Petrom keeps Romanian refinery running

By bne IntelliNews June 5, 2007

Nicholas Watson in Prague -

Oil and gas firm Petrom said Monday it's struck a deal with the Romanian authorities to keep open its Arpechim oil refinery while it works out how best to shut it down in order to carry out the necessary environmental upgrades. Even so, analysts warn the whole affair could still have repercussions for the broader economy.

OMV, which is the majority owner of Petrom, said that while the Romanian authorities hadn't rescinded last week's order to close down the refinery due to the alleged failure to comply with environmental standards on time, it will be allowed to continue full production while a study on the procedures necessary for implementing the shutdown is conducted. Shutting down refineries is a complex and tricky process.

Though this agreement is certainly an improvement on the testy war of words between the two sides over the past few days, analysts stressed little fundamental has changed. "This is a procedural issue and does not represent a new agreement with the regulatory authorities," says Bram Buring, an analyst at the Czech brokerage Wood & Co.

The brouhaha around the country's largest refinery began on May 28 when the regional environmental agency in Pitesti in southern Romania unexpectedly announced it was suspending the environmental permit for the Arpechim refinery for a period of six months because Petrom had failed to carry out the agreed upgrades by the December deadline.

The decision even took the government by surprise, with Romania's economy and finance minister, Varujan Vosganian, telling reporters on May 30 that he had no idea why the regional environmental authorities had ordered the refinery shut. "I really do not know why [the agency] decided to start the closing procedures for Arpechim refinery. It was never a matter of money, but a matter of organizing the investment process," Vosganian said.

Petrom also took this line, calling the suspension of the license "disproportionate and unjustified." Dan Pazara, spokesman for Petrom, said the Arpechim refinery had a compliance programme that had been negotiated with the Environmental Agency and includes specific measures to be taken until 2012, which is also the end of the EU-specified transition period.

"We are making substantial investments to comply with the environmental standards. In the last two years alone at Arpechim, the level of environmental-related investments was more than €60m," Pazara said.

With the company threatening to challenge the order in court and the government keen to keep open the country's largest refinery, cooler heads appear to have prevailed. Now Petrom hopes that while it carries out the detailed study on the procedures necessary to implement the shutdown, it will be able to modernise Arpechim's fixed and floating-cover gasoline tanks, which formed part of the agency's basis for ordering the shutdown. The company says the agency's other concern, the failure to close two slurry dumps used to contain waste, has been completed and the documentation already submitted.

Cost of closing

Keeping Arpechim running will be a big relief to the government. Petrom warned that closing down the 72,000-barrel-per-day (b/d) refinery would have a negative impact on the Romanian economy as a whole, a claim that's not groundless.

Wood & Co estimated that a two-month shutdown might cost Petrom about RON100m (€30.6m), which would not be insurmountable given the fact the firm had net profits of RON2.28bn (€647m) in 2006. However, the hit would come at an already bad time for the refiner, which saw its revenue fall 12% on year in the first quarter to €815m and net profit drop 57% to €112.7m due to the decrease in oil price and increase in the Romanian leu.

Closing the refinery would also have knock-on effects elsewhere in the industry. The country's leading chemical products maker Oltchim, which gets ethylene and propylene from Arpechim, predicted its revenue would drop by 50% and approximately half of its employees would need to be laid off if the refinery shut. Given its reliance on Arpechim, Oltchim officials said their firm would be interested in acquiring the refinery if Petrom wasn't interested in doing the upgrades itself and reopening it.

The consultancy Business Monitor International reckons that given Romania has a refinery capacity of 504,000 b/d with an estimated export potential of well above 100,000 b/d, even if Arpechim is temporarily forced to close, it would cause a reduction in refined product exports but not force the country to import refined products. However, Romania, which is a crude oil importer and is set to spend around $3.10bn on imports this year, based on an oil price assumption of $55.50/bbl (OPEC basket), wouldn't be able to counterbalance this cost because of the reduction in refined oil exports.

On a broader level, analysts worry that such heavy-handed measures by the regional environmental agency could impact on foreign investment, which is needed to finance the record current-account gap stemming from the wider-than-ever trade deficits.

While far from Russia's naked political use of environmental regulations to transfer oil, gas and mineral extraction licenses from foreign firms to state ones, the action by the regional environmental agency could cause overseas investors to think twice before investing in the country's manufacturing industries, which are in huge need of investment to meet EU regulations and compete in the single market.

This would add to the growing unease that the country's current political turmoil - last month a referendum to impeach the president failed, prompting a no-confidence vote in the minority government - is beginning to impact on investors' appetite for the country.

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