Polish energy at the crossroads

In a bold attempt to build a new European energy behemoth, Polish oil firm PKN Orlen said in July it planned to merge with the national gas provider PGNiG and would notify Brussels by the end of 2020. The resignation of PGNiG's CEO last week appeared to move the plan into a higher gear.

The merger would create one of Europe's biggest energy concerns and add ballast to Warsaw's attempts to extricate itself from what it sees as the clutches of Russian energy firm, Gazprom. PKN Orlen has already bulked up, receiving conditional EU antitrust approval to take over smaller domestic rival Lotos in the summer, and acquiring Polish power firm Energa earlier this year.

But the EU will have the final say on the merger and it would be fair to say that relations between Brussels and Warsaw haven't been the best in recent years. While the bloc's antitrust policy seems to be shifting towards the need to support the creation of larger European companies to compete with Chinese, Russian and US firms, it is far from clear that it will give the green light. The issue of the Nord Stream 2 pipeline could find itself folded into the political mix as the ongoing struggle between Berlin and Warsaw continues.

The state owns 27.52% of PKN and 71.88% of PGNiG. Their combined market value is over €13 billion. The merger of all entities—PKN Orlen, Energa, Lotos and PGNiG—would create a company with an annual turnover of 200 billion zlotys (€45 billion; $50 billion). Last year, the net profit of the four entities was 6 billion zlotys. For comparison, last year's revenues of the largest European oil company, British-Dutch Royal Dutch Shell, was 345 billion pounds (€390 billion; $410 billion)), and net profits of 16 billion pounds. 

Domestic politics clears the way

When Jerzy Kwiecinski resigned last week as CEO of PGNiG, only 10 months in his post, it seemed domestic political obstacles to the merger were being cleared. Kwiecinski had cooled in his attitude towards the merger and many believe Orlen CEO Daniel Obajtek cashed in a few political chips with the ruling Law and Justice (PiS) leader, Jaroslaw Kaczynski, to see he was removed. His departure weakens the position of economic liberals such as PM Mateusz Morawiecki and Piotr Naimski, the main architect of PiS's energy policy.

PiS has engineered a reversion to a kind of state patronage model of economic management, where the relationship to the ruling party is crucial. The recent political unrest within the ruling coalition saw factions divvying up fiefdoms in their various sectors of the economy and threats of cutting patronage saw internal critics fall into line.

"Given that it would be strongly bound to government energy policy, such actions would be in line with the energy strategy of the state," Anna Mikulska, of Rice University’s Center for Energy Studies, told DW. "This will depend on those who stand at the helm of the proposed investment and the level of domestic politicization of energy issues versus comprehensive economic and energy security assessments," she says. "But the Polish government's involvement in energy market is nothing new and nothing that differs substantially from other European countries," Mikulska says.

Polish strategic energy policy

There are two main advantage of the potential acquisition, says Aleksander Szpor of the Polish Economic Institute (PIE) in Warsaw. Firstly, increasing the capacity of Polish companies to attract the capital necessary to undertake the energy transition.

"Secondly, it can help to more closely align the targets of the energy transition among different Polish stakeholders and reduce the costs of overlapping activities," Szpor told DW. "There are also a risk. The consent of the Commission may be conditional and the price high, for instance the resignation of full control over the import capacity via the Polish LNG terminal," he adds.  

"As a large, multidimensional company, in theory a large Orlen/PGNiG could not only would have a better bargaining position against other large European and non-European players (US, China, Russia), but would also be able to achieve better synergy between its actions and economies of scale," Mikulska says. 

Poland has long been keen to end its reliance on Russian gas, and Warsaw says it will not buy any gas from Russia after 2022, when its current contract with Gazprom, known as the Yamal Agreement, ends. Instead, the country plans to get its gas from Norway and in the form of liquefied natural gas (LNG) shipped from the US. The expansion of the LNG terminal in Swinoujscie, the construction of the Baltic Pipe and bringing the floating FSRU terminal to the Gulf of Gdansk are testimony to Warsaw's ambitions in this regard.

"Bigger companies have more possibilities to carry out bigger and capital-intensive projects such as building offshore wind farms or big gas-fired power plants. In this context, it will help to change the Polish energy mix towards low carbon," according to Maciej Jakubik of Central Europe Energy Partners (CEEP), an organization that represents the interests of energy companies from Central Europe. A new entity would be able to gather more significant funds for offshore, photovoltaics and low emission investment, he added.

In July, Fitch said that for Orlen, the acquisitions would "firmly position Orlen for the forecast change in energy mix as consumption of oil and oil products is substituted by renewable electricity and natural gas."

Energy sector analysts expect the market in emerging Europe to become more integrated and more competitive. With plans such as the Baltic Pipe and Bulgaria's Balkan Gas Hub, energy companies in the region will face both challenges and opportunities."Orlen will become the biggest energy company in the region and thus will have the possibility for further expansion. We can expect some acquisitions in neighboring markets, probably in the downstream sector," Jakubik said.

Brussels moving too

The approval of the Orlen-Lotos merger in July by EU competition czar Margrethe Vestager was a sign that EU's industrial policy was taking a more political direction. Current EU state aid rules are meant to stop national governments helping favored domestic firms with tax breaks or subsidies.

But after EU antitrust authorities' decision to block several large mergers in 2019, there has been a debate within the bloc about how competition policies could be improved. France and Germany want the EU to deprioritize consumer prices as the key factor in deciding mergers, and allow companies to turn into global big hitters. France's finance minister, Bruno Le Maire, and German Economy Minister Peter Altmaier signed a joint manifesto calling for reform of the EU's competition rule book, including relaxing merger regulations.

What next?

How this will play out is anyone's guess, experts said. "Recent voices from France, Germany and also Poland that in particular call for changes in merger control approach, with a focus on efficiencies brought about by proposed mergers. One can only speculate that perhaps Orlen's new green strategy might have been part of the game. Or maybe not," EU specialist Wojciech Paczynski told DW.

“It will be interesting to observe, given that the Polish government is relatively free to act in the near term as there are no upcoming elections. That being said, the pandemic and social issues create several thorny issues that the government may be careful of stepping into another controversy," Mikulska concluded.