Warsaw — Poland's largest refiner, PKN Orlen, said Tuesday it is increasing its monthly purchases of Saudi crude oil for its refineries in Poland, Lithuania and the Czech Republic by 100,000 mt to 400,000 mt.

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The deal is part of a drive by Poland and its state-controlled refineries to reduce their historical reliance on Russia and Urals crude delivered through the Druzhba pipeline, an effort likely to have intensified after a contamination issue with Druzhba supplies last year that reduced Russian supplies to Europe from May to July. The cleanup in Poland after the incident was set to take many months, Polish officials said.

The deal with Saudi Arabia "is another step on the road to securing the operation of our group's plants and increasing Poland's energy security," PKN CEO Daniel Obajtek said. "We are consistently building our trading position in different regions of the world. This process will undoubtedly facilitate the finalization of the acquisition of Grupa Lotos, when we will become an important recipient of crude oil for global partners."

PKN is still awaiting approval from the European Commission for its planned takeover of Poland's No. 2 refiner, the Gdansk-based Lotos. The latter has also been diversifying its crude imports, benefiting from its coastal location. However, the takeover proposal raised a red flag with the EC due to fears it could reduce the competitiveness of the fuels market in Poland and nearby countries.

PKN's Lithuanian refinery, at Mazeikiai, relies solely on a maritime terminal on the Baltic for imports.

Under its supply contract with Saudi Aramco, PKN was receiving 300,000 mt/month of Arabian Extra Light. The contract was originally for 200,000 mt in 2016 but was increased to 300,000 mt in April 2018.

PKN said that since the start of 2018 it had also bought spot cargoes from Angola, Nigeria, Norway, the US and Saudi Arabia.

More than 40% of all PKN's crude feedstock is now sourced from non-Russian suppliers, up from just 5% in 2013. Its largest refinery, the 326,000 b/d Plock facility, now gets more than half its crude from non-Russian sources. Its Russian long-term contracts are with Tatneft and Rosneft.

Competition concerns

PKN began the process of acquiring Lotos last February, and in July submitted its formal application for approval from the EC. But in September the Commission issued a "stop the clock" decision to give PKN more time to gather additional documents to support its case.

"In my opinion it's quite probable the acquisition will still go ahead. We won't get a clear 'No' from the Commission, but if it proposes strict remedies to allow the deal to go through, that could delay the process," Kamil Kliszcz, equity analyst for mBank, told S&P Global Platts.

Kliszcz said the Commission may require PKN to divest some assets before approving the acquisition, such as PKN's retail and infrastructure businesses. The latter would be more challenging for PKN's board, Kliszcz said, because opening up access to PKN's pipeline and storage infrastructure would require the introduction of new legislation.