Polish energy drive hiccups fell treasury minister

By bne IntelliNews April 22, 2013

bne -

Polish Treasury Minister Mikolaj Budzanowski was sacked on April 19 following a series of embarrassing failures to control state companies and keep them in line with the government's drive to boost energy security.

"Despite my respect for Budzanowski's qualifications, he failed to adequately supervise strategic companies in charge of energy security," Prime Minister Donald Tusk told a press conference, according to Bloomberg.

Tusk nominated Deputy Administration Minister Wlodzimierz Karpinski to replace the treasury minister, and called for "quick personnel decisions" at gas importer PGNiG.

According to the government PR, the crux of the issue for the PM was a piece of Russian mischief-making earlier this month. Moscow proposed reviving the planned Yamal-Europe II pipeline, which would run from Russia via Poland to Slovakia. Following haughty dismissals of the chances of the project from Tusk and senior ministers, Russian gas exporter Gazprom announced on April 4 that it had signed a memorandum on a feasibility study with EuRoPol Gas - which is controlled by PGNiG.

The PM swiftly ordered an investigation into the mess, which was clearly an embarrassment. Neither he, nor Budzanowski, were aware of the agreement at the time of the announcement, Tusk confirmed on April 19.

However, Karpinski's new job looks tougher than that might suggest. Poland is facing a bit of a mini crisis in its ambitious energy policy, as state-controlled companies struggle to keep pace with the demands of the government for huge investment to develop the country's energy sector - both in terms of production and imports. Meanwhile, slumping power markets are squeezing profitability, and demands for investment to boost Polish renewable energy capacity in order to move towards EU targets is adding to the pressure.

In particular, Warsaw's push on companies across the sectors to invest in the hunt for shale gas is putting stress on balance sheets. The cornerstone of Tusk's ambition to wean Poland off its reliance on Russian gas, the shale gas push suffered last year as foreign investors lost much of their enthusiasm due to poor flows at test wells. The low point came when US giant Exxon Mobil upped sticks and quit the country last summer, while other international companies are holding off. In their stead, state utilities, oil refiners and even copper miner KGHM have been pushed into the fray.

Perhaps even more damaging to Budzanowski than the embarrassment over Yamal-Europe II was the announcement this month by the country's top utility PGE that it is scrapping a planned 1.8-gigawatt (GW) expansion of its Opole coal-fired power plant, which Tusk had earlier name-checked as a strategic priority. The PM was also forced on April 2 to step in to promise PGE that it would receive state support in its struggle to build Poland's first nuclear power plant, after it failed to sign off on a partnership to build the 3-GW facility with KGHM and state utilities Tauron and Enea. That promise directly contradicted earlier statements from the treasury minister.

The growing squeeze being felt by Polish state companies was expressed late in 2012 by PGE CEO Krzysztof Kilian, who warned that Poland would be forced to choose between investing in shale gas exploration or a nuclear programme. A series of other - lower profile - projects have also been mothballed recently by state power companies. Energa suspended the Ostroleka power plant project last year and is waiting for partners to help it finance the investment. More recently, Tauron insisted it will push forward with PLN5.41bn expansion of its Jaworzno plant, but is expected to cancel the 850MW gas-fired power plant project Blachownia. Erste analysts anticipate the company's investment programme will peak in 2014 at PLN5bn.

On top of all this, the companies are also being squeezed for cash, to support Warsaw's fiscal targets. The government is pushing to reap PLN5bn in dividends this year, likely setting up another series of defeats for company boards this summer. Managements have seen their recommendations pushed aside for the last two years.

Budzanowski's dismissal - which also follows criticism for the dire problems at flag carrier Polish LOT Airways and the comic soap opera at the Warsaw Stock Exchange which saw its CEO fired recently for trying to raise cash for a film starring his girlfriend - will hardly help the privatisation push either. The sacking clearly denotes a sharp rise in risk that companies will be forced into decisions that are more political than economic. That said, the treasury's privatisation target for 2013 is modest at PLN5bn. However, Warsaw is also relying on privatisation of several assets now held by state development bank BGK in order to fund its flagship infrastructure fund PIR.

Speaking to reporters, Karpinski said energy security, shale-gas exploration and the effective supervision of state companies will be his priorities. A spokeswoman for PGNiG, declined to comment on Tusk's news conference or whether CEO Grazyna Piotrowska-Oliwa plans to quit. However, the gas company head is closely tied to Budzanowski.

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