Czech finance minister blasts plan to hand oil pipelines to Poles

By bne IntelliNews April 25, 2014

Tim Gosling in Prague -


The powerful Czech finance minister insisted on April 24 that the country should not give control of its oil and fuel pipelines to a foreign company, potentially blocking a deal to hand the assets to Polish state-controlled refiner PKN Orlen.

Earlier this month, Prague confirmed that it is in talks with the company over a possible merger of the two companies - Mero and Cepro - with Ceska Rafinerska. The operator of the country's two refineries, which is 67.6% owned by Unipetrol - in turn controlled by PKN Orlen - would maintain control. The assets on both sides have long been at the centre of a background tussle. 

However, Unipetrol appears to have taken the upper hand. It is reported to have made much-needed investment into the Czech refineries dependent on a deal. The European refining segment is under huge pressure right now, and one of the key issues for the weak profitability of Ceska Rafinerska is the high fees charged by Cepro and Mero. Analysts at Erste Bank talk of "compelling pressure" to decrease capacity under current conditions.

Meanwhile, the company is reportedly ready to tighten its control of the refiner, which previous Czech governments had hoped to return to state ownership. Unipetrol bought Shell out of its 16.3% stake in January and is now reported to be in talks with Italian giant Eni on the remaining 32.4%. On April 24, Unipetrol reported that the increase of its shareholding in Ceska Rafinerska had pushed it to its first quarterly profit since 2012.

The Polish-controlled company's tightening grip on Ceska Rafinerska appears to leave the Czech government with a choice: risk watching the country's refining assets reduced or risk handing control of its strategic oil pipeline operator to a Polish state-controlled company. 

It was just over a year ago that Prague was forced to buy a share in the Transalpine pipeline (TAL), which carries crude from the Adriatic, as the country faced a virtual cut off from Russian oil supplies, with one of the two refineries forced to shut down for around a month. Central Europe's relations with Moscow have hardly improved in the meantime.

Czech Prime Minister Bohuslav Sobotka last week expressed his opposition to any deal on privatising Mero and Cepro. Finance Minister Andrej Babis suggested around the same time that fuel distribution, fuel storage, and petrol station network owner Cepro should definitely not be sold due to strategic reasons, but that oil pipeline operator Mero is up for debate. 

However, the billionaire finance minister who has watched his power steadily grow since his new political platform Ano 2011 took power as part of a coalition with Sobotka's Social Democrats in January appears now to have remembered his bad tempered fight with PKN Orlen for control of Unipetrol around a decade ago. 

"I believe that Cepro and Mero are strategic assets of the Czech state and certainly we will not want to privatise them or put them into some joint company. That is my position," Babis told Reuters on April 24. 

The finance minister then sought to revive suggestions that Prague could turn the proposal on its head. Insisting he'll seek an agreement with PKN that would secure the long-term operation of the Czech refineries at Kralupy and Litvinov, as well as end disagreements between Mero and Unipetrol on fees for oil deliveries, Babis said one option is for Mero to take over the Kralupy refinery.

"There are other possibilities how to resolve cooperation between Unipetrol and Mero and Cepro. There are commercial options, for example we have to consider also that Mero would buy the Kralupy refinery, as an asset, not as a company," he told the newswire.

"As the refining marketplace in Europe is showing low profitability, there is a compelling pressure also to decrease Ceska Rafinerska capacity," Erste wrote in mid-April. "We expect several solutions: either PKN Orlen (via Unipetrol) buys out Cepro and Mero or PKN Orlen divests its refineries to the Czech state and agrees on the long-term supply to the petrochemical lines and retail. We like any of these changes as the current setup is not ideal and Ceska Rafinerska burns cash for the group in its current state."

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