Austria's OMV welcomes a new CEO
Rainer Seele has plenty of work to do thanks to the oil price and legacies of the past
Austria’s biggest energy company, OMV, welcomed a German CEO on 1 July, after Gerhard Roiss surprised the company last year by announcing he would leave the company on 30 June.
Rainer Seele, who succeeds him, will have his work cut out for him. Like many other embattled European utilities who were caught out by the recession, high oil prices, renewables and cheap coal, his new company is weighed down with legacies of the past. But at least its ownership structure – the governments of Austria and Abu Dhabi own 50.7% – means it is not an obvious takeover target. And it has a refineries business as a hedge.
Seele was previously the head of Wintershall, the upstream subsidiary of German chemicals giant BASF. OMV is active in some of the same areas, such as Libya and the North Sea, and both companies have experience of gas marketing in Europe, for example.
From his time at the joint venture company Wingas, Seele has a long history of working with the Russian monopoly Gazprom in transport and supply – and that relationship is set to continue. Relations between Gazprom and Europe have been complicated by sanctions arising from Russia’s involvement in the war in Ukraine; by the European Commission’s allegations that Gazprom has abused its market power; and, long before that, by the EC’s demands that gas suppliers may not take advantage of pipeline assets to undercut the competition.
Seele will therefore be aware of the issues arising from the agreements signed by OMV and Gazprom at the economic forum in June, including a memorandum of understanding to take a stake in the expansion of Nord Stream. If it is built, it would double capacity to 110bn cubic metres/year (cm). It will also need to build pipeline capacity onshore and negotiate access terms with the EC.
Austria was once a very important part of the European gas market: Baumgarten, in the east, was the delivery point for some 50bn cm/year of Russian gas going to Austria, Italy, Germany, France and parts of the Balkans.
However, its importance depended on Ukraine and Slovakia, and as Russia is building alternative pipelines to deliver gas without crossing Ukraine, less is likely to flow through those countries, leaving Baumgarten and the associated transit lines working below capacity. OMV had already sold down some of its equity in these, such as the TransAustria Gasleitung which runs to Italy.
OMV has also made errors of judgement, such as its investment in LNG regasification capacity in the Netherlands, at the Gate terminal. With no equity LNG of its own, it had to source it from world markets; but the fall in European gas demand and the rise in oil prices to which much LNG is indexed made this uncommercial. Nevertheless the rights to use the terminal and onward pipeline capacity have still to be paid for. Last year it wrote down €149m, mostly related to those costs.
OMV also took the lead in the Nabucco pipeline project, intended to carry gas from unspecified sources to Baumgarten, from the Bulgaria-Turkey border. This then became a competition between three pipeline companies for gas from the Caspian Sea, but in the end, the producers of that gas, led by UK major BP, Norway’s Statoil and Azerbaijan’s Socar, selected another sponsor. So later this decade the TransAdriatic Pipeline company will take gas into Europe through Italy instead of the Balkans.
OMV has renegotiated its long-term gas contracts with Gazprom to bring them into line with the market but it is still expecting lean times ahead: sales to the power sector are down, reflecting competition from low-priced coal and subsidised renewables which receive priority to the grid.
The company is regrouping to deal with the crisis. It merged its gas, power, refining and marketing under the Downstream business segment at the start of the year. And it has set up a Fitforfifty programme to deal with a prolonged period of lower prices. That means lower costs and lower capital expenditure.
While it says its integrated model is paying off with improved returns from its three refineries thanks to lower crude and better spreads and a utilisation rate that was up 3pp in Q1 2015 to 92%, lower oil prices are hitting its profits. OMV is also an oil and gas producer in its own right with projects in Norway and the Black Sea, although output in Libya and Yemen has been cut by the war there. Its production target for 2016 of 400,000 b/d will slip as it scales back investment and it expects Brent to range between $50 and $60/b this year. OMV’s upstream head Jaap Huiskes is also leaving the company early, but not until the first half of next year, citing purely personal reasons.
OMV is betting on the future in a limited way, focusing its research and development on fuel cells, operating filling stations since 2012. Its refineries already produce large amounts of hydrogen for industrial use and it is one of the 15 members of the Hyfive project to introduce hydrogen on the road. In May it opened its latest in Innsbruck, on one of Europe’s busiest transit routes. The Hyfive initiative, which depends on European Union funding, aims to cut emissions of carbon dioxide and particulates.