INTERVIEW: Poland's PKN looks to Kazakhstan for oil

By bne IntelliNews February 28, 2007

Jan Cienski in Warsaw -

PKN Orlen plans to try to break its dependence on Russian oil by acquiring its own fields, most likely in Kazakhstan, Piotr Kownacki, the company’s new CEO, told bne in an exclusive interview.

"Kazakhstan is one of the greatest areas of interest for us," says Kownacki. "Access to our own reserves is a priority for us - we are actively working towards this goal."

PKN officially plans to refine 400,000 tonnes of crude from its own reserves this year, a sign that its intentions of gaining access to its own oil are serious. Currently, the company processes 13.5m tonnes of crude a year, 90% of which comes from Russia.

PKN's management has already opened a representative office in Kazakhstan and company officials have travelled to the country together with government delegations.

PKN is also interested in acquiring fields in North Africa and in Iraq, although political instability in the latter makes the prospects of a Polish investment less likely, says Kownacki.

If the oil was to come from Kazakhstan, it could be shipped across the Caspian and then sent by tanker and pipeline across the Black Sea and Ukraine to Orlen’s main refinery in Plock, in central Poland. If the company buys a field elsewhere, it could swap the oil produced there for crude closer to Poland.

PKN has no upstream experience and, as such, Kownacki says the company is more interested in buying a share of an existing field rather than developing a new find on its own.


PKN's desperate swim upstream is an attempt to catch up with its regional rivals, Hungary’s MOL and Austria's OMV, both of which are already invested heavily in upstream projects.

PKN has become increasingly aware of the vulnerability of relying on Russia for almost all of its supplies. While Russia, and earlier the Soviet Union, had long been seen as a reliable energy supplier, recent oil and gas disputes with Ukraine and Belarus, which led to supply disruptions, have made it clear that there is a risk of not diversifying.

Poland's relations with Russia have also become increasingly strained. Warsaw has blocked the start of talks on an EU-Russia partnership agreement, citing Russia's embargo on Polish meat and other foodstuffs.

Last year, PKN spent $2.3bn acquiring Lithuania's Mazeikiu Nafta refinery from the Lithuanian government and the bankrupt Russian oil major Yukos - much to the chagrin of the Kremlin, which wanted a Russian major to win the tender.

As the sale was going through, the Russian Druzhba pipeline that supplies the Mazeikiu allegedly sprung a leak, and a mysterious fire wrecked part of the refinery. The pipeline has not yet been fixed, and the refinery has had to be supplied by sea since July.

Speaking recently in London, Semyon Vainshtok, the CEO of Russian pipeline operator Transneft, made it clear the prospects of reopening the Druzhba pipeline anytime soon are not good. Russia insists the reasons for the shutdown are purely technical, but there is speculation Moscow would like to drive down the value of Mazeikiu, forcing Orlen to sell the refinery to a Russian company.

However, Kownacki makes it clear that Orlen has no intention of letting go of its Lithuanian acquisition.

"The transaction still makes sense even if the pipeline is not reopened," he argues. "When the investment was made, our analysts looked at the worst case scenarios and they determined that the investment was still sensible over the long term even if the refinery has to be supplied by sea."

Kownacki estimates that supplying crude by sea added about $1 per barrel to the refinery’s costs, although many analysts put the cost at closer to $2.

Mazeikiu is now operating at 75% of capacity and is not making a profit, but Kownacki expects it to break even by the end of this year.

Defence as offence

Even if Mazeikiu does not turn into a huge profit centre, the investment was in many ways a defensive one for Orlen. Previous CEO Igor Chalupec said the acquisition of Mazeikiu prevented a Russian major from taking over the refinery and flooding north-east Poland with cheap product, which could damage Orlen and drive down its value.

Kownacki also says that Orlen's Plock refinery could be supplied through the crude terminal in Gdansk if the main leg of the Druzhba pipeline running though Poland is shut down by the Russians. "Marine deliveries will not close Plock," he says.

Kownacki took over Orlen in January after Chalupec was removed at the behest of the Treasury, which owns just 27% of PKN, but controls seven of nine seats on the supervisory board.

Chalupec, generally seen as a good manager, had been appointed by the previous centre-left government. Kownacki is a close ally of Poland’s current centre-right president, Lech Kaczynski.

Kownacki says he is pleased with the work of other board members, implying that a is purge of politically inconvenient company officials was unlikely.

Chalupec had helped to turn around a troubled acquisition of 500 German petrol stations and completed the acquisition of the Czech Republic’s Unipetrol.

Kownacki says he will continue earlier cost-cutting measures, which he expects to reduce PKN's costs "by several percent."

Send comments to: Jan Cienski

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