INSIGHT – OUTLOOK ’23: Poland’s PKN Orlen reaping benefits of energy foresight

LONDON (ICIS)–As 2023 dawns, there will be few analysts able to look back on the tumultuous events of the preceding year with an air of “I told you so”.

But of the three integrated oil, gas and petrochemical groups in central and eastern Europe (CEE), there is one that can argue it showed great foresight in, several years ago accelerating its drive for energy security, stepping up the hunt for non-Russian oil and gas supplies with some urgency: Poland’s PKN Orlen.

Poland, and by extension, state-controlled regional goliath Orlen, had long warned that Russia was not to be trusted. While some observers scoffed at what they saw as a certain Polish paranoia about the Russian Bear to the east, Orlen got on with doggedly seeking out alternative suppliers of hydrocarbons.

“PKN Orlen is definitely in the best position versus [Austria’s] OMV and [Hungary’s] MOL, since it managed to secure alternative sources of crude oil supply, i.e. the Saudi Aramco oil supply contract,” noted Oleg Galbur, an analyst at Raiffeisen Centrobank (RCB).

“Also, with the start up of the Baltic Pipe gas pipeline bringing natural gas from Norway and a higher volume of liquefied natural gas [LNG] contracted from Qatar and the US, Poland has secured its gas supply going forward,” he added.

Looking at OMV, while the company can be grateful it had little exposure to Russian oil supply before the late February outbreak of the Ukraine war, its situation with natural gas inflows is rather more challenging.

For many decades, OMV served as Gazprom’s counterparty, responsible for supplying Russia gas to Austria.

As Galbur observed: “With the drastic reduction of Russian gas supply to Austria [with ramifications of the war playing out], OMV has to cover for the difference by buying gas from the spot market at a significantly higher price, resulting in a loss of around €50m/month since Nord Stream 2 pipeline gas was cut at end-May.”

Russian oil, meanwhile, is the big headache for MOL. It accounts for 30-40% of the crude processed at its refineries in Hungary and Slovakia.

The European Commission has granted waivers that allow MOL and Slovak subsidiary Slovnaft to import piped Russian crude, but it’s not clear how long they will be kept in place.

The coming year, of course, should see no let up in the drive for renewables and, once more, it is Orlen that is benefiting from a strategy fortuitously coming to fruition just as Europe needs to redouble its efforts in energy security and transition.

As 2022 drew to a close, the ORLEN Group, Poland’s top refiner, essentially swallowed two fellow state-controlled enterprises, namely the country’s second largest refiner Grupa Lotos and oil and gas exploration and production and gas distribution company PGNiG.

In doing so, it became the largest fuel and energy group in CEE and what some critics have described as  a ‘state chaebol’ (a plutocracy or monopoly), or leviathan.

The hulked-up status should give ORLEN the potential in capital expenditure and market dominance to single-mindedly pursue ambitious energy plans in fields including wind, solar and nuclear, though Tamas Pletser, a Budapest-based analyst at Erste Investment, expressed some apprehension that the goal of making the three companies work smoothly as one could prove elusive, while the involvement of politicians in the entity could interfere with sound business choices.

“I think the major question is how fast the integration of these three companies can take place. These are all major companies with different attitudes, IT, leadership and so on,” said Pletser.

“The key risk is the political one: will any Polish governments use the funds of the merged companies for political purposes? As the new entity will have a 50% government stake, this is a clear risk in my view.”

Given the record high gas prices seen in the past year in correlation with market consequences of the war, fertilizer makers across CEE have been fighting for government subsidies made generous enough, in the interests of food security, to allow farmers to keep up purchases of fertilizers necessarily sold at inflated prices.

That struggle – for producers such as Poland’s Grupa Azoty and Anwil, Hungary’s Nitrogenmuvek and Romania’s Interagro and Croatia’s Petrokemija – looks set to continue in 2023.

“I see the fertilizer plants still running at limited capacities, or in an on/off mode depending on the price of natural gas. On the other hand, a record import volume is coming to Europe. So there will be enough fertilizers, but the prices will be high for the farmers, certainly,” said Pletser.

Of the plethora of chemicals companies in the region feeling the heat amid steep energy prices, one to watch in the year ahead might be Romania’s Chimcomplex Borzesti.

Its extensive growth plans took a blow in September when the firm cited the challenging situation in laying off 396 employees.

Of world-scale installations coming online in 2023, Azoty’s propane dehydrogenation (PDH) and polypropylene (PP) plant in northwestern Poland is due a launch in the first half of the year.

All in all, though, with the region beset by ongoing uncertainties about the war and the interlocking economic downturn, it’s a brave analyst who clings to schedules and rolls out many confident predictions.

Insight by Will Conroy