Foreign oil firms eye stakes in Czechs’ Čepro and Mero

MOL (Hungary), Lukoil (Russia) and PKN Orlen (Poland) are pushing Czech PM Petr Nečas to offer up stakes in state-owned oil firms

 | na serveru Lidovky.cz | aktuální zprávy foto: © Reuters, ČESKÁ POZICEČeská pozice

Prime Minister Petr Nečas’ (Civic Democrats, ODS) government is uncertain what direction to take the Czech state-owned oil pipeline operator Mero and oil products storage company and processor Čepro, both of which are strategic and highly profitable energy-sector assets. Top managers have repeatedly discussed the companies in recent months although the center-right coalition government (ODS-TOP 09-VV) has not formulated a clear strategy for them.

Meanwhile, a number of major energy players in the region are eager to take a stake in Čepro and Mero with an eye to making them more profitable. These include Hungary’s MOL, Russia’s Lukoil and Poland’s PKN Orlen, which already has a majority stake in the Czech petrochemicals group Unipetrol. Through their respective contacts in Czech political circles, all three have been trying to get the Nečas government to offer stakes to strategic investors for more than a year.

Why are the owners of neighboring refineries so interested? The motivation is clear: Čepro has roughly a one-quarter share of the motor fuels market and thanks to its capable business director, Jan Duspěva, is performing better than Unipetrol and MOL’s Slovnaft. Čepro also plays a dominant role in safeguarding and storing the country’s strategic fuel reserves for the Administration of State Material Reserves (SSHR). Mero owns and operates the Czech section of Russia’s Druzhba (“friendship”) pipeline and the IKL (Ingolstadt–Kralupy–Litvínov) pipeline; furthermore, it is the only transporter of oil to the Czech Republic and the leading supplier of strategic oil stocks.

The proposed transaction would allow each of the foreign refineries to significantly boost their share of the Czech market with a number of government officials apparently keen to hear the oil company lobbyists’ proposals. For its part, the state has failed to come up with modern, original and long-term concepts for Čepro and Mero to proceed. Certain ministers blame the economic crisis and lack of funding for such failures. But this is more a question of competency when no one is there who could plot out a broad-based national economic strategy.

MOL, which controls the Slovak group Slovnaft, has long been trying to increase its share of the Czech market. The refinery has surplus production capacity and urgently needs a new export markets. The Hungarian parent company has good contacts in the Czech Republic, especially since 2008, when Czech state-controlled utility ČEZ took a stake in MOL and the two agreed on future regional cooperation. Slovnaft representatives are also on good terms with a number of Czech politicians.

Indeed, this was easy to witness at this year’s Karlovy Vary International Film Festival (KVIFF), where among the celebrities of the business world were MOL’s head Zsolt Hernádi and his Slovnaft counterpart, Oszkár Világi, a former Czechoslovak federal MP. Czech billionaire Richard Háva, a close friend of Finance Minister Miroslav Kalousek (TOP 09), was on hand to discuss Čepro’s fate with the Hungarians.

The Czech government is considering two steps that are neither revolutionary nor counter to the business interests of the powerful neighboring refinery firms.

The first step is the integration of Čepro and Mero along with the SSHR into a kind of petroholding. Similar merger moves piloted by Mero were already under discussion during the government of Mirek Topolánek (ODS) but got no further than being plans on paper.

Last year, the Ministry of Trade and Industry (MPO) ordered a study on the theme of petroholdings, which was worked on by investment bankers from Česká spořitelná and Prof. Michal Mejstřík (a member of the government’s economic brainstorming group NERV). The aim was to put together a single state-controlled parent company — along the lines of the famous Aeroholding — comprising all the business of Čepro and Mero and then attract strategic investors. It was a step which would have suited the neighboring refiners.

The second step is far more specific and relates directly to Čepro. The international consultancy McKinsey has been commissioned to help create a new corporate strategy for the company. According to Czech Position’s information, it consists of four basic strategic options:

1. make no changes
2. create a wholesale unit
3. have the company cease wholesale activities and sell off its network of EuroOil filling stations to focus just on logistics
4. integrate with refineries

McKinsey’s final recommendation favors the fourth option, according to which Čepro would remain in state hands. The company’s management also prefers integration with refineries. But such an option would be difficult for the state. A minority stakeholder with strategic managerial control could in time sideline the government and leave it with no influence or control.

The material on Čepro’s corporate strategy identifies potential partners for the recommended option of integration with the refineries. These are PKN Orlen and Unipetrol, MOL in tandem with Slovnaft, and Italy’s Eni, but theoretically, also with and the Dutch-Anglo Shell and Austria’s OMV. In the first half of this year, Čepro management met with PKN Orlen’s upper management in Warsaw, where the Poles expressed a keen interest in integration. Slovnaft and Eni have not hidden their enthusiasm either.

Čepro is a strategic state-owned firm that trades and stores petroleum products and has a unique products network throughout the Czech Republic. It is a dominant provider of storage and protection of strategic reserves for the Administration of State Material Reserves (SSHR). The company operates one of the largest network of petrol stations in the Czech Republic (192). In 2010, the company had a turnover of Kč 44 billion and a profit of Kč 776 million.

Government lack of interest

Based on recommendations, in June, the government decided to establish an inter-ministerial commission, led by Deputy Minister of Industry and Trade Tomáš Hüner (Civic Democrats, ODS). But there are two problems with the commission. As Czech Position previously reported, Hüner’s boss, Minister Martin Kocourek (ODS), wants to recall him from the post. He had wanted the step to take effect as of Sept. 1, but no adequate place elsewhere in the government or state-run enterprises could be found for him, so Hüner’s departure has been postponed for at least a month.

That’s the least of the problems. The other complication is that the commission hasn't been able to function for two months because the Office of the Government, which was originally supposed to nominate two members to it, has not been able to come up with any names. Asked who they planned to nominate and when, Czech Position received a surprising answer. “The Office of the Government is not involved in the conduct of the Commission,” spokesman Jan Osúch said.

“The involvement of the Office … given the scope of its activities,  was not appropriate and expedient. We believe that the current composition of the commission provides sufficient expertise and will achieve the set objectives. The MPO was officially informed of this by the deputy head of the Office of the Government, Kateřina Hrazdilová, already on Sept. 2,” he added.

Members of the commission for Čepro:

  • Tomáš Hüner, Deputy Minister of Industry and Trade
  • Jan Zaplatílek, director of the department for gas and liquid fuels
  • Zdeněk Zajíček, Deputy Minister of Finance
  • Jiřina Vorlová, director of the department for support business at the Ministry of Finance and a member of the Čepro supervisory board
  • Jiří Borovec, CEO of Čepro
  • Jan Duspěva, Commercial Director of Čepro.

According to Czech Position’s information, Mero representatives dislike the composition of the commission and want to send some of their representatives on it. This request was, however, rejected by the Finance Ministry and MPO. Mero would only have the chance to join the commission if the member were proposed by the Office of the Government and was at the same time a highly placed representative of the company, for example a supervisory board member. Such a possibility has definitively fallen by the wayside. Perhaps in terms of the national interests of the Czech Republic, it is ultimately a good thing that the commission has not even met once.

The Finance Ministry and MPO have also been tasked with choosing, via a tender, a consulting company (expert in mergers and acquisitions) that would, together with the inter-ministerial commission, begin the process of negotiating specific terms and conditions for the integration of Čepro with one or more of the refineries. The problem is that the tender for the selection of a consulting company has not even been drafted so far.

Perhaps in terms of the national interests of the Czech Republic, it is ultimately a good thing that the commission has not even met once and that it has not even chosen a consultant. The delay could allow members of the Nečas government more time to study the problematic future of the Czech oil sector in greater detail.  A quarter of the fuels market is at least at stake, which in itself is enough of a strategic issue for the country and its government.