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Interview with Mariana Gheorghe

19 Mai 2016

Black Sea, an area of strategic importance for OMV Petrom

Mrs. Mariana Gheorghe is for 10 years the Chief Executive Officer and President of the Executive Board of the largest oil and gas company in Romania, interval during which OMV Petrom has recorded a number of significant changes, including several world premieres in implementing new technologies. In the interview offered to our publication we have widely discussed about the current oil market situation and about the company’s medium and long term sustainability strategy.

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You are one of the few ladies in leading positions in a field governed by men. In addition, you have a rich experience in finances and trade. In the current situation, of low crude oil prices, of delayed major investments in exploration, of staff restructuring, of giving up some oil agreements, how do you see things from the position of the leader of the largest oil and gas company in Romania?

Mariana Gheorghe: 2015 was a difficult year for all oil & gas companies, including OMV Petrom. The oil price drop trend, which began in the summer of 2014, continued in 2015 as well, and also this year. From a USD 120/bbl in 2014, we came to minimums of around USD 30/bbl. At the beginning, everyone was hoping that it was just a temporary situation. However, seeing how things are currently developing, we are looking at something more profound: a reconfiguration of the global crude market. In addition to the challenges related to the international crude price, there are also the ones related to the development level of the gas and power markets in Romania. For example, on the gas market, we have been witnessing for a few years now, a drop in demand, especially in the industrial sector, while Romania has come to no longer need imports. The market is balanced for the moment, however on the medium and long term, if the gas offer exceeds the demand, the existence of an interconnection infrastructure with the European market becomes vital. On the power market, during the last years, we’ve seen a boom of production capacities in terms of renewables. In this context, we are facing a reduced utilization rate of the Brazi power plant, which is probably one of the most modern and advanced power generation capacities in Romania, and most importantly, an element that adds stability to the energy system. Therefore you see that we are going through a very challenging period, on several levels: on the crude oil market, gas and electricity markets. In 2015, for the first time after privatization, OMV Petrom reported a net negative result, due to some assets impairments. However, the results are positive in operational terms.

How has OMV Petrom managed to offset the balance and conclude 2015 with a positive operational result in the most difficult period in recent years for the industry?

Mariana Gheorghe: Even since the beginning of 2015, we started to implement a series of measures to adapt to the new crude low price context, in terms of both investments as well as cost reduction and portfolio optimization. We made efforts to optimize costs. Under the a cost optimization program, we rolled out hundreds of measures last year and managed to save approximately EUR 115 mn in 2015, while some of the effects will continue to be seen in 2016 as well. We also had to adjust the investments budget: in 2015 we reported a reduction of 38% compared to 2014. However, even in spite of this reduction, OMV Petrom continues to be one of the biggest private investors in Romania, with investments of approximately EUR 900 mn last year.
In addition to the internal efforts, the fact that we are an integrated company also helped us a lot, with activities in Upstream and Downstream. The Downstream market recorded a favourable development, with refining margins higher than last years, with an increased fuel demand. These evolutions lead to very good results in the Downstream Oil division, which partially offset the unfavourable evolutions in Upstream and Downstream Gas divisions.

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What restructuring and consolidation decisions for the entire chain of operations (Upstream, Midstream, Downstream) do you envisage for the near future? What are the main challenges of the current year for the company and how do you expect to face them? The current complex situation on the oil and gas market calls for new approaches. Which are, in your opinion, the main lines within the company’s sustainability strategy on medium and long term?

Mariana Gheorghe: The measures to re-prioritize investments announced last year will continue in 2016 as well, as well as the costs optimization measures. We are hoping that we are able to build on the existing foundation in order to reach the company’s strategic objectives, despite the fact that we must adapt to the unfavourable market environment. The sustainable performance, the profitability and assets portfolio optimization are the priorities that we are going to focus on. We plan to be cash flow neutral, which means that we have to finance most of the investments out of our own resources.
We are an oil company, so we will continue to focus on our core activities, in a sustainable way. For us, sustainability means the company capacity to generate value for all our stakeholders, now and in the future, by operating responsibly, safely and efficiently. In the same time, our projects are taking into account the sustainable development objectives adopted via the United Nations Global Compact and the sector developments, which make the transition to the energy of the future.

Besides the announced budget cuts and operational cuts, what priorities do you have related to the Upstream segment? What will happen to the onshore hydrocarbons output in the future?

Mariana Gheorghe: For this year, we estimate an additional decrease of investments at OMV Petrom Group level by 10%-20% compared to last year and we will continue the cost optimization programs as well. Some of the projects we were considering in 2014 were cancelled, some were postponed or will be continued with a lower budget. The decrease of investments can be a short term solution, however all fields have a predictable lifecycle, and after the starting period, when the production is growing, the field starts to decline. In Romania, most of the fields we operate are mature fields, in production for tens of years. In the absence of sustained investments, we would see a production decrease of 10%, on average, each year. For this year, we announced a budget of around EUR 700-800 mn, out of which circa 85% is directed to Upstream. In this situation, production in Romania might decrease in 2016 by up to 4%, compared to last year.

What can you tell us about the evolution of ongoing activities in the Black Sea? How does OMV Petrom manage the risks for the projects in the area?

Mariana Gheorghe: Black Sea is of strategic importance for OMV Petrom, in terms of both current production as well as the resources potential in the deepwater area. The discoveries in the deepwater sector have been in the public eye during the past years and few people know that, presently, the Black Sea – shallow water area – is one of the most important production areas in Romania, ensuring 7% of the crude production and 25% of the gas production at OMV Petrom Group level. The potential is linked to the deepwater discovery in the Neptun block. Last year, together with ExxonMobil, we finalized the second exploration drilling campaign. The results are encouraging enough so that the analysis should continue in more detail in order to establish its commerciality. As deepwater exploration in the Black Sea is a pioneering activity, there are indeed a series of challenges. However, presently there are technologies that allow safe deepwater operations and, thanks to our partner, ExxonMobil for Neptun Deep block, we can have access to such technologies and their expertise in the deepwater area.

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Considering the regional/international context and the domestic developments, with new players on the market, what prospects do you see regarding the Downstream segment operations?

Mariana Gheorghe: Downstream has been the star sector in recent period. 2015 was a very good year for refineries worldwide, due to high refining margins. In our case, this favourable context overlapped with the finalization of the Petrobrazi modernization program, which led to an improvement in the refining margin following an updated production mix and reduced energy consumption, so basically we won two times. Good news also came from the fuel distribution sector. After a contraction in fuels consumption in 2014, following the increase in excises, in 2015 we saw a 5% increase in demand due to lower prices but also to economic growth.
Regarding Downstream gas, the utilization rate of the Brazi power plant increased, and electricity production doubled in 2015. Despite good operational results in a market with worsening conditions, the reported result was negative due to impact of provisions for overdue amounts in the natural gas activities.

Despite the economic crisis in recent years, Europe is a major player in the global landscape of science and technology, continuing its efforts in supporting research, technological development and innovation. What is OMV Petrom’s position in this regard?

Mariana Gheorghe: We operate in a technology intensive domain, we depend on technological developments. Last year, OMV Petrom finalized the modernization program of the Institute for Research and Technological Design (ICPT) in Campina, a project which was financed both from own sources and from European funds. Using new technology, like those currently available at ICPT Campina, the company has access to more precise information on geological structures and can test new solutions to increase productivity on existing reservoirs. Another landmark project for innovation in OMV Petrom is the Galileo 3D visualization centre, which allows 3D visualization of geological data and plans and it serves geologists, production specialists and drilling engineers. I am proud that from a company with over 50.000 employees and less than 500 emails sent daily before privatization, we managed to become a company open to new, where people use modern technologies in day to day activities, be it IT innovations or innovations specific to Upstream or refining industries. This deep transformation at the corporate culture level regarding technology I think is one of the greatest achievements of the transformation process over the last 11 years.

The latest statistics and reports show that Romania is making progress in terms of economic growth, surpassing most countries of emerging Europe. What ‘best cards’ do you think our country has in order to become attractive to investors? Which are the weaknesses?

Mariana Gheorghe: If I look at the biggest investment projects in recent years, investments in business services centres of large global players draw my attention, as these bring high added value to the economy, followed by investments in the energy sector and in automotive. I was highly impressed by the fact that, over the first nine months of 2015, the contribution of the IT sector to GDP was higher than that of agriculture. It’s a beneficial development: we have faster access to internal and external information to fundament our decision. The competitive advantages of Romania, especially in the three key areas – IT, energy and automotive - which continue to attract investment, are connected to qualified labour force and competitive costs compared to western countries. As weak points, I would mention limited infrastructure, whether we are talking about roads or highways, or about gas and electric networks interconnections with neighbouring countries. Also, fiscal instability can be a problem, especially as, in the oil & gas field, we are talking about a very high level of investment – in terms of billions of euro – and long investment cycles. Over the last two-three years, new specific taxes were introduced, and their cumulated impact is equivalent to doubling royalties. As we have said it in the past and we will continue to send this message – stability and predictability of the fiscal and regulatory frameworks are essential to having an attractive business environment in Romania.

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This year marks 10 years since you took the helm of OMV Petrom. How would you briefly characterize this period, if pointing to the most important achievement but also to the hardest failure?

Mariana Gheorghe: My first memories about Petrom are related to the old headquarters in Calea Victoriei and the meeting Rroom where the Supervisory Council used to meet; at that time I was representing EBRD who was one of Petrom’s shareholders. Petrom back then was an example of typical state-owned companies, with lack of cash-flow, lack of investment and gloomy future perspectives.
It is very hard to synthesize in a few lines what the transformation of Petrom meant, but I can say, with all belief, that no achievement was possible without the involvement of the team. There are three areas where changes are very visible. Labour conditions changed a lot and so did the attitude towards employees, as they are the ones who create value for the company. Then, from a state owned company who was almost frozen, we managed to become the largest private investor in Romania. This means that we encouraged initiative and we pursued development opportunities. Another area of significant transformation is related to technology. In the years 2000, Petrom was relying mostly on technologies used in the ‘50s. Over the last 10 years, we can name not one, but many world premieres for using new technologies, both in Upstream and in Downstream.

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