Mr. Stratan, you are President in Office of ROPEPCA. For a start, please explain how the association was set up, what are its objectives and main activities.
The Association was set up in 2012 out of the oil industry’s need to strengthen the sector’s image of onshore oil and natural gas exploration and production in Romania. We wanted first of all to strengthen relations with the authorities and with the civil society. At the time the association was set up, there was a vacuum of communication between the industry and the rest of the interested parties.
The press articles before the establishment of the association had sent confusing messages to the public and a custom had been created that these articles were widely accepted as the absolute truth. Everyone had forgotten what Romanian oil industry had represented in our common past of over 150 years. The Prince Charming the Romanian economy was transformed overnight into one Evil Dragon, no longer defended by anyone.
Over this framework, starting 2010-2011, it has overlapped an intensely politicized national hysteria caused by the shale gas, which was a vector used to solve many personal agendas, at the expense of the Romanian state and its citizens. It is easy to sell and convey apocalyptic messages in a country with low living standards, while the people face survival problems from one month to another. Sometimes politicians may have interests that do not coincide with those of the population.
I have a saying: for several hundred years we prove our inability to govern ourselves and continue on the same line without even trying to change something in this ill-fated national karma. The change must come from within, accompanied by responsible assumption of all parties obligations. We must cease waiting for the Faner rulers and for foreign dynasties to lead us and to decide what’s best for us as a nation and as a country. It’s high time for us all to realize what’s best for us and to choose the good from multiple bad.
The mission of the Association is to be represented in the dialogue with the state and to convey the messages with a single voice, following the members’ internal alignment.
The association is a dynamic body that shows flexibility, depending on the response of authorities to the messages previously transmitted by us, in order to maintain a constant dialogue at beneficial levels for all interested parties, to strengthen the constructive attitude and to achieve clear progress.
The association brings together key exploration and production industry players operating in Romania, which share a common vision: respect for the environment, ethical working conditions by applying the highest standards and by using the latest technologies. Our mission is to provide a uniform representation for onshore oil and gas sector in Romania. In order to achieve this goal we try to raise the general awareness level on the industry and its importance to the national economy and to the labour market. We also promote open discussions on topics related to health, safety and environment, education, taxation and technology.
The importance of the upstream segment of oil and gas industry for the national economy is overwhelming, as it is the largest contributor to the state budget and also a significant employer. Your association has therefore a considerable role in the dialogue with the authorities. What were the results so far of the ROPEPCA interventions, which are the major obstacles you face in this regard?
Romanian Petroleum Exploration and Production Companies Association consists of 19 members, holders of concession agreements. These agreements were signed by the member companies with the Romanian State, under the Petroleum Law in force. Currently, ROPEPCA members hold the majority of the petroleum concession agreements for the development and production of onshore blocks in Romania, accounting cumulated investments of EUR 1.5 billion in 2014, a turnover of almost EUR 5 billion and contributions to the state budget of EUR 2.5 billion and have created 18,200 jobs.
Indeed, the oil industry is particularly important for Romania, if not the most important for the whole national economy, due to the major contribution to the state budget, the large number of jobs they provide and the generated multiplication factor. According to a Deloitte survey conducted in 2014, each EUR invested in this sector generates additional EUR 2.3, and every other job generates 4.3 indirect jobs in parallel supporting industries.
In view of optimal exploitation of the reserves, the Association proposed two years ago an amendment to the Law of permanent pastures, the initiative being materialized by exempting them from the scope of that law of exploration and production operations. It was an early achievement for the association and this stimulated us to go on.
We’ve had several rounds of talks with NAMR about amending the Petroleum Law so as to improve the operators’ access to the land needed to conduct petroleum activities. Although the access to resources is guaranteed by the Romanian State, on the ground we face realities that are not provided either by the concession arrangements, nor by the Petroleum Law and by any of the implementing rules, which give rise to numerous legal and administrative interpretations, to failures during the operations. Major delays resulted in carrying out operations precisely because access to land was restricted by the landowners, on the background of total lack of support from local state authorities.
This is a major challenge the industry is facing: major discrepancy between the declarative support of the state at central level and the opposition and lack of support from local authorities. Law enforcement is uneven throughout the country, we have already seen arbitrary interpretations and decisions of various courts that are issued to the detriment of petroleum agreement holders and thus at the expense of the Romanian State. Currently, in the western part of the country more than eighty lawsuits and actions in various courts are pending, to ban petroleum agreements holders’ access to land in order to conduct their operations for which they signed these agreements with the Romanian state. All these things are contradiction in terms, but this is the reality in which we live and we face every day: the state’s inability to defend its own national and strategic interests in the territory.
The association’s dialogue with the authorities was initially received with reluctance, but this was exceeded once they realized that we have the support given by the votes of almost all onshore petroleum license holders in the country and that our proposals are balanced, promoting mutual benefits. The biggest surprise for the authorities was the fact that we have succeeded for two years to be consistent and to discuss in full consensus on the specific issues previously approached by each individual member company.
The greatest obstacle we face is still a lack of transparency, of communication and action. Public consultations are announced within a very short time and sometimes the time needed to prepare our position is almost nonexistent. During the dialogue we have the impression of monologue and that, in fact, nobody really listens to us. All the time we have the feeling that everything is just scenery, in order to have a fake check on a situation or an activity report, just to confirm that the industry was consulted on a particular subject.
We have a new government and we are still waiting to have this impression taken away.
From your association’s point of view, the National Energy Strategy (SEN) should be developed in consultation with the industry representatives. As the announced deadline for finalizing the document is September 15, 2016, quite tight, what information you have about the stage of the meetings? What are the main conclusions from the discussions?
SEN should be developed in full consultation with all the interested parties, not only with the industry. There are areas of the strategy to be covered by other entities, not necessarily by the industry. The industry’s contribution to the drawing up of the strategy will be substantial, although limited at the same time. SEN will have to initially juggle with many original concepts and each interested party will want to see its proposals on the shortlist. The role of state representatives will be to moderate and present the arguments of each party, so that their validity can be accepted by all other parties.
The association issued a press release immediately after the launch of the public consultation on SEN and has already proposed a ‘deep dive’ exercise, following which all the interested parties may express free their target proposals and determine the shortlist on the basis of a mutual agreement or, better said, which ones should survive as proposals and evolve to the higher stage as strategic goal of the SEN. Then a similar exercise is needed for the means of reaching the SEN targets, once they have been identified and agreed upon by all the interested parties.
The deadline of September 15, 2016 seems very ambitious and we hope that the entire process can be completed until that date and that the three summer months, right in the middle of the elaboration operations, will not add additional pressure, so that the proposed steps could be taken with celerity.
So far, a single meeting has been held, during which we were shown the six working committees. We expect the convening of the working groups in order to initiate the public consultation process. I noticed a new level of energy from the Ministry of Energy in addressing this public consultation process and we want it to stay as much within kinetics and as less within the potential area.
According to ROPEPCA, securing the national energy must be the SEN’s main objective, recognized by all interested parties, including the entire political spectrum, which in future should restrain the impulses to issue normative acts in full contradiction with the national public interest. I introduced the word ‘public’ in the above phrase precisely to distinguish the national interest as claimed by politicians and the real one, which should be primarily for citizens’ interests, to enable the free and unhindered access to the available sources of energy, uninterrupted and at affordable prices.
You mentioned that the energy strategy’s crucial goal, according to ROPEPCA, would be to ensure national energy security, Romania having a satisfactory position, given that domestic resources have a significant share in consumption. What support measures do you think should be adopted, at first, in order to counteract the effect of the diminishing production share in the overall hydrocarbon consumption?
SEN will be developed for the period up to 2030 and with forecasts until 2050, so the period under discussion is long and a lot can happen in the meantime. SEN should consider the scenarios regarding consumption and production, the current trend of worldwide geo-politicization of the energy sector, the EU membership and any future changes that may tip the balance in one direction or another. SEN must present viable alternatives for both cases.
Romania may seem surrounded by potential sources of energy that are currently available and can be sources of viable imports, but SEN must also provide that all these energy sources could at some point become inaccessible and therefore should stimulate the domestic oil sector so we can be energy independent for a long period of time, considering a scenario of zero imports of crude oil and natural gas. In addition, SEN must consider the economic side – unlike imports, the domestic hydrocarbons production helps to balance the trade balance, supports local jobs market and the derived contributions to the state budget. This is the great problem of the petroleum industry, namely the inability to maintain a constant level of production without investing additional funds into new exploration and discovery works for new hydrocarbon deposits. A deposit is not like a pipe that has a valve at one end and produces as long as we keep it open. Deposits suffer from a disease which is called natural production decline and make them produce less from one year to another. In order to have a constant national production of hydrocarbons we must compensate the lower quantities produced due to the natural decline of production with other quantities recently discovered and produced. This operation is called reserve replacement.
Any oil company knows it must explore and discover larger quantities than they produce, because only this way it can ensure long-term sustainability. Romania’s oil industry sustainability must become another major objective of the SEN, in addition to the national energy security. SEN cannot talk about energy security without sustainable domestic oil industry, as there can’t be a viable strategy unless it is based on a National Economic Strategy and supported by an accelerated nationwide infrastructure development. The good side is that Romania has a huge potential for development. Currently, with the existing poor infrastructure, we are able to produce an annual economic growth of 3-4%, imagine what economic growth we could generate if we improve the infrastructure.
But we cannot say that Romanian oil sector is supported and promoted by the authorities as long as the state unilaterally imposes new taxes on oil companies without even consulting them, without conducting impact and economic efficiency studies.
We believe that it is high time for all interested parties in developing the national energy strategy to decide what kind of strategy we choose for Romania, one of survival based on imports or a development one.
The new tax regime amendments, long awaited by operators in the oil and gas industry, have given rise to countless contradictory debates. What are the main points of divergence regarding this topic and what viable solutions are in sight?
The three parties interested in the dialogue on the tax regime are the state, on the one hand, oil companies on the other hand, and citizens, in the dual positioning as final consumer and member of the communities in which we conduct oil operations. There must always be a fair balance in this tripartite system, so that each part can operate independently, not at the expense of another party or other parties. This was the key message that the Association has promoted for the past two years and one can notice it hasn’t been well understood or has not been given the due importance. This can be seen today, during the crisis of world oil prices, as we have two losers (producers and communities) and a third party who is not willing to show flexibility and to temporary adjust the tax revenue to allow the survival of the other two parties facing difficulties.
That’s what takes place when a state budget is based on revenues from such activities and does not have the ability to provide that such crises can happen anytime and anywhere. In such circumstances, the state should activate out of its reserves, the contingency as additional sources of income to the state budget in order to quickly and temporarily ease the tax burden that weigh on producers and consumers. Such actions have already been undertaken by several EU countries and certainly their number will increase: let’s look at Great Britain where the government has already taken steps and has openly stated its unconditional support for the national oil industry in order to survive this crisis.
The hardest mission for the interested parties in the subject of the new tax regime applicable to the industry of oil and gas is to negotiate a fair balance for all, so as to allow large enough revenues to the budget and a final price at the gas station bearable to the citizen and, not least, a business environment that recognizes the importance of this industry and to stimulate both foreign capital and domestic capital investments.
The oil royalty itself is nothing but a tax levied by the state, which entitles a company or an operator to prospect, explore, develop and produce resources and the national natural reserves of liquid and/or gas hydrocarbons.
There are currently more than 1,000 different tax regimes in the world and, depending on their economic, political, historical, cultural, and geographical particularities, each of them tries to achieve the fair share between state interests and the interests of oil companies. This fair share is nothing but a fair share of assumed risks by the two negotiating partners. In Romania, where the concession of resources and reserves system is operational, based on a concession agreement for the payment of oil royalties to the state, the highest risks are on the companies’ side and the lowest risks are on the state’s side.
If we weight them all, we would notice that the balance is largely inclined to the state and this leads to the idea that the level of royalties should be dropped in order to allow the companies to absorb these risks and be able to alleviate them, through their own capacities, to bear all the losses caused by them. The risks are various: financial, administrative or time risks. Any delay in the bidding, negotiation, licensing or authorization processes does nothing to enhance the oil companies’ confidence in the state’s ability to be a fair partner on long-term.
The international markets and international business environment reacts very quickly, not in a positive sense, when the state sends negative messages on the market, such as non-observance of the stability clause for the concession arrangements and the unilateral imposing of additional taxes, the changing of a tax system already in place and accepted by the business environment with a more aggressive and regressive one, by which the state is imposing mechanisms to forcefully attract more quickly additional revenues to the state budget.
All the negative messages sent on the market do nothing but scare investors and confirm that the Romanian state cannot be a reliable partner on the long term. The average extent of a concession agreement is 25-30 years and usually includes an optional extension clause of another 10-15 years, therefore we already talk of an agreement that must operate under the same tax regime for nearly 50 years, the tax regime which in turn must be immune to political, economic influence or of other nature. As they say, once the agreement signed, you cannot change the horses in the middle of the race. The investment decision – once taken by the investor – is final and as carved in stone. The state promise comes as guarantee to observe the fiscal framework on long term, throughout the concession agreement.
Any deviation from the initial tax regime that stood as basis for taking the investment decision does nothing but alter the project’s economic efficiency and to shorten its economic life, i.e. bring near/bring forward the date when the exploitation project becomes unprofitable, meaning it goes from profit to loss. Therefore, in the over 1,000 tax regimes worldwide, two systems of royalties apply, namely regressive and progressive.
The regressive system is an aggressive regime of royalties as the state gets immediate and substantial budget revenues in the first years of the exploitation of resources. The disadvantage is that these resources will be less exploited, until the project becomes inefficient. The direct consequence would be the loss of budgetary revenues and other taxes, employment and the entire multiplication factor in the national economy.
The progressive royalty regime is gentler, practicing a lower level of royalties, which allows the faster recovery of the investment, while allowing a longer exploitation of resources, higher budget revenues for a longer time against the regressive regime.
At a quick count one can notice that the absolute amount of budget revenues in a particular project is about the same, the only difference relating to the duration of resource exploitation. The conclusion is that the progressive system is more advantageous for all the interested parties, managing to secure and maintain budget revenues, jobs and a multiplication factor for a longer period of time.
Any energy strategy based on sustainable economic strategy would recommend a progressive royalty regime to strengthen the long-term economic sustainability.
Practicing a high level of royalties would have as effect inefficient investments and undeveloped resources in the state’s care, while practicing a too low royalty level would have the effect of reduced budget revenues.
Examples of undertaken risks to be considered when assessing the royalties’ level:
- Risks assumed by investors: authorization risk; auction risk; negotiation risk; licensing risk; risk related to business opportunities on the market; exploration risk (without compensation in case of failure); risk related to the size of the discovered deposit; geological risk and quality risk of the deposit; technological risk associated to the type of the development scenario; long term risk of 30-50 years; risk of total or partial expropriation/nationalization; weather risk; risk of force majeure (war, insurrection, civil war); prices of crude oil and gas; quality of oil and gas risk; risk related to infrastructure; transportation risk; staff risk; personnel risk; risk related to fiscal stability; regulatory risk; judiciary risk; risk related to obtaining approvals, permits, certificates; risk of access to land for conducting operations; risk to operate within a framework of classified documents; risk of operating with reference price for crude oil and with regulated price for gas; risk related to the investment recovery; environmental risk; risk of wells, facilities, pipelines abandonment and environmental restoration.
- Risks assumed by the state: the risk related to the operator’s technical and financial capability; the risk of not investing the promised amount; the risk of not honouring the promised operations; the risk of premature restitution of the deposit or block; risk of bankruptcy; oil and gas price risk – cancelled in Romania by the reference and regulated prices; main risks: quantities produced and price.
You referred during the Romania Gas Conference 2015 to the negative effects of excessive taxation in Romania as compared to the European taxation system. What are the most important amendments proposed by ROPEPCA in regard to the new law on royalties which will take effect in 2017?
It is true that excessive taxation in force in recent years in Romania kills the oil industry and discourages the process as attracting foreign investments. The latest survey conducted by Deloitte in 2015 certifies that taxation in Romania was in 2015 at a level of 15.7%, while in the same group of countries to which Romania belongs it was 7.5%. The difference is almost double and very hard to be borne by the industry and more and more difficult to explain to the foreign investor whose money we want to see invested in Romania and not in other projects, in other countries that offer tax incentives to attract foreign investments. In addition, the budgetary strategy should be designed so that higher revenues are collected, directly and indirectly, due to the larger quantities exploited, therefore from more investments.
ROPEPCA admits to the growing need of the state to collect more to the state budget, but this need should not cumber the tax burden that presses on the shoulders of the oil and gas industry. Indeed, it is the easiest way to set new fees and taxes and to increase the royalties’ level and it is harder to strengthen fiscal discipline and to increase the tax collection degree to the state budget, thus reducing the huge size of tax evasion in Romania, which is of EUR16 billion per year. The level of tax collection to the state budget was of 58% in 2014 as compared to the desired level of 78% and represented the lowest share in the EU.
The association has already proposed that the level of fees remains unchanged for all concession agreements in force, under the clause guaranteeing stable economic efficiency of a long-term investment, as it was calculated when taking the investment decision. In addition, we have proposed a substantial reduction in the level of royalties for marginal fields, whose production has decreased substantially, which are, under the current tax regime, several years away from reaching economic limits. This scenario was working nine months ago, but in the meantime, due to the global crisis of oil prices, the majority of marginal fields in Romania have already reached the economic limit and exploitation has become unprofitable. What are the consequences? Most of them will be returned to the state, jobs will be lost, receipts from royalties to the state budget will cease, all other taxes from the industry will cease to be paid to the central and local administrations, VAT receipts will become zero, while the oil and gas undeveloped reserves will be abandoned, without a chance to be brought to the surface soon.
This industry doesn’t have an On/Off button, from which it can be restarted overnight. It will take many years for the first quantities of hydrocarbons ever to be produced from the fields returned now. This is another reality of our industry, namely the long operating cycles. Since the signing of a concession agreement until the first quantities of hydrocarbons are produced can pass ten years. Investments in the first period, the exploration one, are always done on the investors’ risk and there are more chances of failure than of success. The exploration success rate varies from one company to another, but we can easily say that out of ten exploration wells only three or four are successful.
We have proposed in the past and we propose again that the new SEN should provide a mechanism for self-regulation of operations in the oil sector, in order to have laws, rules and regulations that can be invoked in times of crisis, not to kill an industry just because we go through a period of crisis and only because the state must survive. And if we think well, the interest of all stakeholders will be covered on long-term. There’s no other alternative.
In Romania there are mono-industrial areas that depend exclusively on the presence and proper functioning of an industry. In our sector such areas are Moinesti, Moreni, Ticleni, Suplac, Boldesti who are totally dependent on the survival of this industry, so there is a specific social component to be considered by the authorities.
In order to boost Romania’s attractiveness on the map of foreign investors we have proposed the offering of tax incentives to companies investing in onshore exploration projects at a depth of more than 3,000 m, in the redevelopment of marginal deposits and in modern technologies of increasing the recovery factor of secondary and tertiary exploitations.
The state may also offer tax ‘holidays’ to investors in order to attract them here. Any loss for the state on short term will turn into substantial benefits on the medium and long term. Therefore SEN will be beneficial to be able to look beyond the visible horizon.
All legislative stutters, related to the tax regime, have brought major disservice to the Romanian oil industry and to the investment framework. When the state can’t provide and guarantee the stability of the legal and fiscal framework, the country is downgraded and will not be found on the short list of the foreign investment capital’s favourite destinations. The banking and country rating were not invented yesterday, and they reflect the level at which our country is perceived abroad. This rating is very fragile, meaning it behaves like any matrimonial or business relationship: it is very easy to destroy and yet very difficult to repair, because trust is the fundamental brick. Once trust is lost, it will require titanic efforts to restore it.
Foreign capital always flees the country that does not provide a transparent, stable and predictable regime. These are the three major attributes of a tax system to encourage foreign investment and yet we cannot boast with any attributes of the three. Taxation applicable to the oil industry should be analyzed as a whole, because in addition to the royalties, many other taxes are paid to the central and local budgets. The association has identified 33 direct taxes and more than 110 indirect taxes, payable under all sorts of forms for a number of certificates, permits, approvals, etc. Eventually all these amounts are expenditures in the financial year for each operator and not revenues.
There is a proposal from the state to introduce a new tax of 35% on the profits of oil companies, which will be considered before calculating the 16% standard tax. The basis of calculation will be slightly different and the industry hopes the investments will be deducted from it. In principle we do not agree with the introduction of any additional tax or charges because we do not see any real justification.
Romania does not have a recent medium or large important history of discoveries, does not register significant growth in the volumes of the hydrocarbons produced, we see no reason why a declining production to be charged more just because the state has a pressing need for more money to the state budget.
We have noticed in the past few years what a good administrator of public funds the State was and it hurts us when we think that we are being imposed additional fees, that the operations of an industrial sector of strategic importance for Romania is undermined, so that more money is wasted on incompletely defined programmes, on electoral activities or on planting pansies of RON 50 each.
All oil companies have independent social responsibility programmes and in many areas these companies have done a lot for local communities, more than local authorities did with public money.
Within the industry there are voices that criticize the National Agency for Mineral Resources (NAMR). How does ROPEPCA envisage the institution’s modernisation and the relaxation of the classified data regime?
Yes, from year to year we are working increasingly hard with the NAMR for several reasons. The Agency was established in 2004 under a programme agreed with the World Bank and the arrangement agreed was good for 2004, representing a promising start. But like any start, it should have been continued and the agency should have been developed continuously to meet the operational and regulatory challenges. NAMR is Romania’s first window towards the world because it is the interface between the Romanian State and the domestic and foreign investors.
Several times foreign investors were discouraged in their attempts to penetrate the Romanian market, where they have had direct contact with the procedures in force. The agency is understaffed, and some of the employees have already made their retirement papers. The Agency will work very soon with approximately 100 employees and will not be able to meet the challenges of the modern world and of the industry.
For comparison, a similar agency in Poland operates with over 300 employees, although Poland produces four times less oil and two and a half times less gas. The agency lacks technical and modern technology and is still not able to create a digital database covering all geophysical and geological information about Romania. The data are in the custody of several companies, are lost or destroyed whenever these data printed paper are moved from one place to another. The holders of petroleum agreements pay to NAMR an annual fee for professional training and technological transfer and these cumulated charges should be enough for the Agency to operate at high and modern standards. The reality shows that the agency is underfunded, it currently receives about 0.4% of the total fees paid by the holders of petroleum agreements, Oil Terminal, Conpet and Transgaz to the state budget under Law 238.
The greatest shock for a foreign investor coming for the first time in Romania and taking contact with NAMR is when he learns that in Romania is still in force a law on classified documents, which impedes him, as a new investor, to conduct operations normally, as he would do in any other country in the world. This law is an archaic one, in force since the times of the Warsaw Pact, a law which surprisingly survived and still regulates that certain documents are secret, that they have a special procedure that cannot be copied or archived electronically, they can be sent from a location to another only by military post and that the data cannot be made public, as they are secret. This is very difficult to explain to a foreign investor, why in Romania and only in Romania there is such a law and the state does not take any steps to repeal it.
The effect is even more daunting when the investor finds out he needs a special room for secret documents in his office, with controlled access and registry records, and he must have an employee authorized to handle such documents, which in turn should authorise others for access. Therefore additional costs are generated for each project in order to meet in 2016 an archaic law, although Romania has joined the EU and NATO and it is part of the informational transparency initiatives. This law is one that stands also in NAMR’s way to establish a digital database with all geological and geophysical information. In the US, Canada and in many EU countries these data are public and accessible on government servers.
The existence of such digital database would very much ease the process of tendering for the exploration blocks or production. Currently the data packages are only on paper and are massive. The modern technology for exploration, development and production uses software solutions that necessarily require that this information on paper be digitized in order to be placed in work programmes.
Many of the foreign companies which have already invested in Romania have a periodical obligation to their councils, to financial institutions and especially to their shareholders to submit periodical financial and activity reports. The law on classified documents in Romania is a major hindrance to the smooth running of the reporting operation of each investor and, therefore, some companies did not invest in Romania, as it was very difficult to convince the shareholders to invest in an EU country which still promotes such archaic laws.
Then there’s the wages level at NAMR, which is very low and that stands in the way of attracting valuable specialists. As I said, NAMR is perfectly able to finance itself and provide its employees a wage level of adequate to professional skills and to the modern challenges.
NAMR’s full responsibility is to set business opportunities for investors every year, or even several times a year. The oil industry cannot develop in Romania if the last licensing round was held in 2009 and the next one has been delayed successively in the past two or three years.
ROPEPCA has recommended NAMR last year not to wait for the coming into force of the new tax package for the oil industry and to launch the 11th licensing round as soon as possible. Last year the oil price was still high and someone had done some calculations imagining what additional amounts could be attracted to the state budget.
Meanwhile the oil prices have collapsed and the premises to launch this bidding round soon have gone.
A train passed through Romania’s station, but has gone and nobody knows when it will return. What are the results? A total lack of market opportunities, declining receipts from royalties to the state budget as the output drops sharply and deposits are closed down as they are no longer profitable. What do we replace the lost production with? With nothing, because in previous years we haven’t organized the licensing rounds and we haven’t set the premises to have new production from new discoveries to offset the current output losses.
Recent analysts’ estimates anticipate a period during which the price of oil will remain low. The heavyweights in the field register losses and continue the series of downward budget adjustments. Moreover, for the first time in 25 years, ConocoPhillips has announced cuts in dividends by 66%. How do you see this signal?
It is not just a signal, but a massive landslide in the oil industry worldwide. Ever since the oil price has begun, everyone is talking about producers and rarely have I seen articles about the parallel support industries, which are much broader than one thinks. The multiplication factor in the world economy is huge. In order to survive, many equipment and services companies merge quickly. The latest examples are the acquisition of Cameron by Schlumberger and Baker Hughes’ acquisition by Halliburton.
The producers are not sitting still either and already are notorious the British Gas Group’s acquisition by Royal Dutch Shell and Talisman Energy’s acquisition by Repsol. We may witness soon British Petroleum’s acquisition by ExxonMobil. Some acquisitions are for consolidation, in order to pass the crisis easier, but others are irresistible transactions in times of crisis, because there are rarely so good business opportunities as those in times of deep crisis. The fact that oil prices reached such lower limits represent a perfect opportunity for companies with large cash reserves to go shopping for large reserves discovered at very low prices.
Until the present moment I cannot understand why Saudi Arabia is happy to sell its oil output at very low prices to get a larger market share, when before it was selling its production more expensively to a smaller market share, but for higher revenues. My feeling is that it destroys the long-term value by selling oil at dumping prices. All investment programmes in Saudi Arabia have been postponed, and this will be reflected in the future in lower levels of production; it has introduced the VAT so that the state budget stays afloat and is further eroding the cash reserves accumulated in previous years.
Such a market policy may easily come out of the aggressive marketing area and may be subject to undermining the national economy. Short-term benefits fade against economic realities foreshadowed on the horizon. The entire technological support for the Saudi oil industry is offered by US companies. If parallel equipment and service industries will go bankrupt, then who will provide similar services to Saudi Arabia? Sometimes the logic of 15% out of zero should be defeated by the logic of 7% out of 100%.
In the context of current pressures and complex situation on the oil and gas market, ‘the new normality’ calls for new approaches. What key changes should include, in your opinion, the sustainability strategy of an oil and gas company on the medium and long term?
I do not think there is a perfect recipe for such crises. Even if the crisis elements are the same, people who manage these companies take various decisions. Rarely these people will take similar decisions. Each one takes decisions in the light of his cognitive practice, of experience gained throughout his career and according to the degree of understanding certain phenomena. Most decisions are often subjective and are rarely objective. Each company’s fight for survival will be shorter or longer, depending on everyone’s wisdom and depending on the degree of success in communicating and disseminating the support message addressed to the subordinate echelons. Some companies control better the vertical axis of the corporate pyramid, others do it worse.
The golden rule is that each company must optimize costs as much to afford to stay in the game until the crisis is gone. Companies having large cash resources may even move to asset acquisitions to increase its reserve base at a very low acquisition cost.
A common mistake that companies make in times of crisis is to quickly lay off as much staff as they can in order to reduce costs. It is indeed a measure quick and easy to implement, but imagine that the company remains fully vulnerable when the crisis passes, and needs to step up its activity again at a level at least similar to the one before the crisis. The company will continue to record losses and its projects will be weak on the short and medium term due to lack of personnel, because it takes a lot of time to recruit quality employees, when the economy gets heated. And there is also a danger that the newly recruited employees do not live up to the level of those laid off.
After each crisis beneficial solutions come up, resulting from the crystallization of the revaluation analyzed options, relocation, reinvention of different ways, methods and operational and business processes which help to keep the company afloat. After the crisis all these would become part of a new normality that will continue to live and to set new standards until the emergence of the next crisis.
Recently Deloitte said in a study that globally about 95% of oil producers can extract in 2016 at lower costs than USD 15 per barrel, up from 65% by mid-2014 due to the improvements made by technology.
In the light of statements and constant presence in the media, you are an extremely active and involved person in promoting ROPEPCA operations. What motivates your effervescence and what is the most important message you want to send to your colleagues in the industry?
Firstly, as President in Office, I am only the tip of the iceberg. Behind me there are a lot of wonderful people who help define a desirable horizon of the Romanian oil industry. Romanian oil industry has a tradition of over 150 years and all of us who have worked a lifetime or less in this industry have a moral duty to carry on. The best motivation is that all these people have invested a huge dose of confidence in me and in the mandate I’ve been entrusted with.
The Association’s actions, the issues proposed for discussion, the interpellations and the positioning letters have so far tried to cover some topics of interest for the industry in general and for its good functioning. We need laws, regulations, rules and new institutions in these modern times and, if possible, we should at least try to break with the past. The road is not smooth and I admit that our communication, negotiation, organisational and managerial skills are often put to the test.
I really appreciate the fact that when we are in trouble there is always a solution offered by one of the members and so we can benefit from the expertise of a diverse group with different social and cultural heritage. The association has hitherto managed to create a unity in diversity and we continue to fight for it.
My message to the entire Romanian oil industry is that, in times of tribulation, always turn back to the springs to rediscover the primordial fundamental values who founded this successful industry in Romania, and from there to get inspired in finding solutions for survival, acceptance, coexistence with other industries and civil society, respect for the environment and the development in their benefit and the country’s.
To the country, I recommend it to re-start taking pride in what our predecessors have created since 1857.