State, PKN Orlen sign $850 million agreement

  • 2006-06-14
  • Staff and wire reports
VILNIUS - A long-held albeit elusive dream for Lithuania came true last week when the government signed an agreement with PKN Orlen for the purchase of a 30.66 percent stake in the Mazeikiu Nafta refinery for $850 million. The Lithuanian state will also have an option to sell its remaining 10 percent stake to the Polish oil group within a five-year period.

The sale follows PKN Orlen's deal with Russia's Yukos to buy a 53.7 percent stake in Mazeikiu Nafta for $1.49 billion. Thus once the transaction is finalized, PKN Orlen will own an 84.4 percent stake in the oil refining and transportation complex, the only one of its kind in the Baltics.

PKN Orlen will pay a total of $2.34 billion for a combined 84.4 percent stake in Mazeikiu Nafta.
The two sides formally exchanged signed agreements on June 13, when the Polish company's chairman, Igor Chalupec, and other top executives were in Vilnius.
The deal could be finalized in September or as late as next March, depending on EU authorities' approval.
PKN Orlen vice-chairman Cezary Smorszczewski told a news conference that the company had started preparing an application to the European Commission for permission to buy up to 100 percent of the shares in Mazeikiu Nafta.

"We expect that the procedure will get underway at the European Commission at the end of July. The whole transaction should be finalized by the end of the first quarter of 2007, but we would like it to be completed by the end of this year," he said.
Meanwhile, PKN Orlen expected that the Polish government would welcome the Mazeikiu Nafta deal and support it, though an advisor at the Polish Economy Ministry said last week that Deputy Economy Minister Piotr Naimski was rather skeptical of this transaction. In his opinion, PKN Orlen may have problems in ensuring crude supplies to Mazeikiu Nafta.
For Lithuania, the issue of stable crude supplies was paramount, and one of the reasons why the former government of Algirdas Brazauskas was reluctant to consider PKN Orlen's candidacy as a strategic investor.

The Polish company has reportedly received supply offers from Russian companies, including Mazeikiu Nafta's current suppliers, but it would not disclose their names. Analysts have said that Russian suppliers would hardly want to be at loggerheads with PKN Orlen, which after the acquisition of Mazeikiu Nafta will be Central Europe's largest crude refiner and importer with an annual refining capacity of 32 million tons.

Speaking in Vilnius on June 13, Chalupec said that the group was taking the issue of crude supplies to Mazeikiu Nafta very seriously. "We have analyzed eight different scenarios for oil supplies to Mazeikiu Nafta, both from the east, via the pipeline, and from different directions, through the Butinge terminal. We have also analyzed possibilities for the Mazeikiu crude refinery to process various grades of crude oil, with both high and low sulphur content, as well as the possible impact of oil supplies from different directions on the refining margin," he explained.
"Today we are sure that crude will continue to flow in through the old route, that is, from Russia via the pipeline to Mazeikiai."
Chalupec reiterated that he could not put forward any oil supply contracts until PKN Orlen became the owner of the refinery.
Company executives said they wanted to apply for EU approval as soon as possible. The Polish group is confident that it will get the go-ahead for the acquisition, but it will take several months to complete the procedure.

Lithuania's negotiators were confident the Poles would invest in the Mazeikiu refinery, which is Lithuania's largest corporation.
Following the signing of agreements, Kestutis Dauksys, acting economy minister, expressed doubt whether the Poles, who had envisaged a large-scale investment program, would pay themselves dividends after taking over the oil complex.
Nerijus Eidukevicius, deputy economy minister and newly reelected chairman of Mazeikiu Nafta, said Lithuanian legislation and agreements with PKN Orlen contained certain safeguards against this.

Currently investments in Mazeikiu Nafta were scheduled at some 700 million litas (203 million euros), which were required to revamp the company and make its products compliant with European Union requirements by 2008. "The projects on development of polypropylene manufacturing and some issues related to heavy fuel oil should be considered prior to the closure of the deal. These projects are truly significant since they will impact both the future of Mazeikiu Nafta, and its expansion as the company will become less vulnerable to market shocks," Eidukevicius said at a news conference.
As worked out, the investment program is fully compliant with the financial capacities of Mazeikiu Nafta. It was specifically adjusted to possibilities of surviving on the market in the event of both low and high refining margins, he added.

Commenting PKN Orlen's sources of financing for the acquisition, Chalupec said that the company had some $300 million of its own resources and another $800 million available under existing credit lines. It is also in talks with banks on a $1.7-billion bond offering.
"The bulk of funds for the transaction will come from the bond placement. The lead-managers are well-known, global banks, but we cannot name them as yet," Chalupec said.

He added that PKN Orlen managed to provide a U.S. court in New York with written guarantees from two banks, confirming that it was in a position to finance the transaction, within 24 hours after Eduard Rebgun, the Moscow-court appointed supervisory manager of Russia's stricken oil giant Yukos, voiced his doubts as to the Polish company's financial reliability on May 24.
PKN Orlen signed a deal with Yukos International UK to buy its 53.7 percent stake in Mazeikiu Nafta on May 26, a day after the New York court lifted a ban on Yukos selling.