EPG: The Rompetrol II file could heal past wounds and clear new paths for investors
A business deal between the state-owned Kazakh O&G company KazMunayGas and a large Chinese private enterprise, CEFC China Energy Company Limited, looks set to be derailed by an eleventh hour decision by Romania’s prosecutors to forward an investigation into one of the country’s most infamous privatizations of its shadowy ‘90s.
Romanian DIICOT, the country’s highest ranking prosecutors, in charge of investigating organized crime and terrorism, decided, May 9, to pursue an in depth investigation of what is now called the Rompetrol II file – a splinter of the original one, which has already resulted in several prison sentences for former company directors, one prominent journalist turned senator, and a former communications minister. They were found guilty of embezzlement, money laundering and stock market manipulation.
The prosecutors in the Rompetrol II file instituted a freeze over assets belonging to three companies that form KazMunayGas’ Romanian business: KMG International (formerly Rompetrol Group) – KazMunayGas’ international arm; Oilfield Exploration Business Solutions (formerly Rompetrol SA, once in charge of the company’s import/export operations) and Rompetrol Rafinare, owner of the company’s refining business. All three are now considered liable parties in the file. The freeze falls over assets worth about €670m and is equal to the damages the Romanian state claims it is owed from the historical privatization.
The details of the decades-long cause remain a case in point for Romania’s murky transition years. Rompetrol was created in 1974 as an oil import-export state-owned company. In 1993 it was privatized through the so-called MEBO method, which meant transferring company shares to a restricted group of people with previous connection to the company (largely management and employees) in an attempt to bring greater efficiency by motivating employees to improve profitability. By 1998 control over the company fell in the hands of controversial businessman Dinu Patriciu and a group of smaller investors.
In 2007 Dinu Patriciu sold 75% of Rompetrol’s shares to KazMunayGas. By 2009, Patriciu had sold the entire package to the Kazakh group for $2.7 bn, granting the buyer full control over Romania’s largest oil refinery, Petromidia, the only one with direct access to the Black Sea, a smaller refinery, Vega, and a European network of gas stations.
KazMunayGas Headquarters (Photo: KazMunayGas)
But Patriciu’s dealings with the state were far from settled at the time. In 2003, four years prior to the sale, the company was handed a significant – possibly illegal – boon to prod what was deemed a strategic investor. Namely, the Adrian Năstase government of 2003 passed Governmental Ordinance (OUG) 118 which converted €570m of the company’s debt to the Romanian state into 7-year maturity bonds, convertible to stocks as the debt reached maturity. And it is precisely the bond’s convertibility into stock that is now in question. There is reasonable suspicion, say prosecutors, to believe that OUG 118 resulted from the decisive influence of an organized crime group over government officials of the time. Four former ministers are now investigated as part of the said group which activated between 1998 and 2003, revolving around Mr. Patriciu.
Three years into KazMunayGas’ purchase, the debt reached maturity in 2010. With the option of dodging payment fully, KazMunayGas chose to pay a mere €54m of the inherited debt (the minimum amount needed that would still allow KazMunayGas to retain the title of majority shareholder) and allowed the conversion of the remaining €516m into stock. The Romanian state thus forcefully ended up with a 44.7% stake in Rompetrol Rafinare, part of KMG International, which it holds to this day. The issue’s settlement is still pending and the current investigation looks like a last ditch attempt by the state to recover at least some of its loses.
In 2013-2015 attempts were made for the issue’s final settlement. The Ponta government of the time signed a Memorandum of Understanding with Rompetrol Group (KMG International as of 2014) which allowed debt forgiveness in exchange for a 26.6% purchase of the state’s shares by the company for a minimum of $200m, and the creation of a joint investment fund expected to reach a total value of $1 bn over 7-years’ time. After an attempt to gain Parliament approval over the MoU, the Government eventually had to undergird the deal by means of Governmental Decision 35/2014. But time will tell if that will make for a clean slate. No deadlines were set for either the shares’ purchase or the fund’s creation, nor were there any penalties set. The shy steps taken by the Government in 2015 for its implementation (a Governmental Decision in July, approving the shares’ sale, and an OUG in September allowing for the creation of a state company to join an investment fund) have resulted in nothing so far. The deadline is December 31, 2016.
As stated by Azamat Zhangulov, Senior VP at KMG International, the transaction with the Chinese buyer has been finalized, but external factors can still lead to its interruption. CEFC China Energy Company Limited and KazMunayGas signed an agreement on April 29 for the creation of a joint venture whereby the Kazakh company would keep a 49% stake in KMG International, but sell the rest to the Chinese company. The estimated date for the transaction’s completion is October 2016.
The 2002-born CEFC is the sixth largest and one of the most dynamic private Chinese companies, with a $35 bn turnover in 2014, included in the Global Fortune 500, and employing over 20,000 people in the energy, financial and investment sectors. It first got a taste of European investment in 2015 when it bought Dyneff, a downstream KMG International company with business in Spain and France. It also holds a controlling stake in J&T Finance Group, a financial services company active in the Czech Republic and Slovakia, which pledged a $5 bn investment fund in the Czech Republic in partnership with Chinese bank Ping An. CEFC is also said to be interested in some Serbian road and airport infrastructure projects.
Such investments look in line with the company’s stated purpose to up investment in Europe as part of the giant Chinese state-driven One Belt, One Road project. If so, the Romanian refinery is but one piece of the larger infrastructure puzzle which is gradually starting to take shape. Whether this is a key piece, however, remains to be seen. Romanian authorities are making it very difficult for the project to save its appeal. What still plays into the transaction’s favor is the low selling price, given the seller’s need for cash at a time of low oil income and economic troubles in neighboring Russia. CEFC is said to have pledged $3 bn over the next five years to an investment fund to be developed with the Romanian Government, but no details have emerged. The quality of the investments, their location, their direct impact on the Romanian economy (job creation especially) as well as indirect impact (tax rate) should all be considered when assessing the fund’s allure.
In overview, the whole case is symptomatic for the changes that Romania is undergoing. It’s highly unlikely that any of the three parties involved – KazMunayGas, CEFCF and the Government – can win all the battles on the short term. Nonetheless, the deal will benefit both state and investors on the long term. Had DIICOT not opened the current investigation, it would have been a sign of continued institutional weakness (as was the case throughout the ‘90s and early 2000s), which is even more repealing to investors than the fallout of the current investigation.
It’s also a good reminder to investors that “all that glitters is not gold”, a saying to become all the more relevant as the country advances towards rule of law and accountability. When KazMunayGas bought Rompetrol from Dinu Patriciu, the latter’s name was already associated with one of the country’s ample money laundering cases, the so-called “Libya debt”. The Rompetrol management was also under investigation since at least 2005 for market rigging in April 2004, as the company was listed on the stock market. Even though some details of these cases were confidential and probably not available to KazMunayGas, the media have constantly brought such accusations to the fore.
The state should act to protect investors through the rule of law, not by means of one-off decisions, governmental or otherwise, with palliative character. It is such practices that, since the ‘90s, have led to situations like this. The issue must be settled once and for all. The sooner that happens, the quicker will investors regain confidence.
Anca Elena Mihalache is an Affiliated Expert with Energy Policy Group, a Romanian think-tank specializing in energy policy and energy security, and a Contributing Analyst at Wikistrat, a global crowdsourced geopolitical consultancy.