In the end of June 2007, information on the Austrian concern OMV planning to take over the Hungarian oil company MOL appeared. Since a part of MOL’s shares is listed on the stock exchange, by means of capital market the Austrian company increased its stake in the Hungarian rival company by 8 per cent, namely from 10 to more than 18 per cent. This undertaking stirred up defiant reactions among the representatives of MOL as well as the politicians in Budapest. The central argument is the ownership structure of OMV in which the Austrian share amounts to 31 per cent. MOL fiercely commenced buying out its own shares in order to achieve an efficient grip on its own shares. (1), (2)
The oil map of Central Europe including Poland, Czech Republic, Hungary, Slovakia, Austria and partly also Lithuania encompasses several by European standards medium-sized companies. Its value as a transit corridor for Russian oil has been on the wane. The reason is the Russian strategy of export routes diversification, which has been under way for a long time already. It has perceptibly emasculated the position of the Družba oil pipeline in Central Europe. (3)
The pipe inlet in the Russian Primorsk terminal on the Baltic Sea coast is to be finished by the end of 2008. One has to point out that it is the top priority. It is going to be used for the diversion of the exports of raw material currently flooding across Belorussian territory into Poland, Ukraine and Slovakia.² The routes of the future exports of Russian oil bypass the countries of Central Europe despite the fact that these states used to be reliable transit countries as well as consumers. Obviously, Ukraine and Belarus, which the Russian Federation has had problems with since they gained independence after the split of the USSR, are not among them. To speak out in defence of them, some conflicts between the countries mentioned came to head owing to the Russian side that perceives the export of its mineral wealth as a foreign political crutch in terms of the relations with the countries in its vicinity.
The importance of the Družba pipeline is not thus great by European standards, however, in the immediate future, it is going to be a problem for Slovakia and Hungary for which it remains the only source of raw materials for domestic refineries. Refineries alongside the oil pipeline used to achieve higher mark-ups in comparison to those in other countries supplied by oil tankers thank to cheaper raw material. This comparative advantage is going to fade away in the course of time and the price of potential seaborne supplies may afterwards grow by a span of 50 cents up to 4 Euro a barrel.³ Russian oil is cheaper also due to the high content of sulphur that makes it more difficult to process. Such a scenario is probable if the Kremlin wanted to influence the situation in Central Europe by the medium of the state-owned Transneft, a company with the strongest influence on the size and direction of oil supplies. Possible reduction of supplies would affect primarily Slovnaft and the Hungarian refinery in spite of long-term contracts. (4)
Poland as a coastal concentrates to a still larger extent on the transportation of oil to its coast by means of oil tankers. It is at the same time the strongest voice within the EU pursuing the supply of Caspian oil into Central Europe and criticises the heterogeneity of the EU in terms of power engineering. The Krakow Summit in May 2007 was the last illustration of this endeavour. (5)
Czech Republic is linked with the West European oil pipeline network. The refinery in Kralupy is capable of processing the light Caspian oil transported from Trieste and for its import it utilises another route as well despite the fact that a part of the supplies comes from Russia.
Similarly to Austria which in order to cover its needs imports three quarters of oil through the AWP pipeline from Tierste. The oil mixture contains raw material of different origin.
Slovak Republic along with Hungary is almost fully dependent on Russian supplies through the Družba pipeline. Refineries in these countries have already registered the lack of supplies for their own use. On July 14th MOL started to import first tonnes of oil through Adria pipeline from Croatia. Nevertheless, the fact remains that the oil was of Russian origin. (6) According to the weekly Trend Slovnaft registered supply outages also during the first quarter of 2007 and was forced to draw oil from MOL. The refinery is not willing to make an official statement. (7)
As I have already mentioned, there are several medium-sized oil companies acting on this geographical market, which is an untenable situation in the long run and there will surely be at least a partial consolidation i.e. fusions among particular companies.(8) The first influx of acquisitions occurred in the beginning of the 21. century when there was a shift in ownership of the Romanian Petrom (OMV) company, 25 per cent of Croatian INA (MOL), Czech Unipetrol (66 per cent are owned by PKN Orlen), Slovak Slovnaft (MOL) and Lithuanian Mažeika (PKN Orlen). (9)
Central Europe is attractive for Russian concerns. With decreasing mark-up caused by the need for processing oil also from another (more expensive) source like Družba in the future the market value of refineries is cut down. All this makes them an aim for the expansion of capacities of Russian oil companies like Rosneft and LUKoil. From the Russian point of view, the advantage consists in their ability to process predominantly exclusively Russian oil which ensures perpetual sales for the oil extraction companies. These refineries have already gone through complicated and costly ecological rebuilding in order to meet the strictest criteria. The entry of Russian concerns, however, is not desirable from the political viewpoint although it is unavoidable in certain situations.(10) The takeover by western companies is meanwhile less probable because they focus primarily on mining projects whereas fusions need to be approved by the EU regulatory bodies. That’s why there will be a mutual consolidation among Central European players, anyway, the risk of the establishment of a regional monopoly contravening the EU ordinances on competitive environment exists in this case as well.
According to the latest development the situation will result in a dominant position of PKN Orlen in the North and OMV in the South from the geographical point of view.
The experts from the largest company dealing in oil, PVM (11), are of such an opinion that the fusion between OMV and MOL is ideal. Johannes Benigni, the PVM chairman in Vienna, assumes that Hungarian side will not refuse the fusion eventually. According to Austrian experts the advantage of the fusion is mainly geographical and the proximity of the refineries in Schwechat and Bratislava is not an obstacle. On the contrary, it will be easier for Slovnaft to furnish the southern areas of Poland and the assets of MOL and OMV would interact. A consortium equal to West European players would be established. Also the connection of Slovnaft and Schwechat would become faster. Through this connection oil could be transported from West European direction (12) and thus the risks of possible outage would be cut back. (13)
There are some questionable points in the above mentioned advantages presented by the Austrian side. The value of the acquisition would though closely but doubtlessly exceed the market value of OMV which would have to borrow enormous financial means from banks. (14) The question arises whether some larger Russian companies with sufficient capital have chosen OMV as a mediator.
It the beginning of August 2007, MOL introduced a paper to the Hungarian Government according to which the fusion with OMV would strengthen the positions of Russian companies in Central Europe. The consequence would be the sale of either Slovnaft or the refinery in Százhalombatta and it is the Russian giants LUKoil, Gazprom or Rosneft that are expected to show an enormous interest. (15) This agreement was allegedly to be signed during the meeting of the Russian President Putin with the Austrian Chancellor Gusenbauer in May. However, OMV denies all the allegations. (16)
Agreements signed during the meeting mentioned enlarge Gazprom’s market share in Austria and ensure it direct access to final consumers through the GWH company registered in Austria. Gazprom also wants to build the largest gas storage tank in Baumgarten near Vienna and simultaneously convert the country into Central European hub for supplies from its territory. (17) This offer, however, has been recently discussed also with Hungary. (18) The Russian “divide and rule” strategy, which pits both the countries against themselves, is confirmed in this way as well as the slackening prospects of the Nabucco pipeline construction since the Austrian OMV was the primary instigator of the project and Baumgarten was supposed to be the termination of the pipeline which starts in the Caspian Sea area.
Moreover, in case of the acquisition being carried out, OMV would obtain two more state-of-the-art refineries operating more efficiently in comparison to its own refinery in Schwechat the results of which aren’t thus much good.
OMV has also planned access to the oil fields in Russia recently. German E.ON, that strives to acquire the shares by means of the exchange of assets, shows similar interests. However, it doesn’t offer assets in Germany, but the gas business of MOL that it gained in the privatisation. Similar situation could arise also as regards the successful acquisition of MOL. In this case the non-Austrian assets would come as first. (19)
On the other hand, Hungary enjoys above-standard relations with Russia on the political as well as economic level. According to backstage information there is a Russian influence in MOL present in the ownership structure established by Yukos in the past. This information can hardly be confirmed as the MOL ownership is fragmented. Everything is based solely upon surmises. The OMV’s proposal and the MOL’s defence would look strange from this point of view, but there is certainly hidden significance that is hard to disclose.
Information on the linkage of Polish oil companies PKN Orlen and Lotos from July 2007 resonates in a similar vein. The PKN chairman Piotr Kownacki deemed the fusion for the Polish daily Rzeczpospolita as conducive and bearing synergic effects. There is also the dread that Russian companies may attempt through their financial means enter Polish companies the position of which would become firmer through the fusion The turnover of the whole consortium would thus rise to 17 billion Euro. The fusion plan in question, however, is at odds with the Polish oil strategy developed in the beginning of 2007 aimed at two independent oil companies. The Polish state possesses approximately one third of PKN and more than 50 per cent of Lotos and does not intend to change the strategy in any case according to the Finance Ministry spokesperson Pawel Kozyra. (20) The long-term independence of Lotos as a smaller company is untenable and its specialisation can serve as addition to the activities of PKN. The intention to create a national champion in terms of Polish power engineering corresponds to the nationwide economic orientation of the nationalistic Government in Warsaw.
According to the predictions, an influx of acquisitions awaits Central European market in the immediate future. The first evidence could have been the planned fusion of PKN and MOL in 2006 which sank into oblivion in the end, but also the takeover of the Czech Unipetrol by Orlen in 2005. The consolidation would create companies with strong capital capable of protecting themselves against hostile takeover attempts by Russian concerns. Also synergic effect could be utilised in full extent and a on a relatively small area. The owner of Slovnaft and the Schwechat refinery would be simultaneously interested in a quick interconnection of both companies by means of an oil pipeline and the provision of stable supplies for the Slovak producer. Such a scenario, however, is not likely without sufficient capacities.
Russian federation exerts a strong influence upon the region of Central Europe that is clearly perceptible on the level of high politics and during meetings as well as in the sphere of economy in relations to the most important Russian companies. Thank to the successful strategy of keeping these companies under the grip of the Kremlin it is feasible to shape the foreign policy through business contacts. The development in our region will be still rich in intriguing events in the period of next months.
(2) See – Russia’s new oil pipe to cut supply to Central Europe, 13.07.2007, source – http://www.bbj.hu/latestnews/news_28901_russias+new+oil+pipe+to+cut+supply+to+central+europe.html
Oil Pipeline Plan Raises EU Fears, Bloomberg, 16.07.2007, source – http://www.themoscowtimes.com/stories/2007/07/16/043.html
(3) According to PVM report(independent broker of oil instruments) issued on 13 July 2007, source – http://www.bbj.hu/latestnews/news_28901_russias+new+oil+pipe+to+cut+supply+to+central+europe.html
(4) Lithuania has already experienced similar situation when it refused to accept Russian offers of buying its refinery Mažeiku and sold it to the Polish PKN Orlen. Russia consequently cut off the supplies in July 2006 giving an accident on the oil pipeline on its territory as a reason. However, real cause has never been made public. Lithuania considers the situation a retaliation for having sold the refinery to a non-Russian company.
(5) Ševce, P.: The achievements of Russian energy strategy, Despite Borders, 19.07.2007, source – /clanky/data/upimages/russian_energy_strategy.pdf
(6) The first oil supply for MOL is flooding through Adria, daily SME 14.07.2007, source – http://ekonomika.sme.sk/clanok.asp?cl=3394426
(7) Beer, G., Slovák, M.: The Kremlin chooses the owner of Transpetrol, weekly Trend, 11.07.2007, http://firmy.etrend.sk/105635/firmy/vlastnika-transpetrolu-vybera-kremel
(8) However, according to the statements by CEO OMV, Wolfgang Ruttenstorfer, from 2005 for Hungarian server http://www.portfolio.hu, OMV is interested in MOL remaining an independent successful Central European company. Source – http://www.portfolio.hu/en/cikkek.tdp?k=1&i=3800
(9) Interview – OMV CEO Wolfgang Ruttenstorfer talks with portfolio.hu, 04.04.2005, zdroj – http://www.portfolio.hu/en/cikkek.tdp?k=1&i=3800
(10) The foreign assets of Yukos auctioned off on 15 August 2007 an unknown company Promneftstroj linked with Rosneft company till 30 June. Rosneft claims, however, it is not in possession of this company. An US real estate company Monte-Valle is considered to be its owner. It has already gained some assets of Yukos in 2007. Rosneft as well as the Slovak Government did not take part in the auction according to the spokepersons. See – http://firmy.etrend.sk/108558/firmy/rosneft-v-aukcii-vydrazil-transpetrol, http://www.kommersant.com/p795749/r_529/YUKOS_Bankruptcy_Promneftstroi/, http://www.platts.com/Oil/News/8207983.xml?S=printer&src=Oilrssheadlines1
(11) PVM – deals in oil products – http://www.pvmoil.co.uk/
(12) The reverse direction than originally agreed on between OMV and Yukos in 2003;
(13) The disadvantage of AWP consists in it capacity restricted to 10 million tonnes of oil 80 per cent of which is utilised by Schwechat. For further re-exports would remain only insufficient supplies of 2 million tonnes. Source – http://www.natankuj.sk/?go=magazin&clanok=1673
(14) The market value of OMV (year 2006) amounts to approximately 14 billion Euro, MOL (year 2005) amounts to 10 billion Euro
http://www.omv.com/SecurityServlet/secure?cid=1173814204098 and http://www.molgroup.hu/en/businesses/sumup/sumup_online/high_participation_at_agm/
(15) OMV prefers „friendly combination”, 09.08.2007, source: http://www.bbj.hu/news/news_29798.html
(16) Übernahme: Druck auf MOL-Führung steigt, 08.08.2007, Die Presse, source:http://www.diepresse.com/home/wirtschaft/economist/322255/clanok.do
(17) Socor, V.: Gazprom Achieves an Anschluss of Austria, Eurasia Daily Monitor, 29.05.2007, http://www.jamestown.org/edm/article.php?article_id=2372192
(18) Through the PM Hungary has challenged under the pressure of this bid the feasibility of the construction of the Nabucco gas pipeline which competes with Russian supplies. For further information see – Ševce, P.: Nabucco, Hungary and joint European energy policy. Despite Borders, 05.05.2007, source – /clanky/data/upimages/Sevce_-_Nabucco_-_Madarsko_-_EU_energeticka_politika.pdf
(19) Socor, V.: An Austrian Back Door for Russian Takeover of Hungary’s Energy Sector?, Eurasia Daily Monitor, 24.07.2007, http://www.jamestown.org/edm/article.php?article_id=2372313
(20) Polens Ölkonzerne planen Fusion, Die Presse, 12.07.2007, source – http://diepresse.at/home/wirtschaft/eastconomist/316684/clanok.do?_vl_backlink=/home/wirtschaft/eastconomist/clanok.do