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Czech Republic: Eni and PKN eye Shell's stake in refiner

POLAND'S PKN Orlen and Italy's Eni are interested in buying Royal Dutch Shell's 16.3% holding in Ceska Rafinerska. Analysts claim it is a good time for Shell to sell its stake in the refiner; Shell refuses to declare its intentions.

Eni outbid PKN in May for ConocoPhillips' 16.3% stake in the refiner for an undisclosed sum. The deal raised the Italian company's stake to 32.6%. PKN's Czech subsidiary, Unipetrol, owns 51% of Ceska Rafinerska and had publicly stated its desire to buy ConocoPhillips' holding.

The bidding war came about because both companies had pre-emptive rights to purchase the shares. The refiner was established as a joint venture in 1996 by Unipetrol, Shell, ConocoPhillips and Eni, and operates two domestic refineries with a combined capacity of 165,000 barrels a day (b/d). ConocoPhillips said earlier this year that it wanted to sell its stake as part of a general move out of the region's downstream. It initially showed a preference to sell to its partner in Russia, Lukoil, which has been frustrated yet again in its attempts to buy refining assets in Europe.

Eni's successful bid was another setback for PKN's plan to turn itself into a regional champion. In April, the Polish company's newly (and politically) appointed chief executive, Piotr Kownacki, had claimed Shell and Eni were not interested in buying ConocoPhillips' stake. He could not have been more wrong.

Eni was delighted to increase its share in what it has described as "the leading refining company in the Czech Republic and one of the most important in Central Europe". Matthew Hall of Global Insight, a consultancy, says: "Eni will almost take its refining capacity in the country to 54,000 b/d, enhancing its integrated marketing and industrial activities. This acquisition represents a further step in Eni's strategy of improving the competitive positioning of its downstream activities in Europe."

Eni would like to take this a step further and buy Unipetrol's stake, but PKN says this is not an option. "[Eni] has not submitted any offer," Kownacki recently told the Polish daily Parkiet. "There are no talks on this subject and Unipetrol is not interested in selling its shares in this company."

The question for the two competitors is, therefore, what plans Shell has for its 16.3% share. PKN and Eni believe Shell will sell, but Shell, so far, has refused to comment.

Ceska Rafinerska has enjoyed a strong run recently, as the refining business globally has recovered. Unipetrol says its first-quarter refining businesses made a Kc490m (€17.3m) profit, compared with a loss in the first quarter of 2006 – the result of robust demand for products, a mild winter and a lack of shut-downs at refineries.

Yet there is a view that the refining business has reached a plateau and that margins may start to decline. If Shell shares that view, it may see an opportunity to sell a business at the top of the market. Then again, Shell may feel there is more upside in the value of its stake in Ceska Rafinerska, given the price that ConocoPhillips secured for its stake. Eni refused to divulge what it paid. CEO Paolo Scaroni claimed it was much less than the widely reported €0.5bn. But analysts say that even if the rumoured amount is close to the truth, it still undervalues the stake, implying a value for Unipetrol's 51% holding of $2.1bn.

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