ANALYSIS-Central Europe oil tie-ups slow Russian advance

By Iain Pocock

LONDON, Nov 6 (Reuters) - Central European oil companies' link ups have slowed efforts by Russian oil firms to expand into the region as the governments there look to limit their fuel dependence on their energy-rich neighbour.

Polish oil group PKN Orlen <PKNA.WA> in May beat a handful of firms including Russia's LUKOIL <LKOH.MO> and TNK-BP with its bid to take over Lithuania's Mazeikiu refinery.

Czech refining and petrochemical group Unipetrol <UNPEsp.PR> last month said it was interested in raising its 51 percent stake in domestic refinery operator Ceska Rafinerska, following market speculation LUKOIL was considering buying a stake in the unit.

"Most of the central European countries are dependent on Russian energy sources like natural gas or crude oil," said Arkadiusz Wicik, energy analyst for central Europe at Fitch Ratings in Warsaw.

"So increasing their dependence on the same country by allowing strategic control of refining assets may be too risky from the point of view of local governments."

Rather, most of the region's oil companies have been looking to reduce that dependency by sourcing oil supplies from elsewhere and by consolidating with each other.

As well as the purchase of Mazeikiu <MNF1L.VL> refinery in May, PKN last year bought Unipetrol, and is now looking at opportunities to expand in southern and eastern Europe.

In Romania, LUKOIL has a foothold with its 51,000 bpd Petrotel refinery.

But Austria's OMV <OMVV.VI> bought a 51 percent stake in Romania's top oil firm Petrom SA <SNPP.BX> in 2004, while the country's other refiner Rompetrol was bought out by its management in 2001.

An exception is Bulgaria, where a lack of diversification has left the country reliant on imports of oil, natural gas and nuclear fuel from Russia. While a new refinery is being built, the country's only operational refinery is run by LUKOIL.

"Bulgaria will focus on its national interest; we will negotiate with Turkey, with Egypt, we will hold talks if needed with Kazakhstan," Energy Minister Rumen Ovcharov said last week after announcing the country will sign a long-term natural gas deal with Russia's gas monopoly Gazprom by the end of the year.

"Unfortunately all these options are much more costly than the ones we have now. We will go ahead with the projects that are most economically sound for us."

RUSSIAN CRUDE

In Hungary, oil and gas firm MOL <MOLB.BU> bought Slovakia's only oil refinery Slovnaft in 2003 and holds a 25 percent stake in Croatian oil firm INA.

It lost out in a bid for a 51 percent stake in Turkish oil refiner Tupras in September last year.

While MOL may cooperate with Gazprom with gas storage or gas transit infrastructure projects, any such move would exclude any tie-up linked with its refineries, analysts said.

"Perhaps this is part of a play where Hungary wants to be more strategically important in terms of transit of Russian gas," Wicik said.

"But it's one thing to have Russian companies which own strategic assets like a major refinery in the country, and another to have cooperation with a Russian company in terms of a joint-venture for gas transit or gas storage."

But even as the region's oil firms consolidate and look to reduce their reliance on their neighbour's energy supplies, they remain reliant on Russian crude oil to feed their refineries.

When crude oil pipeline flows from Russia to Lithuania's Mazeikiu refinery were cut in July, the refinery had to rely on more expensive supplies delivered by boat.

"In the short run, there's no way to circumvent Russia," said Tamas Pletser, oil analyst at Erste Bank in Budapest. "The oil they buy from Russia is impossible to replace.

"In the long term, it's possible to find alternatives, but it's an issue of money. With the pipelines from Western Siberia in place, buying from Russia is the cheapest way."

Even so, the region's oil companies are still looking for other options.

PKN is focusing on Kazakhstan, Azerbaijan or Iraq in its efforts to expand its oil exploration business.

Local rival Lotos, which now buys almost all of its annual throughput of crude oil from Russia, plans to limit supplies from any single source to 60 percent by increasing its production in the Baltic Sea and boosting deliveries from countries such as Kuwait.

Unipetrol has decided against switching crude oil supplies for its 68,000 bpd Kralupy refinery to Russian Urals crude in place of more expensive North African sweet crude after shareholders withheld their support for the move.

Its larger Litvinov refinery already runs on Urals crude.

But with crude oil diversification for the likes of PKN costly and Russian companies keen to expand into the region to diversify their own assets, some analysts predict joint ventures between the two sides are inevitable.

"The ability of Russian companies to expand into the region depends on how far they might go in sharing access to oil and gas fields," said Max Shein, head of equity research at Moscow-based Broker Credit Service.

"The countries will cooperate in the long-run."

((Reporting by Balazs Koranyi in Budapest, Piotr Skolimowski in Warsaw, Tsvetelia Ilieva in Sofia, Jan Korselt in Prague; editing by James Jukwey; email: iain.pocock@reuters.com))

Keywords: ENERGY REFINERY LINKS

Keywords: ENERGY REFINERY LINKS