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Orlen's money is on Upstream

08-02-2012  News

Priorities: Several-fold Increase in Spending, Focus on Poland
 
With a revenue of PLN 100 billion – the best performance in the fuel and energy industry in Central/Eastern Europe – 2011 is almost certain to come down the history of PKN Orlen as a record year. Even so, in terms of market capitalisation Orlen is still lagging behind its chief rivals in the region. It is valued at PLN 17 billion, to MOL’s (Hungary) PLN 30 billion and OMV’s  (Austria) PLN 37 billion. The blame for this situation must be put predominately on the lack of access to own sources of oil and gas – but this is going to change, and soon. PKN Orlen President Jacek Krawiec has announced a new opening in prospecting for hydrocarbons, notably shale gas.
 
This is going to be the group’s priority for the next five years. To make this plan viable, there is going to be a dramatic increase in investment outlays which, under the strategy still in effect, are modest (by this particular industry’s standards) at PLN 700 million. “Our money is on oil and gas exploration, in particular from unconventional deposits within the territory of Poland. In several next years outlays on prospecting for and extraction of hydrocarbons are going to increase several fold, relative to the target set under the present strategy”, declares Jacek Krawiec. Spending on upstream is to account for a sizable share of annual investment spending totals.
 
With an update of the strategy to be yet approved, the PKN Orlen President refuses to disclose final figures. “Please, bear with me for a little longer”, he says. Analysts believe this spending could be in excess of PLN 2 billion. To date the group has investigated opportunities for buying extraction assets abroad, including in North African countries. Late in 2011 Orlen even made a bid for a company extracting oil in Egypt, but these talks fell through both because of the other party’s excessive financial expectations and due to growing concern about political destabilisation in the region.
 
The Płock-based concern had also high hopes of a swap of exploration and extraction assets with Encana, the largest gas company in Canada, but these talks were discontinued too. “There are too many unknowns. We do not know the potential of the deposits in our concession areas, or a future legal and tax framework for the extraction of non-conventional gas. Such being the case, it would be premature to enter into long-term arrangements with foreign firms. I believe that at this stage the most rational thing to do is for Polish companies to join forces for these highly capital-intensive ventures”, argues Jacek Krawiec. Orlen holds eight exploration concessions in Poland and it has been operating on the shale market independently.
 
However, it is open to alliances with domestic partners, particularly now that more and more firms consider consolidating their efforts. Several days ago four Polish companies, PGNiG, KGHM, Tauron and PGE, signed a letter of intent on joint exploration for gas-bearing shale. Orlen’s plans for this year cover intensive work on the appraisal of domestic shale gas reserves. The group has just completed its second exploration well at Berejowo in the Lublin region. “All in all, we collected some 600 meters of rock core samples from the two wells. By mid-year we shall have test results on the basis of we will be able to tentatively evaluate the reserves and to plan horizontal drilling and fracking. This year we’ll be drilling vertically on three concession blocks and, probably, there will be horizontal drilling on two concession blocks”, enumerates the Orlen President.
 
Not limited to increasing spending on exploration and extraction, the revolutionary changes include according priority to the energy sector in years immediately ahead. PKN Orlen proceeds with preparatory work for the construction of a gas-and-steam block in Włocławek. This is to be the group’s first step into electricity generation. The block is to have a designed capacity of 500 MW and it will use about 500 million cu.m. of gas annually. With 1 MW costing EUR 700-750 thousand, the project is (excluding additional costs, such as connections) is budgeted at about EUR 400 million. The contractors are to be known by mid-year. Six offers have been received, each comprising over a dozen binders of documentation. These are now being analysed. “At this stage we do not think of involving other partners in this project. We intend to carry it out on our own”, says Jacek Krawiec. The block is to be put on stream at the turn of 2014, and the company is already looking for sites on which to build next ones.
 
The spectacular 2011 sale of holdings in Polkomtel was to be followed by another transaction, one contemplated for years – the disposal of the Mazeikiai oil refinery in Lithuania. This huge investment of the group has been considered by many analysts as a failure (with little promise of paying back). Nomura, the investment bank, has been working for several months on recommendations on the refinery’s future. The recommendations are to be put before the management board and the supervisory board in several weeks’ time. It can be expected that the bank will recommend putting the sale on hold, for a number of reasons. The chief one, points out the Orlen CEO, is that there is a glut of refining capacity in Europe, which would seriously affect the transaction price. “The Lithuanian assets were acquired for USD 3 billion.
 
Independent analysts estimate today that we could get only about USD 1 billion for the Mazeikiai facility”, says the Orlen President. There are other reasons, too. Mazeikiai’s profit performance, while still oscillating around zero, has improved and the company has generated positive cash flows. Recently Orlen Lietuva signed with the sea terminal Klaipedos Nafta a contract with more advantageous fuel handling rates. “Following somewhat improved relations with the Lithuanian government, Lithuanian and Polish diplomats and the Ministries of the Economy have supported the company’s efforts to stave off the introduction of protective duty on fuel products in Ukraine”, says Jacek Krawiec.
 
Regrettably, the matter of Lithuanian excessive railway rates is yet to be resolved. There is still much to be done about this business, admits the Orlen President. On the home turf, Orlen has not yet decided what is to be done about Anwil, the chemical company: to sell it, or not to sell – or sell it in parcels? “We are under no pressure over this business; we can take a decision at any time, but the decision must be good for Orlen and for Anwil’s further development. Our financial and liquidity situation is very comfortable – and not owing to the steep fuel prices (for, contrary to what may seem, we do not make high profit out of it) but due to cost optimization, deleveraging, and the successfully completed sale of Polkomtel shares which brought us over PLN 3.2 billion of extra cash”, says Jacek Krawiec.
 
Source: Puls Biznesu, 8 February 2012, p.1, by Paweł Janas.

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