By Jakub Wiech
This article is published in cooperation with the Jagiellonian Club think tank.
Polish state-owned oil company Orlen plans to continue its acquisition of other Polish energy companies to create a multi-energy colossus operating in diverse sectors and numerous markets. What are the chances of success for these ambitious aspirations? And what threats might result from the company’s completed and planned mergers?
“There is space for one multi-energy concern of global reach in Poland,” wrote Orlen CEO Daniel Obajtek on Twitter, proclaiming the imperial expansion plans of the energy giant, which will have assets in the oil, gas and electrical energy sectors. After buying Energa and receiving the European Commission’s permission to acquire the Lotos Group, the Płock-based company has also expressed its desire to take over oil and gas firm PGNiG.
These rather abruptly announced plans have provoked a series of comments and questions. The most important ones concern the issue of whether the planned acquisitions are possible under EU competition rules and whether they will be genuinely beneficial for Orlen and for the Polish state. These are closely related questions, as the second one results from the first: the final assessment of these processes will depend on the European Commission’s response and the true costs of Brussels’ approval.
An energy behemoth
The Orlen management’s declarations, the company’s previous actions, and government announcements (especially from the Ministry of State Assets) suggest that it plans to establish Poland’s first multi-energy concern, combining huge assets in such diverse sectors as oil and gas extraction, refineries, fuel retail, electrical energy, and renewable energy. The shell of the entity has already been formed: Orlen has purchased Energa, one of Poland’s largest energy groups (within four months, it obtained European Commission approval for acquisition of 80% of the company’s shares), and it has now received the green light to take over Lotos.
The merger of two Polish oil giants was announced some time ago by the political camp of the ruling United Right coalition (led by Law and Justice – PiS). The first formal steps in this direction were taken in 2018, when Orlen submitted a preliminary version of the application for approval of the concentration to the European Commission. On 14 July, the EC conditionally approved the merger, taking into account Orlen’s commitment to maintain market competition afterwards. Orlen is required to dispose of 30% of shares in Lotos refineries (with a package of governance rights, including for petrol production), sell off around 80% of Lotos petrol stations (exactly 389 retail stations in Poland), release the majority of the capacity reserved by Lotos in independent storage depots (including capacity in an oil terminal), and restrict its influence on the aviation fuel and asphalt markets (which will involve leaving a joint venture trading in aviation fuel and selling off specific Lotos Asfalt production reserves).
What can we say about Orlen’s acquisitions to date? The general direction makes sense – for some time the company has been investing in the electrical energy sector (including in combined gas and steam blocks) and planning to enter the renewable energy market (through offshore wind farms). Adding Energa’s power to its assets therefore strongly emphasises the second area of Orlen’s activity, with the approval of the European Commission. (Daniel Obajtek, incidentally, was formerly the CEO of Energa.) Acquiring Lotos, meanwhile, marks an end to the internal cannibalism between the two state-controlled companies, which did not help the Polish market to develop and expand abroad.
Question marks remain, however, regarding the costs of the merger of the oil companies. For now, there is no answer, as we do not know who will purchase the Lotos assets that are to be sold. They could well fall into the hands of foreign companies (some critics of the takeover are suggesting that Russian investors could acquire them). Yet any transaction concerning these assets must first be approved by the European Commission.
A final appraisal of this process can only take place, therefore, when the buyer is announced and the EC ratifies the transaction. It will then be possible to say how the transfer of sold assets will affect competition on the Polish market and whether the State Treasury will really lose control (in theory, it could be another state-owned company that buys the assets).
Most important here are the rights to Lotos’s refining power, which is the jewel in the group’s crown thanks to the EFRA (Effective Refining) project, which permits advanced petroleum processing and production of high-margin fuels and petroleum coke. The value of this enterprise is 2.3 billion zloty.
It is the management rights to refineries that represent the tastiest morsel that Orlen must put on sale – these are much more important than the value of the filling stations that will gain new owners (retail is a less important part of the income of companies such as Orlen or Lotos, although it is a visible presence in the public space).
Creating a new, large entity in the conditions of EU competition law entails the need to dispose of some assets in order to prevent market monopolisation. These are the real costs of the acquisition, in Orlen and Lotos’s case reducing the control of the State Treasury over the domestic refinery and petrochemical potential. The arguments of critics of this takeover are mainly about the weakening of the merged companies on the retail market (as a result of selling petrol stations), reduced control of logistics (as a result of releasing the access and storage infrastructure), and the worsened position on the aviation fuel and asphalt markets.
Regarding the first argument, Orlen in any case still holds a strong position on the Polish market. In 2018, it had 300 more filling stations than all the foreign companies operating in Poland together. The distance between Orlen and its nearest rival, BP, is too great for the sale of Lotos stations to be a gamechanger for the competition. Of course, in terms of absolute numbers, there will be fewer stations under state control – but this reduction will not be big enough to make a major difference to influence on the market situation.
Objections to loss of control over logistical processes are much more legitimate, although methods of compensating for these losses with the acquired assets are available. This should at least partially soften the potential for putting competitive pressure on the strengthened Orlen, which (from the company’s perspective), means retaining the profits from suitably high margins. It is a similar story with the position on the aviation fuel and asphalt market. The best solution for Orlen will be to apportion the assets earmarked for resale as widely as possible (so that they go to various entities, making it harder to integrate them), while exercising caution regarding the role of this potential for the economic security of the state and its companies.
Similar questions and doubts arise regarding appraisal of the Orlen and PGNiG merger. In this case, proceedings are at a very early stage, and it is therefore hard to predict their result. However, the resistance of the European Commission and the opportunity to impose conditions concerning shedding some of the PGNiG assets must be taken into account. This is important in the context of plans the Polish gas giant is currently implementing regarding diversification of gas supplies to Poland, gasification of the country and working on merging the natural gas market in Central Europe.
Why does Orlen intend to merge with PGNiG? There are two main reasons. Firstly, such a versatile conglomerate will be an excellent tool for implementing the energy transformation foreseen in the government’s white paper Poland’s Energy Policy until 2040. This still unofficial project anticipates simultaneous investments in solar power (within 20 years the installed capacity using this technology is to rise to 16 GW), wind farms (Orlen is already working on such projects), and nuclear energy (building six to nine reactors requires an entity capable of dealing with the financial and operational questions).
By gathering assets from various sectors within one company, the government is producing a vehicle to implement an energy strategy for the country which, by diversifying the portfolio, will be more capable of coping with the need for investment in specific areas.
The second reason is aggregating the potential for competing not only at the highest European level, but even globally. In Europe, there are already voices (from France, for example) suggesting that the key challenge facing the continent is to establish powerful companies, so-called champions, which will be able to compete with entities in the United States or China. This will enable the European Union to cope with the burden of competing with economies whose less rigorous approaches to climate issues and environmental protection give them greater operational freedom in the extraction and electrical energy sectors.
Clash of the titans
Orlen’s target model is nothing new in Europe, where other mega-corporations with similar profiles already operate.
A good example is the Austrian company OMV, whose portfolio includes assets in the oil and gas extraction sector (in Central Europe, the North Sea, Africa and Russia), refineries (in Austria, Germany and Romania), and a filling station network (around 2,000 units in ten countries), as well as gas-fired power plants (in Romania and Turkey), gas storage facilities (in Germany and Austria), and a network of Austrian gas pipelines. The company is also involved in major infrastructural projects – it is one of Gazprom’s European Nord Stream 2 partners.
Another European multi-energy giant is the Italian company Eni, which is de facto government-controlled, making it structurally similar to the super-corporation Orlen is to become. Eni’s portfolio is even broader than OMV’s. Its most important resources are in the oil and gas sector – among the exploration fields where the company operates are sites in Africa, Venezuela, the Barents Sea, Kazakhstan, Iraq and the Far East. Thanks to opportunities in the petroleum sector, it is the leader in petrochemical products sales in Italy and one of the key players in Central Europe (it owns petrol stations and other assets in Austria, France, Germany, the Czech Republic, Romania, Slovakia, Slovenia, Switzerland and Hungary).
Eni operates a number of gas-fired power plants with a combined capacity of around 4.5 GW (almost as much as the coal power station in Bełchatów). The Italian company also has renewables in its portfolio, including a solar power station in Nettuno with installed capacity of 30 MW (in comparison, the largest such Polish unit has capacity of around 4 MW). Eni also owns shares in the Saipem construction company, responsible for laying the Nord Stream gas pipeline and constructing the Polish LNG terminal in Świnoujście, and in 2020 selected to install the marine section of the Baltic Pipe. A major strength of Eni is its subsidiaries operating in the chemical sector (Versalis), electricity and steam power technologies (EniPower) and engineering services (EniProgetti).
From the Polish perspective, these might seem like daunting examples. Yet neither of them is one of the “Big Five”, or “Big Oil”, comprising ExxonMobil, Shell, BP, Chevron and ConocoPhillips (although Eni is not far from this top flight).
From this point of view, however, we can conclude that the business model Orlen aspires to is employed in European conditions, and has been successful. Of course, OMV and Eni have developed in different conditions and processes (not subject to European Commission controls), but their composition model and business strategy are similar to Orlen’s.
Evaluating Orlen’s plans at present is somewhat difficult. The total cost is as yet unknown, and it is impossible to assess the precise impact this process will have on the Polish market as well as what the ultimate added value for the company is likely to be.
Proclamations of the birth of a Polish champion may be music to the ears of every Pole – it is hard to resist fantasies of Orlen developing a global network of influences putting it in the same league as energy giants from around the world. Yet such dreams should be tempered by a reminder of the potential problems of building such a colossus.
Firstly, the final balance of the takeovers will depend on the European Commission, its approval for sales of assets and new buyers and their plans for the acquisitions. Secondly, Orlen, predominantly an oil company, will operate in less favourable macroeconomic conditions largely dependent on the EU climate policy, which is very restrictive regarding fossil fuels and industries based on them. Thirdly, asset accumulation alone does not guarantee success – innovation, research and development spending and modern promotional methods are also all crucial.
Without these elements, Orlen will struggle to compete in foreign markets, which are in any case very demanding and more economically chauvinistic. It will be a suitable marketing and development strategy that will decide whether the Polish company has the potential to become a truly global giant.
The original Polish version of this article can be found here. Translated by Ben Koschalka
Main image credit: Flickr/Krystian Maj/KPRM