Lotos delay good for PKN Orlen

  • 2010-12-23
  • From wire reports

ON THE BLOCK: PKN Orlen says its Mazeikai investment was a mistake.

VILNIUS - Poland’s recent decision to postpone the sale of Grupa Lotos, its second-largest oil refiner, may help larger rival PKN Orlen find buyers for its Lithuanian refinery if it decides to sell., reports Bloomberg. “From our perspective, a delay in the sale of Lotos is good news as it’s better to have one asset in the Baltic Sea basin on sale rather than two,” Chief Executive Officer Jacek Krawiec told reporters in Warsaw on Dec. 10.

Poland’s Treasury Ministry in October called for bids for Lotos, which processes 10.5 million tons of oil a year, and gave potential buyers until Feb. 4 to place initial offers. Prime Minister Donald Tusk said Dec. 7 that the government won’t complete the transaction before 2012. Orlen will decide by the end of February whether to sell Lithuanian unit Orlen Lietuva, Krawiec said. In August PKN hired Nomura Holdings, Inc. to advise on the future of the Mazeikai-based refinery, which processes 10 million tons of oil annually, and said options include selling part or all of the plant. “It was a bad, misguided investment, not needed by Poland,” Krawiec said of the purchase, which happened before he ran Orlen. “If the price is right, we will sell it.”

The Polish company paid $2.7 billion for 100 percent of the Lithuanian refinery, spent another $750 million on capital expenditures from 2006 through 2008 and has been struggling to generate profits from the unit. A Russian pipeline that supplied crude to the refinery has been idled since mid-2006, due to political reasons many believe, forcing Orlen to rely on costlier seaborne imports. Profitability has been hurt by lack of pipeline access to a sea terminal and by higher shipping costs after Lithuania shut down a railway line, making the transportation route longer.

For the past two years Orlen has been reducing debt and seeking asset disposals to generate cash for investments in electricity generation and oil and gas extraction. The company still plans to sell part of its mandatory oil reserves by the end of the year, which could help it pay down debt by an amount similar to the $280 million that the first such transaction in March saved, Chief Financial Officer Slawomir Jedrzejczyk said. “We need funds for exploration and production assets, which can generate a return on investment that is much more attractive than refining,” Krawiec said.

On Dec. 7, Orlen said it signed a deal with the Ukrainian government to work with local partners on oil and gas exploration and extraction. It also opened a procedure to build a 500 megawatt gas-fired power plant in 2014 and plans to complete a similar facility two years later.