The Lithuanian Railways are announcing a tender for the reconstruction of the track section between the Mazeikiai and the Latvian Renge, a key route for Orlen Lietuva. The new opening will help the Polish company strengthen its position in the Baltic States. However, not all disputes with the Lithuanians have been completed yet – writes Piotr Stępiński, editor of BiznesAlert.pl.
A symbolic moment
August 14 will symbolically register in the history of the Lithuanian Orlen Lietuva’s activity. At that time, in the presence of the president of Orlen, Daniel Obajtek and the president of the Lithuanian Railways (Lietuvos geležinkeliai) Mantas Bartuski, there was a symbolic reconstruction of the 19-km section of railway tracks on the route from Mazeikiai-Renge, which was demolished in 2008. At that time, Orlen was forced to transport its products by 150 km longer, which resulted in an increase in the cost of transport. The situation was also not facilitated by a long-standing dispute regarding transport tariffs, which in turn resulted in a decline in the profitability of Orlen’s operations in Lithuania. However, this issue was also settled. The breakthrough came much earlier.
In this context, it should be noted that last Friday Lithuanian Railways announced a tender for the reconstruction of this section of tracks. In addition, the potential contractor will also be responsible for the construction or modernization of five railway crossings and six bridges. The works are to be completed within 400 days. However, in the event of unforeseen circumstances, this period may be extended. The deadline for submitting offers is October 9. Let me remind that according to the announcements of the Lithuanian side, the tracks between Mažeikiai and Renge are to be rebuilt by the end of 2019.
This means new opportunities for the development of Orlen’s activity on the market of the Baltic states. The more so because it did not exclude new investments in the Mažeikiai refinery. In March, the head of the Polish company stated that the business climate in Lithuania has improved significantly, which is expected to give better yields on oil throughput. The activities are to reduce production costs and adapt production to environmental standards.
Orlen’s plans in Lithuania are part of the company’s investment strategy in the petrochemical sector. Let me remind that in June the company announced the largest in its history investment program worth about PLN 8,3 billion in the perspective up to 2023. It is not only to translate into an increase in the company’s financial ratios (EBITDA + PLN 1,5 billion), but also to increase the production capacity in the petrochemical segment by approximately 30 per cent. The more so because the competition is not sleeping. The Hungarian MOL, with which Orlen competes on the Central and Eastern European market, wants to invest at least USD 2 billion in the sector by 2021.
The potential of Mazeikiai
Investments in the expansion of the installation in Mažeikiai may help Orlen to consolidate its position not only on the Lithuanian market, but also in the Baltic States. Mazeikiui has an installation with a production capacity of 10,2 million tons per year and is the only plant of this type in the Baltic States. In addition, the installation in Mažeikiai systematically increases oil processing. For comparison, in 2013 this ratio amounted to 9 010 thousand tones. By contrast, in 2017, it was already 9 821 thousand tonnes (increase by 9 percent). During the first two quarters of 2018, the Lithuanian Orlen installation processed 4,442 million tonnes of oil, similarly to the same period last year (4,462 million tonnes).
Currently, the raw material for the installation in Mažeikiai goes mainly through a 91-kilometer long pipeline that connects it directly to the Butėga oil terminal. The owner of the pipeline and terminal is Orlen Lietuva. The company is also considering the construction of a pipeline linking Mazeikiu and Klaipeda.
It is also worth noting the fact that after years of losses, the Lithuanian subsidiary Orlen’s daughter started to generate profits. In 2017, the operating profit based on LIFO plus depreciation (LIFO EBITDA) before the revaluation descriptions amounted to PLN 1,074 billion.
The improving financial data may indicate the potential of the Mažeikiai refinery that has not been used so far. With appropriate investment outlays and a favorable macroeconomic environment, the Lithuanian installation can be more profitable. Let us point out that the Baltic states market seems promising when it comes to the consumption of fuels and diesel oil. In total, in the structure of sales revenues, the market in Lithuania, Latvia and Estonia is 8.2% compared to 7.8% in the previous year. In addition, according to Eurostat data, in 2017 favorable economic conditions in Lithuania, Latvia and Estonia translated into an increase in gasoline demand by a total of 3.9 percent compared to 2016. In contrast, for diesel, this index increased by 4.5 percent. The upward trend is also visible this year. According to data provided by Orlen for the second quarter of 2018, diesel oil consumption in Lithuania amounted to 0.41 million tonnes (an increase of 4 percent compared to the same period last year), and gasoline 0.06 million tonnes (an increase of 8 percent) .
Further development of Orlen on the Lithuanian market may be facilitated by a further thaw in energy relations between Vilnius and Warsaw, the fruit of which was the signing of a memorandum on energy cooperation. One of its effects was the announcement of a project to reconstruct the tracks to Renge.
In the context of oil supplies, it is also worth paying attention to the handling of raw materials at the Butyndze oil terminal, which supplies the Mažeikiai installation. Between January and July 2018, the terminal reloaded 5,384 million tons of oil, which in comparison to the same period last year means an increase of 0,1 per cent. By contrast, in July 0,985 million tons were transfered, which in comparison to July 2017 means a decrease of 9,9 percent. In 2017, a total of 9,8 million tonnes was transhipped in Butting, which in comparison to 2016 meant an increase of 5,4 percent (9,3 million tonnes). In 2015, this index amounted to 8,7 million tonnes. It is not excluded that the growing transshipment rates are one of the effects of gradual warming in the Lithuanian-Polish energy relations.
However, despite positive signals from Vilnius, there are still contentious issues that may affect the profitability and activity of Orlen in Lithuania. This is a regulation signed at the beginning of January this year by President Dalia Grybauskaite, under which Orlen Lietuva is obliged to inform the Lithuanian government about the transaction, the value of which exceeds 10 percent of the company’s annual income. In the event that Vilnius considers that such a transaction may pose a threat to energy security, it may not allow it. The previous Orlen management pointed out that the said regulation would make it difficult for the company to operate in Lithuania. In addition, the situation does not facilitate the validation of new tariffs for public services for the largest companies that use a large amount of energy. It is worth recalling that the combined heat and power plant (capacity 160 MWe and 1040 MWt) in Mažeikiai is a source of technological steam for production processes and is mainly fueled by heavy oil. The Polish company called for the fee to be reduced or abolished as part of the differentiation of public services for energy produced. According to Orlen, the regulation lowers the competitiveness of foreign companies on the Lithuanian market. In 2011, the exemption of fees for the differentiation of public services for energy produced for own needs was abolished.
Further cooperation is needed
Although not all problems have been solved, the improving relations with Lithuanians may be a good sign for the future, not only for Orlen. The more so because in energy matters Warsaw and Vilnius connect many a critical attitude towards the construction of the Nord Stream 2 gas pipeline or the nuclear power plant in the Belarusian city of Ostrowiec. In addition, the Lithuanians hope to strengthen gas cooperation with the Poles, as evidenced by the construction of the Poland-Lithuania Gas Pipeline (GIPL), thanks to which our neighbors will be able to receive gas from the Norwegian shelf, which at the end of 2022, thanks to the Baltic Pipe, will go to our coast . In addition, by means of a power interconnection with Poland, Lithuania and other Baltic states will cut off the energy heritage of the Soviet Union and synchronize with the continental European networks. Therefore, a wider cooperation between Warsaw and Vilnius is important, which will be beneficial for each party. For Lithuanians, Orlen’s investments mean, on the one hand, stability in the supply of petroleum products to the domestic market, but also additional tax revenues to the state budget. In turn, for the Polish corporation, this is an opportunity to consolidate the position on the market of the Baltic states and the further development of the petrochemical sector.