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ROMANIAN ENERGY REPORT

December 2001

HIGHLIGHTS
* Hiking electricity prices - the toughest problem faced in implementation of memorandum with IMF
* Wave of cold air disrupted natural gas supplies from Russia, industry was partly cut of supplies
* Inflation inched up 2.7% m/m in November on higher energy prices
* Gas price to increase by ROL 600 [3.5%] as of January 1 on higher excises
* Free electricity market expands to 33% by June 2002
* National electricity distributor Electrica formally split into eight incorporated units
* Termoelectrica's cancelled debts to the budget reportedly amount to USD 380mn
* Termoelectrica contracted two external syndicated loans
* Government to decide soon on the privatisation of Petrom
* Petrom expects ROL 3tln gross profit in 2001, to decline by 50% in 2002
* APAPS claims it has a bidder for Oltchim, but it also has a trial with Exall on the petrochemical plant
* Romgaz cut or dramatically reduced natural gas supplies, impact on industry anticipated

Energy sector hit by the extremely cold
weather
OVERVIEW
An IMF team will arrive on January 20 for the first quarterly review of the stand-by
agreement. The second USD 66.7mn tranche of the stand-by credit is to be made available
in mid-February. The most difficult problem faced by the Romanian authorities in
implementing the memorandum with the IMF by far is the gradual increase of the
electricity prices, stated government sources. The same sources indicated that the higher
electricity prices have a strong negative impact on the bill collection rates. The electricity
price will indeed be hiked by 16% in April 2002, hinted official sources after the 3.6%
monthly increases. The stand-by memorandum allows negotiations on this issue, however.
On the other hand, the collection rates at Electrica and Termoelectrica are to be improved
according to a precise schedule included in the stand-by agreement. MF Tanasescu
expressed his optimism regarding the fulfilment of the criteria pledged in the
memorandum with the IMF, thus implying that Electrica and Termoelectrica hope to meet
the tight collection rate stipulated. This is yet highly doubtful given the higher than usual
domestic consumption and the higher prices. In regard with Termoelectrica’s financial
position, it was greatly improved following the USD 380mn worth of debts written off by
the government in December. The USD 250mn worth of loans contracted also in
December secures enough liquidity for imports. In terms of restructuring and
privatisation, Electrica was split into eight incorporated units, out of which two will be
put up for sale in 2003 after restructuring. The privatisation was indicated by sources
within the Ministry of Industry to be conditioned on the purchasing power of the
population in certain areas. Termoelectrica will spin out eight units after another eight
units were already separated and will be put up for sale in 2002. The Ministry of Industry
says that potential investors already manifest interest, but the same eight units were
previously refused by municipalities on the back of financing needed for upgrading.
In addition to the difficulties fuelled by the higher energy prices and difficult restructuring,
a wave of cold air passed Romania in early December with a major impact on the
energy sector. The natural gas, supplied by Russia at lower than planned pressure for
technical reasons, was directed by the government to households’ heating. By yearend the
Minister of Industry, Dan Ioan Popescu, will visit Moscow to negotiate with Gazprom
doubling the quantity of natural gas imported. Popescu hopes at least to increase the daily
imports to at least 25mcm [million cubic meters] per day from currently 15mcm.
Heating suppliers have experienced delivery disruptions over the last few days due to
the extremely cold weather and lower-than-expected natural gas imports from Russia,
according to sources from the Ministry of Industry. Some large industrial consumers
continue to have their natural gas supplies dramatically reduced or cut. The impact of
higher-than-expected energy consumption in the household sector and restricted industrial

1

“Romania's energy system is a
centralised, obsolete, loss-making
system unable to compete in the
international market”, admitted
Minister of Industry, Popescu
Inflation inched up 2.7% m/m in Nov
on higher energy prices
Free electricity market expands to 33%
by June 2002
National electricity distributor split
into eight incorporated units
Electrica applies for a EUR 100mn
pre-privatisation loan from EBRD
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consumption will probably have significantly negative effects on the energy sector. Higher
imports needed in order to refill fuel stocks will impact the trade balance in Q1 2002
[Ministry of Industry excludes higher imports on the spot], the bill collection rate will
come under pressure [as current bills exceed households' payment capacities] and
industrial activity will be also impacted as fuel supplies are reduced.
The need of investments in the power system became obvious at late as the recent
natural gas crisis incurred on the back of low storage capacities. Quite understandable,
Gazprom signs with Romania only contracts stipulating a flat supply rate, while the
consumption is highly seasonal. Moreover, Romania has had no contract with Gazprom
for quite a while as the former government considered switching to another supplier.
Minister Popescu however, seems to favour a long-term contract with Gazprom. This is as
more indispensable as the domestic resources are to be dramatically reduced in the
following decade and, consequently, the imports are to offset the fall in domestic output.
The cost of the new storage capacities was not yet estimated, but the investments needed
for upgrading the battered pipelines in Southern Romania alone amount to about USD
250mn. The replacement process has marked time for the past two years after the World
Bank froze a 1994 USD 175 million loan for the rehabilitation of oil and gas pipelines.
Another quarter billion dollars will have to be spent to modernise and expand oil and
petroleum product transport installations over the next five years. The projects that will
include the rehabilitation and upgrading of the existing pipeline system, safety
improvements, and environmental restoration will be financed by the four companies in
the business-Oil Terminal Constanta, Conpet, Petrotrans, and Transpeco.
Monthly inflation increased to 2.7% m/m in November from 2.4% in October on the back
of recent electricity and natural gas price hikes. Y/y inflation slightly declined to 30.6%
from 30.7% the month before, but the downward trend has flattened at late and the 30%
Dec/Dec target will be probably slightly exceeded. If monthly inflation in December is
higher than 2%, the y/y figure will exceed the threshold. The relatively high inflation in
November was the result of higher energy prices as electricity prices grew 5.1% m/m
while heating was 57% up m/m. Consequently, the main driver of inflation was the non-
food component, with a 4.8% m/m advance [32.7% y/y]. Services prices advanced by only
1.9% m/m [but 34.4% y/y] while food prices increased by only 1.2% m/m [27.7% y/y].
ENERGY GENERATION AND DISTRIBUTION
25% of the electricity market will be opened as of December 20 and 33% as of June
1, 2002, under the government's ordinance. Currently, the share of trades negotiated on a
competitive basis between licensed producers and consumers is limited to 15% of
domestic consumption. Nonetheless, because of the government's interference with large
power generators, this share currently reaches some 8% of domestic consumption,
according to the EU Regular Report.
The national electricity distributor, Electrica, was formally split into eight
incorporated units through a government's ordinance. Thus, the 42 local units of
Electrica were integrated into eight regional units in view of their consequent privatisation.
The privatisation of the first two units could take place no sooner than 2003 [Banat and
Dobrogea units], according to Iulian Iancu, state secretary within Ministry of Industry.
Iancu also explained that the Ministry will suggest to the government not to privatise the
distribution units "until their clients' average income reaches USD 200". Electrica will
close this year with no losses and a turnover of USD 1.55bn, according to Silviu Boghiu,
general manager of Electrica.
Electricity distributor Electrica, seeks a EUR 100mn pre-privatisation credit from
EBRD aimed at cutting losses and upgrading its Bucuresti and Oltenia branches.
Negotiations are currently held with the EBRD, while Electrica expects the credit in 2002.
In 2000, the operating losses of Electrica accounted for 70% of the total losses registered
by Electrica. As regards the increase of the market value for two of its branches, this is
strictly related to the fact that the government intends to entirely privatise the energy
distribution sector by 2004. The privatisation process should start in December 2001 with
the Dobrogea and Banat branches of Electrica, according to the report made by the
2

Termoelectrica's cancelled debts to the
budget reportedly amount to USD
380mn
Termoelectrica to contract USD 250mn
worth of external loans this week
Termoelectrica to spin off another 8
units in 2002
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consultant BNP Paribas.
THERMAL
Termoelectrica's cancelled debts to the budget reportedly amount to USD 380mn.
The debts that the government wrote off last week to Termoelectrica fossil fuel fired
power generator are ROL 12,000bn [USD 380mn], according to Mediafax quoting
company officials. Last week, the government wrote off the debts of Termoelectrica owed
to the budget as of Sept 30. MF Tanasescu said that the decision does not violate the
stipulations of the stand-by arrangement with the IMF. The financial position of the
company is expected to stabilise as Termolectrica signed yesterday two contracts for state-
guaranteed external loans worth a total of USD 250mn. In early 2002, the company will
borrow another USD 150mn, also with government guarantees, while officials from the
Ministry of Industry expect that the company's loans in the 2002/2003 winter season to be
contracted without government guarantee. On the other hand, Termoelectrica expects to
improve the bills' collection rate. The bill collection rate for electricity is 100% and the
rate for heating is targeted to increase from the alleged 11-12% in early December to 95%
by the end of the year, according to the head of international relationship department of the
company, Petre Stroe.
Termoelectrica contracted two external syndicated loans managed by Citibank,
Deutsche Bank and ING Barings and worth a total of USD 250mn. The two credits,
guaranteed by the state, have maturity of correspondingly one year [USD 115mn] and
three years [USD 135mn]. Sources from the Ministry of Industry expressed their content
with the interest rate, but gave no further details. Termoelectrica was allowed through a
government decision to contract state-guaranteed external loans of USD 400mn, to be used
for financing fuel imports this winter. According to sources from the Ministry of Industry,
the remaining USD 150mn worth of loans will be contracted in early 2002.
Termoelectrica will spin off another eight units in 2002 after the first eight units were
split in 2001 and currently they operate on their own, according to Iulian Iancu, state
secretary within the Ministry of Industry. Thus, Termoelectrica will be left with only 8
units. The units that were separated in 2001 will be put up for privatisation in 2002.
HYDRO
The Ministry of Industry and Resources (MIR) published a list of 21 hydro-energetic units
requiring USD 2.1bn for their finalisation. MIR is expecting offers for these units from
Romanian and foreign companies, until March 31, 2002. The offers will be selected until
June 30, 2002. On aggregate, the 21 units have an installed power of 580 MW and may
produce 2,700 GWh per year. At present, Hidroelectrica has installed power total
capacities of about 6,000 MW, producing some 17,500 GWh per year.
Hidroelectrica, a state-owned hydropower producer, says that several international
companies, including Hydro-Quebec (Canada), AES (US), Kansai Electric Power (Japan)
and Union Fenosa Electrica (Spain), are considering investing in Romania's unfinished
hydropower plants, commissioned before 1989. Bids are expected by March 2002, and the
government will decide by June.
3

Petrom’s privatisation - a still
unanswered question
The state is to reduce its share in
Petrom after a separation of the
company's transportation unit
Petrom reports net profit in 10M after
losses in 9M but the net profit might
fall 50% y/y in 2002
Petrom projects exports of USD 325mn
for 2001
Rompetrol contracted a syndicated
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OIL PROCESSING AND DISTRIBUTION
Petrom, the leading domestic company in the field, should be privatised, under the strategy
to be endorsed by the government in 2002 under WB PSAL II. Following a series of
contradictory statements, the government seems to be ready to draft a privatisation
strategy. The executive will probably issue a preliminary draft for company’s privatisation
as soon as this year or in the first days in 2002, as the WB’s Board is expected to
greenlight the PSAL II program in early next year. According to previous episodes, this
first draft will however indicate nothing but the political will to sell part of company’s
stake. Previously, PM Nastase voiced against the privatisation, praising its profitability
and the high value of taxes paid to the budget. Selling it would spur off all those benefits,
or at least endanger them, warned Nastase. It is however unclear why the taxes would not
be paid by Petrom under private ownership. As Petrom expects its worst financial year in
2002, Nastase seems to have been convinced to sell Petrom, as most as this could please
the WB. On the back of adverse international conditions, Petrom’s gross profit is to
decline by 50% in 2002, company’s management expects. For 2001 the Q3 will turn the
losses registered in Q1-Q3 into profits of ROL 3,000bn. The losses in Q1-Q3 were owed
to the alleged restrictions imposed by the government to Petrom as regards the oil and oil
products exports.
The current international economic environment is not favourable for the
privatisation of Petrom, company's CEO Ioan Popa, stated. The statement would be a
decent one if the government sources have not indicated meanwhile that the Ministry of
Industry prepares a privatisation strategy for Petrom to be debated by the executive by the
end of this year. Similar contradictory statements regarding the company's privatisation
were also made by PM Nastase, who said that Petrom is too profitable to be sold by the
state. Yet, according to the government's commitments before the IFIs, Petrom should be
privatised. Under PSAL II, Petrom’s privatisation strategy has to be endorsed and the
process itself should be initiated by the end of next year. Separately, Popa mentioned
also that the company aims at no more bond issues on international markets, but is
currently negotiating a EUR 150mn loan from EBRD.
The shares of Petrom oil company were suspended from trading between November 23-26
on lack of information regarding the listed company. The decision was taken as a result of
the government's approval of a decision according to which the oil transport company
Petrotrans was separated from Petrom. The state stake in Petrom will fall from 93.2%
to 92.2% [by ROL 1,227bn] as a result of the separation of Petrom's Petrotrans unit. The
share capital of Petrom will consequently go down from ROL 39,219bn to ROL 37,992bn.
The move was endorsed by the shareholder meeting of Petrom on December 18. The
government's decision was based on an agreement with the WB on setting up a single
company formed by Petrotrans, Conpet and Oil Terminal in charge of infrastructure
activities in the oil industry.
Petrom posted ROL 1,986bn gross profit in 10M after it registered ROL 20bn losses in
9M. Company's officials explained the quick improvement of the financial situation with
the sale of the stored natural gas. The company, which posted a USD 30mn gross profit in
H1, estimates that its 2001 gross profit would eventually stand at about ROL 3,000bn.
The net profit in 2002 might be lower by 50% as compared to the one estimated for 2001
due to low oil and oil products prices on the international markets, according to the general
manager of Petrom, Ioan Popa.
Petrom projects exports of USD 325mn this year, by 8% up y/y, reads a press release of
the company. In 11M 2001, Petrom's exports stood at USD 295mn. According to
declarations of Ioan Popa, Petrom’s CEO, the company is capable of exporting 75,000
tones of diesel oil and 50,000 tones of gas per month. 10M turnover of SN Petrom stood at
ROL 67,000bn.
The excise for fuel, higher with EUR 20 per ton starting January 2002, will affect the fuel
price by roughly ROL 600 per liter. According to Ion Popa, General manager of Petrom,
the new prices will be established depending on many factors, such as the price of crude
oil on international markets and the rate exchange ROL/EUR. The last increase in the fuel
price was made at the beginning of November by 100 lei per liter.
Rompetrol Group and RZB signed in Vienna a syndicated loan worth USD 75mn, stated
4

loan worth USD 75mn
Oltchim petrochemical plant to
implement a restructuring plan
APAPS receives bid from Israeli
investor for Oltchim
Government cut or reduced natural gas
supplies to bad debtors
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officials of the company. The credit is aimed at financing import, procession and
distribution of fuel. The credit will be disbursed in four tranches and will have a one-year
maturity.
Oltchim intends to spin off several units and to downsize its staff by 2,000 employees
from current 6,000, according to sources within the market. The separated units will be
financially independent, but owned by Oltchim. 9M, 2001 net profit of Oltchim amounted
to USD 1.39mn vs. USD 3.42mn registered in 9M, 2000. The turnover in the first nine
months of 2001 was of USD 168mn. The plant's debts were ROL 5,212bn at the end of
Sept, down from ROL 6,370.7bn a year ago.
The Authority for Privatisation [APAPS] allegedly received a bid for Oltchim
petrochemical plant from an Israeli investor. The investor indicated that it is ready to close
a privatisation contract by January 6-14 2002, reads the daily. However, the feasibility of
the deal is questionable at least in the near future, as long as the trial sued by Exall
Resources to APAPS following the failed privatisation attempt earlier in the year has not
reach an end.
NATURAL GAS MARKET
The price of natural gas will mount by some ROL 250 per cubic meter [9%] to around
ROL 2,750 per cubic metre as of Jan 1. The Ministry of Industry indicated the move as
needed in order to stick with the USD based prices agreed with the IMF. Gas prices last
went up 5% in October, also as an update to national currency devaluation. As regards
Minister Popescu, he blamed the continued gas shortage on extremely low temperatures
that sent consumption skyrocketing.
Romgaz cut or dramatically reduced natural gas supplies following the limited imports
from Russia and the higher than expected households’ consumption. The decision will be
valid over the whole heating season. Large chemical plants [particularly fertiliser makers]
are among the companies that had their supplies cut or reduced. The decision was
prompted by low supplies from Russia due to the low temperatures, and it was not a
measure particularly aimed at imposing financial discipline - however, the large debtors
were the first to have their supplies cut. Ministry of Industry ordered at the same time
higher utilisation of domestic capacities in the short term and started negotiations with
Gazprom on an increase of imports.
The recent critical developments highlighted the need for higher natural gas storage
capacities, while the need for better pipelines was well known since a long time ago.
Minister of Industry Popescu will present to the government a medium- and long-term
strategy for the sector stipulating the increase of the storage capacity from current 1.5bcm
to 2bcm in 2004-2005 and 4bcm in 2010.
MINING SECTOR
The series of small strikes for higher wages continued in the mining sector, with the
government making certain minor concessions. At the same time, looking angry to the
high bargaining power of the miners, PM Nastase ordered investigations on the large
number of medical leaves in the mining sector, a “profitable business that needs more
investigation”, as hinted Nastase. With or without a tight control on this issue, the miners
received a generous holiday vacation from Dec 22 to Jan 3, while the negotiations on the
Christmas bonuses are still under way.
BUSINESS ROUND-UP
F Rompetrol Well Services, formerly known as Petros, has opened a subsidiary at
Aktobe, Kazakhstan. The company will supply services and equipment for onshore oil
drillers in the Kazakh area.
F In 2001, Mol Romania has opened new filling stations in Bucharest and Zalau, putting
their total number to 38, and will open another one in Timisoara by the year's end, general
manager Aliz Kosza said. Also in 2001, the Romanian branch of Hungary's Mol Rt, has
introduced the Euro Super Plus, a new type of petrol meeting the latest European
requirements that is now available at 17 stations around the country.
5
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F The oil carrier Conpet is planning to carry out comprehensive rehabilitation projects
with combined estimated costs of which amount to roughly USD 70 million under the
government's oil infrastructure rehabilitation program for the next four years. A USD 32
million project provides for introducing the Supervision, Control and Data Acquisition
(SCADA) System by the end of 2001.
F Octavian Bancila is to replace Gheorghe Iofcea as general manager at Carom Onesti,
the country's sole rubber maker. Bancila is currently with Reno Imperial Oil [who recently
took over Rafo refinery] and represents SIF Moldova investment fund in the Carom
stockholders meeting. He is regarded as close to local tycoon Corneliu Iacobov, head of
Imperial Oil. Iacobov has clearly indicated he intends to take over Carom, a plant closely
connected with Rafo, which accounts for 40 percent of the rubber maker's raw material
supply.
F An Italian business has expressed interest in taking over gas distribution to the Jiu
Valley coal mining area, Hunedoara County Prefect Aurelian Serafinceanu said. By his
estimates, whoever takes it over will need to spend USD 3 million in the town of Petrosani
alone, and around USD 9 million in the whole area.
F Termoelectrica and Hidroelectrica will jointly tender for a 2.6 billion kWh supply to
Yugoslavia, a foreign relations manager at the former has announced. Belgrade has $30
million available for the job coming from donors in the EU and U.S.
F The Amiantit Group, based in Saudi Arabia, is planning to set up in Romania a pipe-
making centre for various uses, including oil industry pipes. The projected works,
according to their plans, would reach a USD90 million turnover by 2004 and sell its
products in the East and Central European market.

6
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Appendix
Table 1
9M 2001 Y/y change [%]
Total Domestic Import Total Domestic Import
Coal [thousand tones] 27,262.4 24,818.5 2,443.9 116.1 115.5 121.9
Crude [thousands tones] 8,444.2 4,495.7 3,948.5 104.3 98.6 111.7
Natural gas [mn cubic meters] 12,375.3 10,379.9 1,995.4 100.4 101.9 93.3
Hydro, nuclear and import
electricity [mn. kWh] 15,753.1 15,038.8 714.3 92.5 91.8 110.5

Imported petroleum products

[thousands tones] 2,049.6 - 2,049.6 179.1 - 179.1

Thousands of standard coal tones

Resources 41,593.6 28,050.4 13,543.2 107.7 102.7 120.0
coal 9,381.7 7,091.1 2,290.6 115.8 114.0 121.9
crude 11,877.9 6,235.5 5,642.4 104.4 98.6 111.7
Natural gas 14,286.6 11,991.9 2,294.7 100.4 101.9 93.3
Hydro, nuclear and import
electricity 2,819.8 2,731.9 87.9 91.1 90.6 110.6

Imported petroleum products 2,832.8 - 2,832.8 179.1 - 179.1

Table2
9M 2001
Y/y [%]
Mn kWh
Resources 39,589.3 103.6
Domestic 38,875.0 103.5
thermal 23,836.2 112.5
hydro 11,158.4 93.1
nuclear 3,880.4 88.3
import 714.3 110.5
Consumption 39,589.3 103.6
End consumers 33,634.3 103.0
industrial 27,709.0 103.9
public 353.7 108.0
households 5,571.6 98.5
Internal consumption 4,676.9 99.9
Export 1,278.1 143.6 Source: INSSE

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