Restructuring in three years

April 30, 2012

Magazine ”Sibirskaya neft”

The Managers of Gazprom have turned NIS, state monopolist – loser, into a profitable market company.

In February, it was three years since Gazprom Neft took control of the Serbian company, Petroleum Industry of Serbia (NIS). During that period, the company has experienced a radical transformation. It succeeded in solving accumulated problems; it created a long-term Strategy 2020 and started its implementation. It became the most profitable company of Serbia and one of three most efficient business structures of the Balkan region. Moreover, at the last expanded session of the Executive Board of Gazprom Neft, NIS was named one of the main drivers of operating profit of Gazprom Neft group. In 2011, the Serbian company participated in EBITDA with eight billion RUB.

Eyes wide shut

Negotiations on the sale of control packet of NIS were long and quite complicated. The process that began in 2007, and whose final result was signing of the agreement on strategic partnership of Russia and Serbia in the oil and gas field, was several times almost suspended due to NIS. Some representatives of the Serbian government strongly opposed to the terms of purchase of 51% of shares of the Serbian company, which was proposed by Russia. It was about 400 million EUR, investment package in the amount of 548 million and a clear time-limited modernization of the production complex. Similar was the tone of Serbian media at the time – informative environment obviously did not work in favor of Russian investors.

However, eventually the parties agreed on everything, and on 10 February 51% of the shares of NIS officially became the ownership of Gazprom Neft. The Russian representation of managers promptly defined the set of basic problems of the new active.

There was a surplus of employees in the company, not in favor of the real sector – the surplus was in the administration.

All aspects of business activities of NIS underwent structural and technological changes – from research to retail

The state of real sector was not great either. Refineries in Pancevo and Novi Sad, rebuilt after the bombing in 1999, worked with half of their capacity, technologies 20 years old were applied in the production, and there was no mention of investments into this area (as well as in the development of the company as a whole) due to wars and sanctions in the 90s. In addition to this, the debts of NIS exceeded a billion USD, and during the audit of financial reports, it was discovered that the company showed profit on the paper for several years while it actually accumulated losses.

The interest of media for the company did not diminish after the sale and purchase: in 2009 there were more than eight thousand publications. Most of those publications on NIS were negative. The company reputation was not the best either: there were objections to everything literally, from the products quality to the subject of donations.

In those circumstances, it would be too self-confident to expect the profit from company business activities: NIS finished with a loss of 4,4 billion RSD for the year 2009. But it was a success in terms of the conditions of 2009. The year before, losses amounted to 57 billion RSD.

Anticrisis management

Situation in NIS indicated the following: without urgent development and implementation of extended anticrisis program, the company could not be saved. Urgent action was needed: it started from the optimization of human resources and radical change in the structure and business procedures. The key project of the first six months of 2009 was the implementation of the “Program 750” (that was the project of voluntary leave of employees). The amount of 750 EUR per year of employment was paid to the employees who left the company, pursuant to the sale and purchase agreement, was unprecedented in Serbia. Severance payment never exceeded 350 EUR. In 2009, 1,500 employees participated in the program, which seriously improved efficiency indicators of NIS. The number of employees decreased from 16 to 9 thousand.

At the same time, serious changes began in the refineries: the construction of hydrocracking (MHC/DHT) began in Pancevo, the production of euro diesel started, which was previously imported to Serbia, profitability of production increased by 50 percent, and the procurement expenses decreased for more than a third. Other anticrisis measures were implemented simultaneously. During 2009–2010 credit indebtedness decreased for a third, EBITDA was almost three times higher (from 10.4 to 32.4 billion RSD), аnd due to the implementation of new approaches and technologies, the volume of oil production in Serbia increased by 30 percent. A lot of effort was needed in order to change long-term negative trends: new manager of European level were engaged. Gazprom Neft provided technological and financial assistance, aggressive investment program was implemented, new information policy was created and implemented that minimized reputation risks.

– During 2009–2010, we achieved the most important goals. Not only have we saved the company from downfall, under serious adverse external conditions, but we also succeeded in activating internal mechanisms of its development – said the General Manager of NIS, Deputy General Manager of Gazprom Neft, Kiril Kravchenko. – Structural and technological changes were implemented in all areas of business activities of NIS – from research to oilfield services to refining and sales and distributions. Based on the results from 2010, the indicators in all areas were better than before.

Since 2010, NIS is the first (and for now the only) “blue chip” of Belgrade Stock Exchange, whose shareholders are the citizens of Serbia – over four million of citizens. An obvious indicator of anticrisis changes effect is the net income of 16.5 million RSD, which the company achieved in 2010.

Period of growth

Simultaneously with the operating implementation of anticrisis program, the top management of NIS created a long-term strategy of the company development. At the beginning of 2011, it was adopted by the Executive Board and it was named “Five stars of NIS”.

The concept envisages that by 2020, the “upstream” companies shall achieve five million tons of production, refining – five million tons of refining, retail – the same scope of sales. In addition to this, the strategy envisaged the implementation of modern European standards of management (Euro 5), and all together should lead to the record values of the company shares – five thousand RSD per share. More simply, by 2020, NIS should develop from a national petroleum company into a regional energy holding, leader in efficiency in the Balkans.

The strategy implementation began in complex circumstances. The Serbian economy was affected by the European crisis, in accordance with obligations towards the European Union, liberalized the market of petroleum products by opening it to import, while increasing the excise taxes in order to fill the budget. The above mentioned with the decline in standard of living not only in Serbia but also in South-East Europe, extremely complicated the situation: sales of fuel decreased, competition in the region became more severe due to excess of refining capacities.

However, NIS, which during the previous two years became stronger and had the support of the mother company Gazprom Neft, started the implementation of two basic ideas of the strategy: implementation of the program of regional development and diversification of business activities of the company, through the development of the field of energy industry. The first to pass the borders of Serbia was the “upstream”: in February 2011, the company “Jadran-Naftagas” started working in the territory of Bosnia and Herzegovina, whose 66 percent of the shares are controlled by NIS. During 2011, similar structures appeared in Romania and Hungary.

There is a possibility that NIS shall participate in projects in the territory of Croatia, Montenegro, Albania and Greece.

The neighboring countries have become the interest zone of “Sales and Distribution”, as well as in the case of production. The purchase of property started in Bosnia and Herzegovina, Romania, and Bulgaria. – The development of new sales and distribution channels has been dictated by the preparation of facility MHC/DHT for the start of exploitation in 2012 whose operation shall increase the scope of production of oil derivatives of European quality – explained the manager of the Department for Sales Development of NIS, Aleksey Korbov. – In addition to retail in Bulgaria, Bosnia and Romania, which are our priorities from the logistic point of view. We intend to deal with wholesale deliveries (e.g. to Croatia). A serious interest for us is the market of Kosovo, where NIS was present before.

The retail is not limited only to regional activities. During the last two years, dozens of petrol stations have been modernized, which provided stabile maintenance of the company’s position in the national retail market of fuel. The strategic goal of “Sales and Distribution” is the creation of an efficient regional retail network consisting of 800 to 1000 petrol stations.

The sphere of company operations expanded simultaneously. The “Energy” Division was founded in 2011 within NIS. није. Energy should become one of the priority directions of NIS development as soon as possible. The development strategy of this division, adopted by the Executive Board, envisages the elaboration of alternative sources of energy and active participation in the construction projects of all types of capacities for generation of energy in Serbia and in the region.

The goal of the Serbian company is to be actively involved in petrochemistry, organize the production of base oils of high quality in the Refinery in Novi Sad. Among the priorities, there is the implementation of programs regarding increase of debt of oil refining, which is essential for the efficiency leadership.

Sasha Savicevic, Senior Partner of the consulting company “Sputnik” from Belgrade:

– Bearing in mind the conditions in which the European petroleum sector operates, the success of NIS is even more valuable. While in Russia, the main duties based on mining rent goes to production, the situation in Europe is different: small quantities of oil produced in the territory of European countries lead to the transfer of tax duties to the Sales Division, which explains a significant participation of the state in final pricing of oil derivatives for consumers. As regards the increase of efficiency of NIS, one of the key proofs is the comparison of operations of the Serbian company with its Croatian analogue and competition – Ina. At the beginning of the year, Ina had several important advantages: one of the refineries of this company transferred to the production of derivatives of Euro 5 standard, in addition to the advantage of the location of the Adriatic coast. Furthermore, there was a serious advantage in the production and refining – twice they have exceeded analogue indicators of NIS. But, in 2011 the profit of INA was 241 million EUR and the profit of NIS was 380 million EUR. The majority owner of Ina, the Hungarian company MOL, had a conflict with the Croatian government. On the other hand, NIS cooperated with the Government through an efficient dialogue, the company actively expanded in the region and successful implemented the modernization of the complex of refineries.

Success without vertigo

The results in 2011 were completely unexpected for NIS. In spite of adverse external conditions, the profit of the company increased to 40.6 million RSD, the amount of EBITDA is 52.4 billion, and the production exceeded the level of 2009 almost by two times and amounts to 1.52 million tons of oil equivalent. In addition to this, the issue of reputation risks has been completely eliminated: in 2011 the company became the best in several categories, and the most important is the title of the best company in Serbia. According to the assessment of the company management, the main factor of success was human factor: in the period of three years, NIS formed an efficient international team of managers, including citizens of 22 countries, and the Executive Board consists of independent business experts of international class. The branch office of NIS on the European Union started working in 2011.

The new quality of NIS was best defined by the President of Serbia, Boris Tadic, who was present at the opening of the command room in the Refinery of Pancevo in November 2011. According to him, the company NIS “represents the foundation of economic cooperation of Russia and Serbia”.

– It is no news if I say that we do not intend to stop here. We are only at the beginning, and the first control point shall be the year of 2020, when the results of strategy implementation shall be assessed – declared Kiril Kravchenko. – For the time being, we have the assignment to continue the regional expansion, diversification and development of new forms of business operations. The results in 2011 show that we had selected the correct strategic direction of development in 2009 – and we do not intend to change it. The growth of investments in 2009 was 29 percent, in 2010 – 107 percent, in 2011 – 75 percent, and the total amount which has been invested into the development of NIS since 2009 is 1.5 billion EUR. We plan to invest 1.5 billion EUR into NIS in the following three years.

The statement of the General Manager of NIS has been proven by the preliminary data for the first quarter of 2012 – EBITDA of NIS for that period is 15.5 billion RSD, which is twice more compared to the same period in 2011, and the scope of investment has been increased three times. At the same time, the situation in the regional market of derivatives, in the conditions of economic crises and the excess of refining capacities, is still complex, the competition is more severe, and it is more difficult to achieve positive results. Even now we can say that the year 2012 shall not be easy for NIS and the time shall demonstrate whether the company shall maintain positive trends in these circumstances in the market. The well known recipe for problem solution is the constant increase of efficiency which the company has achieved in the last three years. NIS is still at the beginning of the road, and the first stop should be 2020, when the results of strategy implementation shall be assessed.