KMGI threatens to exit Romania over Petromidia dispute

KMGI threatens to exit Romania over Petromidia dispute
The debt dispute over the Petromidia refinery could bring it back into state hands.
By Clare Nuttall in Bucharest August 31, 2016

Kazakh petrochemicals company KazMunaiGas International (KMGI) has said it could cut its losses and pull out of Romania if it loses a dispute with the Romanian authorities over the Petromidia refiner. This could leave the country’s largest refinery back in state hands without a private sector developer or much chance of a new one, and deny the country “billions” in new investment.

In May Romanian prosecutors seized the assets of the refinery and companies connected to it as part of a probe into alleged losses incurred by the state budget amounting to €680mn. The investigation relates to a historic debt conversion dating from before KMGI bought its majority stake in Rompetrol Rafinare in 2007.

“If the investment environment deteriorates due to harmful actions taken by the Romanian state, there is the risk for investors, including us, to look for better and safer environments in other countries,” Azamat Zhangulov, senior vice president of KMGI, said in comments emailed to bne IntelliNews.

Since KMGI, part of Kazakhstan’s state-owned KazMunaiGas (KMG) group, bought the refinery on the Romanian Black Sea coast in 2007 it has invested a further $2bn in Romania, which included financing a major modernisation programme and building an offshore terminal to receive crude deliveries.

KMG’s rationale for investing in Romania was to gain a foothold in Europe; in addition to Petromidia and the smaller Vega refinery in Romania, it also has trading operations and a chain of petrol stations in Bulgaria, Georgia, Moldova and Romania.

KMG’s investment came at a time when other petrochemical groups were scaling back in Europe. According to a European Commission report, 13 refineries with total capacity of 1.7mn barrels per day (bpd) closed within the EU between 2007 and 2013, and more closures have followed since then. The majority of closures were in the EU’s largest economies - France, Germany, Italy and the UK - with casualties including France’s oldest refinery near Rouen, refineries at Harburg and Wilhelmshaven in Germany closed by Shell and ConocoPhillips respectively, and refineries in Coryton, Milford Haven and Teeside in the UK.

At the same time, refining capacity is being steadily boosted in the Middle East, as oil majors set up refining close to the source of their crude. Shell, for example, operates one of the world’s largest refineries alongside Saudi Aramco and is investing in a new petrochemicals complex in partnership with Qatar Petroleum. As well as being more efficient than most of their ageing European counterparts, being located next to oil production cuts their costs.

This relocation of refining capacity away from Europe towards other parts of the world is continuing, with more new projects underway in Africa and Asia. “Total net additions of distillation capacity out to 2020 are forecast at 9.4mn bpd globally … New greenfield refineries, particularly in Asia and the Middle East, continue to provide the largest part of this growth,” says a November 2015 report from McKinsey. Meanwhile, the report adds, “The net capacity change has also been affected by 900,000 bpd of new refinery closure announcements, mostly in Europe and Japan.”

Until Romanian prosecutors seized the assets of the refinery in May, KMGI had been planning to ramp up its operations in Europe, using its presence in Romania as a platform to develop projects in the EU. This would have involved investments worth “several billions of dollars” in the pipeline, according to Zhangulov.

The company has already invested in turning Petromidia into one of the most modern refineries in Europe, with 100% Euro 5 production. Since the modernisation programme, its output includes a higher percentage of valuable products such as gasoline, diesel, jet fuel and liquefied petroleum gas (LPG).

However, the company’s future plans are in doubt after its assets were seized, while a bill on the debt conversion is now being reviewed by the Romanian parliament.

Deal on hold

Zhangulov told bne IntelliNews there was “no connection to the current ownership of the company” and the debt conversion. But while its current operations are not affected, KMGI will not be able to borrow against its assets for planned investment projects, which include the construction of a $100mn power plant.

It also throws doubt on a planned deal with China’s CEFC, under which the privately-owned Chinese company agreed to take a 51% stake in KMGI for $680mn. The two companies planned to work together in a strategic partnership in Romania and the CEE region.

The deal was expected to benefit both companies. KMGI had already established itself in Europe, but needed more funds to continue its expansion. Large amounts of money were no longer expected from its parent company NC KMG, which is mulling the sale of its refineries in the Kazakh cities of Atyrau, Shymkent and Pavlodar as well as the majority stake in KMGI. Meanwhile, CEFC, which has the financial strength to sustain future development projects, was looking for more investments in Europe. In short, KMGI would have brought its infrastructure, crude supplies and experience to the partnership, while CEFC provided the finances.

Now, however, the deal is on hold until the ongoing dispute with the Romanian authorities is resolved. Despite top-level discussions between the two sides - it is believed to have been discussed in July by Romanian Prime Minister Dacian Ciolos and his Kazakh counterpart Karim Massimov during the ASEM summit in Ulan-Bataar - KMGI has already taken the first steps towards international arbitration.

In a July 27 statement, KMGI said that together with KazMunaiGas 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 ... [the letter] also details asset freezes totalling more than $2.1bn and the company's belief that it appears to be the intention of the authorities to seize and nationalise assets that have generated tremendous benefit for the Romanian economy and people," the statement said.

The probe is a particular blow to the Kazakh company because after making a substantial and long-term investment in the Romanian market, it was about to start reaping the benefits.

Now not only are its future investment plans put on hold, it could end up footing a bill of up to an estimated $1.5bn for its existing investments. This would most likely be passed up to its parent NC KMG, and could eventually be borne by Kazakh taxpayers.

As a result, should KMGI lose the arbitration process, the company has already indicated it may pull out of its Romanian investment altogether. Zhangulov said in July that KMGI had been forced to reconsider its position on the Romanian market. “Bottom line, we continue our activities, but at this point we are assessing the overall business context in which we are carrying them out,” he said.

The raises the question of what would happen to Romania’s largest refinery. The number of refineries in Romania has already been whittled down from 10 at the fall of communism to just those owned by KMGI, OMV/Petrom and Lukoil’s Petrotel (the subject of a separate investigation). Lukoil is already considering the sale of its refineries in both Romania and Bulgaria, the company’s CEO Vagyt Alekperov said in an interview with Russia’s RBC in June.

With international oil majors now pulling out of European refining projects, it is unclear who if anyone might be a potential buyer willing to invest in KMGI’s refinery, most likely meaning Petromidia could end up back in the hands of the Romanian state.