Prague closing in on stake in Czech refiner

By bne IntelliNews April 10, 2013

bne -

The Czech government is in talks to acquire a minority stake in the country's largest refiner from Royal Dutch Shell, a step in Prague's long-term plan to build a state energy holding.

According to Dow Jones, Czech Industry Minister Martin Kuba told local media on April 9 that Shell is in talks with shareholders and Prague over the potential sale of its 16% stake in Ceska Rafinerska. "We received an offer from Shell and it's led to negotiations," Kuba told Ceska Pozice.

Kuba added that Shell offered its stake to the two other shareholders in Ceska Rafinerska - Unipetrol and Eni - which have pre-emptive rights on the stake. Italy's Eni holds a 32.4% stake, having doubled its holding in 2007, while Unipetrol - owned by Polish state-controlled refiner PKN Orlen - retains a 51% controlling stake. Officials from Unipetrol and PKN refused to comment, but in the past they have repeatedly said they would like to increase their stake in the refiner.

An acquisition of Shell's stake by the Czech state would be logical only "if it fell into the structure of a future [state-run] petro holding company, on which we are now finishing conceptual work," Kuba said.

That fits with his claim in January - following rising speculation - that Prague was preparing a plan to take over Ceska Rafinerska as part of a push to increase the country's energy security. The plan is to combine the refiner with state-held crude and oil products pipeline operators Mero and Cepro.

"If we want to bring the segment together, we have to go back and seek a stake in Ceska Rafinerska," Kuba said on January 22. When asked whether there was willingness on the part of some shareholders to sell, he said: "Let's say we have indications."

However, Unipetrol remained adamant at the time that it has no intention of relinquishing control of the refiner. PKN, which bought Unipetrol in 2004, was also forced to refute speculation over a potential sale to the state in November. That came following a mini-crisis for the Czechs when the country suffered a short cut-off from crude supplies. That forced Ceska Rafinerska to temporarily shut down one of the country's two refineries.

That scare, driven by dropping volumes of crude from Russia as it adopts new export routes, saw Prague spring into action. The next month, Mero completed the purchase of a 5% stake in the TAL pipeline - the only alternative oil import route to the rapidly drying Druzhba from the east - in order to ensure capacity. The stake was acquired from Shell.

"It is a strategic interest of the Czech Republic to return to... playing an important role in the Central European region and having decisive participation on what is happening in the Czech petrochemical industry," Kuba said. Prague was critical of Unipetrol management for allowing the cut off to develop. "It was shown clearly that PKN does not have all issues contractually covered," Kuba noted.

The price is right

While PKN continues to insist it's not interested in selling its Czech assets, it appears to have several decent motivations to do so should the price be right. The Polish giant has been struggling under a hefty debt load in recent years, and on top of Ceska Rafinerska - which Unipetrol said on January 23 was largely behind the CZK3.1bn operating loss it announced for the last quarter of 2012 - is stuck with a refinery in Lithuania that also impacts its bottom line negatively due to Russian export policy and overcapacity in European refining.

"There is huge overcapacity in [regional] refining. This sector is in huge problems." Unipetrol vice-chairman Piotr Wielowieyski said, according to Dow Jones, as he also revealed that the results included a CZK4.39bn impairment charge, mostly due to a downward revaluation of Ceska Rafinerska. The thriving Czech black market and a recession in the country will keep its earnings under pressure, he added.

At the same time, like several of its state-controlled peers, PKN is being pushed by the Polish government to invest heavily in a drive for greater energy independence, and has been roped into prospecting for shale gas and building new electricity generation capacity. The company said in December that it will invest PLN22.5bn (€5.4bn) on projects in the two segments up to 2017.

On top of that, the Polish treasury is applying pressure for large dividends from state companies to help with fiscal consolidation. That has seen PKN announce it will make its first payout in five years in 2013.

However, PKN is unlikely to be keen to do Prague many favours, given its complaints over the behavior of Mero. Unipetrol is forced to pay "uncompetitive pipeline tariffs" to the crude pipeline operator, Unipetrol CFO Mariusz Kedra said on January 23. "Our expectation is that tariffs will decrease" in the new contract negotiation round, he added. Wielowieyski reiterated at the same meeting that Ceska Rafinerska is a strategic company and that Unipetrol has no intention of selling.

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