Andrzej Stec, Marcin Piasecki and Tomasz Furman interview the President of the Grupa Lotos Management Board.

It’s been ten years since Grupa Lotos shares were first listed on the Warsaw Stock Exchange. Before the floatation a sale of the company had been considered. What factors influenced the decision to go public?

When I first took over as the CEO of Rafineria Gdańska it was a small crude processing business facing a very uncertain future. Unidentified foreign investors had repeatedly tried to buy it, but I doubt their intention was to expand the refining business. Our idea was entirely different − we wanted to build a vertically integrated oil company and make it one of the most advanced plants in Europe and in the world in terms of business concept, technology and management. Our first major step to that end was the successful completion of a capital and business consolidation with Petrobaltic and refineries in southern Poland, which began in 2005. In June of that year our shares were listed on the WSE for the first time. Investors trusted us and we raised over PLN 1bn. Most of the issue proceeds were used to finance the 10+ Programme (editor’s note: a EUR 1.5bn investment scheme designed to increase the refinery’s annual refining capacity from 6 million tonnes to 10.5 million tonnes), which became one of the largest business ventures in Poland at the time. Soon afterwards, we acquired a service station network from ExxonMobil Poland and Slovnaft Polska, and developed a strong retail sales segment, while constantly pursuing new investments and actively restructuring the group.

How many employees were made redundant?

Restructuring processes at Grupa Lotos and its subsidiaries have never involved mass layoffs. Even in the case of the southern refineries, where it was clear that the core crude processing operations had to be discontinued, we never went for any major downsizing. We found work for our staff of several thousand thanks to carefully planned and efficiently executed transformation processes. For instance, the Jasło Refinery became Lotos Infrastruktura. In transforming the company, we made decisions that created jobs instead of cutting them. Lotos Parafiny is a good example − we established a subsidiary whose core business is candle production. Today, Polwax is listed on the WSE and remains one of the leading market players in the EU. Next, there is Lotos Terminale, which focuses on fuel storage and distribution, and was established based on the assets of the Czechowice-Dziedzice refinery. Our restructuring model has always sought to grow businesses rather than closing them. Take Lotos Kolej. It used to be a part of Rafineria Gdańska. It operated several locomotives, which hauled cargo over short distances between the refinery and the ports in Gdańsk and Gdynia, and employed some 40 workers. Today, Lotos Kolej is the second largest railway carrier in Poland, with an almost 10% share in the rail freight market and a headcount of nearly 1,000 staff. When we first started to invest in our service station chain, we had 18 outlets. Today, Lotos and Lotos Optima consist of 450 service stations.

But you have failed to meet your oil and gas production targets.

It’s because of the faulty production platform deployed in the Yme field in Norway. We couldn’t have predicted or controlled what happened in any way. The project was led by a globally renowned licence operator with extensive experience. Obviously, if production from the Yme field had been launched, we would be in a completely different place today. But we will meet our targets − only with a slight delay. I’m certain we will recover the money invested in Yme, because the Norwegian tax law is on our side. The process has already began with Lotos purchasing production assets on the Norwegian Continental Shelf (editor’s note: in 2013 Lotos Norge acquired the so-called Heimdal assets, which are interests in 14 licences in the North Sea). According to the plan drafted by the consortium members, the Yme platform will be removed from the field and scrapped by the end of this year. The Yme field still has production potential, and we will either participate in its development or sell our 20% interest. We also plan to buy at least one more field with a production potential similar to that of the Heimdal assets (editor’s note: approximately 250 thousand tonnes per year). Then we will be able to deduct the full amount of our investment. If we complete the project by the end of this year, we will recover the full amount of the Yme investment in three years.

But the company’s most important investment in recent years was the 10+ Programme. What was its outcome for Grupa Lotos?

Most importantly, it allowed us to increase crude throughput and improve the conversion ratio. The units built under the 10+ Programme have helped us to increase the output of high-margin fuels, such as diesel oil and aviation fuel, which has had a direct impact on the company’s financial position. Thanks to the 10+ Programme, Lotos now operates one of the most advanced refineries in the world.

Last year, you raised some PLN 1bn for new investments on the stock market. Could you not finance them in any other way?

Our analyses revealed that effective implementation of our strategy requires additional funding. We could abandon some of our objectives, but then Grupa Lotos would grow at a much slower pace. We want to continue to invest in upgrading the refinery and developing oil and gas fields in the Baltic Sea. Some of these projects will be financed from own funds and bank loans, but others require additional capital from shareholders. They see eye to eye with us on that, as evidenced by the success of last year’s issue.

What are the key development directions for Grupa Lotos in the coming years?

We are currently drafting a strategy for 2016-2020. Grupa Lotos will remain a vertically integrated business with a strong retail network, but only in Poland. International expansion will be pursued in the upstream segment. We intend to focus on regions relatively close to Poland. We will continue our exploration and production activities in Norway and Lithuania. Maybe in other areas as well. But we have no plans to acquire any exploration and production assets on the other side of the Atlantic. Petrochemical production is a likely addition in our strategy, but we are not interested in any business areas that are completely new to us.

What is the estimated value of Grupa Lotos’s key investments planned for the coming years? Have you secured the financing necessary for their implementation?

We plan to spend a total of over PLN 6bn on our three main projects. The first one is related to the construction of a delayed coking unit with auxiliary installations, which will allow Grupa Lotos to increase its refining margin by around USD 2 per barrel. The delayed coking unit will also change the structure of Lotos’s total output, reducing the share of heavy petroleum products which generate losses and for which demand is falling. At the same time, production of more profitable products, such as diesel oil and aviation fuel, will be increased. The second project is for the development of the B4 and B6 gas fields located in the Polish economic zone of the Baltic Sea. Both of these projects will be partly financed with proceeds from the latest share issue. The third project is for the development of the Baltic Sea B8 field. We have managed to substantially reduce the costs of implementing the project, thus improving its profitability. We have already finished securing financing for some of our planned investments.

In the next few weeks, we should have more credit agreements signed, enabling us to implement further projects.

When will Grupa Lotos start sharing its profits with shareholders?

We plan to start distributing dividends as early as during the period covered by our new strategy. It’s not likely to happen next year, though, given that our shareholders have recently agreed to back our multi-billion investment programme with their own money, counting on measurable benefits in the future. The first dividend payments may be modest, but we will try to increase them gradually.

How is the sale of Lotos Kolej progressing?

Lotos Kolej is not for sale. We plan to grow this business, not sell it to a buyer who will pay an agreed sum and take full control over decision-making. Lotos Kolej provides logistics services to the Group and is key to its operations. Therefore, we want to be able to have a say on its future and support its development. But we would welcome a partner willing to help us do that.

Is Grupa Lotos considering purchasing a service station network in Poland?

Business relies on growth. If an interesting opportunity comes along, we will consider it. But we haven’t identified any such opportunities so far.

What is your target share in the Polish retail fuel market?

By the end of the year, we want to have a 10% share in the retail fuel market. We are very close to reaching this target − our current market share is 9.5%. Importantly, our service station network is big enough to allow us to meet the target without any new acquisitions.

Grupa Lotos spends increasingly more money on sponsorship. Which sports do you support − and why?

We want our company to be associated with positive emotions. Sponsorship builds our brand, boosts product sales and improves the condition of Polish sports. We chiefly invest in professional sports, and we are the main sponsor of the Polish national football and ski jumping teams. We also support physical education of children and young people. For instance, we run the White and Green Future with LOTOS project in the Gdańsk Province in partnership with the Lechia Gdańsk Football Academy, providing professional football training opportunities for young people. In addition, we are a sponsor of motor sports, cycling and golf. We manage our sponsorship activities very professionally, adhering strictly to law and business standards, and our efforts are acknowledged by our trading partners and the external environment. Our results suggest that we are good at what we do, and this gives us immense satisfaction and encourages us to continue our efforts. All our activities are carried out with transparency and professional business sense in mind, as we are aware of our social responsibility and − above all − the importance of keeping our shareholders satisfied.