Economics of growth
Regional finances are set for steady growth, but the CEE could benefit from wider geopolitical stability
It’s just as well the oil and gas industry across the CEE is used to economic and political upheaval. For most of the last 20 years, it’s had to deal with almost continuous change and it’s become a way of life for commerce in general in the region.
As PWC Poland’s senior economist Mateusz Walewski observed earlier this year, “international and local businesses have become used to continual reform over this period and executives say it has helped them to become more agile and less fragile.”
And these nations have to be agile. “The majority of CEE countries are small, relatively open and heavily dependent on exports for growth, notably to other EU countries,” Walewski adds. “This makes them highly sensitive to developments in advanced economies.”
Economists generally divide the region’s countries into three quite distinct camps. There are the smaller Baltic states, the next-biggest and export-focused economies such as the Czech Republic, Bulgaria, Romania, Hungary and Poland, and the troubled countries such as heavily indebted Slovenia. The nimbler ones such as the Baltics are expected to grow at a rapid rate – up to 4% a year between now and 2020 – while the export-oriented countries with “reasonably friendly business environments”, says Walewski, should achieve collective annual growth of between 2-3%.
Of the latter, Romania, Slovakia, the Czech Republic, Hungary and Poland are prime examples. They already serve as a vital element of the European supply chain in manufacturing, particularly in the automotive industry. Just two in fact, the Czech Republic and Slovakia turn out more cars than does France despite having just 16m people between them.
Ominously, they are increasingly applying their engineering know-how to the development of home-grown brands and competing in the wider European market in their own right. Clearly this will be important for the development of the region’s energy sector. And it’s why, estimates consultancy FocusEconomics in a recent forecast, Romania will be the region’s fastest-growing economy in 2016 with a predicted rate of 4.5%, closely followed by Poland and Slovakia, both with around 3.2%.
Although the CEE is seen as a cohesive region, most observers believe economic prospects will vary considerably, according to how capable their governments deal with current challenges including that of Brexit. “The Brexit decision will likely drag on confidence and might contribute to a further weakening of investment [in the region], which has already been declining due to lower inflows from EU funds,” predicts FocusEconomics.
The oil and gas industry has had a particularly turbulent period created by rock-bottom crude prices exacerbated by Iran’s return to oil exporting after the ending of an international ban, the after-shocks of the attempted coup in Turkey that has already affected exports from several countries such as Romania, and the slowdown of Brussels-based investment.
The good news in all of this is low-cost feedstock.
With its ability to transcend national issues, the region’s oil and gas industry is profiting from the ever-cheaper crude that is fuelling the downstream industry. “Taking advantage of cheap feedstocks, refiners have made the most of larger profit margins and producing higher value products,” points out the World Refining Association in its latest report on the region.
Rather than rely on the feedstock windfall though, industry in the CEE has launched its own initiatives. “There has also been a huge focus on driving efficiency, cutting costs and adapting to change,” adds the association. Only by creating efficient, value-driven supply chains have upstream companies been able to survive.
Although it adds to the turmoil, the lifting of sanctions from Iran in early 2016 may be helping the downstream industry. Despite the European market already being oversupplied to the tune of 1.5m barrels a day, the arrival of Iranian oil has served to further depress feedstock prices and encourage in the process deeper investment in petrochemical plants across the region.
According to the association, the industry’s biggest concern now is that feedstock prices continue to stay at current levels. “The majority of respondents see the lifting of sanctions as having a positive affect for European refineries… Iranian crude offers a cheap feedstock for refiners in the CEE region who saw record margins in 2015 and would love to see this trend continue.”
And that’s considered likely because Iran looks like it will continue to pump crude into a saturated European market.
Making hay while the sun shines, oil and gas industry spokesmen report they are using fatter margins from downstream businesses to put aside funds for the sprucing up of ageing assets in their upstream activities.
The attempted coup in Turkey alarmed the region’s entire energy sector. As a vital energy transit hub as well as an important and fast-growing outlet for CEE countries, its long-term stability is considered vital throughout the EU. For example Romania, for which Turkey is its biggest single export market, is already suffering from the economic fall-out of the coup.
On the bright side the region can only benefit from an end to the war in Syria and to conflicts with Islamic State that have destabilised the Turkish market.
Of the two major pipelines running through Turkey, the one originating from Kirkuk in northern Iraq has been severely affected by the fighting.
“Turkey plays a hugely influential role within the region and is seen as a major player in the downstream market,” points out the World Refining Association, citing its strategic location as a shipping hub and infrastructure such as the Star refinery under construction on the Petkim Peninsula.
If and when peace is restored, the CEE’s heavy current investments in their downstream activities could pay off handsomely in the coming years.
This article is part of a report, produced in association with MOL Group. To download the report in full, click here.