Your refinery, which was founded back in 1895, launched production in 1957 after re-allocation to new premises in Vlcie hrdlo, Bratislava, relying on deliveries of Soviet crude oil. Since then it has gradually become the biggest petrochemical complex in the Slovak Republic. Could you briefly describe development of Slovnaft and its transformation?
I think that during the last ten years our joint stock company underwent a major transformation process as a part of the transition from centrally-planned to market-orientated economy. Former centralized regime did not allow companies to expand according to their needs and Slovnaft was at that time orientated only to production and logistics.
It meant that we were neither purchasing raw materials nor we were selling products on domestic or foreign markets and naturally, we missed some activities taken over by the state, in particular activities typical of financial sector. Basic problems in post-communist countries are in the management of finance and marketing. That is why these areas required over the last years special care and attention but naturally it is not simple to find a good finance or marketing manager.
Can you describe the transformation process of Slovnaft during those ten years prior to MOL's entry in your capital?
In 1992 Slovnaft as former state enterprise was transformed into a joint stock company 100 % owned by the state. Already in 1992 as part of the coupon privatisation investment funds and individual shareholders acquired approximately 20 % of the shares. An important change happened in 1993 when Czechoslovakia split into two sovereign states. In that period management started to look for own ways of the development of the company. At the beginning of 1994 a strategic development project was adopted for the period of forthcoming 10 years.
The trickiest part of this project was the financial aspect; in line with adopted financial models we started piling up our share capital by USD 112 million, which took place in 1995. It would be a challenge even today as Slovak capital market was and still is unable to accept such a big offer.
I think that we were the first company in the Central-European region, which was capable of selling new issue of shares worth USD 112 million, which represented piling up the share capital by 25 %. Foreign investors acquired majority of shares. We were successful in meeting two requirements: firstly, we reduced the stake of the state and simultaneously we acquired badly needed capital to be used later for development projects.
By improving own activities we stepped up creation of own resources. However, we were still lacking financial capital for project implementation so we announced subscription of a syndicated loan facility amounting USD 250 million, which we acquired by the end of 1996. An important feature was that we were successful in acquiring this credit line without a state guarantee relying on company guarantee only so that no burden was generated towards the state. This move led to a total modernization of the refinery finished in March 2000 by commissioning of the ultimate plant unit of the EFPA technology complex - Environmental Fuel Project Apollo. This was how Slovnaft, a. s. joined the club of most advanced refineries in Europe.
And it seems that this coup has paid back when looking at your financial results ...
According to preliminary year 2001 results our turnover exceeded USD 1.5 billion, which is approximately the level of the preceding year. As regards net profit, compared to year 2000, we recorded the rise of 26 % to the level approaching USD 66 million.
What preceded these results? You mentioned modernization of the refinery. Can you be more specific?
It is very demanding to squeeze ten years of work into one hour. After piling up shareholders' equity the privatisation of Slovnaft continued and in 1995 employees-cum-managers joint stock company became involved in the process and purchased shares for favourable price. This aspect of privatisation was widely discussed not only in Slovakia but also abroad. On one side it was called a privileged privatisation but on the other side the aspect, which was not mentioned, were the conditions of the company before and after privatisation process. Transformation of such a significant company depends predominantly on the quality of people, like anywhere else in the world, and usually the starting position is not that important as the final one. Many companies in the Slovak Republic, but also in other transforming countries, went bankrupt because of those who were managing them, as they were incompetent to manage under totally different economic and social conditions.
During the last 50 years the state failed in its role to manage economy centrally and that was the rationale for the privatisation of companies, responsibility for their operations was transferred to private hands. Transformation of a company means also a change in how people think as they were above all used to some welfare benefits, social security, social allowances, rewards etc. and one cannot expect the situation would change over ten years; it represents a generation gap. We had to persuade our own employees that all those heavy investments were necessary for the company to survive tough competition pressures and would pay back.
Refinery modernization and finalisation of company upgrade encompassed also completion of the company by purchasing and marketing facilities. All these targets had to be hit within the period of 6 to 7 years. During that period we invested approximately USD 1 billion. It is quite a lump sum for such a company as Slovnaft, a. s. and I admit that we were also rather heavily indebted company.
However, as in the year 2000 we were successful in getting a strategic partner and also in launching new technology we became a financially stable company with very low gearing. By the end of 2001 gearing was 14.2 % while usual gearing in the refinery-petrochemical business may approach as much as 40 %.
What are your priorities? Do you intend to confine to core business or do you intend to diversify and what market shares are you aiming at in these different sectors?
That is a very good question indeed. In 2001 we already started restructuring our business and decided to get rid of all non-core business activities. That means we scanned our complete ownership portfolio and started divesting everything outside the perimeter of our core business. We do not conceive investing into diversification projects, which are not directly linked to our core business. With our strategic partner we believe that there are enough opportunities in Central-European region within the framework of a joint development of core business.
In 1999 when we were launching the tender for a
strategic investor we had two directions on our
mind. One concept we had was to get a distant partner
territory-wise; we assumed it would be a multinational
company and another one was to get a regional consolidator.
When you look 3 years back you can see that was
a time when oil giants started to merge and these
mergers usually took 12 to 24 months as a minimum.
It indicates that companies focused at that time
on these mergers and so after discussions with our
advisors we decided to follow regional consolidation
route. In the international tender MOL was the most
successful company. |
As regards your downstream operations, what is your investment strategy for expansion of your service stations network?
In principal, business activities in the refinery are split into two major sectors: wholesale and retail.
Some theorists have been trying to create a boundary between wholesale and retail activities though in reality it is impossible as you can be 100 % sure of selling your products only at your own service stations. That is why investments in own service stations network are a must. We are at the beginning of the process as if in 1992 we did not own a single service station now we have in total 367 of them in Slovakia, Czech Republic, Poland and still the number is insufficient; we want a bigger market share.
A lot of EU standards exists which will have to be applied to service stations in the European Union. Do you comply with these standards at present?
In Slovakia as part of the transformation to a joint stock company we acquired from the state a small network of service stations and later we purchased more than 200 service stations majority of which did not comply with the EU standards, especially as regards ecological parameters and also their design was substandard. That is why the Board of Directors of the company approved a project last year, which should lead to such a situation that all our service stations would comply with the EU standards by 2005. At present we have already been constructing service stations according to such a model both, in Slovakia and abroad. Naturally we also have to respect EU market quality requirements on our products as we have been exporting approximately 70 % of our goods either to the EU or to EU-associated countries. Presently we meet all quality parameters valid in the EU for motor fuels and we have been working on an investment project enabling us to meet more stringent parameters coming to force from 2005.
Most of the crude oil you process comes from Russia, right?
Russia covers 100 % of our crude consumption as from logistics viewpoint it is the cheapest way; we are directly hooked-up to the Friendship pipeline. However, after refinery modernization we can mix Russian crude with any other crude oil including heavier crude types from other exploration territories.
OPEC countries did their best in achieving crude production cuts in Russia. Can such a decision constrain your activities?
No. The request for reduction of own OPEC production by 1.5 million barrels per day and for reduction of production in Russia, Mexico, and Norway by 500,000 barrels per day is not targeted against us. We represent a small crude oil and crude oil derivatives consumer; territory of northern America is the biggest consumer. Crude oil consumption follows fluctuations of economic development there. Because such a rule applies that the biggest player decides. Global crude oil consumption dropped off, which is the reason why OPEC countries have been pushing non-OPEC countries to decrement their production. Because if that were not the case it would be only OPEC countries, that would stabilize crude oil prices and non-OPEC countries could benefit.
Which kind of development would you foresee on crude oil markets in 2002?
If I knew that I would not be a Slovnaft manager. All forecasts are based on some analyses but one has to be aware that it is still a theory. In the past OPEC was unable to create a mechanism capable of maintaining a desired price level. It seems that such a mechanism has already been invented. The plan for two forthcoming years is to keep prices between 22 and 28 USD / bbl. However, it depends a lot on discipline of OPEC and non-OPEC members.
How a non-OPEC country can be forced to follow those rules?
It is the matter of a mutual agreement because each of those countries represents a sovereign subject and as such cannot be forced in anything. They have to recognize that the only way to getting result is to observe discipline and behave according to certain rules.
How do you visualize Slovnaft in 5 years time on the assumption that Slovakia would at that time be an EU member state?
We shall see what reality will look like as it is a long period and much will depend on the economy development in Slovakia and Europe. Naturally, Slovnaft fully supports the integration concept of the Slovak Republic in the EU and NATO. Much will also depend on drifts in global economy. All producers and sellers are afraid of global economy recession leading to slump in standard of living and to downturn in demand for fuels. If the demand falls the price war starts. Naturally, a consumer may favour such a situation but suppliers cannot go below some limits. One cannot just think what would be the situation in 5 years time but you have to create resources enabling you to innovate and modernize in the future. That is why we are clapping our hands when the market is demanding still more and more.
What will be your personal challenge as the Chairman of Slovnaft Board of Directors in the forthcoming months?
My challenge is to be as helpful as possible in co-ordination of the two companies cultures harmonization in Slovnaft - MOL tandem. Surely you will agree with me that it is usually rather difficult and it is not just a specific feature of this region but it is normally the case everywhere. The sooner we overcome all problems and harmonize our working relations the better for us as then it will be the right time to start working even more efficiently on projects we want to implement. Year 2001 was the first year of our activities with international management and naturally it brought many positive aspects we would like to develop further.
Note:
As of 31/12/2001 Mr Slavomír Hatina based on his own will terminated his acting in the capacity of the President of Slovnaft, a. s., Bratislava.
Based on agreement with major shareholders he remains in the position of the Chairman of the Board of Directors, the position he has been holding continuously since March 1994. Separation of the position of top representative of the executive management of the company (CEO) from the position of the Chairman of the Board of Directors took place due to practical reasons and such management form is typical of majority of refinery-petrochemical companies.
Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions. |
Slovnaft, a. s.