Record loss

Struggling Oil Firm OMV Pivots East

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OMV is preparing to open the taps to Russian gas.
  • Why it matters

    Why it matters

    Following its losses, OMV is having to make radical cost cuts while exploiting opportunities where it can cheaply tap new sources and expand into new markets, such as Germany.

  • Facts

    Facts

    • OMV is an Austrian energy company that supplies 200 million Europeans with energy.
    • Its 2015 losses mean it is cutting investment by €400 million ($444 million), having already reduced it by €1 billion last year.
    • The company has struck a deal with Russia’s state-owned oil giant Gazprom to gain access to Arctic extraction technology.
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    Audio

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The Austrian oil group OMV, which supplies 200 million people in central and eastern Europe with energy, has responded to the drop in oil prices with a radical cost-cutting program.

The aim is to become “a streamlined, focused technology group in the oil sector,” says boss Rainer Seele, who has been in post since July. The former head of Wintershall, Germany’s largest producer of crude oil and natural gas, wants to cut investment as well as the company’s dividend and to divest unprofitable areas of business such as the group’s Turkish operations. At the same time, he plans to step up OMV’s collaboration with Russian state-owned energy giant Gazprom.

OMV recorded a net loss of €1.1 billion ($1.2 billion) in 2015, having achieved a profit of €278 million in the previous year. Group sales totaled €23 billion, a year-on-year drop of 27 percent. “We have been living beyond our means for years,” Mr. Seele has complained. The company has debts of €4 billion.

OMV admits that its results would have been even worse without the strong contribution made by its downstream business – its refineries and gas stations. It says that 93 percent of capacity in its refineries was used.

As with other oil groups such as French company Total, it has been able to absorb losses due to the sharp decline in crude oil prices. Since mid-2014, oil prices have fallen by more than two-thirds to around $34 per barrel. Mr. Seele believes they may not recover until 2020, when he expects a barrel of Brent crude oil, the industry benchmark, to cost $75.

The Austrian group wants to acquire a stake of almost 25 percent in parts of the Urengoy oil and gas field in Siberia, which will give it better access to technologies in the permafrost area.

The group wants to make drastic savings in view of its poor price prospects. Analysts expect oil multinationals to cut investment to $522 billion this year, the lowest level for six years, following a 22 percent reduction to $595 billion in 2015.

Mr. Seele has begun the process of selling OMV Petrol Ofisi, one of Turkey’s leading oil companies in the gas station and customer business. “It didn’t fulfill our expectations,” he says. He also reveals that the group’s foray into electricity generation has proved expensive and that he wants to withdraw gradually from this business in order to focus on oil and gas.

In terms of future opportunities, Mr. Seele says that the takeover of the Austrian gas trading company EconGas, which OMV has until now jointly owned with partners, has allowed the group to achieve complete independence. He wants to Europeanize the group’s gas trading business and as a first step plans to expand to Germany in the summer, where he aims to have a market share of 10 percent within 10 years.

Despite tough competition, he is confident that OMV “will find its place in Germany”, promising to use “very modern sales concepts.” He points out that the group already channels its gas from Norway or Rotterdam through Germany, Europe’s biggest market, without tapping this market.

Changes will also be made in upstream operations; when it comes to oil fields, OMV plans to concentrate on highly profitable deposits in the future. “The strategy of increasing production volumes at any price is over,” says Mr. Seele, explaining that his goal is to maintain production levels at 300,000 barrels per day until 2020.

Closer cooperation with Gazprom is a key part of this plan, as OMV will benefit in multiple ways. The Austrian group wants to acquire a stake of almost 25 percent in parts of the Urengoy oil and gas field in Siberia, which will give it better access to technologies in the permafrost area.

 

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A strong performance from OMV’s gas stations helped OMV to keep its head above water last year. Source: OMV/Gerhard Till

 

In exchange, Gazprom is to receive a share in OMV, although no further details have been provided as yet. The planned asset swap will make Russia one of OMV’s core regions; the others currently include Romania, Austria, the North Sea, the Middle East and Africa.

“We will gain access to vast reserves in the Urengoy field,” Mr. Seele says, adding that this will help to stabilize upstream business. “OMV will be able to reduce its exploration costs from €700 million to €300 million only if we gain such a position on the market.”

The expansion of collaboration between OMV and Gazprom will also benefit another project: the new Baltic Sea gas pipeline Nord Stream 2, which OMV is planning together with Gazprom. German energy group E.ON, Anglo-Dutch oil and gas giant Shell, French utility company Engie and Wintershall, which is owned by German chemicals group BASF, are also involved.

The pipeline, which according to Mr. Seele will improve the security of supply, is controversial. The fixed returns that it would generate would help OMV to further reduce its dependence on oil prices.

“We have encountered a lot of support for Nord Stream 2,” says Mr. Seele. He explains that companies from Germany, the United Kingdom, the Netherlands, France and Austria are in favor of the project and that resistance has come from Brussels and Eastern Europe, who are worried about a reliance on Russian gas.

The oil group is also pinning its hopes on Iran, which has the world’s fourth-largest oil reserves. These reserves are attracting all major oil companies, not just OMV. “We know Iran very well from our existing business,” Mr. Seele says, emphasizing that the group has already explored two oil deposits, one of which it actually discovered. “We can make an attractive bid very quickly.” If the Austrian group gets an opportunity in Iran, it would more than compensate for lost production in Libya and Yemen.

The North Sea is a production region that is not uncritical to OMV. “The investment obligations we entered into previously are now weighing us down,” Mr. Seele admits. “They prevent us from being flexible when cutting costs. Because prices are low, I can’t take a break from oil and gas extraction. That’s a major burden in this difficult market environment.”

 

Regine Palm is a Handelsblatt editor, writing about commodities, machine makers and the trade fair industry. Hans-Peter Siebenhaar is Handelsblatt’s correspondent in Vienna and specializes in media and telecommunications coverage. To contact the authors: palm@handelsblatt.com, siebenhaar@handelsblatt.com

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