Fuel safety in the oil sector stands for the certainty to meet the demand for crude oil, oil products and earth gas, in a specific volume and time, in an extent allowing the economy to function properly. This is also about preventing disruptions in supplies of crude oil and oil products, expansion of the logistics infrastructure for collection, transportation and storage of that raw material and its products. Finally, it is also the maintenance of intervention and strategic reserves in line with the estimated demand. An element of the fuel safety improvement is also the diversification of oil import sources.
By August 2022, there were two key fuel companies in the oil sector in the Polish fuel market (statutory companies): PKN Orlen and Grupa Lotos, which competed in many areas. Their share in the retail market in 2021 was 23.2% and 6.6% respectively, placing companies in the first and the third position correspondingly in terms of the number of their fuel stations (the second position was taken by BP concern). PKN Orlen and Grupa Lotos competed also in terms of the crude oil processing. The oil processing capacity of Grupa Lotos refinery in Gdańsk reached 10 million tonnes of oil per year, whereas the capacity of PKN Orlen refinery was 16 million tonnes.
The audited period was 2018-2023, as that was when significant processes were taking place, having impact on the picture of the oil market in Poland and the fuel safety. In 2017, the government started to implement the Polish Government Policy for the logistics infrastructure in the oil sector and in 2018 the process of merging Orlen with Grupa Lotos, and then with PGNiG SA, was started. The audit was to establish if the measures related to the improvement of fuel safety in the oil sector were properly and effectively implemented. The audit covered: the Ministry of State Assets, the Ministry of Climate and Environment, the Office of the Government Plenipotentiary for Strategic Energy Infrastructure and two companies: PERN SA, Gaz-System SA.
NIK’s attempt to audit PKN Orlen failed. Since the company prevented the audit from being carried out, NIK filed a report of possible criminal activity to the prosecutor’s office under the Act on NIK. The company’s conduct represented a breach of NIK’s constitutional and statutory right to audit statutory entities.
Ineffective implementation of the government policy
The government objective to achieve full ownership control of the State Treasury companies over the hydrocarbon transportation and storage infrastructure, being critical for the state fuel safety, was not met. The objective was set out in the Polish Government Policy for logistics infrastructure in the oil sector and the Energy Policy of Poland until 2040. Hence, the state control over the logistics infrastructure for crude oil and liquid fuels was not strengthened.
The Minister of Climate and Environment failed to prepare an amendment to the Act on the provisions of crude oil, oil products and earth gas as well as procedures in case of threats to the state fuel safety and oil market disruptions. That Minister (until November 2019), and then the Minister of State Assets did not make sure PKN Orlen was properly supervised in terms of transporting strategic elements of infrastructure from that company to companies fully controlled by the State Treasury.
Finally, the assets were not transferred because PKN Orlen suspended its activities. The Minister of State Assets did not use his ownership rights in that situation to make sure the policy of the Council of Ministers was implemented. He did not show any initiative also when the Council of Ministers adopted the Energy Policy of Poland until 2040 in February 2021, indicating him as responsible for organising the ownership structure of the fuel infrastructure (with the deadline in 2021).
Merger of PKN Orlen with Grupa Lotos
On parallel with refusing to perform tasks defined by the Council of Ministers, PKN Orlen, in cooperation with the State Treasury, initiated the process of merging with Grupa Lotos.
The key moment was when the European Commission passed the so-called remedies in July 2020 to ensure competitiveness in the Polish and European markets. For the EC to approve the merger of Orlen and Lotos, the former had to sell part of its assets from the areas of fuel production and wholesale activity, fuel logistics, retail activity, aviation fuel and biofuel market. These remedies considerably changed assumptions of merging those companies and altered the picture of the Polish oil sector. Orlen, following negotiations with the EC, agreed upon conditions of individual transactions and in line with those conditions the company sold the assets of its own or of Grupa Lotos, as required by the European Commission.
PKN Orlen received PLN 4.6 million for selling assets covered by the EC remedies (as of 31 December 2022). According to NIK, PKN Orlen sold the assets for a price underestimated by PLN 5 billion minimum.
The selling price of the minority shares of Rafineria Gdańska Sp. z o.o. for the benefit of Aramco was particularly inadequate. It was PLN 1.1 billion, although NIK estimated its value at PLN 4.6 billion. At the same, Aramco obtained extra benefits and rights, including the power to veto key strategic decisions on the management of Rafineria Gdańska Sp. z o.o. Besides, Aramco received the right to use 50% of products made in the Gdańsk refinery. It means that as compared with the time before the merger of PKN Orlen with Grupa Lotos, the statutory companies could no longer use products (petrol or gas oil) derived from the processing of about 5 billion tonnes of crude oil. In that way the State Treasury lost impact on approx. 20% of the market of refinery products made in Poland.
Risks in the process of merging PKN Orlen and Grupa Lotos partly materialised:
- strikingly low selling price of Grupa Lotos assets;
- Aramco achieved a very strong position in Rafineria Gdańska Sp. z o.o. and has the veto power in key issues;
- the State Treasury has no rights to block Aramco from reselling its shares in Rafineria Gdańska Sp. z o.o. to another entity;
- in case Aramco decided to export products derived from oil processing in Rafineria Gdańska Sp. z o.o. instead of introducing them to the domestic market, there is a risk of deficit in the fuel market.
Without auditing PKN Orlen, NIK could not establish why some assets were sold below their value. It needs to be noted, though, that the advisory company, which prepared analyses on the said merger for the Minister of State Assets, indicated there was a risk of not achieving the market price due to poor negotiation position of PKN Orlen resulting from the obligation to meet the conditions specified by the EC. Also, NIK did not verify if the merger with Grupa Lotos was economically justified (for the same reason as mentioned above).
Improper merger supervision
The process of merging PKN Orlen with Grupa Lotos was not properly supervised by the Minister of State Assets who failed to meet some of his duties related to ensuring safety in the oil sector. The same irregularities on part of the Minister were identified in the merger of PKN ORLEN with PGNiG SA.
The Minister of State Assets did not have full knowledge about costs and benefits of the merger and its consequences for fuel safety and safety of critical infrastructure. Analyses, commissioned by the Minister, were based on incomplete source data and the key results of estimation of the synergy effects were a copy of PKN Orlens’s calculations, without the knowledge of source data and the methodology adopted to estimate those effects. The Minister lacked knowledge about the terms of transactions made by PKN Orlen as part of implementing remedies defined by the EC and did not try to acquire that knowledge.
Besides, the Minister of State Assets did not secure essential rights in the agreements and understandings signed with PKN Orlen and other companies participating in the merger process.
The Minister failed to analyse risks related to the implementation of the European Commission remedies at any stage of the merger process. Also, he did not consider some recommendations related to securing the interest of the State Treasury.
NIK stands in a position that the Minister not only could impact Orlen’s activities related to the merger with Grupa Lotos but also had the statutory obligation to control that process. However, he did not use his statutory rights to acquire essential data or information related to the companies’ merger process that would allow him to objectively estimate the costs and benefits of the merger.
The Minister of State Assets almost entirely gave up exercising prerogatives related to his statutory function. The Minister failed to use his rights to obtain detailed information about ongoing transactions. In other words, the Minister remained passive in the consolidation processes.
Negligence of the Minister of State Assets
First of all, under the Act on auditing some investments, the Minister could introduce another company (Lotos Asfalt Sp. z o.o., currently: Rafineria Gdańska Sp. z o.o.) to the list of protected entities, which would make the Minister of Assets an auditing body in the proceedings concerning the purchase of the company’s shares by Aramco. Then the Minister would have access to all essential information and documents related to the merger.
Using his statutory mandate, the Minister of State Assets should obtain all information to identify any potential threat to the operations, business continuity and integrity of the critical infrastructure being Rafineria Gdańska Sp. z o.o. Besides, the Minister could have secured his mandate in the agreements with PKN Orlen, which were signed several times in the process of merging with Grupa Lotos.
In that situation, without having knowledge of the conditions of implementing remedies, the Minister filed a request to the Council of Ministers to approve the merger of PKN Orlen and Grupa Lotos. He did not use the opportunity to properly consult and seek advice on his request, he ignored the recommendations made and additionally requested a special (circulation) procedure, which prevented any discussion at the Council of Ministers’ session.
In that way the Minister of State Assets presented the Council of Ministers with requests to approve the merger of PKN Orlen with Grupa Lotos, and then with PGNiG, without submitting their reliable assessment. Prior to taking the decision on the companies’ merger, the Minister failed to provide members of the Council of Ministers with a wide spectrum of consultations and advising on PKN Orlen’s request to approve the merger with Grupa Lotos and PGNiG.
Chief irregularities in the Minister’s activities at the stage of presenting the Council of Ministers with the request to approve the merger of PKN Orlen and Grupa Lotos included:
- the advisory body appointed by the Minister did not provide an objective recommendation as it was the Minister’s support organ;
- the Minister did not use the mandate of the Economic Committee of the Council of Ministers or other support bodies of the Council of Ministers;
- the resolution was passed under a separate procedure, without public consultation or advising of the Committee on Legal Affairs and the Standing Committee of the Council of Ministers. The separate procedure can be applied in extraordinary circumstances which was not the case here.
As a result of all the above-mentioned activities and omissions the possibility of consulting and advising on the project of merging PKN Orlen and Grupa Lotos at the government level was limited as much as possible. The Minister’s efforts show that he did not aim at proper development of the government’s standing on the merger executed by PKN Orlen. Just the opposite – the Minister of State Assets ignored all warning signals and prevented any potential discussions in the support organs of the Council of Ministers.
Following those measures, the Minister of State Activities recommended that the Council of Ministers approve the merger of PKN Orlen and Grupa Lotos without ensuring proper cost and benefit analysis both at the level of entities subject to the merger as well as Poland’s fuel safety and its interest.
Risks for fuel safety in the oil sector
The merger of PKN Orlen and Grupa Lotos posed significant risk to fuel safety in the oil sector.
The government objective to achieve full ownership control of the State Treasury companies over the hydrocarbon transportation and storage infrastructure, being critical for the state fuel safety, was not met. The implementation of remedies resulted in transferring part of that infrastructure to private companies, over which the State Treasury has no ownership control: Unimot and Rafineria Gdańska.
Besides, under agreements signed by PKN Orlen with Aramco as part of the remedies, the foreign investor obtained the right to use 50% of products made in the Gdańsk refinery. It means that after the merger of PKN Orlen and Grupa Lotos the statutory companies could no longer use products (petrol, gas oils) derived from the processing of approx. 5 billion tonnes of oil. In that way the State Treasury lost impact on about 20% of the market of refinery products made in Poland. This poses a risk that the domestic demand for these products will not be met, if Aramco decided to sell products (which it is entitled to) in foreign markets.
It should also be noted that as part of remedies, Aramco obtained the veto power in Rafineria Gdańska Sp. z o.o. against key strategic decisions related to the company management. As a consequence, strategic decisions will be determined by the will of Aramco. It means that the State Treasury will not be able to implement economic policy of the Council of Ministers via the activity of the refinery in Gdańsk.
Neither the Minister of State Assets nor the Minister of Energy developed a strategy to eliminate those risks.
Effects of two mergers
Not a long time has passed since the merger of PKN Orlen and Grupa Lotos and PGNiG, so it is impossible to assess if the operational efficiency improved in such areas as refinery extraction and production or work efficiency.
Following that merger PKN Orlen became a multi-energy concern and significantly increased its share in the domestic market of crude oil products, also in the Polish power and gas market. Yet, a big part of refinery products (approx. 20% of the whole Polish market) was transferred to a foreign entity (Aramco) as a shareholder in Rafineria Gdańska Sp. z o.o.
The position of PKN Orlen in foreign markets improved, yet not in all areas. The share of PKN Orlen in Czech Republic and Baltic countries increased in terms of crude oil processing by 6.8 percentage points (up to nearly 58.9%) and by 10.7 percentage points (up to 83.7%). The company increased its share in the fuel retail market (by purchasing a petrol station network) in Slovakia (up to 5.6%) and entered a new market in Hungary with the share of 4%. The share of PKN Orlen in the European market in terms of petrochemical production did not change considerably.
Fuel safety
Continuous supplies of oil and finished products to the market were possible thanks to activities in the field of securing crude oil and oil product supplies in quantities meeting domestic demand as well as the expansion of logistics infrastructure in the oil sector.
The domestic market is dependent on oil supplies from abroad, due to the small volume of domestic production in relation to demand. In the audited period, the diversification of oil import sources increased. In 2022, the oil imports were diversified to such an extent that the oil imports did not exceed 50% from any direction and the oil imports from Russia were discontinued in February 2023. The biggest oil imports to Poland in 2023 came from Saudi Arabia and Norway.
Poland maintained stability and continuity of oil supplies due to the domestic oil logistics infrastructure.
The Minister of Climate and Environment properly executed his statutory obligations in terms of securing crude oil and its products, monitored the level of intervention reserves and the safety of market provision with oil products. Besides, he identified and managed risks related to the war in Ukraine. The Minister, making amendments to the Act on Reserves, did not consider activities which increased the role of the Government Agency of Strategic Reserves, and thus the state’s share in creating intervention reserves.
Recommendations
The audit results point to the need for significant improvement of supervision over strategic areas of the oil sector. Therefore, NIK made the following recommendations:
To the President of the Council of Ministers to:
- appoint a government administration organ responsible for implementing the Polish Government Policy for logistics infrastructure in the oil sector;
- update the Polish Government Policy for logistics infrastructure in the oil sector in terms of setting deadlines to complete unfinished tasks and meet all of the Policy objectives.
To the Minister of State Assets to:
- ensure, as part of the corporate governance in ORLEN Group, protection of the economic interest of the State Treasury and fuel safety protection, by conferring the mandate to the General Assembly of Shareholders of PKN Orlen in terms of giving consent in key issues from the viewpoint of the Energy Policy of Poland.
To the Minister of Climate and Environment to:
- make an analysis of consequences of PKN Orlen’s activities taken with regard to the implementation of remedies defined in the process of merger with Grupa Lotos, for the oil and gas market in Poland, including the level of Poland’s energy safety.
