Regional European oil companies will merge 'in the long run'

Darius V. Snieckus
OGJ Online

LONDON, June 21 -- The economic rationale for consolidation of the dominant regional oil and gas companies of Poland, Hungary, and Austria is still insufficient to tip the scales in favor of a full-scale merger, according to a report by central European bank Raiffeisen Zentralbank Österreich (RZB) AG.

A merger between PKN Orlen, MOL Rt., and OMV AG, along with the Slovakian refinery Slovnaft -- in which MOL has a 32% stake -- would create a combined company with "far greater geographical reach" and synergies in "pretty much all areas of the business," the report's author, Bidzina Bejuashvili, believes.

Such a geographically dominant combine would also contribute to the building of a "more cohesive" single market of oil products in the region, he said, at a time when European Union expansion means securing supply to regional markets will be "essential" to oil and gas companies trying to stave off competition.

But, in the short-term, old national rivalries are likely to continue to forestall any alliance between these states' regional champions, unless the danger of expansionist campaigns by Russian oil and gas companies shows itself to be real.

"It would be foolhardy to expect that a strong economic rationale would translate into a full-scale merger in the short-term," Bejuashvili believes. "MOL and OMV both hope to be able to claim the mantle of the leading regional entity alone and nether would opt to play second fiddle to the other.

"This will continue to be the issue overriding all others, until such a time as the economic imperative bites -- that or a shift in the Russian threat from the perceived to the real finally seals the deal.

"After (OAO) Gazprom's hostile takeover of (Hungarian chemical company) BorsodChem earlier this year, it is not surprising that (these) companies are wary of Russian designs on further regional acquisitions as a lunch pad for conquering new markets," said Bejuashvili.

PKN has been pushing for a strategic alliance between the three players based on the sale of an 18% stake in its company. MOL reportedly is interested in bidding for the slice of the Polish company, but with debts of more than $1 billion and a loss-making gas business, is unlikely will be unable to find financing.

Meanwhile, OMV, which would like to buy into the Polish market -- "the nut that any company with pretensions to regional dominance needs to crack," according to Bejuashvili -- but finds its hands tied by claims by Austria's main opposition party, the Democratic Left Alliance, that such a sale would be a threat to the security of the nation's energy supply.

The likelihood of a "cohesive" alliance between any of the three regional players, or all three, Bejuashvili believes, is scant. More probable is that MOL and PKN "come up with some kind of pricing or financial arrangement that is beneficial to all parties, but which fundamentally retains the competitive nature of the relationship.

"MOL is unlikely to want to adopt a secondary subordinate role which would see its strategy dictated by OMV -- neither is it likely that OMV and PKN will take a subordinate position under MOL.

"That said, in the long run, we consider that all of the parties are aware that their chances of survival, continuing competitiveness, and resistance to Russian expansion will be better served under the banner of a more unified front"

Contact Darius V. Snieckus at [email protected]