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Financial Times: Reason for pursuit lies downstream

By Ed Crooks and Haig Simonian
Published: September 26 2007 03:00 | Last updated: September 26 2007 03:00

With the whole Hungarian establishment and about40 per cent of its target’s shareholding ranged against it, OMV’s pursuit of Mol might seem quixotic.

But the potential prize, if the deal is done right, could be great.

OMV spoke yesterday about the benefits of a takeover in terms of upstream activities, such as the greater negotiating power a combined group would have in exploration and production deals. But the real benefits would be in acquiring Mol’s downstream assets: its refineries and petrol stations.

While the market for oil products is stagnating in “old Europe”, including OMV’s home country of Austria, “new Europe” is set to grow rapidly. Over the five years 2005-2010, oil product demand is set to grow by3.2 per cent a year in Hungary, and by 3.7 per cent a year in Slovakia, compared to just 0.7 per cent in Austria and 0.6 per cent in western Europe, according to Wood Mackenzie, the consultancy.

A merger would make the combined OMV/Mol a powerful operator in that fast-growing region, centred on the Danube basin, which both companies see as their core.

Excluding the effect of any disposals the merged company would make, it would become the fourth-biggest refiner in Europe with refining capacity of 877,000 barrels of crude a day – level with BP and behind only Total, ExxonMobil and Royal Dutch Shell.

In terms of the number of petrol stations, it would be the seventh biggest, behind those four companies, Eni and Repsol. Synergies will be worth €400m ($565.9m) a year, OMV believes.

However, while new Europe has attractive opportunities, it also faces risks, mostly arising from its historic ties to Russia.

Mol’s “jewel in the crown” is its refinery at Szazhalombatta in Hungary, a large and highly efficient operation designed to take Russian crude coming down the Druzhba pipeline. But it has become clear that Russian companies believe they have been giving too much away to refiners that have had a captive source of supply in Druzhba, and are seeking other options to improve their terms.

During the summer, Lukoil, Russia’s second-biggest oil company, slowed oil deliveries to German refineries to strengthen its hand as it renegotiated prices. A new pipeline being built to take oil to the terminal at Primorsk on the Baltic will further widen Russian suppliers’ options.

OMV argues that under its control, Mol’s refineries, especially the Duna refinery at Szazhalombatta, would have access to alternative sources of supply, from terminals on the Adriatic or from the Caspian region through Turkey.

Mol disputes the scale of those benefits. The central point of its case is that however large they are, they would be far outweighed by the fact that OMV would have to sell Duna to comply with EU competition rules.

OMV, by contrast, argues the deal would not be worth pursuing unless the refinery could be retained.

Yesterday, the group spoke only of “some disposals” being required to win approval. “Such disposals will not materially impact the attractiveness of the combination”, it said.

Approval from the EU seems set to be critical, deciding both whether the Hungarian government’s efforts to protect Mol are permissible, and whether the benefits of a deal would be up to OMV’s expectations. The battle may be decided not in Budapest or Vienna, or even in the markets, but in Brussels and Strasbourg.

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