The first quarter of 2022 saw a clear uptrend in the consumption of fuels on the Polish market after a period of decline caused by administrative restrictions imposed to contain the spread of COVID-19 infections. Additionally, late February and early March 2022 saw fuel sales surge at stations on a wave of panic buying triggered by the outbreak of military hostilities in Ukraine and fears of product scarcity or price growth.

The recovery in energy demand underpinned by economic factors on the one hand, and the disturbed energy supply and elevated risks, such as the risk from supply chain disruptions and gradually extended sanctions over trade flows with Russia and Belarus, as well as the war-torn Ukraine, on the other were fuelling consumer panic and a rise in the prices of all minerals. Considerable uncertainty as to how the situation might develop set off ripples through the financial and commodity markets. Both natural gas and crude oil prices were fluctuating widely, their volatility coupled with sharp growth in product prices across European markets.

Since February 24th, the Company has not entered into any spot purchase transactions for Russian crudes, but has continued to take deliveries under the forward contracts effective until the end of 2022, withdrawal from which could expose it to recourse measures and financial penalties, as well as the delivery of partially prepaid crude oil to a third party. Moreover, seeking to secure uninterrupted fuel supplies to the Polish market, in the first quarter of 2022 the Company purchased its two largest ever tanker loads of diesel oil from the Middle East (of 200 thousand tonnes), which were delivered to the LOTOS refinery via Naftoport.

Exploration & Production

In the first quarter of 2022, the LOTOS Group’s average daily production volume of crude oil and natural gas amounted to 16.9 thousand boe. Normalised E&P EBITDA for the first quarter of 2022, adjusted for one-off items, came in at PLN 0.54bn. The segment’s revenue reached PLN 0.74bn. The growth in the Exploration & Production segment’s revenue (+137.9% y/y and +2.1% q/q) was driven largely by the rising prices of natural gas and crude oil combined with an increase in the average quarterly exchange rate of the US dollar.

The positive effect of the higher oil and gas prices on the segment’s performance was offset by lower sales of hydrocarbons (down 19.8% y/y and 5.1% q/q). The sales volume decline was due to partial production stoppage at the Sleipner area following a compressor failure in March 2022, and two well workover operations carried out in the first quarter at the Baltic Sea’s B3 field. In addition, the segment’s EBITDA performance was affected by higher depreciation charges related to production from the Yme field in Norway.

Upon conclusion of the annual licensing round (APA 2021), on January 18th 2022 LOTOS Exploration and Production Norge (LOTOS Norge) was awarded four new exploration and production licences: PL1144 (30% interest), PL1142 and PL1143 (17.94% interest in each), and PL1135 (30% interest). With their addition, LOTOS Norge’s portfolio of Norwegian assets has increased to 34 licences.

Refining & Marketing

The Refining & Marketing segment’s adjusted LIFO-based EBITDA for the first quarter of 2022 came in at PLN 0.78bn. The marked improvement in normalised earnings under the LIFO method compared with the same quarter of 2021 reflected higher refining margins on the European markets, an increase in the quarterly average USD/PLN exchange rate affecting margins and a higher sales volume.

The LOTOS refinery’s throughput of crude oil in the first quarter of 2022 was 1.95 million tonnes. As at the end of March 2022, LOTOS operated a chain of 523 service stations, a year-on-year increase of 9 sites.

March 9th 2022 marked the beginning of the LOTOS refinery’s overhaul, performed as a partial maintenance shutdown (its first stage having been executed in spring 2021). 50 out of more than 65 refinery facilities were shut down for maintenance, and their phased restart was completed on schedule in mid-April 2022. The final stage will involve insular maintenance of the hydrogen generation unit between April 17th and May 14th 2022.

The Company was able to significantly reduce the volume of crude oil processed, drawing on stocks it had previously purchased or ordered to last for the duration of the scheduled maintenance work. Taking advantage of its coastal location close to the liquid Amsterdam-Rotterdam-Antwerp markets, the Company actively diversified the crude diet taking account of its temporarily reduced requirements and capacities, e.g. by processing light crudes produced from the Baltic Sea and onshore in Lithuania by the LOTOS Group’s Exploration & Production segment. The oil purchase directions in the first quarter included the North Sea and the Norwegian Continental Shelf.

CAPEX projects

In the first quarter of 2022, the LOTOS Group was implementing a number of capital projects. One of the largest involved replacement of furnaces at the Claus facility to improve the efficiency, reliability and safety of the hydrogen sulfide combustion unit.

The LOTOS Group is also pursuing a project to expand its LPG storage and loading capacities. The project seeks to increase the dispatch capacity for LPG production from the refinery to about 1,200 tonnes per day with the use of rail tank and truck loading facilities.

Another project is to expand one of the rail tank loading facilities. In the first quarter of 2022, the tendering process was concluded and the seeking of contract approvals began. In addition, as part of the Pure H2 project, process links were made to enable the start-up of a new hydrogen purification unit and a system for delivering hydrogen to tube trailers.

As part of the flagship refinery development project called HBO (hydrocracked base oils), a full NTP (Notice to Proceed) was issued to the general contractor, Kinetics Technology (KT), in March 2022. Design work, procurement and preparations for the HBO unit construction are currently under way. Additionally, a project to construct a cargo terminal on the Martwa Wisła river is in the planning phase. In the first quarter of 2022, a procedure was carried out to select a potential contractor for the main scope of the design and construction work.

Merger with PKN Orlen

On January 10th 2022, agreements were signed setting out the terms and conditions on which certain employees would be transferred outside the LOTOS Group after the divestment of assets covered by remedies defined in the European Commission’s conditional merger clearance of July 14th 2020. The documents were signed by the Management Board of Grupa LOTOS, the management boards of the LOTOS Group companies covered by the remedies and representatives of trade unions willing to act as social partners in the process.

On January 12th 2022, work to implement the merger remedies was finally completed. Saudi Aramco was selected as a remedies partner in the refining and wholesale business, and in aviation fuels. MOL Group became a partner in retail, Unimot Group was selected as a partner in logistics, while Rossi Biofuel Zrt. was chosen for biofuels. Currently, a request is pending for the European Commission’s approval of the concluded agreements and asset purchasers under the remedies.

***

For more information on the LOTOS Group’s financial performance in the first quarter of 2022, visit https://inwestor.lotos.pl/193/raporty_i_dane/raporty_roczne.