'Deal of the century' finalized 's PKN Orlen buys Mazeikiu Nafta for $2.3 billion

  • 2006-12-20
  • By Gary Peach

SHHH...KREMLIN'S LISTENING: Orlen's Chalupec (left) and PM Kaczynski praised the deal as the largest Polish investment ever.

RIGA - Champagne corks and victorious smiles filled Vilnius on Dec. 15, as Lithuanians celebrated the successful sale of Mazeikiu Nafta to Poland's PKN Orlen for a total $2.3 billion. In back-to-back deals over two days, PKN Orlen bought a 53.7 percent stake in the refinery from Russia's Yukos for $1.49 billion on Dec. 14, and then a 30.66 percent interest from the Lithuanian government for $852 million, giving the Polish company an 84.4 percent ownership.

The final price puts the market capitalization of Mazeikiu Nafta, the largest corporation in the Baltics, at $2.7 billion, or approximately 10 percent of Lithuania's gross domestic product.
Most importantly, the sale grants Lithuania a windfall in cash - $852 million 's that it can use to compensate ruble-deposit holders who saw their savings evaporate in 1991 and invest in future development.

Lithuanian leaders praised the deal in unison, with Prime Minister Gediminas Kirkilas labeling it "the deal of the century."
"Despite being surrounded by numerous skeptics and conspiracy theorists, we have managed to prove that the minority government may successfully pass decisions of utmost importance to Lithuania," Kirkilas said in a statement.
The sale caps off a turbulent year surrounding the refinery, which included litigation in three countries (and two continents) and a conflagration in October that did some 36 million euros of damage to the plant's diesel facility. In addition, Russia ceased supplying oil to Mazeikiai, the town where the refinery is based, in July, citing a pipeline accident in Belarus.

An executive from Transneft, Russia's oil transportation monopoly, was subsequently quoted as saying it wasn't worth repairing the 42-year-old pipe.
Thus in a span of five months of agreeing to purchase the refinery, PKN Orlen saw the plant's supply line run dry and a large swathe consumed by fire.

Yet the investor didn't give up. Refinery managers figured out a way to expedite repairs and import crude via the Butinge terminal on the Baltic Sea. Mazeikiu Nafta is now refining tanker-supplied oil.
"This transaction will see the creation of the largest East European fuel concern, which has the potential to expand further," said Igor Chalupec, CEO of PKN Orlen.

Speaking to Polish radio on Dec. 19, Chalupec said the company intended to invest some $700 's $900 million in the refinery and that the refinery would return to full production in the next six to nine months.
Integrating it into the Orlen group will take two to three years, the CEO added.
Chalupec did not seem concerned about getting oil. "There are scores of oil suppliers," he said, adding that diversification of supplies is one of PKN Orlen's goals.

In Vilnius, Chalupec even took a jab at Russian competitors. "We have escaped a deadly threat of a competing concern setting up in Mazeikiai and have created a model of energy security for other Polish companies," he said during the Dec. 15 ceremony, echoing growing concerns over Eastern Europe's dependence on Russian hydrocarbons.

Lukoil in particular had hoped to take over the refinery, as the company pursues an ambitious downstream expansion campaign (see story on Page 6) that puts it head-to-head against PKN Orlen in Eastern Europe.
In the months before the signing in May, Kremlin officials made it clear to Lithuanian ministers that they wanted a Russian company to take over the refinery. After the agreement was inked, unofficial statements confirmed the Kremlin's covetous stance on Mazeikiu Nafta.

A year ago PKN Orlen was widely regarded as the underdog. The Orlen group possesses no crude oil production capacities, and therefore, in the eyes of many Lithuanian leaders, particularly the then Prime Minister Algirdas Brazauskas, was not the ideal investor.

Brazauskas went on to choose TNK-BP, a Russian-British joint venture, as the government's favored investor. Within weeks, however, Yukos made it clear it had no intention to sell to the Kremlin-friendly corporation.
Understandably, Brazauskas didn't want to go down the same road twice. Faced with a choice of a Russian producer or a Western oil major, in 1999 Lithuania chose the latter. But eventually Williams International proved unable to cope with the severity of the refinery's problems, and the U.S.-based company backed out of the deal, selling its stake to Yukos.

Only time will tell, but history may judge that Yukos did Lithuania an enormous favor by choosing PKN Orlen over a Russian producer. The two sides started from opposite ends 's Yukos was after the best price, and Lithuania a reliable investor 's but in the end they both appeared to get what they wanted.
"This is a great Chrismas gift 's both to the people of Poland and Lithuania," said President Valdas Adamkus. "It proves once again that we are able to work together for the common future."

To be sure, the refinery deal gave an added impulse to bilateral relations, which in recent days have been heady thanks to agreements to build a new nuclear power plant and connect the two countries' energy grids.
"Today we lay the foundations of special relations between two nations. It proves that in 15 years we were able to create something that makes us stronger in the European Union and strengthens Europe itself," Polish Prime Minister Jaroslaw Kaczynski said.

PKN Orlen called the deal the single largest Polish investment abroad.
Mazeikiu Nafta refined 9.2 tons of oil and feedstock in 2005, up 6.8 percent year-on-year. Revenues amounted to 11.1 billion litas ($4 billion), up 45 percent compared with 2004, while earnings amounted to 885 million litas.

The government retains a 10 percent stake in the refinery, which PKN Orlen has an option to buy after five years. The remaining shares are traded freely on the open market.