A) MACROECONOMIC ENVIRONMENT
In the last two quarters Slovak economy increased its dynamics against the previous year. Both domestic and foreign demand participated in the growth of GDP. The first six months were characterized particularly by the increase of the formation of gross capital which from the mid-term perspective is an important determinant of the prosperity of economy. Slovenská ratingová agentúra, a.s. positively evaluates the conclusion of other sections in the process of negotiations with the European Union as well as the enhancement of stability in the financial sphere (by means of privatization as well as legislative changes). The sale of state share continues in the energy sector as well. The progress made in the area of some structural reforms was also recognized by the rating agencies Standard&Poor`s and Moody`s that increased long-term rating of Slovakia in foreign currency to the investment degree. The regular annual report of the European Commission has designated the Slovak Republic as functioning market economy.
However the last months brought also events that may mean a potential threat to Slovakia in the future period. The terrorist attacks in the United States have an important influence on U.S. economy as well, which got into recession because of them. The key question is: How long will the recession take? In absence of other events of military nature which could have a substantial influence on U.S. economy, the massive monetary and fiscal stimuli should cause the growth of GDP as early as in the second half-year 2002. In this case the recession is only of short-term character and it should not have significant and long-term effect on the performance of EU economies and subsequently that of the Central and East European countries. Moreover, the growth of GDP in Slovakia is no more produced exclusively on the basis of the growth in foreign demand. A positive effect of the recession is the expected lower price of commodities on world markets (by reason of weaker demand), which may be reflected in costs of companies. However the companies exporting commodities will probably have lower sales.
Other risks result from the relatively high potential growth of final consumption of households in the following year. In 2002 the regulated prices will only increase moderately which, according to the estimates of the Slovak Rating Agency, can decrease the dynamics of the consumer price index in the first two months of the following year to the level at the vicinity of 5%. Some rigidity of nominal wages can then lead to faster growth of real wages. Moreover, net income of population will also increase as a result of the reduction of natural person income taxes. The higher growth in final consumption of households may subsequently increase the deficit of current account because historical time series show relatively high elasticity of imports to the growth of household expenditures. At the same time, the actual situation is already unfavorable - according to the estimates of the Slovak Rating Agency, in September the deficit of foreign trade reached 9.5% of GDP (on a twelve-months basis).
Problems also persists in fiscal area and on labour market. Public finance actually represents one of the most problematic areas of Slovak Economy. However we must distinguish between the short-term and the long-term perspectives. The results of state budget management for the first ten months indicated that there would be probably no problems in keeping the deficit of public finance under the planned value (3.9% of GDP). To be objective we must say that if we talk about the planned value we bear in mind the methodology using which the objective in the area of deficit was determined. But from the mid-term perspective, there are still doubts on the sustainability of debit balance. The absence of consensus over the role of Government in economy and slow solution of problems in health, education and social areas and in public administration are the primary risk factors.
The company Transpetrol as the sole representative of the industry operates in very specific segment where it has a monopoly position. In the following period the results of management of the company can be mostly affected by demand for oil products in Slovakia, but also in the Czech Republic and the European Union. With the view of the expected growth in final consumption of households and relatively low expected oil prices in the following year the Slovak Rating Agency counts with a growth in demand for oil products in the Slovak Republic. As economic growth of the Czech Republic is backed by domestic demand the increase of demand is realistic also at the west neighbors. The situation in the European Union, where the decline in dynamics of prosperity will probably prevent high growth in demand, should be different.
Since the attacks on the United States the risk of sudden change in oil prices on world markets has significantly increased. The attacks on Afghanistan don´t mean any immediate threat to the price development but speculations on potential attacks on Iraq may cause a short-term fluctuation of prices. Not talking about other potential terrorist attacks on the United States that the official places in Washington have also warned of. In absence of unforeseeable events of military character, the Slovak Rating Agency does not suppose any significant rise in oil prices in the short-term horizon for several reasons. OPEC will probably not cut down its production until the end of year (the decision to cut down should take effect from January 1). In the following months we count with a decrease in demand because the recession will show mostly in the fourth quarter. At the same time, oil stocks are sufficient so the pressure on prices will be rather opposite. In addition, the actual production of OPEC is higher than the agreed quota. In the first six months of the following year the OPEC countries will have to develop much effort to keep oil prices within the determined range from 22 to 28 US$ per barrel. World demand will be rather weak and it is not sure whether the countries out of the cartel will be also inclined to reduce their output in the effort to rise black gold prices. Moreover, some countries, consumers, will prefer lower oil prices because it can support the growth of economy in the form of "saved" money at both households and companies.
We anticipate some revival of demand not sooner than in the second half of the following year. The question is to what level will OPEC want to reduce its production to rise oil prices. Moreover, agreement is one thing and its implementation another thing. Therefore we don´t believe that OPEC oil price will permanently exceed the limit of 25 US$/barrel without another unforeseeable shock.
We neither exclude a deeper fall of oil prices in case that the countries outside OPEC will use no endeavor to make corrections in their production. The negative attitude may even bring the prices nearer to the limit of 15 US$ per barrel. But at present we consider as more probable the scenario in which a slight retreat will be also made on the part of exporters outside the cartel so that oil price will keep at the proximity of the lower limit of the range determined by OPEC.
B) MICROECONOMIC ENVIRONMENT
As oil transport and storage is very specific segment of Slovak economy (also with regard to the monopoly position of the company Transpetrol), the analysis of the industry must be executed in the international context as well. Most European countries are dependent on oil imports which makes of oil transit and storage an important strategical and political interest.
Oil transport and storage in the region
Slovak Republic
Two oil pipelines cross the territory of the Slovak Republic: Družba and Adria. The oil pipeline Družba (with total length of 506.6 km in the Slovak territory) was built in the years 1960 to 1965 for the purpose of oil transport from the former Soviet Union to the Czechoslovak refineries. The works were pursued in the seventies and eighties and they consisted in the duplication of some primary sections. Družba enters the Slovak territory at the border with Ukraine and through 5 repumping stations continues to the Czech Republic (see the Figure). The diameter of the oil pipeline Družba in primary sections is 500 and 700 millimeters. Its total annual capacity achieves more than 20 mil. meter tons. Total length of the pipeline Družba in front of the Slovak territory is 2 280 km and it crosses the territories of Russia, Byelorussia and Ukraine.
The pipeline Adria starts in the Croatian port Omišalj, continues through Hungary and after the distance of 606 km enters the territory of the Slovak Republic where it has the length of 8.5 km. In Tupá it is connected to the pipeline Družba. The diameter of piping is 400 mm. The annual capacity of the pipeline Adria is 4.5 mil. meter tons. Adria serves as complementary oil resource but it is permanently out of operation in the direction from Croatia to the Slovak Republic. However, as bilateral pumping allows it, the pipeline serves for the transport of Russian oil to Hungary and Croatia.
In addition to oil transport the key matter is its storage (considering the high dependence on fossil fuel imports). The European legislation requires the volume of state reserves at the level of 90-days demand (approximately 644 thousand tones), which the Slovak Republic does not meet yet. Investments in storage tanks should ensure the enhancement of capacity to the requested level before the end of the year 2008. The planned capacity after the completion of construction is 730 thousand m3. In addition to state reserves it is necessary to ensure the storage for private companies (Slovnaft, Paramo, Česká rafinérska). The existing capacity of storage tanks (Budkovce, Šahy, Vojany) reaches 520 thousand m3.
The only Slovak buyer of crude oil is the company Slovnaft, a.s., which is actually dependent on imports of Russian oil. In the recent years the volume of demand has permanently moved around the level of 5.3 mil. tones, which only represents about 25% of total capacity of the oil pipeline Družba.
Czech Republic
From the view of the utilization of the capacity of oil pipelines in Slovak territory the Czech Republic plays the key role. In Czech territory the oil pipeline Družba is directly connected to the oil pipeline from Slovakia. The Czech section of the oil pipeline was put into operation step by step. The primary section was put into permanent operation in the year 1964/1965. During the following years the oil pipeline was intensified for needs of refining plants. Total length of the oil pipeline Družba in the Czech Republic is 547 km. The annual transport capacity represents 10 mil. tones.
Unlike Slovnaft which is dependent on Russian oil the Czech Republic reached diversification in the past years by the connection of the terminal in Nelahozeves to the oil pipeline IKL, which starts in the Bayer city Vohburg an der Donau, Germany, where it is connected to the oil pipeline TAL leading from the Italian port Triest. The oil pipeline was put into operation on 9 January 1996. Total length of the line is 349 km, of which 179.3 km in German territory and 169.7 km in the Czech Republic. The annual transport capacity is 10 million tones. The repumping station in Vohburg has storage capacity of 200 000 m3.
In the last years the volume of transported oil from Slovakia to the Czech Republic showed descending tendency because of the diversification of imports at the west neighbors, differences of the Czech Republic and the Russian supplies and the modernization of the refining plant in Kralupy as one of customers of the company Transpetrol. While in 1998 Družba transported to the Czech Republic about 5.5 mil. tones, in 2000 it was only 3.6 mil. tones. The differences with Russian oil companies have been settled so the transported volume has showed ascending tendency in 2001. In the first six months of this year the volume increased by 9.1% against the same period of the previous year. The faster growing Czech economy has also played a role in this context.
Hungary
Oil production and oil industry has a key position in Hungarian economy. In the country there are four refining plants: Szazhalombatta, meeting the European standards, and other three smaller refineries located in Komárom, Zalaegerszeg and Tiszaújváros. Oil and oil products are kept in fifteen stores, of which 13 owned by the company MOL.
Hungary produces about 7 million tones per year, of which 1.2 mil. tones come from own resources of the country and the rest from supplies by the oil pipeline Družba. The oil pipeline Adria connecting Omišalj to Szazhalombatta, only serves as a diversified resource in case of the lack of oil.
The volume of transported oil from Slovakia to Hungary and Croatia actually reaches about 5% of total amount of transported oil through the territory of the Slovak Republic. In the first six months the transport through the oil pipeline Adria to Hungary represented 241 mil. tones, which means an increase of 42% against the same period of the previous year.
Ukraine
Since 1991, the year of independence of Ukraine from the former Soviet Union, the country has been trying to reduce its dependence on external resources, particularly Russian ones.
Total length of the Ukrainian oil pipeline system is 2 781.5 km. The country play an important role as transit corridor for oil transported from the Russian Federation to Slovakia and Hungary. In 2000 the volume of transported oil through the oil pipeline Družba to Hungary and Slovakia was 15 million tones.
Another effort at the expansion of the capacity of the transit system - as an alternative to the existing oil transport channels - is the construction of the section Južnyj - Brody with total length of 670 km. Južnyj has the daily capacity of 800.000 bbl/d. The completion of the oil pipeline Odessa - Brody will allow to Ukraine to function as a transit country for Caspian oil.
Negotiations are going on between Transpetrol and the Ukrainian operator of the oil pipeline "Družba" with the view of connecting one of the oil pipelines from the Caspian region which would significantly enhance the importance of the Slovak Republic as transit country not only for the Czech Republic but also for the West European countries.
Austria
Like the other countries in the region, Austria is dependent on oil imports. Domestic oil output provides resources in the volume of about 1 mil. tones/year while imports represent 7 to 8 mil. tones. Most part of imported oil is channeled to Schwechat, the only refinery in Austria, through the oil pipelines Transalpine (TAL) and Adria-Wien-Pipeline (AWP). The length of AWP is 420 km and its capacity is estimated to 10 mil. tones per year.
South Germany
The oil pipeline Transalpine (TAL) connects the Adriatic port in Triest to the German refining plants located in Ingolstadt and Karlsruhe with length of 759 km. The existing annual transport capacity is 37 million tones, of which the refinery in Karlsruhe processes 14 million tones.
TAL is connected to the oil pipeline IKL, which continues to the Czech Republic and serves as the source of diversification. Its annual capacity is 10 mil. tones.
The potential of the Slovak Republic - maximization of transport volume.
With regard to the reducing volume of transported oil, the Slovak Republic looks for possibilities how to reduce in the mid-term perspective the free capacity of the oil pipeline Družba. Actually the following possibilities seem the most realistic: supplies to the complex in Ingolstadt, Germany, for the refining plant OMV Schwechat in Austria, and the increase of supplies for the Czech Refining company and the countries of the former Yugoslavia.
The Czech section of the oil pipeline Družba as well as the oil pipeline IKL have the maximum annual capacity of 10 mil. tones. Technical improvement of the oil pipeline will allow oil supplies from the oil pipeline Družba to Ingolstadt. This oil can be supplies through the system of Transpetrol only, so there is a potential for the increase of transported volume of 7 mil. tones per year. This is calculated as the annual capacity of 10 mil. tones less total consumption of the Czech Refining company, which represents 2.99 mil. tones per year purchased from Transpetrol out of total consumption of 6 mil. tones per year. This additional volume could be used by the refining plants located in the region of Ingolstadt or by the Czech Refining company.
On the contrary, the modernization of refining plants slows down the growth of the volume of transported oil. On one hand, the efficiency of production processes allows to produce a larger amount of outputs for the same volume of inputs. On the other hand, the quality of Russian oil sometimes does not meet the requirements of more advanced production processes.
In the short-term horizon we don´t anticipate any significant changes in the structure of customers or in the volumes of transported oil supplied by Transpetrol. The growth in domestic demand in the Slovak Republic can be reflected in higher purchased amounts for Slovnaft, but with regard to the project EFPA the dynamics should not be high. In our opinion the volume in 2002 should fluctuate around the central point of optimal band for Slovnaft (5 to 6 million tones). In case of the Czech refineries the conservative scenarios forecasts the annual volume of about 3.5 mil. tones of oil. In opinion of the Slovak Rating Agency, the other supplies should move around the level of 0.2 to 0.5 mil. tones (revival of economies of the former Yugoslavia with lower anticipated oil prices). At present we consider as the most probable the volume of transport during the following year within the interval from 9.0 to 10.0 mil. tones.
From the mid-term perspective, the key moment is the possibility of Caspian oil transport through the oil Družba. Oil from this area has higher quality and is of great interest for the west part of the old continent as well. It much depends also on the privatization of Transpetrol, i. e. on the power of the new owner to push through the interests of the company. Upon completion of works on the oil pipeline IKL oil could also run in direction of Germany, which would create new sales possibilities.
The distance between Schwechat and Bratislava is not difficult to overcome which could increase the volume of transport and diversify imports of minerals in Slovakia at the same time. The expected annual transport maximum on this section would be 2 mil. tones in both directions. If the new owner has strong influence in the region and succeeds to make contracts for Caspian oil we don´t exclude the growth of the volume of transported "black gold" of 50 to 80% in the mid-term horizon. However, without possibility of transport of Caspian oil, the annual volume at the amount of 9 to 12 mil. tones seems the most realistic.
Expected volume of stored oil
In addition to oil transport, "core business" of the company Transpetrol includes its storage. In the previous years revenues from this operation were only at the level of 2 % of revenues from transport, but in the future we can expect some growth in this area, thanks to the approximation of law in the section Energy with the European Union.
In the recent years revenues from storage were relatively stabilized: in 1999 they reached SK 31,094 mil. and in the last year SK 31,854 mil.. The storage of state material reserves recorded in 2000 revenues at the amount of SK 21.7 mil.. With regard to successive increase of the volume of stored oil for Government in the next years we expect an ascending tendency of revenues from this operation. The target volume of state reserves is 644 thousand tones, of which one half should have the form of oil.
Conclusion
The industry of oil transport and storage ranks among Slovak industries with strategical importance. By its geographic position, total capacity of oil pipelines and possibility of transit of oil with different quality Transpetrol ranges with perspective companies of the industry in the Central European region. We consider the transit of quality Caspian oil as the most important opportunity in the sector because it would allow to significantly stabilize revenues of the company at relatively high level. Economic fundaments in the Czech Republic and Slovakia, together with the settlement of disputes between the Czech Republic and Russian suppliers, show that from the short-term perspective we can expect a slight increase of the volume of transit. The process of harmonization of Slovak legislation with the European Union clearly creates also conditions for the growth of revenues from oil storage (state material reserves). In our opinion the most serious risk consists in the existing dependence of the industry on Russian oil.