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Austrian oil group OMV embarks on restructuring

The company will divest almost 50% of its gas distribution network as part of the portfolio shake up

Austrian oil group OMV plans to rationalise its portfolio by divesting up to 49% of its gas distribution network Gas Connect Austria, while fully taking over its gas marketing subsidiary EconGas. Its latest plans under its “Fit for Fifty” strategy, which assume a Brent oil price of $55 per barrel in 2016, continue to include close business links with Russian gas giant Gazprom.

The company said on 19 October it expects to announce a roughly €1bn ($1.1 bn) impairment charge on upstream assets in its third quarter results. "We are taking the appropriate measures to both optimize the portfolio and strengthen the group's cash flow and balance sheet", said OMV downstream and gas chief Manfred Leitner on 19 October.

Gas Connect Austria (GCA), today wholly owned by OMV, operates a roughly 900-kilometre important high-pressure pipeline grid across Austria with a 2014 combined entry and exit volume of 149bn m³ that, among other flows, includes nearly all Russian gas transited to Italy. OMV said that, as a central hub in Europe's gas network, GCA makes a substantial contribution to Austria's gas supply and that of other countries like Germany, France, Slovenia, Croatia, and Hungary. OMV said it is in the process of selecting an advisor to support the divestment, which it expects to be signed during 2016, but did not say how much it expects to raise. Many of its European peers like Italy's Eni or the German utilities E.On and RWE sold off their regulated gas networks long ago or, like France's ENGIE, had years ago reduced their stakes in them - in many cases to private equity or pension fund investors.

Separately, OMV on 23 October reached an agreement with three minority shareholders in its gas marketing business EconGas to buy the 35.75% of shares it does not already own; a contractually binding agreement is to be concluded with EVN, Wien Energie and Energie Burgenland by the end of this year. EconGas specializes in direct natural gas sales to European business clients and distributors; it traded 28.4bn m³ of gas in Europe and Austria in 2014.

The same day in Vienna, OMV chief executive Rainer Seele and his Gazprom counterpart Alexei Miller signed a memorandum of understanding on possible oil supply from the Gazprom group portfolio to OMV, and also discussed their "potential asset swap" and cooperation on development of the Nord Stream 2 pipeline beneath the Baltic Sea from Russia to Germany.

A month previously on 4 September, Gazprom, E.ON, OMV, Shell and ENGIE inked a shareholders agreement relating to construction of Nord Stream 2 -- which like the existing twin-pipe Nord Stream 1 system would have a capacity of 55bn m³/yr. That same day, Gazprom and OMV agreed main terms and conditions of an asset swap whereby OMV would acquire a 24.98% in the project for developing Blocks 4A and 5A of the Achimov deposits at the Urengoy oil, gas and condensate field in exchange for Gazprom's participation in OMV assets. Gazprom sold 4.2bn m³ of gas to Austria in 2014 and was both the country's and OMV’s largest gas supplier.

The proposed asset swap echoes one negotiated two years ago which, after being put on ice late in 2014, was completed a month ago by BASF subsidiary Wintershall, of which Seele was chief executive until this summer, and Gazprom whereby the German firm obtained a 25.01% stake in the same project to develop Blocks 4A and 5A of the Achimov deposits at Urengoy, in return for Gazprom securing outright ownership (from 50%) of gas trading firms Wingas, WIEH and WIEE plus a 50% interest in UK-Dutch upstream business Wintershall Noordzee.

Interviewed by Austrian newspaper Der Standard on 23 October, Seele insisted he wasn't going to follow the same course at Wintershall but rather develop a new strategy for OMV. He added: "We want to reduce the level of debt and structure the company so that it can fully cover dividends with free cashflow -- something that was not possible last year." Seele also insisted relations with core OMV shareholder Abu Dhabi state International Petroleum Investment Company (IPIC) were good. On 12 October, OMV extended ethylene and propylene supplies from its refineries to petrochemical producer Borealis for 11 years until 2028. Borealis is 64% controlled by IPIC, 36% owned by OMV.

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