KazMunayGas-Petromidia: What’s next?

Petromidia Refinery Has The Best Results In History, But Is Likely Due To The Dissolution Of Law In Romania

This month, KazMunayGas International N.V. (KMGI), which owns the Petromidia refinery complex in Constanta county (south-east Romania), will be entitled to file a claim with the international arbitration court, demanding that the Romanian Government revokes the seizure of company assets imposed by Directorate for Investigating Organized Crime and Terrorism (DIICOT) prosecutors.

As known, Romanian prosecution authorities launched an investigation in May 2016 into the circumstances of the privatization conducted in 1998-2004 regarding Rompetrol properties, acquired by KazMunayGas in 2007.

Prosecutors have not put forward any specific complaints against KMGI (at least not yet), but the seizure of assets not only seriously complicates the activity and investments of KMG International in Romania, but also the completion of the deal with China’s CEFC Energy Company Limited, with which an agreement was reached for the sale of a 51% stake in KMGI at the end of April.

Almost three months ago, on July 26th, KazMunayGas International notified the Romanian Government on the possibility of international arbitration. Its legal basis will be an agreement on mutual protection of investments between Romania and Kazakhstan, and between Romania and the Netherlands, in whose jurisdiction KMGI is registered, as well as the Energy Charter Treaty, which Romania also joined. According to the procedure, Kazakhstan has the right to initiate international arbitration procedures three or six months after filing such notification.

The ball is now in Romania’s court, and it remains to be seen what will happen in the coming weeks when the legal deadline imposed by the Kazakh side will expire in what regards the initiation of the international arbitration procedure.

As known, Romania will hold parliamentary elections on December 11, and although the election campaign has not yet officially started, it seems that everybody is already electioneering. It is for this reason why this issues involving KMGI might be ignored during this period in which the whole of Romania is electioneering, despite the very positive bilateral talks held recently between PM Ciolos and his Kazakh counterpart at the ASEAN Summit—that undoubtedly tackled this sensitive issue—respectively between Romania’s Minister of Foreign Affairs and Kazakhstan’s Deputy Minister of Foreign Affairs who was in Bucharest a few weeks ago.

However, representatives of Kazakh business circles cannot help themselves wondering about what may or may not be a mere coincidence: the agreement with the Chinese company was signed on April 29th and shortly afterwards, on May 6th, KMGI received from the Romanian authorities the seizure of assets notification for events and actions that happened over 10 years ago and have no connection with KMG International.

According to Azamat Zhangulov, KMGI Senior Vice President, the Kazakh side’s position is simple: a bona fide purchaser who should not be held legally responsible, since the Kazakh Group bought Rompetrol after the period investigated by DIICOT prosecutors for irregularities in the privatization process of this company.

Especially if we are to remember the history of relations between the Romanian Government and the Kazakh investor.

The agreement on the acquisition of 75% shares of Rompetrol Group N.V., owned by the controversial late Romanian businessman Dinu Patriciu, was signed on August 24th, 2007. Three years later, in 2010, Rompetrol Rafinare – a Rompetrol Group company and the owner of Petromidia refinery – converted the bonds issued in 2003 into shares of company stock in favor of the Romanian Government.

As a result, the Romanian Government acquired the status of minority shareholder of Rompetrol Rafinare, with a stake of 44.69%.

Afterwards, KMG had to enter long negotiations on the status of the Romanian Government as a shareholder and to repurchase shares.

These negotiations culminated in January 2014 with the signing of a memorandum according to which the Government received from KMG USD 200 million for a 26.7% stake in the oil company.

The memorandum also provided the establishment of a joint investment fund for the implementation of projects in the Romanian energy sector up to the amount of USD 1 billion, the share of the Romanian Government being 20%.

The complicated situation surrounding this case means representatives of Kazakh business circles are not ruling out the possibility that the current Romanian Government’s claims are intended to obtain other benefits from Kazakhstan.

Especially since KMG International is extremely interested in the deal with the Chinese investor, some Kazakh media reports point out.

In the first half of 2016, for the first time since the acquisition of the asset, KazMunayGas International achieved a net operating profit in the amount of USD 32.3 million.

The EBITDA (analytical indicator which is equal to the profit minus the cost of taxes paid, interest payments on loans and accounted for depreciation) for this period also reached a record level of USD 104.6 million, which is 28% higher than the same period last year.

By the end of this year, according to KMGI Senior Vice President Azamat Zhangulov, the planned figure is at least USD 200 million. The tendency of increasing the refinery margin in Europe and the transformation efforts carried out at company level, the reduction of administrative costs and optimization of business processes contribute to the results.

If we take into account that in 2012, when the new company management started to work, the consolidated EBITDA level was only USD 79 million, and a net loss was in the amount of USD 156 million, it is easy to calculate that EBITDA increased almost 3 times in 2016.

Despite the difficulties it faces in Romania, KMGI—which is represented in the retail sector in Romania, Moldova, Bulgaria and Georgia under the Rompetrol brand–has ambitions to grow further. The Chinese investor, in addition to the payment of “real money” for the 51% stake, has made a commitment to implement the investment program, which will be concentrated in the retail sector.

The seizure of assets blocked the closure of the deal with the Chinese company, but KMG International has been eyeing other very promising markets, such as Turkey, and it is not at all ruled out for a gas stations network to be purchased there with Chinese money.

However, at the diplomatic level, as the Ambassador of the Republic of Kazakhstan H.E. Mr. Daulet Batrashev underlines, the problems that KMG International faces for the time being have no effect on the political bilateral relations which are «excellent and have very good prospects».

But in his opinion the current problematic situation concerning the activities of Rompetrol in Romania is becoming a concern, since Rompetrol is a 100% subsidiary company of Kazakhstan’s National Company « KazMunaiGas », which has so far invested more than USD 3 billion in Romania.

In addition, Mr. Batrashev expresses hope that all the problems involving KMG International will be solved for KMGI positively and in the shortest time, emphasizing that he is personally monitoring the current issue with the company.

Under these circumstances, the natural question arising, with the answer expected not only by the Kazakh investors is: what’s next?

BY DIANA POPA OCTOBER, 2016
http://www.nineoclock.ro/whats-next/

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