04/29/2022 12:22 (act 04/29/2022 12:30)
Good business for OMV in the first quarter ©APA/AFP
Russia’s next OMV gas bill is due in May. How the payment should be processed, whether in euros or rubles, is still unclear. “There is relatively little clarity on whether Gazprom’s proposed new payment methods will comply with sanctions,” OMV CEO Alfred Stern said in an interview with the APA on Friday. “I cannot comment on this at this time as we are still in the process of working this out for ourselves.”
According to the existing contract with Gazprom, payment was made in euros until the end. The new payment modalities desired by Gazprom are currently being analyzed and the proposed solutions are being worked on “that are in accordance with the sanctions and the law”. As of when the new payment terms required by Gazprom will apply to OMV, “this is not entirely clear at the moment,” says Stern. “I would say this should happen in the course of May.”
Apparently, a possibility is currently being discussed in several countries that would allow Russia and the EU to save: gas customers in the EU could therefore pay in euros, the money would be immediately exchanged by Gazprombank for rubles and Gazprom as requested, get rubles.
According to Stern, reports that OMV wants to open a ruble account with Gazprombank in Switzerland are false. “I am not aware of this Swiss ruble account.” However, OMV has a commercial activity in Russia with its stake in the Yuzhno-Russkoye gas field. “We have an office there, and of course you have to pay the rent in rubles. There have been local business accounts in rubles for years.” However, these bills would not be used to pay for gas deliveries.
OMV has a 24.99% stake in the Yuzhno-Russkoye gas field in western Siberia. The gas produced there is sold “at the pump” – half of it on the Russian market, “unfortunately the prices there are not very attractive”. The other half will be sent to Germany. “The cash flow there was such that we received a dividend once a year in August”, in the order of 200 million euros. Due to existing sanctions, it will not be possible to transfer this payment from Russia to the parent company, at least next August. “This is not an EU sanction, but a Russian decree,” explained OMV CFO Reinhard Florey in the presentation of the quarterly figures.
“We recorded losses related to this gas field in the first quarter due to the change in the situation and our expectation that there will be difficulties in getting the money out of the country,” said CEO Stern. This special effect was estimated in the quarterly report at around €1 billion. As the interest in Yuzhno-Russkoye is no longer consolidated on OMV’s balance sheet, gas production is no longer accounted for as OMV’s production. “Yuzhno-Russkoye produced around 100,000 barrels a day last year, which is 20% of OMV production,” said Stern. This means that 80,000 barrels of OMV production would be lost this year because the Russian gas field was still consolidated on the OMV balance sheet in January and February.
The move away from Russian gas announced by several European countries is likely not going to be as easy as it is sometimes portrayed at the political level. On the one hand, there is a legal hurdle: “We have two contracts with Gazprom,” Stern said. “One is for Austria, which runs to 2040, and we have one for Germany, which runs to 2032.” The OMV chief stressed that the company would “act in accordance with sanctions and within the legal framework” at all times. “Of course, acting within the legal framework also means that I will fulfill my contractual obligations. I am the wrong contact person for how the legal framework and sanctions framework will develop in the future.”
Apart from the legal issue, from today’s point of view it is not possible to do without the supply of Russian gas in the short term for economic reasons, because these quantities of gas cannot be compensated with gas from other sources. “If we stop this delivery, there will be a bottleneck in the market, which I believe will also have huge consequences for the economy and the industry.”
In March, the gas storage tanks started to be filled again and the OMV storage tanks are now 26% full. Now, one is in the process of devising payment arrangements that comply with the sanctions. In addition, they are analyzing the flexibilization of the contracts for the sale of the quantities of self-produced gas. “In the medium term, we are also in the process of increasing LNG quantities through our LNG terminal in Rotterdam and bringing them to Europe. Of course, it all depends on having pipeline capacities.” With a specially deployed task force, they are in the process of minimizing risk and maintaining gas flows. “The chances of becoming independent of Russian gas overnight are extremely limited.”
According to Stern, the “Neptun Deep” project in the Romanian Black Sea plays a central role in OMV’s strategy. OMV Petrom has been working on the project for many years and more recently there has been a move with the long-awaited offshore law change. “It is mainly about the tax regime for offshore oil and gas production in the Black Sea. This is necessary to be able to present this project economically.” There is now a bill that has been submitted to the Romanian Parliament for consideration. Once the law takes effect, it will take around nine to twelve months for the final investment decision to be made. An investment volume of “less than two billion euros” is expected.
Production will begin about four years later. So far, Exxon has been OMV’s 50% partner on the project. Exxon’s stake will be taken over by Romania’s Romgaz – negotiations are progressing well, Stern said. Austria will not be able to substitute Russian gas for future production in the Black Sea, Stern explained, because this gas will be needed mainly in Romania and southeastern Europe. The gas produced by OMV in Norway is currently being sold to Germany because no pipeline capacity to Austria has been reserved – Russian gas deliveries have so far reached Austria as contractually agreed.
Mainly thanks to the currently very high gas price, OMV significantly increased its sales and operating profit in the first quarter of 2022. Revenue increased by 146% to 15.8 billion euros. Adjusted for inventory effects, CCS’ operating income before special items tripled from €870 million to €2.62 billion. CCS’s net income for the period attributable to shareholders before special items more than doubled from €424 million to €1.07 billion.
However, the profit actually achieved (after special effects) was reduced by heavy write-downs – in addition to the value adjustment of the Yuzhno-Russkoye gas field, loan with which OMV participated in the financing of the Nord Stream 2 gas pipeline was also reduced by June 5, 2018 March “fully damaged” with a good 1 billion euros (including accrued interest). At 546 million euros, the result for the period attributable to shareholders was therefore below the result for the first quarter of 2021 (654 million euros).
The CEO declined to confirm reports of a possible reorganization of OMV’s board. There had been speculation in the media that Vice President Johann Pleininger, responsible for Exploration and Production, and the head of the Romanian subsidiary Petrom, Christina Verchere, could change jobs. “I’m not aware of it and I have no decision on it,” Stern told the APA.