COMMENT: Why the Czech finance minister fears the Poles

By bne IntelliNews April 28, 2014


If Polish state-controlled oil and gas firm PKN Orlen is ever to gain more influence in CEPRO, the Czech state firm that controls a large chunk of the Czech motor fuels market and stores the country’s strategic fuel reserves, who can say what might happen to CEPRO’s excellent relationship with the finance minister’s private biofuels business? Or to Agrofert’s appetite for revenge on PKN after a debacle ten years ago over the country's leading refinery and petrochemicals group Unipetrol?

As Czech finance minister, Andrej Babis is in negotiations with PKN Orlen, owner of Unipetrol, over the future of state-owned CEPRO. At the same time, his own business, Agrofert Holding, is a major supplier of biofuels to CEPRO. And as if that were not enough, Agrofert is pursuing PKN for €725m in damages over Unipetrol. 

Less than a week before Babis was sworn in as Czech finance minister this January, the Polish state-owned PKN Orlen, which acquired Unipetrol from the Czech state in 2004, issued a statement which read as follows: “A court in Prague has dismissed a petition by Agrofert Holding for the reversal of the Arbitration Court's decision of October 21st 2010 on the payment of CZK 19.5 billion in damages for losses incurred as a result of unfair competition, unlawful injury of the Czech company's reputation, and default on contracts executed by the companies in 2003–2004. In 2010, the Arbitration Court dismissed Agrofert's claim in full and ruled that the company pay the court fees incurred by PKN Orlen. Agrofert then lodged a petition with a court of general jurisdiction in Prague, moving for the reversal of this decision. In today's ruling, the court in Prague concurred with PKN Orlen's position, upholding the judgement issued by the Arbitration Court on October 21st 2010 and dismissing the petition as groundless.” 

Agrofert revealed in April that it would appeal against this latest unfavourable court ruling in a legal battle that began ten years ago after PKN failed to honour its agreement to sell on to Agrofert the chemical assets of Unipetrol in the event that PKN acquired a majority stake in the Czech refining. In 2009, the Czech courts imposed a penalty of some CZK2bn (€73m) on the Poles for breach of contract, ten-times less than Agrofert is seeking. 

Agrofert’s decision to press on with its legal action against PKN places its single shareholder, the Czech finance minister, in an uncomfortable position. To begin with, the Czech government is now deciding upon on whether to accept PKN’s proposal to join up its Czech refining business, owned by Unipetrol, with CEPRO. 

For over five years, the government has been considering the creation of a single holding company that would bundle up CEPRO and MERO, the company that owns and operates the Czech section of Russia’s Druzhba pipeline and the IKL pipeline, and then integrate this all into a refining business, such as Unipetrol’s Ceska Rafinerska, or Slovnaft, part of the Hungarian state-owned MOL.

Andrej Babis threw the whole plan into the air last week when he told journalists that “CEPRO and MERO are strategic assets of the Czech state and certainly we will not want to privatise them or to put them into some joint company. That is my position." 

People, such as Patrik Tkac, founder of the controversial financial group J&T, which has built up a substantial minority stake in Unipetrol, must now be wondering whether the finance minister’s position is influenced by Agrofert’s strained legal relationship with PKN. Or even, perhaps, by Agrofert’s commercial relationship with CEPRO. Agrofert supplies CEPRO with biofuels. In 2013, the CEPRO business was worth €35m to Agrofert. 

If PKN was ever to gain more influence in CEPRO, who can say what might happen to CEPRO’s deep relationship with the finance minister’s biofuel business? Or to Agrofert’s appetite for revenge on PKN after the Unipetrol debacle? In short, it is clear how Agrofert's interests might be threatened by PKN and CEPRO moving closer together. But it is far from clear how this would harm the interests of the Czech Republic.


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