Poland's PKN Orlen gives up on offloading Lithuanian refinery

By bne IntelliNews April 26, 2012

Tim Gosling in Prague -

Polish state-controlled refiner PKN Orlen has officially announced the (long suspected) news that it is abandoning attempts to sell off its struggling Lithuanian plant Mazeikiu Nafta, and says it will now invest in upgrading the plant to improve its financial performance.

Putting a brave face on the fact that interest in the Baltic refinery is low because it is cut off from cheap pipeline supplies of Russian crude, CEO Jacek Krawiec told a news conference on April 25: "The management recommendation is to keep increasing Mazeikiu's value and to not continue the sale process. The supervisory board approved this recommendation yesterday," reports Reuters.

With the help of bias in Vilnius, PKN fought off competition from Russian rivals to acquire Mazeikiu from the Lithuanian government and now-defunct Russian oil company Yukos in 2006, for €1.9bn. However, "technical problems" closed the spur of the mainline Druzhba pipeline that fed the refinery with Russian crude the same year, and it has remained cut off ever since.

The refinery has consequently underperformed, as it now has to rely entirely on crude shipped by sea and then transported inland. With the deep recession in the Baltics also hurting Mazeikiu's business, PKN has incurred huge losses on the asset, despite running it at reduced capacity.

It's little wonder then that interest in the sale of Mazeikiu has been low. In addition to the plant's high debt burden, the list of realistic buyers is limited to Russian companies (only one of the country's oil majors would have the necessary influence to persuade state pipeline operator Transneft to fix the broken spur). TNK-BP, Lukoil and Surgutneftegas were all reported to be interested in 2010, but at least two baulked at PKN's ambition to limit a sale to a minority stake and maintain control, and it came to naught. Such a sale would probably face fresh resistance from Vilnius also.

Krawiec said PKN could revisit the plan if it gets an attractive offer. But at the same time the CEO sought to highlight that Mazeikiu's performance has improved, and so the Polish energy company would now look to build the asset's value. The Polish refiner now plans to invest LTL84m (€24m) within the next 12 months on upgrading Mazeikiu, according to Leta.

Krawiec said the refinery's sales volumes were 2% up year on year in the first quarter of 2012, driven chiefly by stronger performance in the retail and petrochemical segments, and operating profit came in at PLN939 (€240m). Meanwhile, PKN's total debt has fallen to PLN7.1bn, he said.

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