EXCLUSIVE Petrom CEO Christina Verchere announces new 9-year strategy: we are reshaping the company as part of the energy transition / Natural gas is key, we will consider low emission and zero carbon investments / It is essential to have the new offshore law this year

Christina Verchere

Christina Verchere, CEO of OMV Petrom, announces in an interview with G4Media and Economedia that in December the company will present its new development strategy for the next nine years, and says natural gas will be a key component of this new strategy. Christina Verchere also says that amending the offshore law this year is “essential” for the development of the Black Sea gas field.

As for the company’s development, the OMV Petrom CEO says the new strategy will follow the energy transition, in line with new European environmental policies. In addition to focusing on the production and use of natural gas, the company is considering other renewable sources for electricity and also increasing the volume of bio-components in fuels.

The increase in gas, electricity and fuel prices is driven by the regional and European market, rising post-pandemic demand and reduced imports.

See the full interview transcript below:

Rep: I saw the new results of OMV Petrom, with an impressive profit. How do you explain this profit?

Christina Verchere: Looking at our results and in general at the 9 months, we really see that demand for our products is recovering to pre-crisis levels. This is an indicator of increased mobility and economic recovery in general. If you look at our figures, for the first 9 months of the year, our result from operations is 2.9 billion lei, which is a 55% increase compared to the same period last year, but it is not yet at the level of the first 9 months of 2019.

We are not back to pre-crisis levels, but we are clearly above the level of 2020, a dramatic year for everyone. So what is driving our results? There are a few factors. One, as you mentioned, is the price of oil, as well as the increase in demand for products. We’re seeing an increase in the price of natural gas, but it’s not influencing the results that much for two reasons. One, quite a lot of our gas has been contracted at a lower price period – we generally contract for a year at the beginning of the year. And the second reason is that when the gas price exceeds RON 85/MWh, an incremental charge of 80% is applied. So this increase you see in the price is not reflected much in our results.

 

Rep: And where does the money from this tax go?

Christina Verchere: It’s a tax, so it goes to the state.
We also had a very good performance in our Downstream Oil business, particularly in our refinery utilization rate. It’s been very good, so it’s been a solid support for fuel supply, which is an important issue.

Rep: Some voices in the market, as well as some politicians, accuse Petrom and other gas producers of cutting gas production this year to keep prices high. Is this true? Because we see in the results that gas production is constantly decreasing, not just this year.

Christina Verchere: I think there are two aspects. First, the prices are set at regional level, at European level. And we see this being connected to these hubs. Romania is much more connected now to these hubs, which is very important for security of supply and the ability to import gas. So prices are really determined at the European level, it’s not an individual producer that can determine prices.

In terms of our production, yes, it is coming down a little bit more than we anticipated. We had predicted a 5% decrease. At the moment we have a decline of about 7%. Partly because we had lower investments this year and last year because of the Covid crisis – but we see that coming back and we had some operational issues. But our goal is to produce as much gas as possible and I think that’s why it’s so important for Romania to be able to develop its own gas resources, to sustain its energy security. And at the heart of this is, of course, the Black Sea.

Rep: We’ll come back to the Black Sea a little later, because before opening this topic I’d like to ask you about the Padina field in Buzau. In 2018 there was an announcement, Petrom said it was one of the largest gas fields in Romania, but we haven’t seen any results from Padina. What happened to that gas field?

Christina Verchere: In terms of gas field development, we see that, in general, onshore activity is declining. There are old fields, from which, although we continue to make more and more investments, the resource is running out. And generally faster in natural gas than in oil. We’ve had some onshore growth, Totea South etc., but they’ve plateaued and gone into decline. So gas is declining faster than oil, which supports why we think the best place to invest for large gas resources is offshore because the onshore area is depleted.

At Padina we have had development activity with Hunt Oil. What we did was seismic exploration. This method allows us to see the quality of the reservoir and where it is located and then start exploration activity. But the possibilities for onshore are limited, not comparable to offshore.

Rep: Now, about offshore. You said in your report that changing the Offshore Law this year is essential. But if the law is not changed, what happens?

Christina Verchere: I will say a few things about the Black Sea. I strongly believe that it is now fundamental that Romania’s energy security is underpinned by the development of the Black Sea. And why do we say it’s so important to have the Offshore Bill this year? The authorities have made a commitment and said they will make changes to the Offshore Law.

Rep: They have been doing this for three years. The last three governments, all of them, have committed to make those changes: the Dancila, Orban and Cîțu governments.

Christina Verchere: Why do you think it’s very important that it happens this year? I think it’s essential that it happens this year. Why do I think it’s so important? It is fundamental! We need to be able to develop natural gas, and once we have the Offshore Law passed, it will be five years before we get the first volume of gas. So it’s very critical, very critical, because we see the challenges of security and energy supply for Romania. This is the solution to those challenges and it has to happen this year.

Rep: There are a lot of people who have been saying this for three to four years now. How can you explain the delay in amending this law?

Christina Verchere: I am not in a position to explain why, we don’t legislate, we invest, others legislate. We invest.

Rep: Do you think that once Romgaz announced the deal with Exxon, we can expect the law to be amended quickly?

Christina Verchere: We are happy that progress has been made and as we said in April, when the deal between Romgaz and Exxon is finalized, we will take over as operator. We are ready for this and to take the project forward. We have 40 years of offshore experience and we are part of a large group, like OMV, that has access to deep-water expertise. So we are ready to do that. We find that encouraging and look forward to having Romgaz as a partner. We see it as an alignment with the Romanian state to develop this resource.

Rep: If the political crisis continues for several more years, the political parties will not have the same opinion about the Law and the Law will not be amended this year or in the first part of next year, what will you do? What will the company do? Are you thinking of abandoning this project?

Christina Verchere: I have been asked this question many times. I am a firm believer that logic prevails. Romania needs this resource. This is our conviction. Therefore, it is fundamental to act on this. The current provisions of the law make the development of the project economically unfeasible. We fundamentally believe that the Offshore Law must be changed. Delaying the Offshore Act delays the project.

Rep: Do you think Romgaz will have the financial capacity to develop, to work together with Petrom in this project?

Christina Verchere: I cannot comment on Romgaz, as you can imagine. This is where Romgaz has to say. But we look forward to having them as a partner.

Rep: We have seen many new policies in Brussels promoted by the European Commission with a huge impact on all industries and especially on the energy industry. How will your company adapt to these new policies where the EU and governments will try to reduce the environmental impact? Will your company adapt with a new strategy or will you stick to your existing strategy and adapt it?

Christina Verchere: I think this is the question for any board member of an oil and gas company. As an energy company, energy transition, Fit for 55, commitment to the Paris agreement, these are fundamental elements for all of us in the oil and gas sector.

Rep: We’ve seen in the last 2-3 years some dramatic changes at some of the big energy companies.

Christina Verchere: Absolutely. We are very committed to the energy transition and committed to the role we will play in it; for our company, for our shareholders and for Romania – given our size. We believe that a fundamental aspect of it is natural gas, especially for Romania. It has the capacity to replace coal in electricity production, as well as to support the economic security and energy security of the country. So we think natural gas is very important, but we are also looking at other renewable sources for electricity and also how to increase the amount of bio-components in our fuels. We also install electric vehicle chargers in our stations, we have photovoltaic panels in our filling stations, so we are looking at all these options. By the end of this year, we will present our strategy to 2030. We will present our plans to 2030, plans that are part of our commitment to Fit for 55 and to the climate change agenda.

Rep: You mentioned the same deadline as for the offshore law, the end of this year. Are they connected? Without the new law will you also postpone the new strategy? Are they interconnected? Or will the new strategy come regardless of what happens with the law?

 

 

Foto: Ovidiu Micsik / InquamPhotos

Christina Verchere: It is essential that Black Sea gas is developed. We believe we are the best investor to do that and have been the most consistent about developing it. So it is fundamental to make sure that Black Sea gas is developed.

Rep: Because without Black Sea gas the new strategy will make little sense.

Christina Verchere: Resource development is a key component. Because they exist and because they are needed in the country. We want to progress as quickly as possible, we are ready, we are waiting.

Rep: Tell us a bit more about this strategy. What do we expect from it? You talked about gas. Will the new strategy be based on natural gas production?

Christina Verchere: The new strategy – and I won’t say everything now, because we have to communicate it towards the end of the year, just some ideas. We’re going to lay out how we see the next 9 years and how we see things happening, what our investment levels are going to be and how we’re going to start reshaping the company as part of the energy transition. As you said, a key component is natural gas. But just as importantly, we will be looking at low emission and zero carbon investments.

Rep: So it’s going to be a greener strategy?

Christina Verchere: It’s going to be how we intend to reduce our carbon footprint in our operations, how we can contribute to Romania’s Fit for 55 journey, and how we commit to our stakeholders.

Rep: At the end of the new strategy period, let’s look into the future, 9 years from now, do you see gas stations completely transformed from what they are now into something else? Generally speaking, not just your gas stations.

Christina Verchere: We have discussions about what retail will look like in 2030. Even today, if you look at our business, at our customer offer: yes, we have fuel offer, but there is much more in the fuel stations. We have a varied offer in terms of food and necessities. We have partnered with MyAuchan and we are in the process of refurbishing and remodeling all our Petrom stations, where we are setting up MyAuchan stores, while we are making improvements in all Petrom stations. We will renovate 400 stations in 4 years. Our goal is to have over 100 this year. We want to have an improved offer for our customers. So what we see today, actually, the gas station is much more than fuel. As we move towards 2030, customer needs will change and we are taking those developments into account.

Rep: Another important aspect of your report is electricity demand. Do we expect significant new investment in an electricity generation facility?

Christina Verchere: You are right, we anticipate an increase in electricity demand in Romania and a change in the mix of energy sources for electricity, with some decrease in coal and we will talk more about that in the strategy. Gas plays an important role. Romania benefits from electricity from non-fossil fuels thanks to hydro and nuclear as well as renewables, but we will continue to see the renewable component grow. Natural gas plays a very important role in electricity generation because it balances the market. It is very important because when there is no sun and the wind is not blowing, people still need electricity. And so electricity from gas plays a very important role in balancing. This will be really very important. So the more renewables we have, the more we need that balancing generation; to make sure that when the weather is bad, everybody still has electricity. This will be very important. We have a gas-fired power plant that fulfils this role now, it will continue to do so in the Romanian market.

Rep: What about the future? Once you have gas. Let’s assume that in 5 years Petrom and Romgaz will start producing gas from the Black Sea. Is a new investment in a power plant like the one in Brazi possible?

Christina Verchere: I think the essential thing is that the gas will be available for customers to use as they see fit. This is essential.

Rep: On investment, how much will you invest in the refinery in the coming years?

Foto: Ovidiu Micsik / InquamPhotos

Christina Verchere: These figures are not yet public, we will publish them as we establish the budget for the coming years. But this year we are committed to invest 2.9 billion lei, we are on track. Over the next few years, this amount will increase, excluding strategic investments, so we will increase our investments again. We reduced our capital in 2020 – it was such an unpredictable year, with such a big drop in prices and demand, but we are increasing it again. And those investments are predominantly in upstream, but they’re also going into refining. We want to make sure that we support two things: the reliability of this facility – it’s a very important component of the key infrastructure for the country, and the development of the petrochemicals aspects of it, but also the growth of the biocomponent capacity. So it’s a key asset.

 

Rep: What are the other significant directions for investment in the coming years? What should we be looking at?

Christina Verchere: A key one will be Neptun Deep in the Black Sea. We also have perimeters in Bulgaria and Georgia. Our strategy is to be a player in the Black Sea. So we will have investments will be in Bulgaria and Georgia, all offshore. In addition, we have what I call the base of activity. This is the onshore drilling program and the workover; these underpin the current production and are very important. And then we’ll look at new opportunities in low carbon and zero carbon, as well as technology developments such as carbon capture and storage and hydrogen. These are fundamental to getting to net zero in 2050. But again, we will talk about that in our strategy.

Rep: You mentioned earlier the unprecedented interventions by governments in Europe in energy systems. We also have in Romania a new law passed by the parliament this week, with an impact on the whole energy market. What impact does this new law have on Petrom’s operations?

Christina Verchere: At the moment we are still assessing, we are looking at the implications. For us, the most important thing is that we can provide the products that the market needs and that the market is not distorted, allowing us to continue with our investments. At the moment we don’t see distortions, but we are still assessing.

Rep: Two weeks ago, both the prime minister and the president of the country said that parliament has to be very careful when it comes to this market intervention because it may discourage further investment. Do you think this new law affects your future investments or are you still evaluating?

Christina Verchere: We are still assessing the impact of this law. But what I can tell you is that Romania has some of the highest gas investment taxes in Europe: three times higher onshore, five times higher than the European average for offshore. This discourages investment. It does not necessarily have to do with what is happening now, but at this moment it is very important that interventions are made with attention to the long-term impact of investments, because investments and long-term predictability allow the energy system to supply society.

Rep: Is this high level of taxation, as you said, related to the decrease in gas production in the last few years of Petrom? Is that because trying to discover new fields or extracting as much as possible from depleted ones costs even more with these taxes?

Christina Verchere: Yes, after all every well is an economic decision: drilling the well depends very much on what you think the well will be able to produce, and the cost of that well, part of the cost of the well is the tax. So if you have higher taxation, it’s less economical, and at some point, if it’s not economical enough for you, you won’t drill the well. Legislation and taxation have an impact on investment and you always try to get the balance right. And gas taxation in Romania is uncompetitive.

Rep: Our colleagues at the Austrian newspaper Kurier wrote on Thursday about the alleged interest of a Polish company to buy OMV’s stake in Petrom. The Polish company later denied the information, but this is not the first time the Austrian press has written about talks about Petrom and the idea of a sale by OMV. Do you have discussions about this with the board in Vienna? About the sale of OMV’s stake in Petrom?

Christina Verchere: These are questions you will have to ask OMV. I think the most important thing I would say is: we have a strategy for OMV Petrom that we want to announce at the end of this year, which is a strategy that will be approved by the supervisory board of OMV Petrom, which includes OMV.

Rep: When will this new strategy be approved?

Christina Verchere: It will be announced in December.

Edited for English

Foto: Ovidiu Micsik / InquamPhotos

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