Funds From Merged PKN Orlen, Lotos May Be Steered into Polish State Projects

Poland’s government may be set to redirect funds into its own high-priority projects from the new oil and petrochemicals group to be created by combining PKN Orlen and Grupa Lotos, bank Erste Investment said on Wednesday.

The Polish energy ministry is working on a project to build Poland’s first nuclear power plant by 2030 and there is presently a political debate in the country over whether some financing for the investment could be sourced from state-owned companies, including Orlen.

Tamas Pletser, a Budapest-based oil and gas analyst at Erste, expressed some reservations after assessing the announced agreement between the largest Polish refiner and petrochemical producer Orlen and the Polish treasury.

Under the terms of the agreement, Orlen would buy at least 53% of the shares in the country’s second largest refiner and fellow state-controlled company Grupa Lotos.

“My concern is that this whole move is being orchestrated by the government. There is a lot of talk about the involvement of PKN Orlen in Poland’s nuclear project. I think the government is pursuing the merger to have a higher influence over the sector and then use the funds of the merged companies for different government-supported projects, which are not necessarily in line with the interests of the shareholders,” said Pletser to ICIS.

The analyst added that the plan for Orlen to take control of Lotos, unveiled on Tuesday, might prompt Poland’s antitrust office to require the selling of some assets as a condition for the deal.

The assets would most likely be fuel retail stations, he said.

On the plus side, Pletser identified a couple of synergies that could flow from the combination of the companies.

Gdansk-based Lotos, for instance, could provide feedstock for Plock-based Orlen’s petrochemicals production.

The companies, which have only engaged in limited product swaps in the past, could also unlock some logistical benefits and adopt a common upstream strategy, the analyst said.

PKN Orlen announced on 23 February the completion of share purchases which took its stake in sole Czech refiner and petrochemicals producer Unipetrol to 94%, up from 63%,

The company said that with the Lotos transaction it was aiming at “creating a strong, integrated company capable of better competing internationally, resistant to market fluctuations [partly] through utilisation of operating and cost synergies” between the two firms.

The idea of merging Orlen, based in Plock, central Poland, and Lotos, located in Gdansk, northern Poland, has been regularly discussed over the past 15 years by sitting governments.

However, all proposals had so far been rejected, partly from anxiety that it would have effects on market competition detrimental to the Polish consumer.

The idea of merging Orlen and Lotos was refloated in February last year by Henryk Kowalczyk, chair of the standing committee of the council of ministers and the current acting treasury minister.

The latest plan is backed by the national-conservative Law and Justice (PiS) party that has ruled Poland since late 2015.

PiS was elected with a manifesto that said the state’s role in the economy should be strengthened and its ministers make a point of pushing for strong, national industrial champions.