Energy Sector Governance in Romania: Good Omens from the Private Sector
Energy security has been on everybody’s lips since the beginning of the Ukraine crisis, since it has revived an examination of Europe’s import dependence. This has brought into the discussion sensitive topics and procrastinated decisions (over shale gas for example), which could help certain countries play a more prominent role on the European energy market. Romania is one such country, provided that it can deal with its own internal governance issues.
Romania is better positioned to leverage its relative energy independence for the public good, especially when compared to other countries in the region. This is true of traditional hydrocarbons like oil and natural gas. Romania has the third-largest gas reserve in the EU; and less than 30 percent of its gas consumption depends on imports. Unless changes are made, this otherwise positive outlook could turn negative in the future. For example, Romania’s gas resources are estimated to drop to 77 billion cubic meters (bcm) in 2020 (down from 134 bcm in 2011), while oil reserves are estimated to decrease to 28 million tons by 2020 (down from 60 million tons in 2011). In light of the overall energy and geostrategic challenges that Central European countries face, Romania will need to have a strong strategy to prepare for this transition.
The energy sector of the economy is one of the five priorities for the current government’s National Plan for Strategic Investments (together with mineral resources, infrastructure, agriculture and industry). The Romanian government has made market liberalization one of the biggest priorities of its energy strategy, but the concrete steps to implement it are slow and cumbersome.[1] One step in fighting deficiencies in the energy sector is to improve the efficiency, competitiveness and transparency of large State Owned Enterprises (SOEs), which is in line with the requirements of international agencies such as the IMF, EBRD and the European Commission.
Signs from the private sector
Last year, the two most profitable companies in Romania were in the energy sector. These are Petrom (with 46 percent market share in gas production) and Romgaz (with a 51 percent market share). Importantly, only 20.64 percent of Petrom is owned by the Romanian state. Meanwhile, the government maintains a 70 stake in Romagaz. With a lower share of government ownership, the 2012 figures show that Petrom employed three times more people and registered almost four times higher profits than Romgaz. The third most profitable company in Romania in 2013 was Fondul Proprietatea, an investment management fund whose portfolio includes 66 state companies, of which 42 percent are from the oil and gas sector.
The story behind these figures points to the fact that, at least in certain areas, the private sector could be a better administrator than the state, including a strategically-sensitive area like energy. With a large state-owned energy sector (53 percent of the energy and gas sector is now controlled by SOEs[2]), Romania’s few positive examples of successful privatizations should inform its future policy choices.
How Petrom made it to the top
Petrom was one of the biggest state-owned companies—with 93.04 percent state ownership before privatization—that was successfully privatized in Romania. It was the most important integrated oil and gas operator and producer in the country, and ranked among large regional peers in Central and Eastern Europe. It also had many weaknesses. The decision to privatize Petrom was a result of a common diagnostic used by the EU and IMF for Romanian SOEs: lack of competitiveness, transparency and investments; huge financial losses, overdue debts, arrears and small profits compared to actual capabilities; corruption among company employees regarding contracts with suppliers and third parties.
To close the Energy chapter and complete the country’s EU accession process, Romanian authorities agreed with the EU, IMF and World Bank to privatize Petrom. These institutions supported Romania in amending its legislation to make privatization possible. After an international tender was held to choose the consultants and analyst who would assist in the process, the Austrian company OMV Group bought 51.01 percent of the company’s shares in 2004. The final transaction was worth 1.5 billion euros ($2 billion). Besides the 51.01 percent owned by OMV, 20.64 percent of company shares were held by the Ministry of Economy, 18.99 percent by Fondul Proprietatea and 9.35 percent by other legal entities and individuals.
In 2006, because of concerns that the privatization process was unfair and unlawful, the Romanian Senate established a commission to investigate the conditions under which the privatization occurred. The commission concluded that all laws had been respected, but it recommended increasing the royalties and creating a special fund to mitigate the impact of rising gas prices on consumers. The commission also suggested that the company’s overall value had been underestimated and thus its selling price. In recent years, the dissatisfactions regarding Petrom stem from the small royalties paid (between 3.5 and 13.5 percent). The agreement on the level of royalties expires in 2014 and is now the subject of talks between Petrom and the government.
The success of Petrom is clearly visible in the outcome of privatization. Petrom is now the biggest contributor to the state budget, accounting for approximately 2.3 billion euros ($3.1 billion) in 2013, or around 11 percent of the non-consolidated state budget for the year. Its post-privatization financial track record is stunning. In 2004, when the company was bought by OMV, Petrom registered losses of 216 million euros ($294 million). The following year, it was already seeing profits of 314 million euros ($427.27 million) and had investments of 247.6 million euros ($337.28 million). Gross value for dividends paid to Petrom’s shareholders increased by almost 400 percent compared to 2000. For 2013, Petrom declared its intention to reinvest more than one billion euros, equivalent to its record profits registered in that year.
Other privatizations are also in plan, but follow a different strategy. Indeed, the recent success of the Romgaz IPO in 2013 shows that Romania now has both the experience and the rationale to decrease the government’s role in the energy sector. However, additional steps in this direction will require a more transparent, thoughtful and inclusive regulatory process, professional and independent management and a more market-driven approach to efficiency.
What is next for Romania in the energy field?
The first important step in maximizing Romania’s potential in the energy sector is to enforce a coherent and transparent legal framework and effective competition in a free energy market. Romania’s energy resources place the country at the core of the discussion regarding its regional geopolitical and economic potential, especially given the implications of recent events in Ukraine. To make the best use of its energy potential, Romania needs to focus foremost on building a new long-term natural resources and energy strategy, using transparent and broad-based consultations with all stakeholders. The strategy should include development priorities and alternative or unconventional sources, issues of ownership and the role of SOEs in the field, the impact on the local environment, supervision and control, as well as the interconnectedness with regional markets. The capacities of the National Agency for Mineral Resources and of the National Agency for Energy Regulation need to be enhanced to provide more transparent, politically independent and nondiscriminatory services.
Secondly, the government needs to speed efforts to modernize SOEs in the energy field through professional and independent management. This will increase the prospect of investor interest and will support the gradual liberalization of the energy market. Recent stock exchange listings of companies like Romgaz and Nuclearelectrica show that investors are incentivized both by the attractiveness of natural resources and by the transparency and predictability brought about by regulation of the financial markets. Further IPOs in the energy/natural resources sector need to be carefully planned so that they do not compete against each other. Not least, more transparent and clear rules about utilizing the profits obtained through the selling of shares are crucial for maintaining the attractiveness of companies. While dividends and profits are important, showing that the Romanian state can be an effective administrator and smart seller can send a strong message of confidence to investors and citizens.
Corina Rebegea is Resident Fellow at the Center for European Policy Analysis (CEPA). CEPA has published a new report, “Romania’s 'Tipping Point' - Advancing the Rule of Law, Governance and Public Leadership.” Click HERE for the full report. CEPA is a Natural Gas Europe Knowledge Partner.