Romanian Fight With KMGI And Rompetrol Chases Away Foreign Investors

KazMunaiGas EP to supply 4.6 million tons of oil to Kazakh oil refineries in 2018

The election of a majority Social Democratic PSD party in Romania this past weekend gives the country a chance to push the reset button on its relations with foreign investors, The Financial Times writes.

After a year when the government has been drawn into fruitless squabbles in commercial courts and arbitrations with no less than five international companies, now is the time to reassure investors that Romania is open for business. The time to close the book on introspective and opaque government is long overdue.

The government’s current fight with KazMunaiGaz International (KMGI) and Rompetrol, its Romanian asset, poses a particular long-term threat to the country. The company, which is Kazakhstan’s largest energy provider, has supplanted Russia as Romania’s primary source of energy. Over the last nine years, KMGI has been chipping away at Russian domination of oil and gas to Romania and today some 55 per cent of energy comes out of the Central Asian state and only 27 per cent from Russia.

Rompetrol, under the name of Oilfield Exploration Business Solutions, is the country’s second largest energy provider and owns Romania’s largest oil refinery called Petromidia and a chain of petrol stations called Vega.

Yet, at the point when the country has energy self-sufficiency, this is the moment when the country’s Directorate for the Investigation of Organised Crime and Terrorism (DIICOT), Romania’s commercial police agency, has decided to re-open an investigation of a historic but controversial deal involving Rompetrol.

The investigation, termed in the local press Rompetrol Two, has resulted in the indictment of four ministers in the former government and the freezing of $670m worth of assets. DIICOT’s action was announced just days after KMGI announced it was selling a 51 per cent stake in Rompetrol to the Chinese company CEFC China Energy. The geopolitical implications of this deal make it particularly sensitive and it is now in jeopardy.

The target of the investigation is a transaction carried out in 2003, when the company’s largest shareholder Dinu Patriciu converted $570m of Rompetrol debt into bonds with a seven year repayment term. The transaction engendered controversy because of the way the bonds were valued and was investigated by the DIICOT. Patriciu, who was the country’s richest man as a result of his ownership in Rompetrol, was charged with money laundering and acquitted. He has since died.

The issue appeared to have been closed at that point, although rumblings of discontent have continued over the following decade and more. In May 2016 DIICOT announced they were reviving their case of 13 years earlier and this highly complex investigation continues.

This was the prompt for the freezing of the assets, a move being resisted by KGMI, whose lawyers Freshfields sent the Romanian government a Notice of Dispute on July 26, 2016. This accuses the DIICOT and other agencies of “attempting to seize and destroy Oilfield’s business.”

One local publication took the DIICOT to task for the government’s heavy-handed action saying that it risked ‘chasing away one of the largest investors from the Romanian economy, at times when other refiners in Europe are leaving this industry.”

KMGI says it has no connection with the events or individuals under investigation and professes itself mystified by the turn of events. It also points to the fact that it has invested some $1.6bn in Romania’s energy infrastructure over nine years. It notes it has contributed extensively to the country’s tax revenues.

It does however say that it may have to reconsider its nine-year long investment in the country if the assets continue to be frozen. Perhaps this is bluffing in a politicised battle of wits with a Romanian government eager to raise tax revenue, but the stakes are high.

The continued freezing of the company assets could put into jeopardy the future of a $1bn joint investment fund set up, under a memorandum of understanding, by the government of Kazakhstan for furthering investments in Romanian energy projects.

Not in doubt is that the Romanian action casts a cloud over Romania as a destination for foreign investment, especially that sourced from China, warns KMGI. Azamat Zhangulov, KMGI’s senior vice president, lauds KMGI’s contribution to the country, saying that Romania’s oil sector was “unproductive, inefficient, uncompetitive and close to insolvency” when the company acquired Rompetrol.

“We have transformed it into a number one producer for quality volume and exports…. [W]e have invested billions to make our assets the best in the market. We are good corporate citizens and good for Romania.”

The election of a new government brings new opportunity. “KMGI in partnership with China can play an important role in connecting Asia to Europe,” said Alexey Golovin, VP for Corporate Development and Strategy at KMGI, in an interview with Capital magazine in Romania. “It is a real chance for Romania.”

Nick Kochan is a UK based writer and journalist and his work may be seen Kochan is writing a book a book on the politics of oil and development.