Business Polish owner of Czech oil refinery assets boosts volume in spite of low margins

25-07-2014 11:17 | Chris Johnstone

Stepping up refinery activity after just taking a massive hit from the struggling sector might at first glance seem a puzzling strategy. But the Polish overlords of most of the Czech refinery and petro-chemical sector believe they can turnaround the business as they prepare to take over full management control. But they say a little help from the Czech government would not go amiss.

Illustrative photo: Victor Habbick, Free Digital PhotosIllustrative photo: Victor Habbick, Free Digital Photos The poker game over the oil, fuels and refining sector between the Czech government and Polish refining company PKN Orlen looks like continuing in the mid term with both parties waiting for the other to blink.

PKN Orlen, which now owns 67.5 percent of oil and petro-chemical group Unipetrol but whose ownership is expected to rise to 100 percent by the end of the year when it counts on being cleared to buy out the shares of Italy’s ENI, this week rebuffed suggestions that it should sell the Kralupy refinery to the government.

That deal was mooted by finance minister and ANO leader Andrej Babiš as a means of giving the Czech state a foothold in the oil refinery sector. The suggestion had many analysts scratching their heads since Kralupy is regarded as the most modern Czech refinery though being at a disadvantage that it is not as plugged into supplying the petro-chemical sector as the Litvínov facility.

Mr. Babiš has some history as regards Unipetrol and PKN Orlen, having been involved in court proceedings accusing the Poles of backing out of agreements which would have given him some of the refinery and petro-chemical assets when the group was privatized almost a decade ago.

Meanwhile, PKN is pushing ahead with its policy of stepping up the refining volume and cutting costs at both Česká Rafinérská sites although current extremely low margins of around US 0.50/per barrel refinery margins might make this appear a highly questionable policy.

Unipetrol announced a one off hit of 4.7 billion crowns on its second quarter profits on the grounds that its past forecasts for results from the refinery sector had been far too rosy. The more sombre prediction for the period ending in 2017 are based on the current low margins caused by Europe’s continuing refinery overcapacity.

The Czech refineries are now operating at around 90 percent of full capacity, up from around 80 percent a year ago. One of the Czech government biggest criticisms of PKN in the past was that it was not making full use of the Czech capacity and as a result the whole Czech petro-chemical sector was suffering. PKN Orlen’s logic for stepping up the throughput at its Czech refineries in spite of the extremely low profit margins is that they can feed into the much more profitable petro-chemical sector.

Its rising share stake in Unipetrol also encourages it to make maximum use of the fixed assets. Thanks to its purchase of Shell’s around 16 percent stake in Unipetrol at the start of the year, PKN already has majority control of the company and decision making is no longer hampered by the former difficultly of getting agreement from three different shareholders.

Pointing to the rising oil refinery volumes and its policy of boosting petro-chemical turnover, PKN Orlen bosses argue that the Czech government should recognise their efforts and at least cut the charges they pay to state-owned oil pipeline and storage company Mero and fuels distributor Čepro. Talks continue, but on these demands but the PKN bosses should write off the chances of much good will if Mr. Babiš has any say in the matter.

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