KMGI: Records and ProspectsOleg Chervinskiy, Bucharest-Constanta-Almaty
Closing of a deal is expected in the near future between the National Company KazMunayGas and the Chinese CEFC on acquisition by the last mentioned of 51% stake in the KMGI Group, which owns and carries out refining, trading and sales of petroleum products through the own network of petrol stations Rompetrol in Romania, Bulgaria, Moldova, Georgia, as well as through its partners in the Black Sea region.
The deal is equally beneficial for both parties. At the time of the conclusion of an agreement with a Chinese investor KazMunayGas International has evolved into an attractive and stable profit generating asset. For the first time since Kazakhstan's National Company KazMunayGas acquired Rompetrol (this phased process took place in 2007-2009), last year KazMunayGas International (now this is the new name of the Rompetrol Group) achieved the net profit.
Excellent indicators KMGI demonstrates in the current year as well. For 10 months EBITDA (profit before interest, taxes and amortization) amounted to 217 mln USD. For comparison, during the whole year of 2016 it amounted to 204 million dollars.
"For 10 months of the current year the company achieved great historic success - we surpassed last year's EBITDA, and in 2017 expect it to be at least 240 mln USD. Such a record will be achieved for the first time in the history of the company since its acquisition by the strategic Kazakhstani investor”, said Vice-President of KazMunayGas International for Finance and Risks Almas Lepesbayev.
According to him, the net profit of KMGI based on the results of 10 months is also record-breaking at 101 mln dollars. “For comparison, last year for the first time the company achieved the net profit figures, meaning that for the first time we surpassed the break-even point, and during 10 month of this year we have already exceeded last year’s figures by seven times”, said Mr. Lepesbayev.
Another historical record is set on daily refining: in October of this year KMGI’s oil refinery Petromidia refined about 18 thousand tons of crude oil per day, which is the highest figure in 41-year history of the refinery. For 10 months 4.54 mln tons of raw materials were refined at the refinery. By the end of the year, this figure is expected to reach 5.6 mln tons. The second refinery that belongs to the Group - Vega oil refinery and petrochemical unit collectively refined 60 thousand tons of raw materials, which is also a historical record.
The third record was set by the subsidiary of the company specializing in trading - KMG Trading, in October it transported and sold about 2.2 mln tons of oil and oil products, which is also the highest figure in the history of the company.
What is the formula of success?
Almost immediately following the consolidation by the National Company KazMunayGas of 100% stake in Rompetrol Group in 2009, the company began a large-scale modernization of the Petromidia oil refinery, which was completed in 2012, and 450 mln US dollars invested. As a result, the estimated capacity of the refinery was increased to 5 million tons per year, and refinery yield reached 94.7%. While the output of light petroleum products amounts to 87%.
In addition, due to the modernization, the refinery is now able to refine high acid crude oil, which has increased its profitability. Today the refinery is able to accept a variety of grades of oil, depending on market conditions. Its portfolio includes traditional Urals, as well as CPC Blend, Azeri and even Iraqi Kirkuk. The sulphur content in this grade reaches 2.5%, and therefore it sells on the market with a significant discount comparing to Urals, which allows to earn additional margin on its refining. A few years ago Kazakhstani Urals amounted to at least 90% of the total volume of the supplied raw materials, now its share does not exceed 55%, and in future it is planned to reduce it to 50%.
"To date, the operating power and flexibility of the refinery allows to refine different grades of oil. Like sour crude oil, heavy crude, as well as light oil grades. Therefore, in order to achieve the maximum efficiency in terms of profitability, in addition to Kirkuk and in addition thereto such light grades such as Siberian and Azeri were purchased, said Almas Lepesbayev, Vice-President of KMGI. - Overall it reduced the cost for raw materials that we purchase. All this allowed us this year to maximize the yield structure of light petroleum products at more than 86%. Of them, respectively, nearly 50% was diesel.
Flexibility, which the refinery acquired after upgrading, allows it to respond quickly to market conditions not only on raw materials but also on finished products. Literally within a few days the refinery is able to increase the output of products that currently are most in demand on the market. If until recently the most popular fuel in Europe was diesel, the refinery increased production of diesel in particular. Today the inverse trend can be seen, and Petromidia is ready to increase the output of high-octane gasoline.
After modernization Petromidia oil refinery has become the most effective refinery in Romania, also taking the 9th place in the 250 oil refineries of Europe and Africa list, and its refining complexity index rose to 10.5. It was the first in Romania to introduce European environmental regulations and fuel standards.
The second factor of success after the carried out modernization became the business transformation program that was launched by the company in 2013, named Change for Good (CFG).This is the first initiative aimed at restructuring of the whole KMGI business. The program brought a fresh look at the efficiency of the company, inspired to set new tasks, which gave tangible impetus for development. It includes many initiatives aimed at positive changes in all aspects of the business. Among the most important ones:
● Dolphin project, aimed at improving refining operations;
● Shared Service Center (SSC) project, which provides standardization of enterprise functionality and enables to simultaneously improve its efficiency on the level of all companies comprising KMG International;
● Terminal Automation System project, which allows greater control of losses during the offloading/loading in terminals, providing modernization of the technical infrastructure and standardization of work in terminals, also allowing to achieve the increase in level of transparency and efficiency in operations in terminals, ensuring reliability and cost optimization.
Since the beginning of the program’s implementation, the total amount of direct benefits from the implementation of these and other transformational initiatives amounted to about 120 mln dollars. It is expected that by 2020, this figure will increase to 235 mln USD.
At the same time KMGI Group proceeded to the new mission called Mission +, aimed at improving profitability and achieving a leading position in the retail market in Romania and other countries of presence, while providing customers with high quality products and services.
The effect from the implementation of the transformation program in KMGI is multi-level. In particular, it became possible to significantly reduce the operating costs. According to Vice-President of KMG International Almas Lepesbayev, currently the refining costs at Petromidia oil refinery are around 16.7 USD per ton. For comparison, before 2010, prior to modernization, refining costs reached 27-28 dollars. The figures speak for themselves!
The company managed to virtually nullify non-normative loss and theft of both raw materials and finished products. How? Due to the fact that all processes during offloading to consumers are fully automated and exclude human presence.
Working in a highly competitive market (where there are such giants as the Russian LUKOIL, Austria OMV and others), KMGI is literally fighting for every customer. Suffice it to say that the standard for the production of the company's client card is just 10 minutes!
"Today our company is a major player in the economy of Romania. It takes the third-fourth place in terms of turnover, annual contributions to the budget of the country accounted for more than one billion US dollars", said Vice-President of Corporate Development at KMG International Alexey Golovin.
The top management connects the prospects of the company’s development with the development of retail. And this is no coincidence: it is the retail sector that gives the company the highest margins. According to Almas Lepesbayev, sales of manufactured products through its own retail network brings the company income of 150 dollars per ton. When the wholesale from the refinery to the other networks of petrol stations from 25 to 40 dollars, and exports 10. The second priority, directly with the expansion of the network of own petrol stations, is the development of petrochemicals at the second refinery of KMGI (Vega oil refinery), because it provides a margin of up to 200 dollars a ton.
Implementation of these large-scale projects will already be carried out in cooperation with the Chinese partner - a joint investment program is estimated at 3 bln USD in the coming years.
According to KMGI’s Vice-President of Corporate Development and Strategy Alexey Golovin, the company's potential in Romania has not yet been fully implemented. Today the share of KMG International on the Romanian market is 16%. The immediate goal is to bring this figure up to 25% in the next three years. In addition to the above, the company should become a leader in terms of service quality and sales.
With regard to the plans in Spain and France, where KMG International also has assets, the challenge is to increase the share of presence twice, from 2.5% to 5%. There are plans to enter the promising Turkish market, however, as pointed out by Mr. Golovin, in the new partnership all the key decisions will be taken on a parity basis by Kazakhstani and Chinese shareholders. While the operational management remains with the Kazakhstani side.