Lotos - alone and unloved

By bne IntelliNews February 16, 2012

Jan Cienski in Warsaw -

A resounding silence greeted the Polish Treasury Ministry late last year as it waited for binding offers to flow in to buy the Lotos Group, the country's second largest refiner, as foreign buyers proved reluctant to pony up the PLN3.5bn (€844m) that the government reckons the firm is worth. Now the ministry is casting around for a domestic company that can be prodded to take over heavily indebted Lotos - something that can only realistically be done by two state-controlled companies - PKN Orlen, the largest refiner, and PGNiG, the leading gas company.

"Lotos needs a strategic investor, but given the lack of foreign interest, we are left with a choice of companies from the domestic fuel industry," Treasury Minister Mikolaj Budzanowski told the local press recently. "There are not that many local fuel companies, so the choices for a consolidation scenario are limited."

Budzanowski's back is against the wall, as the ministry has pledged to raise PLN10bn this year by selling off state assets, and the 53% stake it holds in Lotos would go a long way towards meeting that goal.

There are also political benefits to keeping Lotos under the wing of a state-controlled company. In recent years, it had been clear that the only companies interested in Lotos were Russian oil majors, as Lotos' refinery in northern Poland and growing network of petrol stations made it a decent fit with Russian companies while also giving them an entry point into the EU. However, selling Lotos to Poland's ancient enemy would have created serious political problems for the government of Prime Minister Donald Tusk.

In the end, no bids flowed in for Lotos, with analysts saying that the reason was the glut of European refiners on the market and Lotos' large debts. It owes more than PLN6.9bn (much of that in dollars) - the price for modernising its refinery and beginning to invest in upstream oil extraction projects in the Baltic and North seas.

More silence

The markets have been unenthusiastic about Budzanowski's ideas of getting PKN or PGNiG to help out.

Although PKN would seem to make the better fit, merging the country's two largest refiners would almost certainly cause trouble with Poland's competition authorities, something Budzanowski appeared to recognise when he said that did not want to create a local fuel monopoly.

PKN is also saddled with the after-effects of a previous politically inspired investment, its $3.7bn purchase of Lithuania's Mazeikiu Nafta refinery. The refinery has been dogged with problems after Russia shut down the pipeline supplying it with crude, and has been a drain on PKN's balance sheet.

PGNiG has no experience in the oil industry, which some analysts feel makes the potential purchase of Lotos very risky. "We believe it would represent a suboptimal allocation of resources in the sector," writes Robert Rethy, an analyst with Wood & Co, a central European investment bank, adding that PGNiG could add $2bn to its balance sheet to absorb Lotos.

Despite market concern, keeping Lotos in the family does have large advantages.

Despite its pro-market background, the current centre-right government has become increasingly keen on building up large state-controlled companies that dominate important sectors of the economy, following a model of how the French have built their own industrial champions. Jan Krzysztof Bielecki, a former prime minister who is now one of Tusk's leading economic advisers, is a leading exponent of this sort of thinking, arguing that the private sector has failed to build large companies that have weight needed to compete in the EU, forcing the government to step in.

The government has already undertaken a series of "privatisations" that have seen the control of the sold companies remain in state hands, while the Treasury garners the proceeds needed to keep public debt from rising to dangerous levels. Last year saw the sale of Sweden's Vattenfall utility to PGNiG and to two other state-controlled companies: Tauron, an electricity producer, and KGHM, a copper miner. KGHM has also bought a 10% stake in Tauron.

Two years ago, PGE, Poland's largest electricity company, bought Energa, Poland's fourth largest utility, although competition authorities later barred the sale from going forward.

The planned sale of Enea, another utility, to Jan Kulczyk, Poland's wealthiest businessman, was also blocked by the government in 2010, leaving the company still in state hands.

A final factor in the government's decision making is the hope that Poland could be sitting on sizeable deposits of shale gas, enough to end the country's gas dependence on Russia and to turn it into an energy exporter. In order to fully take advantage of shale - if it turns out to be present in commercially viable quantities - is to have a domestic fuel industry large enough to become a partner for the US and Canadian companies which have the technology to extract the gas. "The new entity would have a better ability to borrow for investments," Piotr Syryczynski, an analyst with Atkins, tells the Dziennik Gazeta Prawna newspaper.

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