11.2.1 Risk of movements in commodity and petroleum product prices
The Group considers the risk of movements in commodity and petroleum product prices to be particularly important. The following risk factors are identified in this area:
volatility of the refining margin, measured as the difference between liquid indices of a reference petroleum product basket (e.g. aviation fuel, gasoline, diesel oil, fuel oil) and a liquid index of reference commodity (e.g. Urals crude), volatility of prices with respect to the commodity and product inventory volumes deviating from the required levels of emergency and operational stocks, volatility of differentials between the reference indices and indices used in commercial contracts (e.g. Urals-Brent differential, i.e. the difference between different types of crude oil), use of non-standard pricing formulae in trade contracts.
The Parent has in place “Grupa LOTOS S.A.’s commodity and petroleum products price risk management policy”, which defines the classification system for transaction portfolios and their business functions, describes how risk is understood and how portfolio exposures are measured, specifies permitted financial instruments and limitations on their use, and transaction execution standards, and also provides guidelines on how to evaluate risk management performance and set relevant limits. Transaction limits falling within the scope of that policy are delegated by the Management Board to lower-level decision-makers.
To support the achievement of the policy objectives, the Company uses a leading Energy Trading and Risk Management system (Allegro).
Under the approved policy, the Company may continue to offer petroleum products at fixed prices. To preserve the original price risk profile, the Group has entered into commodity swaps.
In 2018, the Management Board of Grupa LOTOS S.A. approved the “Market Risk Management Policy for the exploration and production segment of the LOTOS Group”.
Open commodity swaps as at December 31st 2021:
| Type of contract | Reference index | Valuation period | Amount in tonnes in the valuation period | Fair value measurement | |
|---|---|---|---|---|---|
| Financial assets | Financial liabilities | ||||
| Commodity swap | 3.5 PCT Barges FOB Rotterdam | Apr 2022 – Sep 2023 | 31,040 | 26.3 | – |
| Commodity swap | Gasoil 0.1 pct Crg CIF NWE_ARA | Apr 2022 – Sep 2023 | 9,809 | – | (4.2) |
| Total | 26.3 | (4.2) | |||
These swap transactions for a total of 31,040 tonnes based on the 3.5 PCT Barges FOB Rotterdam liquid index in the period from April 2022 to September 2023 and 9,809 tonnes based on the Gasoil 0.1 pct Crg CIF NWE ARA liquid index in the same period were entered into to reverse the risk profile of commodity and petroleum product prices arising from the sale of bitumen components at fixed prices.
Open commodity swaps as at December 31st 2020:
| Type of contract | Reference index | Valuation period | Amount in tonnes in the valuation period | Fair value measurement | |
|---|---|---|---|---|---|
| Financial assets | Financial liabilities | ||||
| Commodity swap | FuelOil 3.5 pct Brg FOB Rotterdam | Mar 2021 – Nov 2022 | 196,939 | 29.6 | (2.8) |
| Commodity swap | Gasoil 0.1 pct Crg CIF NWE_ARA | Mar 2021 – Nov 2022 | (18,203) | 3.4 | (2.3) |
| Total | 33.0 | (5.1) | |||
These swap transactions for a total of 196,939 tonnes based on the 3.5 PCT Barges FOB Rotterdam liquid index in the period from March 2021 to November 2022 and (18,203) tonnes based on the Gasoil 0.1 pct Crg CIF NWE ARA liquid index in the same period were entered into to reverse the risk profile of commodity and petroleum product prices arising from the sale of bitumen components at fixed prices.