During the first half-year 2013, LOTOS put down solid foundations for its ambitious 'Efficiency and Growth 2013-15' programme.

“The approval by the Supervisory Board in early July of the 'Efficiency and Growth 2013-15' programme has ushered in a number of effective capital and business changes at Grupa LOTOS, in support of the delivery of its strategy, which are geared primarily to stepping up the growth of its upstream business,” said Paweł Olechnowicz, CEO of Grupa LOTOS S.A.

Q2 2013 saw a noteworthy achievement with the improvement of the Company’s liquidity position and reduction of its overall debt level, which fell by more than PLN 1bn year on year.

At the close of H1 2013, LOTOS posted revenue of nearly PLN 13.3bn, down by 18% year on year. Top-line performance was affected by a number of factors, including lower sales volumes due to the scheduled maintenance shutdown of the Gdańsk refinery, as well as a further decline in domestic fuel consumption.

The over one-month long shutdown was successfully completed on May 10th 2013 at a direct cost of PLN 92.1m, a large part of which reduced the second quarter performance. Another consequence of the shutdown was a drop in production, which went down 29% quarter on quarter in Q2 2013 and 17% year on year in H1 2013.

Marek Sokołowski, Vice-President of the Grupa LOTOS Management Board, Chief Operation Officer, emphasised that “The maintenance shutdowns are regularly scheduled, and this one came in on time and under budget. The main added value from its execution includes improved efficiency of the refinery units, greater energy efficiency and increased mitigation of environmental impact.”

Following the Spring 2013 shutdown, LOTOS plans to extend the time interval between overhauls from four to five years, which should work to the benefit of its financial performance.

According to the Polish Organisation of the Oil Industry and Trade (POPiHN), in the first half of 2013 the consumption of liquid fuels in Poland fell 6.9% year on year (3% in the case of gasoline and 8% in the case of diesel oil), due mainly to an expanding grey market, which may have accounted for 10%-12% of total diesel oil sales in January-June 2013, according POPiHN’s estimates. By comparison, in Q1 2013 POPiHN estimated its share in diesel oil sales at just 9%.

Moreover, the macroeconomic landscape in Q2 2013 was less favourable than in the first three months of the year. The model refining margin fell to USD 4.08/bbl (-37.4% y/y and 8.5% q/q). The Brent/Ural differential stood at USD 0.73 (-65.5% y/y and -58% q/q). 
The falling margin and differential weighed down on LOTOS’ operating result. At the end of Q2 2013, the Company reported PLN -101m and PLN -126m in operating and net result respectively. At the end of H1 2013, its consolidated EBIT was PLN -126m, while the net result came in at PLN -273m.

Efficiency and Growth 2013-2015

In 2013, work is now underway in the upstream area to launch commercial production from the B8 field in the Baltic Sea, which is to be brought on stream in 2015. Its production potential stands at 3.5 million tonnes of crude oil, and its average annual output is estimated at 250,000 tonnes.

LOTOS Petrobaltic continues production from the B3 field. After the PG-1 unmanned platform is repaired, production from the field is expected to have increased by 2026 to 15,000 tonnes per annum. Overall, LOTOS plans to produce approximately 100,000 tonnes of crude oil from the B3 field.

Baltic Gas, an SPV established in April 2013, is working on the development of the B4 and B6 gas fields, both of which have a production potential of 4 billion cubic metres of natural gas. Under the preparatory work schedule, acquisition of seismics and selection of a preliminary field development concept are scheduled for 2013.

LOTOS Petrobaltic is also working with PGNiG on exploration and production of conventional and unconventional natural gas and crude oil.

In the refining segment, we are working on two petrochemical projects with Grupa Azoty, which are key to LOTOS' growth. The companies are now working on a preliminary feasibility study for the projects, and if the results are positive, design work on the selected options can begin. Grupa Azoty will be the main customer for the new units' products.

In order to fully leverage the benefits of the successful implementation of the 10+ Programme, LOTOS plans to build a delayed coker unit (DCU) at its Gdańsk refinery, which will directly enhance processing efficiency there. In line with projections, the launch of the DCU unit will add approx. USD 2/bbl to the refining margin.

The top priority defined in our growth strategy for 2011-2015 is to focus on the core businesses - hydrocarbon exploration and production, deep crude processing and trade in petroleum products. The LOTOS Group's internal restructuring under the Efficiency and Growth 2013-15 programme is designed to ensure faster implementation of its strategy.

The process of developing two specialist business units – for logistics and infrastructure – based on the assets of four existing companies (Grupa LOTOS S.A., LOTOS Czechowice, LOTOS Jasło, RC Ekoenergia) is in progress. LOTOS Jasło, renamed LOTOS Infrastruktura, is now responsible for professional infrastructure management at the Jasło and Czechowice plants. The logistics company, which was established in Silesia, is engaged in fuel storage and distribution activities, operating depots in Piotrków, Rypin, Poznań, Jasło, and Czechowice-Dziedzice.

On June 25th 2013, Air BP (the aviation services division of BP) acquired a 50% interest in LOTOS Tank. Following the transaction, a new player emerged on the Polish aviation fuel market - LOTOS Air BP Polska. The joint-venture operates at the Gdańsk, Warsaw, and Kraków airports. LOTOS Air BP Polska will leverage Air BP’s global customer relationships and extensive experience, as well as LOTOS’ local expertise and supply capabilities.
 

Development of projects in the Baltic Sea

In Q2 2013, LOTOS Petrobaltic continued to produce crude oil from the B3 field. CalEnergy Resources Poland Sp. z o.o., which became the operator for the development of the B4 and B6 gas fields, presented the work schedule and budget for the current year.

LOTOS Petrobaltic acquired two new exploration licences within the Słupsk E and Słupsk W areas, located in the Baltic Sea.

In Q2 2013, preparatory work was under way on the Yme field to remove a defective platform (MOPU). Also, analyses were carried out to assess the feasibility of a revised concept for the Yme field's development using another production unit in place of the removed MOPU.

In Q2 2013, Lithuanian companies AB LOTOS Geonafta, UAB Genciu Nafta and UAB Manifoldas were engaged in production of crude oil from on-shore fields. In June 2013, drilling of the Kretinga-12 production well was completed. 2D seismic surveys were carried out in the Western part of the Klaipėda licence area (UAB Manifoldas).

New additions to LOTOS Optima network

As at the end of H1 2013, LOTOS’ share in the domestic retail fuel market reached 8.3%, up 0.3 pp year on year. This increase was led by the expansion of the service station network, which helped achieve a sales growth that outpaced the decline in fuel consumption by retail customers in Poland.

In a continued effort to expand its distribution network, LOTOS launched eight new LOTOS Optima-branded economy service stations in Q2 2013 (bringing the total size of the network to 121 locations at the end of July 2013). LOTOS Optima stations operate across the country. Relative to the end of Q2 2012, LOTOS increased the number of its service stations by 10.6%, and remained one of the fastest developing retail fuel networks in Poland.

Communication Office
Grupa LOTOS S.A.
ul. Elbląska 135,
80-718 Gdańsk,
tel. 58 308 87 31, 58 308 83 88, 58 308 83 55,
e-mail: media@grupalotos.pl