Harald Kraft: Romania benefits from a strong upstream industry
Harald Kraft is the President of Romanian Petroleum Exploration and Production Companies Association (ROPEPCA) and has over 38 years’ experience in the petroleum industry, upstream, midstream and downstream. He holds a degree and a PhD in Petroleum Engineering both from the University of Clausthal-Zellerfeld, Germany. After joining Wintershall AG Germany he has worked as reservoir engineer domestic and international operations and as head of the acquisition and new ventures group. At Wingas Germany he held the position of head of the logistic department. Harald Kraft moved to Romania in 1997, where he held management positions in oil and gas companies up to the present date. He was Managing Director of WIROM/Wintershall Romania for 8 years and Director of OMV Petrom’s Natural Gas Division for 10 years. Currently, he is the Country Manager of Stratum Energy Romania.
You have given many years of your life to oil and gas industry and you have probably witnessed many achievements and failures over the past period of time. What’s your view on the upstream sector in Romania and on regional level? What about the oil and gas market?
It is crucial to understand the important role the upstream industry plays in the Romanian economy. Not only that it helps Romania be to a large extent self-sufficient in terms of liquid and gaseous hydrocarbons, but upstream companies are also an important contributor to the state budget and are offering more than 15,000 secure and well-paid working places. We also have to acknowledge that Romania is having the longest history of all countries in the commercial production of hydrocarbons. First official recording of commercial oil in 1857, first high-pressure gas pipeline 1914… This long history shows its effects until today. The Romanian subsurface is already extensively explored. The period of easy to find oil and gas accumulations is gone. Despite this, Romania is almost self-sufficient with regard to its gas supply, which not least is the merit of the Romanian gas producers. Last year only 11% of our gas was from imports. With regard to oil, Romania is to 33% independent. How many other European economies benefit from such a favourable situation? I am not that sure that this is duly appreciated by the public, and here I like to explicitly include the politics as well. Unfortunately, the perception of the upstream industry is reduced to the ‘cow one can milk’, not considering the positive impact of this industry on the Romanian economy.
I think the oil market in Romania is not very different from other countries; however, the internal gas market has its peculiarities. I remember the former gas-basket obligation, a unique system found nowhere else. For years the producers have been forced by law to subsidize the residential and district heating sector and still they are forced selling a substantial quota – the political wish is up to 100% – at the centralized market whether producers like it or not. Such paternalism is poison for any investments and is threatening investors.
Recently, ROPEPCA celebrated 5 years of activity. 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. What are the association’s activity highlights and key figures so far and how do you plan to increase its impact on economy?
ROPEPCA’s goal was and is to be a trustworthy partner to its stakeholders, – the Romanian state, the authorities, the institutions we work with and the public. For the last five years, we have tried reaching this goal by facilitating communication and establishing functioning and valuable relationships.
Let me focus on some figures: During the last 3 years the upstream industry contributed to the state budget with a total of 5.2bn € of direct taxes. Of course, due to the collapse of the international oil price the 2016 turnover and the profit of the companies, and consequently their contribution to the budget, has dropped significantly. Despite this the number of jobs assured by our industry remained stable, numbering around 15,000 employees each year.
The onshore sector of Romania is an interesting target especially for small and medium sized companies. Therefore, we have great expectations in the long waited 11th licensing round for petroleum blocks. Many companies are waiting to invest; however, some already have left the country, tired of the many delays and the fiscal and regulatory uncertainties. The 11th round will become a success, but only if the legislator is providing the fiscal and legal frame motivating such investment and is not threatening potential investors. One never should forget, there is an international competition for investments and money is shy, going to where it finds the best possible zone for its prosperousness.
ROPEPCA has a considerable role in the dialogue with the authorities. What are the results of the association’ positions, which are the major obstacles you face in this regard?
The role of ROPEPCA would not be correctly described as being a lobbying organization. Yes, we are participating in policy making, but more we understand our role in having constructive dialogues with our stakeholders and offering our input as industry professionals, but always aiming to achieve a workable balance between differing interests. It would not help defining a benchmark how many interventions were successful and how many were not. If our arguments motivate the authorities to see a pending topic from another perspective as well and to think it over again, I think we did a good job. I hesitate using the word obstacle, but indeed we face challenges. You know as well as I do, what means bureaucracy in Romania and my impression is that authorities became very restrictive using the wiggle room for their decisions they have.
The association has drawn attention to the most recent evolutions in the oil and gas market and has called for public policies that encourage maintaining oil and gas production in Romania. What is the current decline rate and what are the next steps to manage the natural decline of onshore production? What will happen to the onshore hydrocarbons output in the future?
Natural decline of hydrocarbons is inevitable and we have to get accustomed to decreasing production at higher costs. The decline rate of Romanian oil and gas production was dramatic during the nineties, but has attenuated during the last years due to huge investments in field rehabilitation and modernization of production technologies. With regard to natural gas, the decline rate during the last few years was close to zero. This was not free of charge considering the investments done by the upstream industry: 2014 – € 1.6bn; 2015 – € 1.03bn; 2016 – € 591mn. Again, the oil price collapse showed its effects in 2016 with regard to investments as well.
Exploration and production, particularly deep drilling, imply high investment risks and also specialized expertise and newest technologies. We know that investments in mature fields can be expensive, even the gains can be significant for the investors. Now more than ever, with the current oil price environment, there is urgent need to operate oil and gas reserves in a very efficient way to ensure they stay economical. What should companies do to handle this situation?
The human factor plays a considerable role in this. The companies have to motivate and train their employees to fight for any barrel of oil and for any cubic meter of gas at the lowest possible costs. However, this never must bring in danger Health Safety and Environment. The technologies are available, but they need to be applied in a prudent way. There are estimates that more than 1bn €/year of investments are necessary just to maintain the status quo. This money need to be earned first!
The redevelopment projects of mature fields are one of oil and gas companies’ major concerns. What is the current situation with respect to these deposits? What new redevelopment projects will be implemented in the next period?
Such redevelopments are interesting especially for smaller, flexible upstream companies. We know that an incumbent oil and gas producer in the past has placed several mature fields on the market to be operated by other companies and probably will continue doing so in order to streamline operations. Further details are not known at the moment.
What support measures do you think should be adopted in order to counteract the effect of the diminishing production share in the overall hydrocarbon consumption?
The strategic value of domestic resources should enter more in the focus of the legislator. Bureaucracy is a major burden as well for doing the necessary investments. As example I can mention the lengthy and cumbersome procedure in getting a construction permit. On the World Bank website, one can find an interesting statistic on how long it takes to get the construction permit even for a simple warehouse. Romania ranks with an average of 260 days on place no. 187 of 207 countries analysed.
A useful step would be declaring the upstream operation as being in the general interest of Romania as is the case for example the transportation and distribution of electric energy, gas or crude oil.
The new tax regime amendments, long awaited by operators in the oil and gas industry, have given rise to countless contradictory debates. What is your point of view on this issue? What are the most important amendments proposed by ROPEPCA in regard to the new law on royalties which will take effect in 2018?
We consider that the current tax regime for the upstream industries does not encourage producers to further invest. The new draft law on royalties should take into account all effective tax paid currently by producers, along with royalties, and result into a royalties system that would lead to a fair and bearable taxation for upstream companies.
Worth to keep in mind that the percentage level of royalties is fixed in the concession agreements in place as of now and cannot be changed unilaterally by one partner to this contract, i.e. the Romanian state. In this context, ROPEPCA especially is advocating that the reference price given by the competent authority and being the floor for calculating royalties should represent the real market environment in Romania and not from somewhere else.
According to the Deloitte study developed in the spring of 2017 for ROPEPCA, the effective average rate of royalties and other tax for the upstream industry increased from 14% in 2014, to 16.9% at the end of 2015, reaching 17.5% in 2016! This permanent discussion of supplementary tax on hydrocarbon production is not helpful and creates a lot of uncertainty.
The over-taxation of domestic natural gas, which recently was increased up to 80% actually results in a higher income to the state budget than the natural gas royalties, and it is not understandable why only the domestic production is subject to this tax and not imports as well.
When we are talking about excessive taxation of the upstream industry in Romania we should also mention the intended introduction of a 1% tax of the investment value for the environmental impact assessment permit. The upstream business is a very capital intensive one and this tax will be a real bombshell for all investments.
During the Romania Gas Conference 2017 you referred to the negative effects of OUG 64/2016 and excessive taxation in Romania. What are the major challenges of the Romanian natural gas market liberalization? What solutions do you see for these problems?
The obligation to sell a certain fraction of the natural production on the centralized market is one of the peculiarities of the Romanian gas market which will not be found elsewhere. By this measure the producers will be blocked from negotiating custom made supply contracts necessary especially for medium to large commercial and industrial consumers. The experience from Western Europe gas exchanges shows, that such platforms predominantly are the playground for traders and not so much for end-consumers. Do we really think that the insertion of intermediaries, i.e. suppliers, between producer and consumer, – here I am referring to the category mentioned above -, will lead to reduced prices? A basic element of a free market is the freedom of choice, but having only one state controlled gas exchange as monopoly is not a solution and is in contradiction to a free market. Not to be misunderstood, I do not at all question the justification for and the benefit of a centralized market, but on a voluntary basis only. To enforce participation at the centralized market by imposing severe penalties definitely is the wrong way and is opposite to a functioning market economy. If such a centralized market offers attractive products and liquidity, the problem of its acceptance will immediately be resolved by itself.
How do you assess the evolutions in the region regarding the development of the natural gas market, within the context of new priority measures from the European Commission for the EU members, including Romania (securing natural gas supply, interconnections stand, the reverse flow at the cross-border interconnections, transparency regarding reports on gas storage capacity, etc.)?
Romania is behind with respect to its interconnectivity with neighbouring markets and hopefully will remedy this in the near future. We know that Transgaz, which definitely is doing an excellent job, – this needs to be said and be appreciated-, is actively working on this. The priority measures given to member countries by the European Commission are justified and at the very end will be to the benefit of Romania. The huge reserves of the Romanian Black Sea cannot be developed if Romania remains isolated from other markets. Initiatives to block or overtax the export of Romanian gas is seen very critical by ROPEPCA and contradicts the idea of the European Union, where we all benefit from. When you are asking me about the transparency on reports on gas storage and gas transportation, I do not see a big deficit.
What are ROPEPCA’s priorities for the future?
Of course, the eleventh licensing round is one of our highest priorities but I would like to emphasize also some of our other main topics. Among these, the most important are the new regulatory framework for the royalties system, here especially the methodology for calculating natural gas and oil reference prices. The legal and regulatory framework surrounding the natural gas market liberalization definitely will keep us busy. Once again, we offer our cooperation in all these matters and focus on being a trustworthy and professional partner to our stakeholders.
Oil companies have three ways of remaining profitable: reduce cost; manage portfolio; or go into adjacent markets, such as investing in renewables, stated recently Tassos Vlassopoulos, Global Marketing Director of Baker Hughes, a GE Company. In your opinion, how will the international energy market change, given the high energy demand but also the decrease of the EU hydrocarbons reserves? Is renewable energy a solution for the world economy during this time of crisis? Is it a solution for the future?
The resources of hydrocarbons are not endless; this is a known fact. Renewables will gain importance in the future, but in this context and as example let me refer to the hype with electric cars. Where is the infrastructure for charging millions of electric cars, where does the energy come from? From shut down nuclear power plants, or from blocked projects of coal fired or hydro power plants for environmental reasons? It will take definitely a while until hydrocarbons will lose their incumbent position in the energy mix. Investing in renewable would mean diversification for the upstream industry. Diversification or focusing on core activity in the past always was discussed controversial. Sometimes diversification was en vogue, to be later replaced by focussing on core activity and vice versa. Personally, I am of the opinion that focusing on the core activity is the appropriate solution, by applying strong cost control and optimized portfolio management.
Any migration should be handled responsibly: stable growth of the petroleum industry is favourable ground and valuable resource for the technological innovation, which would allow a smooth transition to the non-fossil energy in the future.