Jan Cienski in Warsaw -

PKN Orlen bestrides the Polish oil market and has made inroads into neighbouring countries, but whoever takes over as the new CEO needs to move fast and strike a deal to acquire access to reserves or it could quickly lose its dominance.

PKN is a refining and retail power in which the state treasury has a 27% stake, but the firm has no reserves of its own, unlike regional rivals such as Hungary's Mol and Austria's OMV. Last year, it reported a net profit of €680m, up from €595m a year earlier. "They have to get access to reserves - earnings from refining are simply not enough," says Kamil Kliszcz, an analyst with BRE bank.

Getting PKN's hands on oil wells was one of the aims of Piotr Kownacki, the company's outgoing CEO. Yet despite visits to Azerbaijan and Kazakhstan, and strong political support from the government, he failed.

The problem for Orlen is that it doesn't have the access to cash to buy into a producing field. Investing into unproven fields or into exploration is usually more of a risk than a slow-moving company controlled by the state would want to take. By contrast, two of Poland's wealthiest businessmen, Jan Kulczyk and Ryszard Krauze, are sinking millions into exploration in places like Siberia and Latin America. "Plans to acquire reserves have been put on the back burner because of prices," says Bram Buring, an analyst with Wood & Co, a Prague-based broker.

The best fit for PKN would be a match-up with an oil producer from Azerbaijan or Kazakhstan that has reserves but no European refineries or retail network. But if the Polish company does not act quickly, those potential partners will start to build their own European networks, as is happening now with Kazakhstan's KazMunaiGaz, which last year took over Romania's Rompetrol and is now looking into building a refinery in either Ukraine or Belarus. "If they do that, they would be able to attack the Polish market," warns Kliszcz.

Refining its strength

PKN has been most successful in expanding in its core strengths of retail or refining. In 2002, it bought 494 gas stations in eastern Germany, and in 2005 it bought the Czech Republic's UniPetrol as well buying a controlling stake in the Mazeikiu refinery in Lithuania a year later. But the scope for other regional acquistions is now much more limited.

Kownacki had tried to push through an old idea of joining PKN with the smaller Gdansk-based Lotos Group, also controlled by the state and also an oil refiner and distributor. However, Lotos has strong local support from Baltic coast politicians, and the company's CEO, Pawel Olechnowicz, is one of the wiliest survivors in corporate Poland, outlasting governments of both the right and the left, all of whom made it a habit to sweep away managers appointed by their political rivals. That stability has allowed Lotos to prosper and to begin developing its own oil deposits in the Baltic Sea. By contrast, PKN, because of its higher profile, has been a frequent target of political interference, which has damaged its attempts to swim upstream.

Outgoing CEO Kownacki is a case in point. He got his job not because of any experience in the oil business, but because he was closely tied to Lech Kaczynski, Poland's president. Kownacki replaced Igor Chalupec, one of the country's more talented managers who had been responsible for closing the Czech acquisition and for buying Mazeikiu. However, once he was no longer useful, Chalupec was swiftly removed by the Law and Justice party government of the day.

Now Kownacki is being flung from the same carousel that gave him one of the top jobs in Polish industry. He was suspended from his post in February after getting involved in a spat with Aleksander Grad, the Treasury minister under the new government of Prime Minister Donald Tusk. Kownacki accused Grad of exerting pressure on him to remove the CEO of Polkomtel, a mobile phone company in which PKN has a 20% stake. Grad admitted he had called Kownacki, but denied putting pressure on him. PKN's board then suspended Kownacki, saying: "The independent actions of the president, not taken in consultation with the board, had damaged the image of the company by involving it in current political conflicts."

In mid-March, the board announced it was holding a contest to replace Kownacki, who had been in the job just over a year. There are few tears over Kownacki's departure. "He did not have the same weight with investors as Chalupec," says Buring. "In the short time Kownacki was in that position, he didn't really do enough to gain that credit."

Whoever is chosen to replace Kownacki should have a slightly longer tenure than he did. The Civic Platform party now in power is expected to continue in government for another three years, which will give the new CEO time to try and finally strike a deal that would give PKN access to its own reserves.

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