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Energy 10 August, 2018 10:00 am   
COMMENTS: Paweł Poprawa

The Lotos-Rosneft contract will slow down, but will not stop diversification


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Grupa Lotos and Rosneft Oil Company signed a contract for deliveries from 6,4 to 12,6 million tons of oil to Poland last week. The agreement is valid until the end of 2020. According to Paweł Poprawa, an energy market expert from the AGH University of Science and Technology in Krakow, this decision will not change the long-term course for diversification. According to Poprawa, the agreement with Rosneft may result from US sanctions imposed on Iran.

Politics and business

According to Poprawa, the Lotos-Rosneft contract should be viewed from two perspectives. – On one hand, it is a poin of view of the state. In this context, dependence on Russia is very large, and from the point of view of the state, it is desirable to reduce this dependence. The other side, there are entrepreneurs, so in this case Grupa Lotos, which looks at it not so much as a company that implements the vision of the state, but also business. We do not know, first of all, what are the commercial conditions of this contract – said Paweł Poprawa in an interview with BiznesAlert.pl.

He added that for Rosneft, fighting for the Polish market is already “a kind of success”. – Through the actions to date towards diversification, Polish companies have made it clear to companies in Russia that they must endeavor to fight for this market and no longer have a monopoly guaranteed here. Perhaps Rosneft, trying to maintain its position on the Polish market, offered favorable and competitive market conditions to the Polish company. However, we do not know that – said Paweł Poprawa.

As he noted, the purchase made by the Lotos Group is large and concerns 25 – 50 percent of the refinery’s demand for raw material. – This is a significant contract, however, the advantage is the high flexibility in the volume of raw material deliveries. Both Polish companies, Lotos and PKN Orlen, have in their long-term strategies a provision regarding the conclusion of long-term gas supplies from Russia or other direction. Operation based on the spot market is risky and more difficult to manage. In order to assess the value and sense of oil supplies from Russia one should look at the commercial value of contracts to which we have no access – he added.

Without Iran, it will be harder to diversify

An important factor that sheds new light on the supply of oil from Russia is the return of US sanctions against Iran. – The Iranian direction was perceived by both Polish companies as an attractive long-term. Russia will be a beneficiary of the return of sanctions. I think that it could have an impact on the conclusion of the contract with Rosneft – said Poprawa.

He added that having an oil terminal, Polish companies can import goods from any direction. For several years, they have been testing oil from various suppliers and signing timely contracts or looking for opportunities on the spot market. Again, one should refer to the structure of the contract. – If Lotos has received attractive conditions, it naturally chooses them and extends its duration for over two years – he explained.

According to our interlocutor, Lotos has an active policy of diversification, and the index of oil supplies from other directions than the Eastern one ranges from 25 to 50 per cent depending on the quarter. – Lotos wants to continue diversification on one hand, and strive for the most attractive offer from Rosneft on the other – said Poprawa. – Stabilization of supplies facilitating management speaks in favor of the agreement with the Russians. The disadvantage usually with such long-term contracts is the lack of flexibility. In this case, however, we have flexibility in the form of large forks in the supply of raw material and a relatively short period of validity, two years are guaranteed.

Slowing diversification

When asked whether the 40 percent level of diversification achieved by Lotos in the first quarter of this year is to be maintained until the end of the year, Paweł Poprawa said that it will be difficult to achieve. – In recent years, this ratio has been at 20-30 percent. An agreement with Rosneft may slow down the rate of import increase from directions other than the East. However, on a long time scale, we will continue what we have seen for many years. PKN Orlen and Grupa Lotos are working towards diversification and have it included in the development strategy – Poprawa concluded.