KMG concludes sale of 51% stake in Romania’s biggest refinery to China’s CEFC

KMG concludes sale of 51% stake in Romania’s biggest refinery to China’s CEFC
By Carmen Simion in Bucharest December 15, 2016

KazMunaiGas (KMG) and China’s CEFC concluded an agreement on December 15 on the sale of 51% of KMG International (KMGI), the majority shareholder in Romania’s biggest refiner, to the Chinese group, KMGI announced. 

CEFC and the Kazakh company signed an agreement in April which envisaged that the Chinese company, which is involved in financial, energy and investment industries, would purchase 51% of KMGI. However, the transaction was put at risk after Romanian prosecutors seized the assets of the refinery and started investigations into alleged losses suffered by the state budget during the privatisation of the Petromida refinery and the conversion of the refinery's debt into bonds.

Currently, KMGI holds 48.1% in Rompetrol Rafinare, the operator of the Petromidia refinery, while Romania holds 44.7%, with the remainder being held by other shareholders.

Earlier on December 15, KMGI announced that negotiations between the two companies had reached the final stage.

According to the April agreement, CEFC will purchase 51% of KMGI's equity shares for $680mn, after which the two sides will integrate their resources for joint exploration of international oil and gas markets. They also announced investments worth at least $3bn in the following five years.

The transaction was scheduled to be completed in October, but KMGI senior vice president Azamat Zhangulov told Romanian media in September the deadline had been extended. According to an earlier statement made by Zhangulov, KMG was renegotiating some of the terms for the sale of Romanian refinery to CEFC, following the asset seizure and investigations launched by Romanian prosecutors. Zhangulov has suggested there had been changes to the price of the transaction, although the Chinese buyer has never said that it would pay less because of the Romanian state's actions, according to previous media reports.

“After a period in which both parties clarified certain legal and technical aspects of the deal, KMG NC and CEFC reaffirmed the commitment to support the implementation of KMGI’s development plans in Romania and the Black Sea region. The deal will undergo standard procedures and clearance stages, including approvals from the EU, Romanian and Chinese competent authorities,” KMGI said in a statement.

KMGI's strategy with its new major shareholder is aimed at developing major projects, with Romania being the business priority.

“We plan to increase the refining capacity to 10mn tons of crude per year, to build up to 200 new fueling points, to develop industrial services in upstream and downstream areas, as well as to build a cogeneration plant on Petromidia platform. The investments carried out up to present, the implemented business model as well as the future partnerships are factors which make us optimistic about the continuous growth of the business,” said KMGI CEO Zhanat Tussupbekov.

At the same time, KMGI said it stands firmly by all of its commitments derived from the memorandum of understanding with the Romanian state, including the establishment of a Romanian-Kazakh Investment Fund of up to $1bn depending on the market conditions during the investment period of seven years.

The memorandum was signed between the government and KMGI on a $660mn debt settlement  in 2013 and approved by the government one year later after a failed attempt to have it endorsed by the lawmakers. It stipulates firstly the sale of a 26.7% stake in Rompetrol Rafinare’s to KMGI against $200mn and secondly the creation of a "$1bn investment fund", with a $150mn initial contribution from KMGI.

Romania’s government is considering extending the memorandum signed with KMGI on the settlement of the $660mn debt owed by Rompetrol Rafinare to the state, Energy Minister Vlad Grigorescu told Bursa daily in September. The memorandum expires at the end of the year.

According to government sources quoted by Euractiv in July, Romania’s anti corruption body, the National Anticorruption Directorate (DNA), seized documents related to the signing of the memorandum.

“KMG International has already identified a number of profitable projects for the Investment Fund – the extension of fuel stations network on the local market, the construction of a new cogeneration plant on Petromidia platform, and continuation of investment in upstream exploration fields – to generate direct and indirect beneficial effects for Romanian economy, for the communities where these projects are going to be implemented, including total creation of approximately 2,000 jobs during different phases of the projects,” KMGI said.

Another delicate problem in KMGI's relationship with the Romanian state is the asset seizure.

KMGI said in July that together with KMG it had submitted a notice of investment dispute to the Romanian authorities, a first step towards eventual international arbitration. “The arbitration dispute concerns the treatment applied by the Romanian authorities to the investments performed by KMG and KMGI in their Romanian subsidiaries,” KMGI said in a statement at that time.

Romanian prosecutors seized the assets of the refinery and companies connected to it including KMGI on May 9. The Directorate for Investigating Organised Crime and Terrorism (DIICOT) said at the time that it was taking action to recover alleged losses incurred by the state budget amounting to €680mn.

Three former ministers have already been indicted in the investigation relating to the privatisation and a historic debt conversion by the refinery’s operator Rompetrol Rafinare, which was taken over by KMGI in 2007. Former Prime Minister Victor Ponta is rumoured to be under investigation in the same case.

The net profit of Rompetrol Rafinare increased 41% y/y to $20.9mn in the first nine months of 2016. Petromidia refinery processed 3.9mn tonnes of raw materials in the same period, down by 5.3% on the year. The refining capacity was 80.48% in January-September, down by 7% y/y.