The question is whether the Czech government under PM Petr Nečas is ready and willing to take on strategic investors in the oil sector
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 Polish group has an in thanks to its control of Unipetrol
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.
Finance Minister Miroslav Kalousek sent allies to watch over Čepro
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
Russia’s Lukoil has long been looking to expand in the CEE
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.