no adequate market mechanism to determine gas prices

Dr. Robert M. Cutler: It is becoming less appropriate as time goes on, but in some parts of the world there is no adequate market mechanism to determine gas prices.

PIR: Due to the anticipation of an enhancement of the economic recovery, at the beginning of April, the oil contracts reached the highest level in the past year and a half, and this supports the financial markets and the price of raw materials, but also the oil demand, the International Energy Agency (IEA) estimates. In your opinion, how will the oil market change in the next period (five-ten years)?

Dr. Robert M. Cutler: Overall not much really, since the economic recovery may not be so strong as expected, unless China succeeds in managing its various bubbles, but even that may not much affect the oil market.

PIR: Recently, one of the world leaders in electric power plants equipments in China concluded an agreement with the EFT group for the construction of a steam power plant in Bosnia and Herzegovina. It is the first such agreement signed by Chinese producers in Europe, signalling an important change in the European energy sector. How do you comment this event?

Dr. Robert M. Cutler: This contract represents Chinese intent to increase economic penetration into Europe going beyond production of consumer goods for export. The recent announcement of Chinese financial assistance to Greece likewise shows such a direction of Chinese foreign economic policy, suggesting that the contract with EFT group is no accident.

PIR: As an energy analyst, how do you think the oil and gas sector in Romania and in the region will change in the next ten years?

Dr. Robert M. Cutler: Gas reserves will continue to be depleted. If new gas or oil pipelines will cross Romanian territory, then this presents the possibility to offload partial quantities. At the same time, however, new and existing non-hydrocarbon sources should be further developed, including alternative sources.