Cold comfort for Slovnaft

THE HEAVY fine imposed by the Finance Ministry still hangs over the country's major oil refiner, Slovnaft, for what the ministry says is unjustified profit-making and violation of pricing discipline.

THE HEAVY fine imposed by the Finance Ministry still hangs over the country's major oil refiner, Slovnaft, for what the ministry says is unjustified profit-making and violation of pricing discipline.

The Finance Ministry's internal control section has reviewed the fine and reduced the original sum by Sk11.4 million (€294,000) to Sk1.34 billion (€34.5 million).

Finance Minister Ivan Mikloš returned the Slovnaft case to the first level authority (the finance control section) of the ministry on May 19, 2005.

Mikuláš Gera of the Finance Ministry's press department said that the reduction in the fine is related to Slovnaft's argument that the cost of research and development should be factored into its prices.

The oil refinery said that money spent on testing the quality of products, for example, were justified costs.

"This time the controlling body acknowledged that some of Slovnaft's investment into science and research represented justified costs," Gera told The Slovak Spectator.

"After receiving it, Slovnaft has 15 days in which to appeal the ministry's decision on the fine. If the company does appeal, the Finance Minister has an additional 30 days in which to decide on the appeal," Gera said.

Slovnaft said it will certainly appeal the fine and maintains that it has been operating in line with regulations.

"Slovnaft disagrees with the decision of the Finance Ministry and will use the right to appeal the decision. The company believes that it will manage to persuade the authorities with economic and legal arguments that Slovnaft operates fully in harmony with the valid legislation and its pricing policies are in line with EU competition laws," Slovnaft's spokeswoman, Kristína Félová, told The Slovak Spectator.

The Finance Minister would examine any appeal from Slovnaft. If he confirmed the penalty then the only recourse Slovnaft would have would be to turn to the courts. The Finance Ministry has been preparing for this eventuality, however.

"When the minister returned the decision on the fine to the controlling body, the goal was to revise the decision in a way that the risks of losing an eventual court trial are reduced to the minimum," Gera explained.

Slovnaft maintains that the profits it made, which inspired a massive inspection from the Finance Ministry, were justified.

"According to a study by the renowned consultancy agency, McKinsey, Slovnaft is making lower profits than comparable oil companies do. Slovnaft's profitability, measured by the most relevant indicator, the cash return on equity, was, in 2004, 7.8 percent, which is much lower than the 13.4 percent profitability level [normally] reached in the oil sector. It also means that Slovnaft investors have not gained the same profits they could have made by investing in other oil companies, " Félová explained.

According to Félová, Slovnaft, just like other oil refiners, bases its pricing policy on the development of oil prices on the international markets, the development of the Slovak currency against the US dollar (since prices for oil and oil products are quoted in US dollars) and local factors influencing supply and demand.

"Such a pricing policy is usual anywhere in the world. It is difficult to find a more transparent system of prices as the quoted prices, which are internationally acknowledged. Their development is published in real time, in the same way as the price of shares on the international stock exchange markets," Félová said.

However, the ministry says that it based the fine on the results of its audit, which tested how far the law allows Slovnaft to go in inflating its prices.

"We have published the Finance Ministry's position and have not seen the study that Slovnaft has been referring to. We have in our hands the results of the check conducted by the Finance Ministry, which were conducted based on the law on prices, so we strictly checked what the law allows Slovnaft to do. Slovnaft has been referring to a study prepared by a private firm," Gera told The Slovak Spectator.

A ministry inspection initiated by the Antitrust Office in November 2004, concluded that in 2002 and 2003 and the first nine months of 2004, Slovnaft illegally inflated its prices and made unjustifiably high profits.

According to the ministry, the high prices resulted in additional profits of Sk252 million (€6.5 million) in 2002, Sk276 million (€7.1 million) in 2003 and Sk824 million (€21.3 million) in the first nine months of 2004.

Late January, Mikloš said the ministry would be able to discipline Slovnaft using price regulations, putting the cost of fuel into the state's hands.

Slovnaft claims that the ministry's decision disregarded market principles.

The fine was the result of an audit that investigated the company's financial records between 2002 and September 2004.

Currently, Slovnaft is the target of another audit, which is looking at the company's figures from October 2004.

The Finance Ministry says that the oil refinery continues to abuse its dominant position on the market, a gambit that critics say has spiked prices at the pump.

The Finance Ministry's Gera said it was too early to say how the state would use the money, as the Finance Ministry is first of all waiting to see what steps Slovnaft will take.

"If Slovnaft pays the fine, which we hope it does, the money would count as standard income into the state budget," Gera explained.

Last year, Slovnaft posted a record net profit of Sk10.1 billion (€260 million). This represents a more than three-fold increase from the Sk3.148 billion (€80.7 million) earned in 2003. Total net sales of Sk85.174 billion (€2.1 billion) in 2004 represented a rise of 26.6 percent year-on-year.

Slovnaft also posted a taxed profit of Sk2.383 billion (€61 million) during the first quarter of 2005. Compared with the same period in 2004, this represents a 28.5 percent increase. Slovnaft's net sales rose by almost 17 percent year-on-year to reach Sk17.74 billion (€455 million). Currently, fuel prices are around Sk37.35 (€0.97) per litre at Slovak gas stations, but experts say that the cost of filling your car might soon cross the Sk40 (€1.04) per litre barrier.

Béla Kelemen, deputy director of marketing at Slovnaft, has confirmed that the fuel prices are likely to rise further.

"As a consumer I am hoping that fuel prices will not exceed this psychological barrier [Sk40], but as an expert, I do not have that optimism," Kelemen told the press.

The price of gasoline has already climbed 55 percent since January, while diesel prices have increased by more than 40 percent.

Analysts point out that the newly gained strength of the US dollar, which since May has firmed by five percent against the Slovak crown, is one of the factors pushing up fuel prices.

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