Privatization of the oil sector in Central and Eastern Europe

Energyobserver.com

ABUNDANT SUPPLY AND CHOOSY BUYERS

Privatization of the oil sector in the region of Central and Eastern Europe in the previous period has been very dynamic, as the privatization processes in this part of the world started with the collapse of Soviet domination. Early in the 1990s, the preparations for privatization were performed and they reached their peak late in the 1990s and at the beginning of this century. 

However, even after fifteen years, these processes have not been completed, which only confirms their complexity because of the intertwining of numerous interests in the oil field, from economic, state, corporative, geopolitical to social and party interests. 

In spite of all that, the very process of privatization should not be brought into question, because all studies made on this theme confirmed that private companies which run a business under the competitive conditions, i.e. on the market, are considerably more effective than state companies that make business in a monopolistic environment, and moreover private companies have no problems with providing necessary means for modernization and investments, as is the usual case with state ones. Apart from a lack of money for investments, state companies are often under the attack of irrational pricing policies of the Government, tax burdens and of political interventions. 

Key Oil players

Below we discuss who are the most active “players” in the processes of the privatization of the oil sector in Central and Eastern Europe. 

• Russian LUKOIL took over majority ownership (58 %) in Bulgarian oil refinery Neftochim in 1999. 

• Greek HELLENIC PETROLEUM bought a majority share (54 %) in Macedonian refinery Okta in the same year. 

• Austrian OMV by purchase of shares of minority shareholders came to 10 % ownership of Hungarian MOL in 2001. 

• In 2002, Greek HELLENIC PETROLEUM continued expansion on the regional market through buying majority ownership (54 %) of Jugopetrol in Montenegro. 

• Austrian OMV then took over a quarter ownership (25, 1%) of Romanian Rompetrol, and then in April 2005, Rompetrol bought its share from OMV and regained control of 100% of the company. 

• Privatization in the oil field continued in 2003, with the entry of Hungarian MOL in Croatian INA (purchased 25% of shares). 

• Russian LUKOIL, in 2003, bought 70% of Serbian Beopetrol paying a record price for petrol stations. 

• HELLENIC PETROLEUM continued enlarging, through the take-over of Greek company Petrola Hellas. 

• PKN ORLEN- The Polish leader in the oil sector took-over 63% ownership during the privatization of Czech Unipetrol. 

• Hungarian MOL, after purchases during 2000 (36%) and 2002 (32%), in 2004 bought the remaining shares of Slovenian Slovnaft, and in that way gained control of 85% of that company’s shares. 

• Russian state oil company TATNEFT at the beginning of 2004 appeared as the best bidder- $1,3 billion- for 66 % of the ownership of Turkish refinery Tupras, which, with a refining capacity of 27.6 million tons per year represents 87% of the refining capacities in Turkey. However, by rule of the Turkish court, the transaction was nullified, and TATNEFT announced that it will not take part in the repeated tender for Turpas in May this year. 

• Austrian OMV bought a 51% share in Romanian Petrom. 

• In April 2005, Hungarian MOL continued the spreading of its retail net, by acquiring 130 Shell petrol stations in Romania (it has about 10% of the Romanian market). 

The restructuring of NIS and the preparation for its privatization in 2006 will go on under the pressure of competitive privatizations in the region, such as potential privatization of the state share in Polish giant PKN ORLEAN, the repeated attempt of privatization of the refinery in Gdansk, the privatization of Turkish refinery Turpas in September, and the potential sale of the state share in Greek HELLENIC PETROLEUM. All these privatizations threaten to distract the attention of potential investors away from NIS. 

In April 2000, Russian Lukoil together with its English partner ROTCH ENERGY offered a billion dollars for Polish oil refinery, Gdansk, which with a net of 300 petrol stations covers 17 % of the Polish market. Since the largest western companies had already positioned required refinery capacities in this region, they did not show any interest in Gdansk. The Polish Government was crying out for an investor willing to invest in the modernization of the refinery, which was operating on the verge of profitability- and it welcomed the entrance of Lukoil. This company also offered an enlargement of refinery capacities from 4.5 to 6.0 million tons a year, with modernization of the refinery which would secure the achievement of all ecological standards in production. They even offered to secure an annual export of Polish agricultural products to Russia amounting to $500 million. 

All this, however, was not enough to prevent the occurrence of a strong spreading wave of opposition to the privatization. Public opinion surveys showed that 51 % of Polish people think that the investment of big Russian energy companies "is not in the national interest" and the Polish Government had to give it up and stop the privatization. It is considered that such an attitude was notably "stirred up" by PKN ORLEN, a leading oil company in Poland, because of its endangered share of 60 per cent in the petroleum products market (with its 2500 petrol stations). London’s ROTCH ENERGY withdrew from the Lukoil partnership and joined a competitive bid from PKN ORLEN for the refinery in Gdansk. 

In October 2004 two reports of the Polish Intelligence Service were revealed, saying that Jan Kulcik, a Polish tycoon, met Russian spy Vladimir Alganov twice in Vienna and promised to help with persuading the Government to change its mind considering the privatization of the refinery in Gdansk. 

This privatization is not still finished and the buyer is expected to be known this year or at the beginning of the next year. 

This negative attitude of the Polish public might be the result of their memories of the Soviet domination, but also of a new Russian practice to use energy companies such as Lukoil or GAZPROM, as instruments for the achievement of their foreign policy and internal aims. 

It is known for example, that Lukoil in February 2001, as a minority shareholder, succeeded in legally stifling Russian television TV-6, which had supported the opponents of the Russian President Putin. GAZPROM in 2001 did the same with Russian television NTV which had been a loud critic of Putin. Examples of using Russian energy companies for foreign policy purposes are also known. During the late 1990s Russia signed an agreement with Sudan concerning the development of oil fields in central Sudan in exchange for the delivery of weapons to the Sudan army. Lukoil is notably investing in the development of new oil fields in Iraq, in Algeria, and in Libya. All these examples show that Russia does not shy away from using energy companies in its advance towards the territories considered as "its" areas of interest. 

An answer to the question of just how much NIS costs cannot have just one meaning, because the value of NIS will be determined by its attractiveness to a particular investor at the moment of privatization, which in turn depends on the investor’s assessment of its possibility to make profit in the future. 

Scrutiny of the amounts earned in the privatization of refineries and retailers' capacities in the last period can serve as the best indicator. 

The completed analyses aimed at identifying the most important, the most desirarble, the most interested, and the most probable buyers of NIS, where Hungarian MOL, Austrian OMV, Russian Lukoil and the biggest unknown- Israel BATEMAN were singled out. The mentioned companies have strategic reasons for entrance into the Serbian market: MOL because it wants to confirm its role as regional leader, OMV for its focus on the Danube corridor, Lukoil to secure and expand its existing share in the Serbian market, whilst BATEMAN expressed a strong interest in participating in the privatization of NIS and the petrochemical complex. 

As for who will really be the new owner of Naftna industrija Srbije, we shall see in 2006.