EAST GERMAN INDUSTRY POISED FOR JOLTING UNIFICATION CHANGES

Oct. 1, 1990
Practically all major German oil companies, including subsidiaries of international companies, showed up in force as exhibitors at the centuries old Leipzig, East Germany, trade fair last month. Their mission: to publicize their positions, acquire or set up new companies, and make contacts in eastern Europe. Subsidiaries such as Esso AG and Deutsche Shell have been given the responsibility of doing business and setting up operations in all of eastern Europe, not just East Germany. But the

Practically all major German oil companies, including subsidiaries of international companies, showed up in force as exhibitors at the centuries old Leipzig, East Germany, trade fair last month.

Their mission: to publicize their positions, acquire or set up new companies, and make contacts in eastern Europe.

Subsidiaries such as Esso AG and Deutsche Shell have been given the responsibility of doing business and setting up operations in all of eastern Europe, not just East Germany. But the latter is where the focus is as Germany heads toward official unification Oct. 3.

East German refining, petrochemical, and related companies were there, too, housed in exhibition stands that belied their poverty. Many bear once famous names and were advertising their management, capabilities, and technologies in hope of finding a white knight from the West.

WHAT'S AHEAD

About 3,000 East German companies will in the coming few months have to prove they can survive and make a profit. If not, they will be shut down.

Practically all in the refining and petrochemical sector will need to cut employment drastically and be sold or partially taken over by one or more investors. They have been converted from so called "the people's own enterprises" (VEBS) to stock companies (AGs or GmbHs).

A new entity in East Berlin called the Treuhandanstalt, a fiduciary trust, owns all the stock in these companies. The Treuhandanstalt is headed by a West German executive, Karsten Rohwedder, former chief executive of Hoesch Rohr, a Dortmund company that makes among other things large diameter pipe for oil and gas pipelines.

The Treuhandanstalt is making bridge loans with West German support to the troubled companies and is pushing them to get their houses in order. It also is trying to interest others in taking them over.

One major problem facing potential buyers is possible environmental liability. Parts of some of plant sites are badly contaminated and will need major remediation. They also will have to come up to West German pollution control standards after unification unless regulations are relaxed for them.

Environmental tax subsidies also may be required to get potential investors interested.

A "SERVICE STATION" FAIR

During the past several decades Leipzig's multiindustry autumn fair has been Communism's window on the West. It brought high officials from around the Communist world to a place where they could sign deals with western companies and make propaganda.

This year it became largely the "service station" fair.

Gasoline retailing in East Germany is in shambles. There are about 1,000 stations there now. Some are, however, little more than a single pump or environmental disasters as a result of tank leakage that will require abandonment or remediation.

On average, tanking up requires at least a 2 hr wait by motorists.

Esso says 2,000-2,500 new stations will be needed to satisfy the East German market, hungry for western cars and the gasoline they need.

Many West German lenders have forged into East Germany with "buy now, pay later" car loans. Used cars have disappeared from the border regions, and Volkswagens, Opels, and the like are rolling alongside Trabants on East Germany's aging autobahns.

Another magnet for western European marketers who haven't been heavies in West Germany is that all companies will start on the same foot. Pre-World War 11 marketing networks and relationships have been virtually wiped out. There is no brand loyalty. It is there to be created.

As the German manager for a French marketer said in Leipzig, "Esso and Shell have been around since my grandfather's time, but not here."

As a result, many oil companies such as Deutsche BP and Elf Acquitaine are putting elegance, automation, and modern equipment into their first flagship stations. BP is plunging nearly across the country from the border and is building such a station in Dresden.

Esso was surprised at the number of persons who visited its stand at Leipzig and wanted to run an Esso station. Some had property.

Esso has looked at about 1,000 possible sites for service stations and is trying to place two or three in operation before yearend. Esso says it ultimately will have 250 stations in operation in East Germany.

Thomas Kohlmorgen, head of Esso, says the pace would be quicker if local authorities approved permits for such stations. He believes the East German driving public will soon be a positive factor in speeding the process.

Aral, retailer for several gasoline producers including Veba Oel and Wintershall, plans 500 stations in East Germany during the next 10 years. Agip Deutschland plans 80-100.

EAST GERMAN REFINERIES

The two major refineries in East Germany are run by PCK AG Schwedt at Schwedt on the Polish border northeast of Berlin and LeunaWerke AG at Leuna just west of Leipzig. Both are tied exclusively to Soviet crude moved by pipeline from the Ural region.

Schwedt, with a capacity of about 218,000 b/d, is a fairly modern refinery with a large fluid catalytic cracker. Leuna has a capacity of 105,000 b/d and hydrocracking capacity based on reactors built before World War 11.

Veba Oel is a likely candidate to buy into PCK Schwedt, but observers say it is more likely a group will be involved. Deutsche BP has agreed to advise Leuna on technology. There could be some BP participation in new units.

German observers are puzzled by an announcement that a group made up of Neste Oy, Mitsubishi, and Thyssen is studying the feasibility of building a refinery at the North German port of Rostock. This is a shallow water port, and lightering would be required. The Baltic is no place for VLCCS, observers say, and a refinery would make economic sense only if it involved discounted Soviet crude.

The relatively sparsely populated region of East Germany can be supplied from West Germany via the Elbe River, which flows across East Germany, and a well developed canal system. Shell sees North Germany as an excellent outlet for its Harburg refinery near Hamburg.

SHELL STUDY

Deutsche Shell released a major study at Leipzig covering the energy future of a united Germany. It is one of the first that covers East Germany (see table).

The study breaks out East Germany's current energy sources and reveals the inefficiency, by per capita energy consumption, of state planned economies when compared with a free market economy.

Shell used hard coal heat units, or SKEs in the original tables. One million tons of SKE equal 29.3 petajoules.

Shell emphasizes that its study spells out possible developments, not predictions. In both cases-an open market vs. one dampened by protectionism-there is a decrease in energy demand.

Hard coal, lignite, nuclear energy, and petroleum consumption decline, but natural gas shows major growth. Shell says this is because of growing concern about pollution in general and specifically about the greenhouse effect blamed on carbon dioxide and other trace gases. Carbon dioxide emissions, the report shows, could drop from about 1 billion tons in 1989 in East and West Germany to 977 million tons in 2010 in the high economic activity case.

The price of oil will rise during the period, Shell says, but the company did not quantitatively consider this factor.

The scenario "Europe in transition" is based on a strong economic development in all of Europe that brings eastern Europe, operating under free market conditions, into the mainstream.

In the "European Economic Community as a bloc" scenario, protectionism gains the upper hand with attempts by the EEC to restrict the inflow of products and services from eastern Europe, Japan, and North America. The consequence of this are breaks in economic growth.

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