The Rompetrol Group wantsaa‚¬a„¢ the state as shareholder after September 30, as positive cash-flow remains an illusion

The September 30 deadline in the Kazakh oil company, KazMunaiGas (KMG), which controls Petromidia refinery in Romania and the Finance Ministry dispute has sparked even more debates over the Petromidia’s historic debt. 

While the state would want to see on the table the remaining EUR 500 million (ed.note- KMG has paid on August 9 about EUR 71 million of the total EUR 571 million historic debt) in cash, Dmitry Grigoriev, financial director of The Rompetrol Group (TRG) says “the cash-flow of the Group isn’t positive. Rompetrol is subsidizes by the mother-company and the deadline to repay the debt is coming and to close the refinery is an option. The total debt to KMG reaches USD 900 million.”

Rompetrol majority shareholder must repay bonds held by the Romanian state by the end of September or convert the debt into shares to be owned by the government, according to an exceptional legal document. Petromidia refinery’s historic debt of EUR 571 million represents the company’s claims until September 30 2003, accumulated by the refinery before the TRG takeover (VAT, excise, contribution to the special Public Roads Fund, delay increases, interests, penalties and penalties for delay).

Grigoriev had stated that “We consider an option to have” the state “as a partner in the refinery and we think that situation might create benefits for both parties.” According to TRG officials, if the bonds are transformed to shares KMG still remains the majority shareholder, while the state’s stake will reach some 40 percent.

Grigoryev said the company would have saved USD 50 million if the refinery would have been closed in the first six months of this year and if an agreement with the Finance Ministry will not be reached there is “always” the option of shutting it down.

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Rompetrol Rafinare plans to shut down the Petromidia refinery for 45 days of repairs and maintenance from Sept. 20, according to Grigoryev.

Rompetrol Rafinare, which manages the refinery, posted a net loss of USD 119 million in the first half of the year compared with a USD 69 million loss in the same period of 2009 and will not return to profit until 2013, as company officials announced.

The historic debt in detail:

The provisions of the Emergency Government Ordinance 118/2003, as approved by Law 89/2005 clearly establish the payment of Rompetrol Rafinare’s budgetary obligations regarding Petromidia refinery’s historic debt of 571 million Euros, the measure being validated and approved by Parliament and the Council of Competition. The amount represents the company’s claims until September 30 2003, accumulated by the refinery before the TRG takeover (VAT, excise, contribution to the special Public Roads Fund, delay increases, interests, penalties and penalties for delay).

In the current economic conditions, the Rompetrol Group aims to reimburse a part of the 571 million Euros until September 30 2010, with the reminder to be converted into RRC shares offered to the Ministry of Public Finances. According to legal provisions, Rompetrol Rafinare may convert all or part of the bonds into RRC shares, if not redeem them until maturity.

Thus, on August 9, Rompetrol Rafinare redeemed 54 million Euros worth bonds from the Romanian State, through a loan from its majority shareholder (98.63%) – The Rompetrol Group. Also, the Group subscribed 329.5 million shares in cash during the Rompetrol Rafinare capital increase public offer on August 18, the total amount of 77.9 million Euros (329.5 million lei) serving as well the redemption of bonds representing Petromidia’s historic debt.

The total amount paid and delivered buy the Rompetrol Group and Rompetrol Rafinare for the reimbursement of the 571 million Euros historic debt presently reaches 131 million Euros (approximately 22%), deadline being September 30, 2010.

The Group paid interests worth of 226 million USD to the State budget from 2004 until present day into the bonds’ account and their total value at maturity will reach 260 million dollars. 

Between February and May 2001, The Rompetrol Group, which acquired the majority stake in Petromidia, secured the financing needs of the refinery from its own sources as well as the international banking market so as to make possible the resumption of production and payment of current debt. Thus, the company paid 61.9 mil USD to state budget in 2001, 190.4 mil USD in 2002 and 371.6 mil EURO in 2003. So, since 2002, Petromidia has become the largest private contributor to the state budget, paying its current debt within deadlines. 

The revival of the company occurred in less than 3 years, given that prior to privatization the refinery was on the brink of liquidation. The investments made by the Rompetrol Group according to the privatization contract amounted to 225 mil USD – for the revamping of the refinery – and 40 mil USD – direct investments in environment protection. These were necessary as the refinery couldn’t produce any fuels at European standards at the time TRG purchased it, thus limiting production. Presently the refinery produces Euro 5 fuels and continues investments to comply with Euro 6 standard.  Investments were also made in the petrochemical sector. Rompetrol Petrochemicals, the only company in the petrochemical sector in Romania continues to invest in production capacity while Arpechim closed and RAFO is in a long process of modernization. 

Out of 13 functional refineries in 1989 only three of them still produce fuels: Petromidia (Rompetrol), Petrobrazi (Petrom) and Petrotel (Lukoil). Since its modernization, the company had no resources available to pay the historical debt but has not registered any other debts either.

1^st argument supporting Rompetrol position – historic context: 

Petromidia’s debt was made during state ownership, before the refinery was acquired by The Rompetrol Group.

The 571 mill USD debt due to be redeemed in 2010, according to existing legal framework, is an historical debt inherited from Petromidia refinery, coming from the period before privatization. In its decision, Rompetrol acts within the existing legal framework and with goodwill towards the Romanian State.

Argument: The Rompetrol Group took over Petromidia refinery in 2001, together with an historic debt generated while the Romanian State was sole owner of the refinery. The company has proved its trustworthiness by paying the agreed interests rates at market value, within established deadlines. Rompetrol has been acting and continues to act according to the law, within market and industry competition regulations.  The state hasn’t erased any of Petromidia’s debts and The Rompetrol Group hasn’t received any economic benefits from the Romanian state.  On the contrary, because of the highly bureaucratic Romanian legislation and abusive measures taken by the state, Rompetrol had to pay a constantly increasing historic debt, where various penalties accumulated to the initial sum owed by Petromidia.

When taken over by The Rompetrol Group in 2001, Petromidia was facing major financial difficulties, with debts of around 285 million USD, 181.9 of which to the state budget.  The interests and penalties for this debt were calculated at a very high rate (0.06% per day, 27.9% per year).

Competition Board Decision no. 135/20.07.2005 decided that the operation did not constitute state aid and the Romanian state in this case acted as a private lender and prudently maximizing debt recovery in accordance with market principles.

In its decision, Rompetrol acts according to the existing legal framework: Emergency Government Ordinance 118/2003, approved by the Parliamentary Law 89/2005.

History of the privatization:

• Complexul Petrochimic Midia Navodari – the first name of Rompetrol Rafinare SA Company – was part of the large oil refining plants which appeared after 1975.
• 1991 – the Combinat changed into a stock company
• After two failed attempts to privatize the refinery (1999 – 2000), Rompetrol acquires Petromidia in 2001
• Previous to the privatization, Petromidia was amongst the companies recommended by the World Bank to be closed as such since they could not be either sold or made profitable (the list also included several mines)  [1] 

Key facts:

• The 571 mill EURO debt Rompetrol due to be redeemed in 2010, according to existing legal framework, is an historical debt inherited from Petromidia refinery, coming from the period before privatization. 35% of the debt converted into the bond represents late payment interest, which in the case of other privatized companies, including other refiners, was forgiven by the State. Rompetrol has been paying all the due interests for the Petromidia debt, within deadlines, and at market value without any preferential conditions.
• Rompetrol has been paying up to now 225 million USD interests, observing all due deadlines and their total value will reach 260 million USD this year;
• The interest established for the historical debt are not preferential but are at the market level – Rompetrol has been complying with the relevant regulations and Issuance Convention and has been observing all debt payment deadlines;
• Rompetrol is a good contributor to the state budget and it has no personally accumulated debts. On the contrary, it is also one of the top contributors through export volumes, taxes, employment taxes;
• In 2007, KazMunaiGaz purchased 75% of the shares for 1.6 billion dollars, and in 2009 it acquired the remaining 25% of the shares. Rompetrol becomes thus a Kazakh state owned company.
• According to the rules of the Romanian National Securities Commission (CNVM), TRG had to conduct public takeover offers. Following this bid, TRG increased its participation in RRC from 75.99% to 98.61%, paying a total sum of 358 million lei (approximately 120 million USD). This allows TRG to delist the company off the stock market.
• Despite the unfavorable domestic and international economic context (lower demand for petroleum products, currency differences, as well as lower refining margins), the Group continued its investment program in 2010, the estimated sum for this year amounting to 240 million USD, of which about 175 million USD targeting investments in refining and petrochemicals. Despite efforts made by the Group, recorded net losses in the first half of this year were 109 million dollars, managing however, to maintain the current number of employees and salary levels.
• Rompetrol Rafinare continued to be a good contributor to the State budget, paying in the first quarter of 2010 more than 484 mil USD.
• Rompetrol Rafinare (RRC) shareholders have subscribed 329.49 million lei worth shares to the company’s capital increase, below the programmed 450 mil lei. During the subscription period, there were 3.294 billion shares bought at a nominal value of 0.1 lei, according to a press release from the Bucharest Stock Market. Thus, the capital will be increased to 2.439 billion lei, from its current value of 2.109 billion lei. A number of 1,205 billion shares which hadn’t been subscribed have been cancelled.
• Rompetrol has already paid 54 million Euros into the state’s account.

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2^nd argument supporting Rompetrol position – legal observance

In redeeming Petromidia’s debt, TRG acts according to the legal framework established at the time of the privatization.

The existing legal framework (GEO 118/2003 and Law 89/2005) grants Rompetrol the right to convert RRC’s historic debt into shares. The decision of paying 100 million EURO, besides the 49% pack of shares is a proof of Rompetrol’s intention to make a deal with the Romanian state which is mutually beneficial.

Argument: The proposal made by Rompetrol to pay the Romanian state 100 mill EURO in cash and to convert the remainder in company shares observes the legal context provided by the Romanian Government and Parliament. See Q&A. 

• In 2003 Rompetrol Rafinare debt was converted into 7 year bonds through Government Ordinance (Emergency Government Ordinance 118/2003)
• In 2005, the Government Ordinance was approved by Romanian  Parliament through Law 89/2005
• In accordance with the Romanian law and the Bond Issuance Convention, RRC has the right to choose between these ways of redeeming its debt:
• May pay the debt to the state either fully or partially before or on September 30, 2010
• Until September 30, 2010 it may convert its debts, partially or completely, into RRC shares
• In 2005, the Competition Council validated the settlement, concluding that the State acted in its best interest as a prudent private creditor when enacting the bond issue.

3^rd argument supporting Rompetrol position – economic advantages

The Romanian state would have numerous economic advantages from the partnership with The  Rompetrol Group if it becomes a shareholder of RRV (formerly Petromidia).

Argument: The Rompetrol Group is a powerful and reliable economic partner, proving throughout time good performance and potential: increasing turnover and sums of money paid to the state and local budgets, constant investments for higher performance, increased processing capacity, increasing number of personnel, increase in exports of finished petroleum products, maintenance and development of petrochemical sector, strengthening the activities and operations in 12 countries in which the Rompetrol brand is present.

In 2007, the Group has successfully made the investments set by the privatization contract signed with AVAS, having invested 225 million USD in the Petromidia refinery technology and environmental investments of 40 million USD. Moreover, Rompetrol hasn’t received any economic benefits from the Romanian state, even though the latter chose to exempt several companies from budgetary debts and penalties within several processes of privatization. This is the case of Petrom, Rafo or Sidex.

In other cases, the State decided to convert the debts into equities of these companies. By way of example, the state increased Petrom’s capital by Government Emergency Ordinance no. 205/2000, those shares then having been transferred from the Ministry of Finances to the Ministry of Industry and Resources, through Government Decision no. 555/2003.

Debts have been erased through several acts, as follows:

• RAFO Onesti – Government Emergency Ordinance no. 177/2001, approved by Law no. 599/2004;
• Petrom – Government Decision no. 219/2002 and Law no. 555/2004;
• Sidex – Government Emergency Ordinance no. 119/2001, approved by Law no. 122/2005.

Recently, the Romanian Government has also agreed to allow Ford company one more year to meet its contractual obligations, thus not imposing the 3 to 17 mill USD due penalty fees. At the beginning of the year, the Romanian State also agreed to guarantee 80% of a 400 mill USD EIB loan and also granted a 200 mill state aid for the factory. Ford contractual obligations included 675 mill USD investments reaching a 250.000 units production capacity – so far the factory has assembled only 600 cars and has invested 200 mil USD.

Investments:

• KazMunaiGaz has injected over 1.8 billion USD in The Rompetrol Group over the past three years.
• Recently, Rompetrol Gas has opened a third LPG bottling terminal in Bacau, following a total investment of 11 million dollars. The terminal has an annual capacity of 20,000 tones of LPG bottling and storage of 1,500 cubic meters.
• Rompetrol Petrochemicals will increase the HDPE plant capacity by over 70% by March 2011 and the total investment is estimated at approximately USD 18 million.

Turnover:

• 2008 – 4,68 billion USD turnover, 15 times higher than in 2000 (312 million USD)
• 2009 – 7 billion USD turnover
• 2010 – approximately 1.76 billion USD in the first semester, 24% higher than the same period of time last year

Business growth / expansion:

• distribution network: growth from 10 stations in 2001 to almost 1.100 in 2009 nationwide and internationally
• Rompetrol Downstream has opened a new filling station in Timisioara, in the first semester of this year,  its internally operated network thus consisting of 797 distribution points (own station, Partner Rompetrol Express stations, internal database with a capacity of 9:20 m cubic) and six warehouses. To these there are added a number of 258 LPG distribution centers and over 6,000 gas cylinder outlets.
• personnel: from 3000 in 2000 to 9600 in 2010, over 8000 in Romania
• processing capacity: During the three decades of existence, Petromidia refinery has processed 80.7 million tons raw matter (77 million tons crude oil), out of which 40% as of 2001 (when it was taken over by Rompetrol Group).
• 2008 – historic record of 4.4 million tons raw matter processed, from 3.7 million tons in 2007 and 1.5 million tons in 2000 (before Rompetrol)
• 2010 – 2011 – estimated processing capacity up to 5 million tons crude oil
• export:  Rompetrol was in 2008 the most important exporting Romanian company, with a total amount of external markets sales of 1.6 billion USD, 48% growth from 2007 (at the same time total Romanian exports increased by 25% up to 49 billion USD). According to ANEIR, in the first four months of this year, Rompetrol Rafinare ranked in the top three leading exporters, along Dacia and Nokia.
• state budget contribution: 8 billion USD contribution to the State Budget between  2001 and 2010, out of which 3.6 billion USD only between 2007 and 2009. In the first semester of 2010, Rompetrol Rafinare’s contribution reached more than 484 mil USD.

Value recognition & key accomplishments

• 2003 – London World Refining Association grants Rompetrol Refinery the “Best Refinery in Central and Eastern Europe” award.
• 2008 – Rompetrol Group has been designated the No.1 exporter in Romania by the National Association of Exporters and Importers in Romania (ANEIR).
• September 2006 – Rompetrol Rafinare to be the first refinery in Romania to process Euro 5 diesel fuel
• September 2008 – first refinery to start production of Euro 5 gasoline fuel
• 2010 – Rompetrol Rafinare to announce compliance with Euro 6 standards; Rompetrol continues investments to comply with the future Euro 6 quality standard mandatory since 2014
• Fuels oproduced by rompetrol Rafinare, Alto and Efix ranges, are present in countries like Bulgaria, Georgia and Moldova.

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4^th argument supporting Rompetrol positioning – external policy and energy independence context

By becoming a shareholder of RRC, the Romanian state implicitly enters a partnership with Kazakhstan, an important geopolitical entity.

Argument: The Romanian State is about to enter a business partnership with an important geopolitical entity – the Kazakh State, owner of Rompetrol Group, through Kazmunaygas – KMG.

• The Romanian State has the historic opportunity to enter a partnership with a geopolitical strategic entity;
• Kazakhstan is a country rich in natural resources, which are not exploited at full capacity though.
• Both countries have economic and energetic interests in the establishment of the PEOP pipeline (Pan European Pan European Oil Pipeline) – Croatia, Romania, Serbia, Slovenia and Italy have signed in 2007 an agreement for the construction of PEOP, a 1.400 km pipeline transporting oil from Constanta to Trieste. PEOP cost is estimated to 2 – 3.5 billion USD;
• Its reserves of uranium in soil, place the country 3rd in the world. Also, Kazakhstan has large amounts of oil, natural gas, coal, copper, zinc, manganese, iron, gold. Kazakhstan is the largest oil producer in Central Asia.
• By establishing this strategic partnership, Romania can secure supplies of oil, creating an alternative route for oil from Russia; KazMunayGas owns an oil export terminal in Batumi port and in Romania, through TRG, owns an oil terminal off the Black Sea, with a total capacity of 24 million tons annually.

 [1]

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