Orlen. Olefina III investment by Daniel Obajtek criticized by current CEO Ireneusz Fąfara

– If at the time of the investment commencement the management declares that it will cost PLN 8 billion and will be completed by the end of 2023, and then the deadline is postponed and the amount increases, first to PLN 13.5 billion, and then to PLN 25 billion, i.e. three times the initial assumption, it means that the investment was poorly prepared and managed or not at alland its implementation was started on the principle of a mass mobilization. This is clear to every manager – said president Ireneusz Fąfara and added that “the threefold increase in investment costs cannot be treated as a mistake in estimates. This is mismanagement and lack of responsibility.“.

In June 2023, the then Orlen management announced that the cost of building the Olefiny III complex would amount to approximately PLN 25 billion. The need to sign an agreement with the contractor of this investment was justified at that time by the update of its assumptions, which was caused primarily by the war in Ukraine and the associated sanctions and thus rising material costs, broken supply chains and limited availability of implementation resources.

In turn, at the end of March 2024, the new Orlen management board decided, after conducting impairment tests of the group's assets in the petrochemical segment, to recognize PLN 10.2 billion in impairment losses on fixed assets in its financial statements for 2023 and fixed assets under construction due to high investment costs in Olefins III.

In the opinion of CEO Ireneusz Fąfara, the threefold increase in investment costs at Olefiny cannot be explained only by the war in Ukraine.

– The prices of raw materials, materials, and labor did not increase by as much as three times during this time. For a while, gas prices were several times higher, but then they fell below the price of February 2022. Therefore, this underestimation of costs cannot be explained solely by the war – he said. – No investor in Europe increased investment expenditure by 300 percent during this time – he added.

President Fąfara, when asked what plans the new Orlen management board has for the investment in Olefins, indicated that theoretically there are three solutions.

– In theory, in such a situation the investment can be continued, stopped or brought to a point where it can be suspended for some time. The decision we have to make will be rational and safe – assured the president of Orlen. – We are currently analyzing this investment very carefully. External companies are also involved in this. The scale of topics related to Olefins, which require detailed verification, is very large. Therefore, some time is needed to be able to make a responsible decision regarding the future of this investment. We do not act rashly – he stated.

In the opinion of President Ireneusz Fąfara, the commencement of the investment in Olefiny was not based on rational premises.

– I have no doubts about that, but we can't turn back time. We are in a situation where a lot of money has already been spent on this investment and we have to take this fact into account in our forecasts for the future of petrochemistry. This makes the analyses we conduct very complicated – he said. – The difficult situation of the European petrochemical market does not make matters easier – he added.

The Orlen board, headed by Daniel Obajtek, decided to start investing in the Olefiny III complex, although it was perfectly aware that the project did not meet the basic business assumptions. The adopted variant was below or very close to the acceptable level of the profitability threshold – according to the preliminary findings of the audit conducted in the Płock company by PwC, which Business Insider Polska obtained.

The first variant assumed that the internal rate of return on investment (IRR) was 3.3% with a weighted average cost of capital (WACC) of 4.55%. The second variant, in turn, indicated that the IRR could amount to 4.6%. This means that Orlen, under Daniel Obajtek, accepted an investment that would not earn even enough to cover the interest on the capital employed.

According to information from Business Insider Polska, auditors also managed to establish that at the time of making the investment decision (final investment decision, FID — ed.) in May 2021, design work for the accompanying infrastructure was still underway. Already at that time, one of the advisors indicated that meeting the deadline for at least part of the investment was less than 1%.

Read also: How Obajtek spent billions. “It's scary”