Jan Cienski in Warsaw -

Poland's treasury ministry is preparing a short list of bidders interested in taking control of Lotos Group, Poland's second largest refiner, for June 10, but the odds of the transaction coming to a successful conclusion look increasingly remote, as the most serious contenders are those unloved Russians.

"There is a parliamentary election later this year, which makes a sale in the near future very unlikely," says a person close to the transaction.

The treasury ministry has already received preliminary offers, and according to reports in the Rzeczpospolita newspaper, all of the serious bids have come in from Russian oil majors, including TNK BP, Gazpromneft, and Rosneft, as well as two bids from Western Europe, one from Biosyntec, a French cigarette filter maker, and another from Transfigura, a Dutch oil trader.

The Polish government wants to sell its 53% stake in Lotos as part of a privatisation programme that aims to raise PLN15bn (€3.8bn) this year and PLN10bn in 2012, key to the government's hopes of keeping public debt below 55% of GDP. The transaction is through to be worth about PLN3.5bn, but the ownership premium for taking control of the company is expected to be worth about PLN1bn more.

Treasonous

The government has purposely set up the transaction so that any sale would take place after this autumn's parliamentary election, but even the preparations for the sale are likely to be extremely politically fraught.

Aleksander Grad, the treasury minister, has already been threatened with a possible treason charge if Lotos is sold to a Russian company. "If the Lotos Group is sold to a Russian energy company or a company controlled by the government of the Russian Federation, Aleksander Grad will stand before the State Tribunal," threatened Dawid Jackiewicz, an MP from the right-wing opposition Law and Justice party. "It doesn't matter if it happens in this, the next or any other term of parliament."

Both Grad and his boss Donald Tusk, the prime minister, have been careful to say that a successful Russian bid cannot be ruled out - making such a comment would fall afoul of EU regulations - but they are also obviously wary of the implication of selling off a large and strategic business to the Russians.

Although Grad stressed that his ministry is not conducting a "make-believe" privatisation, he has said the treasury "has a very careful approach" to the sale. "We have imposed very stringent requirements for investors. We want the future investor to ensure the company that it will continue to develop and have access to oil deposits."

Tusk has said: "There is no ideological reason to give a categorical 'no' to an investor from any particular country, including Russia," before going on to say that possible dependence on Russia demands a certain "care and restraint" on the part of the government.

The government's caution over selling strategic energy companies could be seen in the botched attempt to sell Enea, the country's third largest power generator. First a bid by Jan Kulczyk, Poland's wealthiest man, was scotched by the treasury in large part because of political worries, and later talks with France's Edf fell apart, and the company remains unsold.

Swimming upstream

The uncertainly over Lotos's future owner is causing problems for Pawel Olechnowicz, the company's longtime CEO, who has embarked on a programme of increasing its own access to upstream oil resources.

Currently, Lotos has very little of its own oil, mainly coming from platforms it owns on the Baltic Sea. It recently acquired AB Geonafta, which has onshore fields in Lithuania, and has also invested in oilfields lying off the coast of Norway. The goal is to increase oil extraction to 1.1m tonnes by 2015 and 5m tonnes by 2020. If it reaches that level, that would amount to about half of Lotos's current annual refining capacity.

However, in order to dramatically expand its upstream capacity, Lotos could use the help of a deep-pocketed investor. "We aren't thinking of an exotic investor from the other side of the world, someone not involved in the upstream business," Olechnowicz said in a recent interview. "The best for us would be someone from northern Europe."

Lotos also incurred significant debt as part of its programme of expanding the capacity of its refinery in northern Poland. The company last year had a profit of PLN651m on revenues of PLN19.7bn.