CEO and co-owner of the energy holding Energetický a průmyslový holding (EPH), Daniel Křetínský, claims his company’s prospective purchase of a 49 percent stake in Slovak gas major Slovenský plynárenský priemysel (SPP) would be a long-term strategic investment. “We’re not preparing this acquisition for anyone else including [any] Russian gas companies,” Křetínský said in an interview with Czech Position.
Speculation has emerged in energy circles that EPH —owned by PPF Group with a 40 percent stake, J&T - 40 percent, and Daniel Křetínský - 20 percent — is looking to buy a 49 percent stake in SPP which is currently owned by E.ON Ruhrgas and Gaz de France Suez with the intention of selling it on to Gazprom or another Russian gas company for a considerable profit.
“EPH has all the characteristics of a strategic specialized investor and our presence in the energy sector is long-term and systematic. European players already consider us to be a standard energy company. We have repeatedly demonstrated that we understand the responsibility that doing business in the energy sector carries. Our approach towards our customers is conservative and we’re about long-term sustainability of our business,” Křetínský told Czech Position. Nevertheless, he refused to comment about the details of the prospective deal to buy SPP.
A major gas deal
51 percent of SPP shares remain in the ownership of the Slovak state, while 49 percent belong to Slovak Gas Holding which is jointly owned by E.ON Ruhrgas and Gaz de France Suez. SPP’s pricing policy and this year’s announcement of a 40 percent price hike is causing consternation in political circles and among the wider public.
Although Křetínský is refusing to reveal what percentage of shares in Slovak Gas Holding his firm is looking to purchase, if a deal is struck it looks probable that in early 2012, EPH will have a larger stake in Slovak Gas Holding than both Gaz de France Suez and E.ON Ruhrgas – this is because the French firm has announced that it intends to sell off its regulated assets in Central and Eastern Europe, while the German firm E.ON Ruhrgas has announced a divestment program for assets worth around €15 billion.
It therefore cannot be ruled out that the French and German firms will opt to sell all of Slovak Gas Holding, which is valued at around €3 billion, to EPH.
It is likely that Gaz de France Suez and E.ON Ruhragas concluded that they cannot effectively use their minority stake in SPP as a strategic asset in dealings with the Russians because all key decisions require the approval of the majority stakeholder – the Slovak state.
Gas experts also point out that both Gaz de France Suez and E.ON Ruhragas are involved in the partly completed Nord Stream submarine gas pipeline which runs directly from Russia to Germany via the bed of the Baltic Sea. By comparison, SPP is not planning any significant projects for expanding the Slovak gas network’s transit capacity, and at the same time the firm’s expansion into gas sales in the Czech Republic has not produced the desired results.
At the same time, the company’s pricing policy and this year’s announcement of a 40 percent price hike is causing consternation in political circles and among the wider public.
“It’s necessary to adopt a conservative approach to infrastructure companies. Unlike financial groups, we are fully aware of the societal aspects of dealing in the energy sector,” Křetínský told Czech Position, adding that two fundamental changes can be expected if EPH acquires a stake in Slovak Gas Holding: a more sensitive, or conservative approach to end consumers regarding pricing developments and active development in the area of gas transit and a far more active approach to supplying Czech consumers.
Gazprom didn’t use purchase option
The sale of Slovak Gas Trading could be favorable news for the current Slovak government and also former prime minister Robert Fico whose center-left SMER party is still highly popular. Who other than EPH would make for a better partner for the Slovak government than Gaz de France Suez and E.ON Ruhrgas? Which companies could have a serious interest in purchasing the asset? Gazprom has instead opted to target Slovak consumers directly through daughter and sister companies.
It’s pretty clear that no major EU energy player is interested in buying into SPP. As Czech Position has ascertained from a well informed Russian source, the Russian state-controlled gas major Gazprom had an option to buy the 49 percent stake in SPP but did not implement it probably because it would put Gazprom in violation of the EU’s so-called unbundling regulations barring producers from holding majority stakes in distribution networks.
Gazprom has instead opted to target Slovak consumers directly through daughter and sister companies. Other potential buyers are those with significant cash reserves, which now mean Chinese and Arab investors. But a non-European investor would not exactly be welcomed by Slovak politicians.
Then there are private equity funds and speculators which with quick returns on investments being their priority would also not be welcome.
What EPH can expect in Slovak gas sector
The sale price of Slovak Gas Holding remains an issue. According to Czech Position’s information, the holding is currently valued at around €2.5 billion. It could be that EPH will attempt to use the general fall in stock prices over the summer to push the sale price lower.
If EPH does acquire Slovak Gas Holding, it would be the largest investment in the company’s seven-year history and would increase its assets by 50 percent and boost pre-tax (EBITDA) profits to rise to a level of around €600 million, placing the firm among the largest Czech companies.
One major advantage for EPH would be the addition of gas to its resources portfolio which would serve as a balance to its coal based resources and assets.
SPP’s business structure in terms of EBITDA:
- Around 60 percent of SPP’s profits are generated from the transit of Russian gas via Slovakia to other European markets. SPP has signed long-term contracts (mostly for 20 years) with producers which, irrespective of how much gas Russia sends, guarantee a steady cash flow. Gazprom has the Slovak transit network reserved for many years to come for a pre-agreed price.
- Around 25 percent of SPP’s income is generated from distribution of supplies to Slovak domestic suppliers.
- The third line of business is storage of gas in underground storage facilities.
- The fourth line of business is supply to end consumers which generates comparatively very little profit. Last year and in the first half of this year, this segment was apparently in the red.
Tough negotiations with Russians unavoidable
Although deliveries to non-domestic end users are not key, it is in this area that SPP has come up against two key issues. The first is If the deal goes through it will be a priority for EPH to attempt to renegotiate the contracts with Gazprom, which would be no easy task. regulation by the Slovak state which forces SPP to supply households at a loss, and the second is the long-term gas supply contract with Gazprom. The purchase price of this gas is pinned to oil prices which have been very high for several years already. Largely thanks to liberalization of the EU gas market there is now plenty of gas available on the continent’s market at considerably lower spot prices.
The price discrepancy means that it is much harder for SPP to sell Russian gas purchased at oil-pinned prices. What is more, the “take or pay” clause in the Gazprom contracts means SPP has to pay Gazprom even for gas which it does not take. Therefore, if the deal goes through it will be a priority for EPH to attempt to renegotiate the contracts with Gazprom, which would be no easy task.
EPH would also face a more complex task – of a geopolitical nature. In the coming years with the emergence of rival routes Nord Stream and the planned Nabucco and South Stream routes, SPP will have to ensure that sufficient supplies are sourced to fill the pipeline running from Ukraine to Slovakia and onwards to the Czech Republic in the coming decade.
Given the existing long-term transit contracts between SPP and Gazprom, the issue of securing future supplies is not urgent, it is however fundamental for SPP’s future. It would be in the interests of SPP’s private shareholders and the Czech and Slovak states to initiate some form of geopolitical game with Russia in time, to ensure optimal use of the Slovak gas network. For example, the formation of a permanent joint Czech and Slovak energy representation in Moscow could be highly advantageous.
It’s sure that when it comes to dealing with the Russian state EPH will count on shareholder PPF’s experience in Russia, first and foremost Jiří Šmejc who oversees the group’s business operations there. Šmejc, who has a 5 percent stake in the PPF Group, has established excellent contacts in Russia and has demonstrated on a number of occasions that he is able to communicate effectively with key Russian politicians and businessmen.
In any event, it will be necessary to defend and promote the transit of gas from the former Soviet Union to Europe via the Slovak and Czech networks.