IHS Global Insight Perspective | |
Significance | Russian oil companies have frequently faced strong political opposition in their attempts to acquire refineries in Europe, but companies such as LUKoil and Rosneft have now managed to overcome xenophobic fears to expand into Europe's refining sector. |
Implications | With the Polish government initiating the sale of its controlling stake in Grupa Lotos and Poland's PKN Orlen looking to sell its Lithuanian refinery, Russian oil companies are well positioned to acquire these assets. |
Outlook | Russian oil firms again face political obstacles—largely based on historical fears of Russia's motivations—in seeking to acquire refinery assets in Poland and Lithuania, making it all the more important that potential Russian suitors emphasise their business acumen (and oil supply capabilities) rather than their national affiliation. |
Refinery Stakes Up for Grabs
Even before the Polish government finally made its planned sale of its 53.19% stake in Grupa Lotos official last Saturday (30 October), Russian deputy prime minister Igor Sechin went on record to say that Rosneft—the Russian state oil firm of which Sechin is also chairman—was interested. Sechin, who was in Poland last week to finalise a long-delayed deal to increase Russian gas supplies to Poland, said that Rosneft was interested in participating in the privatisation of the Polish government's controlling stake in Grupa Lotos, the country's second-largest refiner. Subsequently, both Russian-British TNK-BP and Gazprom Neft, the oil division of Russian gas Gazprom, have come out to express their interest in the Grupa Lotos stake sale.
At the same time that Poland is looking to offload its Grupa Lotos stake in an effort to generate much-needed revenues, PKN Orlen, Poland's top refiner, is moving towards divesting its controlling stake in neighbouring Lithuania's only refinery. Since buying Mazeikiu Nafta in two tranches in 2006 from now-defunct Yukos and the Lithuania government, PKN Orlen has dealt with a series of operational problems with its Lithuanian unit, since renamed Orlen Lietuva. A halt in direct pipeline shipments of Russian crude oil has forced the Mazeikiai refinery to rely on more expensive, seaborne deliveries of crude oil feedstock, while a row with the Lithuanian government over the Polish company's efforts to acquire the Klaipeda terminal in order to improve its operational efficiencies has given PKN Orlen a further reason to consider a divestiture (see "Related Articles" below). Worsening bilateral relations between the Polish and Lithuanian governments have added to speculation of an imminent sale.
Overcoming Political Barriers
Russian oil companies have typically faced strong political opposition in Europe in their efforts to acquire refineries. Until LUKoil finally broke through with its acquisition of a stake in the ISAB refinery on Italy's island of Sicily two years ago, the Russian company had been repeatedly turned aside in its efforts to secure refining capacity in Europe. LUKoil was successful in buying refinery and retail fuel assets in the Balkans, but the company was denied several times as it sought to buy stakes in refineries, both in Western and Central Europe. Memories of Soviet political domination in Central Europe, in particular, fed fears of a new era of submission to Russia if strategic assets such as refineries were to fall under control of Russian companies.
However, Russian companies over the past two years have begun to overcome this xenophobia, as both LUKoil and Rosneft have now successfully acquired stakes in refineries in Western Europe. The Russian companies have managed to overcome irrational political concerns partly by partnering with other firms as owners—easing worries of allowing a refinery to fall under complete Russian control—but also by emphasising their business acumen, namely in their ability to ensure a steady and stable supply of crude oil as feedstock for processing. Of course, lower refining margins since the collapse of global oil prices in 2008-2009 have helped the Russian companies as well, particularly as Western oil companies have increasingly sought to reduce their financial exposure in the refining segment, meaning they are more willing to part with their refining assets than before the economic downturn.
Outlook and Implications
Taken together, the Polish inclination to sell and the Russian determination to buy would seem to make an obvious match, putting Rosneft and its Russian brethren in good position to acquire the Grupa Lotos stake and/or Lietuva Orlen. PKN Orlen has not stipulated a timetable for selling its Lithuanian unit, nor is the Lithuanian government apparently ready to allow the Polish company to sell, but—unless the dynamics of the relationship change for the better in a hurry—in all likelihood the two protagonists in this ongoing drama will part ways in the not too distant future. With Grupa Lotos, the timetable for a privatisation is more certain: Poland's Treasury Ministry has set a 4 February 2011 deadline for potential bidders to submit their initial offers, with an 18 February 2011 target date for a chosen buyer to begin talks on a final deal.
Despite their recent successes in Western Europe, however, Russian companies will face an uphill battle in convincing the Polish and Lithuanian governments to allow refineries in their countries to pass into Russian ownership. The tortured political history of Russian-Polish and Russian-Lithuanian relations guarantees a certain level of domestic political opposition to any deal, improvements in recent years notwithstanding. Just as Surgutneftegaz's acquisition of a minority stake in MOL has stoked the flames of fear in Hungary regarding the motivations—real or perceived—behind the Russian oil company's actions, so any attempt by a Russian company to purchase refining assets in Poland and Lithuania will provoke a political backlash.
The fact that Lietuva Orlen's main problems relate to the government's unwillingness to sell Mazeikiu Nafta to a Russian company—not to mention that the Lithuanian refinery achieved its best success and most profitable period when it was majority-owned by Russia's Yukos—seems utterly lost on the Lithuania government. Whether the Polish government will realise it has more to gain (in terms of steady oil supplies and stable deliveries of Russian crude feedstock for Grupa Lotos's refineries) than it has to lose in accepting the idea of a Russian company being in control of its second-largest refiner remains to be seen. If the Russian oil companies are to continue their recent run of success in acquiring refinery stakes in Europe, they will have to emphasise their business prowess and downplay their national affiliation—and hope that governments in Lithuania and Poland are willing to listen.
Related Articles
Russia - Venezuela - Germany: 18 October 2010: Rosneft, PDVSA Strike Deal on German Refiner As Russia and Venezuela Strengthen Energy Ties
Lithuania: 26 August 2010: Lithuania Dismisses Key Refinery Sale Speculation
Lithuania: 6 May 2010: PKN Orlen Files Suit Against Yukos over Lithuanian Refinery
Lithuania: 23 February 2010: PKN Orlen to Consider Strategic Partnerships for Lithuania's Maizeikiu Nafta
Russia - Lithuania - Poland: 9 February 2010: Future of Lithuanian Refiner Uncertain as Polish Government Backs PKN Orlen's Exit
Poland: 8 February 2010: Three Companies Express Interest in Buying Stakes in Poland's Lotos
Poland: 25 January 2010: Government Sells 10.8% Stake in Poland's Grupa Lotos
Netherlands - United States - Russia: 22 June 2009: Total Sidelines Valero in Deal with LUKoil for Dutch Refinery Stake
Italy - Russia: 24 June 2008: LUKoil Announces Formation of Italian Refining JV with ERG Following Stake Purchase
Lithuania: 29 May 2006: PKN Signs Agreement to Acquire Majority Stake in Lithuania's Mazeikiu Nafta