A detailed analysis of the economic viability of a new petrochemical plant in Gdańsk and the projected demand for its products will be ready in June or July this year, CEO of Grupa LOTOS told Jakub Kurasz and Tomasz Furman.

RZECZPOSPOLITA: CalEnergy Resources Poland is to help Grupa LOTOS develop natural gas reserves estimated at 4 billion cubic metres that lie beneath the Baltic Sea within the bounds of the B4 and B6 licence areas. When will this happen?

PAWEŁ OLECHNOWICZ: We chose CalEnergy because the company has a long track record in offshore oil and gas projects. It was determined that, since Grupa LOTOS owns the licences, our share in costs and profits will be the majority interest of 51% and that of Cal Energy – 49%. Currently, research is under way to determine whether extraction of the proven reserves is economically viable. After that, we will devise a schedule of work aimed at preparing the fields for production, and we will decide how many wells need to be drilled. If the first stage of the project that involves seismic surveys proves successful, it is possible that we will be able to start drilling exploration wells.

What may be the cost of developing the offshore reserves?
The cost of seismic surveys and appraisal wells is in the range of between twenty and one hundred million złoty. A lot more will need to be invested in production wells. The definite figure will mainly depend on the field development project's business plan.

The Ministry of the Environment has put forward proposals of new regulations governing oil and gas exploration and production in Poland. What is your view on those proposals?
New regulations should, first and foremost, serve to improve the state security, but they also need to be business-friendly. The industry has been on edge waiting for the new laws to regulate hydrocarbons exploration and production, and I am glad that the draft has been put in motion. This being said, a number of question marks still linger. Grupa LOTOS and the Azoty Group are planning to join forces to construct a new petrochemical plant in Gdańsk.

Why invest in a venture that does not fit with your strategic direction of growth?
Obviously, our strategic direction of growth is to expand our upstream operations. No great outlay will be made on the petrochemical project, however we can see that it has an interesting business potential and is likely to yield measurable benefits. This has encouraged us to take a closer look. Detailed analysis is being carried out to probe the economic viability of the project and the level of potential demand for petrochemical products in Poland and abroad. The questions will be answered in June or July this year.

What will Grupa LOTOS contribute to the project?
First of all, we own land just next to the refinery that may be used for the purposes of the proposed project. Also, we have extensive experience in implementing large-scale capex projects, as confirmed by the success of the 10+ Programme which helped us increase the throughput capacity and operational efficiency of our refinery. Our other strengths are competent staff and natural gas resources, a feedstock required for petrochemical processes.

How much will it cost to build the petrochemical plant and who will foot the bill?
A preliminary cost estimate puts the cost of completing the project at around PLN 6–8bn. Considering the volume of petrochemical products imported to Poland, the break-even point will come soon enough. The greatest burden of building the new process unit will be borne by the Azoty Group. Additional financial support has been promised by Polskie Inwestycje Rozwojowe. Traditionally, projects of this sort require external funding.

The problem in Poland is a rampant black market and illegal fuel imports. How do you approach the problem?
No doubt the black market and illegal fuel imports need to be curbed if only because they cost the government a tremendous lot of money, including due to lost VAT revenue. But this lies within the remit of competent government agencies and institutions. We believe that the problem will be contained or we would not be able to implement any projects, pursue growth opportunities or hope for future profits.

Grupa LOTOS failed in its attempt to purchase Neste'sfilling stations chain in Poland. What are your expansion plans for this market segment?
Our current share in the retail market for fuels is estimated at over 8%. We intend to make it 10% by 2015, mainly through organic growth. Also, we plant to further improve the quality of our products and open new filling stations. It is hard to say today whether it is 50 or 100 new stations that will be sufficient to deliver on the market share target.

Are you considering any acquisitions?
An acquisition of assets comprising filling stations is possible, although no such opportunities are currently available on the market. I am not aware of any big players planning on selling their chains.

A market segment in which you have begun to actively compete is aviation fuels. What are your objectives here?
In Poland, aviation fuels are made by the refineries in Gdańsk and Płock. At present, the key factor determining economic viability of aviation fuel trading is the cost of logistics. Grupa LOTOS has sights set on becoming the second largest player in the segment. It is an ambitious goal but we are on the right track to its attaining. This year we will prove that we are an important supplier of aviation fuel to airports, and not only on a local but also international scale.

Jakub Kurasz, Tomasz Furman