The European Union’s most coal-reliant country has a controversial new strategy for its €400bn ($456bn) green push: bulk up the Polish state oil company and let it lead the transformation.
Poland announced plans to build an energy champion with the financial heft to drive the overhaul by combining refiner PKN Orlen SA and gas group PGNiG SA. It may soon find, however, that growing European reluctance to invest in companies selling fossil fuels means that adding oil and gas to the mix won’t necessarily make it easier to gain funding.
“A combined entity could find it harder, not easier, to attract funds to finance green transition,” said Bloomberg Intelligence analyst Elchin Mammadov. “I’m very skeptical about this consolidation plan.”
Even as financing the oil and gas industry remains a big business for banks, the trend is changing. While most European banks have withdrawn from funding coal projects, the European Investment Bank last year decided to stop funding all fossil fuel projects, extending its ban to oil and natural gas.
State-controlled Orlen has argued that now may be the last moment to gain financing for green projects based on its oil and gas business.
“Who should be in charge of the energy transition in Poland? Show me a company that could carry such a task now,” chief executive officer Daniel Obajtek said last week. “If the country is to invest in low-emission power generation, we need to create a European champion.”
It’s still unclear how Orlen will finance the purchase of PGNiG, a company worth nearly $8bn and bigger than itself. The refiner this year bought state utility Energa SA and just won EU clearance to merge with oil peer Grupa Lotos SA.
With green projects typically 70% to 80% funded by debt, the size of the company isn’t as important as its existing leverage and credit rating, which in Orlen’s case is linked to the PGNiG deal, BI’s Mammadov said.
Moody’s rates Orlen at its second-lowest investment grade. It revised its outlook on the Baa2 rating to positive after the PGNiG announcement.
The scale of Poland’s green transformation is huge and the country — which relies on coal for 70% of its electricity — is the only EU member not signed up for the bloc’s goal for climate neutrality by 2050.
A government report showed the cost of meeting the target is upwards of €400bn, equivalent to about 80% of gross domestic product. Still, rising prices of carbon emissions and some of the continent’s worst air pollution are pushing it toward renewables.
The country plans 10 gigawatt of capacity in offshore Baltic Sea turbines by 2040, making it one of the continent’s hottest markets for wind power. It’s also planning solar projects and considering nuclear energy.
Before the Orlen-PGNiG bombshell, the government discussed rescuing power utilities by spinning off their coal assets, which would enable them to take on more debt to finance green investments.
Having Orlen lead the transformation is a double-edged sword. On one hand, it limits the role of coal-based power producers and sidelines powerful mining unions that for decades resisted change. But it also amplifies doubts over the future of the utilities themselves, with PGE SA — the country’s largest power producer — talking of bankruptcy.
“We can no longer pretend that we don’t see the problem, because otherwise the company could go bankrupt” within two years, CEO Wojceich Dabrowski told newspaper Dziennik Gazeta Prawna. Without the spinoff, debt ratios will worsen and banks may stop financing, he said.
Ipopema Securities analyst Robert Maj said decisions regarding the coal industry, not the Orlen-PGNiG merger, will ultimately decide the pace and scale of Poland’s energy transition.
“It’s a very positive sign that shedding of coal is being discussed, but this merger doesn’t have much to do with it at first glance,” Maj said. “The aim of the transaction is rather to create a chaebol, a monument.”
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