Romania’s major energy company Rompetrol was on the verge of sale to a Chinese company when the country’s investigative agency, the Directorate for the Investigation of Organised Crime and Terrorism (DIICOT), announced it was investigating a thirteen year old transaction. The background to the decision to launch an investigation has not been revealed, writes financialintelligencer.com. Hereby the text.

”The probe has resulted in the seizing of over $670m worth of Rompetrol assets, put the Chinese investment at risk and led the Kazakh company’s owners KazMunaiGas to warn that it is reconsidering its nine-year long investment in the country. KazMunaiGas International (KMGI) entered the country in 2007 when it bought the Petromidia refinery operation and the Vega oil distribution system. These today go by the name of Oilfield Exploration Business Solutions.

KMGI says it has no connection with the events or individuals under investigation. It also points to the fact that it has invested some $1.6 billion in Romania’s energy infrastructure over nine years as well as contributed extensively to the country’s tax revenues. As a result of the investment, Kazakhstan has overtaken Russia as Romania’s primary energy source, with 55% derived from the Central Asia state as opposed to 27% from Russia.

Today’s troubles date back to a controversial series of deals by Dinu Patriciu, a highly controversial Romanian businessman who made his fortune from Rompetrol. Patriciu died in 2014. He acquired Rompetrol from the state in 1998 and took it through a series of acquisitions before converting $570m worth of debt in Rompetrol into bonds with a seven-year tenor in 2003. This occurred during the period of the Adrian Năstase Government. Năstase later spent two years behind bars for illegal campaign and party financing practices.

The debt to bond conversion was hugely controversial and it was widely claimed the company’s value had been greatly undervalued by Patriciu. The DIICOT was brought in to investigate the deal.

In 2007, Patriciu sold 75% of the shares in Rompetrol for $2.7 billion to KazMunaiGaz, the Kazakh energy combine. The deal made Patriciu the richest living Romanian and a billionaire. Prior to his death Patriciu was acquitted of defrauding the state, money laundering and illegally manipulating markets to benefit Rompetrol.

In 2010, the bonds were converted into equity with the government receiving 44.7% of the company. The conversion was also regarded as suspicious and, according to a report in BNE Intellinews

led to a further investigation. The National Fiscal Administration Agency (ANAF) contested the conversion in 2010 and seized some of the refinery’s assets. This was subsequently reversed following a court decision.

The DIICOT returned to the fray in May 2016 in what has been described in the local media as Rompetrol II, an investigation that was announced just days after KMGI revealed it intended to sell a 51% stake in the international business to a Chinese company. The Romanian Government’s existing share in the Petromidia refinery would not be affected. It was said to be an immensely complex investigation. Four former government ministers have been indicted.

The Romanian media have raised questions, pointing out that a similar scandal involving the privatization of the oil company Petrom led to much less dramatic treatment.Evenimentul Zilei, a leading Bucharest publication, concluded that “the state has had double standards in regards to the two privatizations and what investor could afford to pay the absurd sums claimed by DIICOT, whose action may even chase away one of the largest investors from the Romanian economy, at times when other refiners in Europe are leaving this industry.”

KMGI issued a Notice of Dispute on July 26, 2016 to resist the asset seizure. A letter sent by KMGI’s lawyers at Freshfields to the Romanian prime minister and other senior ministers accuses the DIICOT and other agencies of “attempting to seize and destroy Oilfield’s business.”

The letter outlines a transaction that took place before KMGI’s involvement in the country when the then state-owned oil company Rompetrol sold an interest in a Libyan operation to Repsol, the Spanish energy company. It continues, “several years after privatisation… the Romanian authorities commenced proceedings to recover all receivables from Repsol which it argued should have been paid over to the Romanian state.”

The letter refers to a local judicial decision to make KMGI civilly liable for the “alleged embezzlement by former owners and officers of the payments from Repsol.” Initial losses were put at $58m but as a result of punitive interest rates, these escalated to $240m. The document then outlines how the Romanian authorities imposed wide-ranging freezing orders on Oilfield”s assets “effectively debilitating the company.”

It continues, “The process in which Oilfield was forced to participate was procedurally unfair and arbitrary, characterised by gross violations of due process…. Romania singled out Oilfield for draconian treatment… It constitutes expropriation without compensation.”

DIICOT later expanded the range of frozen Rompetrol assets. It is understood that more than $2.1 billion of Rompetrol assets are now subject to freezing orders.

One effect of the move against KMGI’s energy assets is to place in jeopardy the sale of an interest in the Romanian oil industry to the Shanghai-based CEFC China Energy. CEFC is understood to remain interested in the deal, and has given KMGI an extension of the required completion date. Azamat Zhangulov, senior VP of KMGI said in October, “the deal is being renegotiated.”

KMGI draws attention to the risk the seizure presents to Romania’s energy diversity and self-sufficiency. This is particularly crucial as Romania is a member of the European Union. The possibility that the Kazakh company will withdraw from Romania and pursue interests in other Central European markets remains very live and pressing without some movement from the Romanian government, it warns.

The future of a $1 billion joint investment fund set up, under a memorandum of understanding, by the government of Kazakhstan for furthering investments in Romanian energy projects also looks in jeopardy.

Foreign investors will also need to factor in Romania’s treatment of a foreign investor before committing funds to the country, warns KMGI. Zhangulov comments that Romania’s oil sector was “unproductive, inefficient, uncompetitive and close to insolvency” when the company acquired Rompetrol. “We have transformed it into a number one producer for quality volume and exports…. [W]e have invested billions to make our assets the best in the market. We are good corporate citizens and good for Romania”.