A Forty-Year-Old Oil Empire
This is the story of an oil refinery that covers 480 hectares of space. To give you an idea about its size, I will say that entering its premises makes you feel as if you are visiting a separate city, which is bordered by an uninhabited territory on one side, and by the Port of Midia on the other. The latter is situated on Romania’s Black Sea coastline. Due to its strategic geographic location, it has historically been a point that connected the Black Sea countries to each other and to other countries of the Near East. The Port of Midia has been supplying crude oil to the Petromidia refinery almost 20 years, and in the past ten years, crude was supplied mainly through an offshore terminal.
“Oil is supplied to the Petromidia refinery by the world’s largest tankers through this route. The production and transportation cycle ultimately serves to create a product of the highest quality,” states a Petromidia refinery employee. We reached the main reservoir, which is situated 10 km from the shore, by a sea tanker. The Black Sea is calm during autumn, but according to the crew, waves at the shore can reach up to 5-6 m in height during winter. The sea can also freeze when temperatures fall, in which case the seamen have to cut it in order to reach the terminal.
The history of the oil and gas industry begins in Romania. Although the country itself does not have large oil resources, it was the first to start producing oil, and became Europe’s largest producer during the First World War. At that time, Bucharest became the first city in the world where the streets were lit up by around 1000 oil lamps.
The Petromidia refinery began operating on 29 June 1979. At that time, the company’s annual output was 1.2 million tons. During the next 40 years, Petromidia extended its reach into Western Europe. Today it is one of the largest ultramodern refineries in Southeastern Europe and the Black Sea region, supplying the oil company Rompetrol. Today, the KMGI Group (owned by KazMunayGas) operates a full production cycle, meaning that it extracts crude oil, processes it at the Petromidia refinery and sells the resultant high-quality fuel in eleven countries, including Georgia.
Romania has been a major supplier of fuel to Georgia for several years. It accounts for around 30% of petrol and diesel imported by Georgia, and is second only to Russia in this regard. Georgia imported 130,200 tons of fuel from Romania during the first half of 2019, which is 26.3% of the total imports. Russia is slightly ahead of Romania, accounting for 151,800 tons (30.7% of total imports).
Why should consumers choose Rompetrol? I put this question to the CEO of Rompetrol Georgia Zamanbek Mirzayanov. His reply is laconic, yet comprehensive: “we only produce European-quality fuel. Rompetrol is therefore the top choice for customers for whom quality is important.”
Petromidia has been owned by the Kazakh group KazMunayGas International (KMGI) for the last 12 years. The oil empire of Kazakhstan is also celebrating an anniversary this year – the first deposits of ‘black gold’ were discovered in the country 120 years ago.
34-year-old Zamanbek Mirzayanov has been working in Georgia for two years. He joined the KMGI team in Kazakhstan in 2013. He describes the decision to work in Georgia as a new challenge with different duties and responsibilities. The KMGI portfolio currently includes 14 countries and more than 20 subsidiary companies. Zamanbek Mirzayanov does not differentiate between the Georgian and European markets. However, he states that Georgia was a difficult market to operate in during 2017-2018. The company had to simultaneously deal with the twin problems of devaluation of the Lari and the increase of the fuel excise tax.
“The local currency exchange rate presents the main challenge for investors in Georgia today. We buy products in Euros and US dollars, while selling them locally in Lari. Devaluation of the local currency significantly damages international investors and business. It is now very important for the Lari to become stable to show sustainable economy. We have great investment plans for Georgia, but they are being delayed due to the unstable economic situation. We can see that the country’s economic figures are improving. We therefore believe that forex fluctuations is caused by speculation and panic on the market. We have observed similar situations on other markets across the world,” states Mr. Mirzayanov.
In 2019, the company had to face another challenge in the shape of companies on the so-called ‘golden list’ having their tax benefits scrapped.
“We are a major contributor to the state budget. Abolishing the ‘golden list’ naturally puts additional strain on our cash flow and financial figures. This will ultimately affect the product prices. Paying taxes on time is important for us, and we are never late with our payments, but the problem is that we need a period of 2-3 weeks to purchase the product, deliver it from Europe, make all import formalities and then sell it on Georgian market”-states Mr. Mirzayanov
Rompetrol first appeared on the Georgian market in 2005. Since then, the company has managed to secure a 19% share of the market. The company has more ambitious plans for the future: Rompetrol plans to increase its market share to 25% over the next few years and to open an additional 10 petrol stations by 2020.
“Since 2005, we’ve been closely observing Georgia’s investment climate and its improving with every year. Rompetrol has been supplying European standard fuel to its customers since it entered the Georgian market,the fuel that is processed in the EU territory, specifically at the Petromidia refinery. The only plan we have in Georgia is to develop and increase the market share”- says Mr. Mirzayanov.
“Our development on the Georgian market continues, and we have an ambitious plan to achieve a 25% market sharein the near future. We plan to achieve this by conducting further investment in Georgia. Here, as in other countries, we face strong competition. However, we will soon increase our share on the retail market,” states the Marketing and Retail Sales Director of KMGI Group Vladislav Rusnac.
Petromidia refinery celebrated its 40th anniversary by announcing 11 record figures made just in the last year. More specifically, a $450 million investment into the company’s comprehensive modernization programme increased Petromidia’s annual output to over 5.9 million tons, while the refinery became the most technologically advanced and modern facility in the region. $50 million have been allocated for investments, modernization and compliance works in 2019 alone.
There are several large international brands selling fuel in Georgia. Mr. Mirzayanov therefore believes that healthy competition has a positive effect both on his company and the consumer. However, Rompetrol faces a major challenge in the shape of small, unbranded companies. According to Mr. Mirzayanov, such companies represent a 45% share of the overall Gas stations on the Georgian market, which creates an unhealthy environment for numerous reasons.
“Rompetrol meets strict technical regulations regarding its petrol stations and complies with all Georgian requirements and legislation. In addition, some of the technical requirements met by us are not currently mandatory in Georgia. We therefore find it difficult to compete with some smaller players, as they are not obliged to follow certain regulations. The government must pay attention to technical regulations, which are directly connected to safety and environment aspects. For us, Health Safety and Environment aspects are a priority #1 in all our business activities and across all countries we operate in.”
Rompetrol currently operates more than 1400 petrol stations and serves up to 60 million customers annually. It is a top player on each market where it is represented. The company’s success is reflected in the assessments produced by international organizations: according to the Solomon Associates report, the Petromidia currently has a refinery complexity index of 11.4, which is one of the top figures in Europe. The company also has a utilization rate of 90%, with the average figure for Europe being 83%. According to the 2018 report by Wood Mackenzie, the refinery is one of the most productive in the region, ranking 9th among 250 refineries in Europe and Africa.
The KMGI Group also owns theVega refinery, which has a 114-year historyofitsown. It turned from a classic oil refinery into a manufacturer and supplier ofsemiprocessed oil products. It refines the semi-processed oil products supplied by Petromidia.
Georgia will switch to the Euro 5 standard next year, as mandated by the country’s agreement with the European Union. Numerous players on the market will have to change their business model. In contrast, Rompetrol customers have been purchasing Euro 5 standard fuel for several years.
“Our refinery is located in Europe. We therefore only produce European-standard fuel. Some of our competitors in Georgia will have to change their supply policies, as they do not have their own refineries, but I do not think that this will be a difficult process,” states Zamanbek Mirzayanov, adding that the move to Euro 5 standard might lead to a slight increase in the market prices, however it will purely depend on how government will regulate the market.
“The prices of our products are regulated by market trends. If companies buy cheap products, they will not attain our standards of quality. Like other companies, we cannot operate our business at a loss, any normal business organization must have certain revenues and profit, otherwise we cannot conduct business,” states Zamanbek Mirzayanov, adding that the introduction of European standards will have a positive impact on the environment in the country and its population. Mr. Mirzayanov believes that the environmental situation in major cities of Georgia is considered unsatisfactory comparing to European cities. This is caused by low quality fuel products and hazardous exhaust generated by those products. We as an international company strongly support Georgian initiatives on adopting European environmental regulation, says Mr. Mirzayanov.
Georgia is a neto importer of oil, meaning that price changes are dependent on several factors simultaneously. These include the quotations of crude oil, the exchange rate of the Lari and the taxsystem.
My next question for the company representatives concerns precisely the price of fuel. Zamanbek Mirzayanov points out that fuel is currently cheaper in Georgia than in Romania, where the company has transhipment expenses.“We constantly scrutinise the current trends on specific markets. I can say with confidence that fuel prices in Georgia are quite affordable compared to countries such as Romania – our main market – where the average price is more than 1.3 EUR per litre, while in Georgia it is below 1 EUR.”
The Business Unit Retail Operations Director at Rompetrol, Anca Banciu, explains that the price of fuel in Georgia is more stable than in European countries. For example, the price of fuel in Germany can change several times in a single day.
“The price of fuel in Georgia follows the trends on the international market. In Romania and Germany it can change several times during a day, while the Georgian market is relatively stable in this regard. European prices are also influenced by seasonality – prices go up when there are more consumers, and decrease when demand is lower. Georgia has a different competitive environment. Apart from large petrol stations, there are also smaller unbranded stations that take up a significant share of the market,” states Anca Banciu.
Zamanbek Mirzayanov highlights another change on the market. Parallel to growth in the share of hybrid and electric motor vehicles, the company director expects global demand for oil to decrease slightly.
“I personally do not believe that the world will make a full switch to electric vehicles in next 20-30 years, but their share on the market is growing,” says Mr. Mirzayanov and points out that companies on the retail market have long begun diversifying their products and services portfolio, astheycan no longer make a profit solely from operating petrol stations. We observe that on some European markets, the margin of profit from fuel sales at the petrol stations is minimal and close to zero. “The global trend leads to companies actively offering customers diverse products. For example, you will find more and more cafes and shops at petrol stations. This is what drives the retail sales on gas stations today- says Mr. Mirzayanov”.
The forty-year-old company has also attracted my attention by honouring veteran employees. This would not seem particularly remarkable if it was not for the fact that Petromidia refinery currently has 55 employees who have been with the company since its establishment four decades ago. This undoubtedly points towards good company management and staff motivation to work for an employer whose development is directly proportional to their own professional and career growth.
ARTICLE IN GEORGIAN.