Report Summary

The future of the Romanian petrochemical sector has become uncertain following government threats to renationalise Petrom amid controversy over the level of tax the company is paying. The uncertainty has led to a downward revision in BMI’s petrochemicals business environment score to 51.9 points out of 100, 1.3 points down over the previous quarter. Nevertheless, in its latest Romania Petrochemicals Report, BMI states its belief that the country’s score will steadily improve with the expansion of petrochemicals production capacity and improvements to the overall regulatory environment, which should support a positive business environment. Petrom’s prospects have changed for the better with the advance in privatisation and the arrival of strategic investor/partner OMV. On its own, the company looked vulnerable. Backed by OMV, which could eventually merge its entire Romanian portfolio into Petrom, the future looks considerably brighter.

The company’s strategic objectives for 2010 involve a significant increase of investments of up to EUR1.5bn per year. It maintains that, as an integrated company, high oil prices have both positive as well as negative effects and will not affect its overall performance over the next three years. In terms of its refining business, Petrom is focused on increasing efficiency, expanding refining capacity of Petrobrazi to 6mn tpa from 4.5 mn tonnes per annum, improve product yield and significantly reduce own crude consumption. The modernisation of refining activities will be completed in 2011 and the full benefits are expected in 2012. In Q108, Petrom’s financial results were positive, indicating the positive effect privatisation has had on the company’s performance. EBIT was up 161% year-on-year (y-o-y) to RON1.03bn (US$450mn), net income was up 156% y-o-y to RON977mn (US$426mn) and turnover was up 35% y-o-y to RON3.72bn (US$1.62bn).

Investments almost tripled to RON2.05bn (US$895mn), confirming the commitment to Petrom’s long term developments. Despite Petrom’s success, since the centre-left lost power in 2004, the Romanian government has been critical of Petrom, accusing it of refusing contract modifications, particularly the level of taxes paid by Petrom on the use of the country’s oil reserves. At present, Petrom pays 6% tax on oil and gas exploitation, which is half the EU average. The government has threatened to renationalise the company and has suggested Petrom could reduce the fuel price by 5-10% without recording losses. It has suggested that Petrom’s contract could breach EU legislation as the low level of tax compared to the EU average could count as state aid. The threat to review Petrom’s privatisation comes amid soaring energy costs, which have impacted badly on the Romanian poor, many of whom are now unable to afford winter heating. Yet, even the threat of renationalisation could reverse some of the positive gains seen since privatisation and risks hampering the company’s long-term investment programme.