The “Stabilisation and Secure Development” strategy

The key objectives of the Grupa LOTOS Strategy are the Group’s stabilisation and sustainable growth. As Poland’s leading company and a major energy group, Grupa LOTOS S.A. strives to position itself as:

a producer of premium quality fuels and chemicals, with the optimal degree of vertical integration,

a provider of specialist logistics and maintenance services, and

a leader of innovative implementations within its core business, designed to promote sustained growth in Grupa LOTOS S.A. shareholder value

The Company pursues five strategic objectives:

  • effective use of assets throughout the value chain: including optimum use of production licences, further technological optimisation of the refinery, launch of new products and alternative fuels, and commitment to quality;
  • consistent and repeatable reduction of operating expenses and optimisation of margins along the value chain;
  • readiness to develop and embrace innovation based on dedicated funding, an advanced model of cooperation with research institutions and creative engagement of employees;
  • flexible response to risks, perceived also as potential business opportunities;
  • commitment to fostering and developing talent within the organisation, improving safety and security (across OHS, infrastructure, and IT), and coherent standards of corporate social responsibility.

The Strategy is to be pursued within two time frames. In 2017–2018, the main goals were to stabilise cash flows, reduce debt, and effectively implement the ongoing investment projects.

In 2019–2022, the Company plans to pursue a new investment programme based on development of selected production assets, building an efficient upstream asset portfolio, further organic expansion of the retail chain and implementation of innovative projects.

As at the date of issue of this report, the Company was involved in work related to the planned acquisition of Grupa LOTOS S.A. by PKN Orlen S.A. (for more details, see Section 4.8).

Key metrics to assess the implementation of the LOTOS Group Strategy 2017-2022:

  • doubling the average annual LIFO-based EBITDA in 2019–2022,
  • reduction of net debt/LIFO-based EBITDA to or below 1.5,
  • capital expenditure at PLN 9.4 billion over the entire Strategy period,
  • acquisition and maintenance of 2P6 crude oil and natural gas reserves at over 60 million boe, with an average
  • annual hydrocarbon production volume in 2019–2022 at 30-50 thousand boe/d,
  • increase in the number of service stations to 550,
  • low accident rate (LTIF7 <3)

Current strategy implementation progress

Strategy outlook for 2019–2022, key strategic metrics and performance against the metrics:

2021 result above strategic assumptions due to optimization of throughput processes at the LOTOS refinery, gradual improvement of market conditions and surge in natural gas prices.

net debt to LIFO-based EBITDA maintained significantly below the strategic target of 1.5x

 

maintaining crude throughput at the same high level despite significant market turbulence triggered by the COVID-19 pandemic.

  • 2P reserves (69.2 million boe) currently above the strategic target of 60 million boe, achieved mainly thanks to active efforts on the Norwegian Shelf
  • lower than expected oil and gas production volumes due to delays (against the schedule) in launching production from the YME and B8 projects.

Macroeconomic assumptions underlying the Grupa LOTOS Strategy for 2017–2022 vs actual petroleum commodity prices and key product cracks

Effective use of assets along the value chain

As at the end of 2021, Grupa LOTOS S.A.’s total 2P oil and gas reserves amounted to approximately 69.2 million boe, above the assumed strategic metric. In 2021, LOTOS Group’s hydrocarbon production averaged 17.3 thousand boe/d (a decrease of 15% year on year). The decline was attributable to a number of factors, including production shutdown (maintenance shutdown in the third quarter) on the Norwegian Sleipner and Utgard fields, as well as temporary technical difficulties (water breakthrough) on the Utgard field.

69.2 million boe

Volume of total oil and gas reserves held by LOTOS Group S.A. at the end of 2021 in category 2P

Production (start-up phase) from the YME field commenced in October 2021. The planned output from the field is approximately 5,000 boe/d (on average over five years of production) for LOTOS’s share in the project. The postponement of the start of production at the YME field from 2020 to 2021 was due to, among other things, the pandemic, which had an impact on the availability of personnel, and the extended duration of the conversion of the Maersk Inspirer rig at the Egersund shipyard. Polish fields (B3 and B8), on the other hand, saw production rise to 5.7 thousand boe/d.

Refining segment

The volume of crude oil processed by the Grupa LOTOS S.A. refinery in 2021 was approximately 9.9 million tonnes, with the Company’s installed refining capacity utilised at 94.3%. Stability and high operational availability of the refining units, with the refinery’s complexity expanded by the EFRA Project (Nelson Complexity Index of 11.1), allowed the Company to flexibly optimise the stream of petroleum products to adjust yields to changeable and unpredictable market conditions prevailing in 2021, which resulted in improved economic viability of crude oil processing.

9.9 million tonnes

The volume of crude oil processed by the Grupa LOTOS S.A.

As part of the investment projects, in 2021 work was under way under to replace Claus furnaces at the LOTOS refinery to improve the efficiency, reliability and safety of hydrogen sulfide combustion. The project is due for completion in early 2023.

The Company carried out preparatory activities for a project to expand LPG storage and loading capacities to about 1,200 tonnes per day with the use of rail or truck loading facilities.

Another project implemented in 2021 was the expansion of the rail tank loading facility.

At the beginning of 2021, the Company launched the Pure H2 project involving the construction of a hydrogen purification unit and a system for supplying hydrogen to tube trailers (vehicles used to haul compressed hydrogen).The project is scheduled for completion in 2023.

The Hydrocracking Base Oils (HBO) project received approval to proceed to the implementation phase, and design work with prime contractor Kinetics Technology began in 2021.

In its forecasts regarding future development of the fuel market, CONCAWE, an association of European refineries, presented a vision of the 2050 model refinery as an energy hub relying on renewable energy sources. The first stage of a refiner’s development in that direction would be to achieve operational excellence. In the second stage it would bring more low-carbon biocomponents into its product mix, and in the next stage it would become an energy hub relying on biomass and waste conversion processes and capturing CO2, thus advancing a circular, environmentally neutral economy.

Grupa LOTOS has been consistently pursuing that transition path through a range of major development projects. In the first stage, they were milestones towards the refinery’s operational excellence – the 10+ Programme and the EFRA Project. In 2021, the Company continued analytical and preparatory work under projects identified in its 2017–2022

In 2021, a decision was made to implement the HBO project. This direction of the refinery’s technological development is the diversification of operations into new, non-fuel products and the efficient management of residues from the MHC hydrocracking unit, or hydrovax. The HBO project addresses the current challenges faced by refineries focused on motor fuel production.

The project will enable the launch of production and sales of high-margin Group 2 and 3 base oils. The scope of the project includes the construction of a hydrocracking plant using catalytic dewaxing and hydrogenation processes, feedstock and product tanks, inter-process pipelines and a power supply station. Other planned works include the adaptation and upgrade of existing facilities on the refinery premises, interlinked operationally or technically with the new units.

Its annual output will comprise over 400 thousand tonnes of Group II base oils and several dozen thousand tonnes of fuel intermediates. Under the current schedule, all new units and facilities are expected to be commissioned and operational in the first half of 2025. The main contractor is KT – Kinetics Technology S.p.A.

The CCGT plant project is in line with the envisaged transition in the mix of energy sources to expand the refinery’s potential and for commercial purposes. Based on a letter of intent signed between Grupa LOTOS, PKN Orlen and Energa on November 2nd 2020, the companies are looking into the possibility of joint construction of a CCGT unit in Gdańsk, to be completed by July 2026. Possible use of this CCGT unit for the Company’s own purposes, exploiting the partners’ expertise and the project being an investment in the Company’s energy security, all speak for undertaking further analysis of the project feasibility. On December 29th 2021, an annex to the letter of intent was signed, extending the deadline for the parties to enter into relevant agreements until not later than December 31st 2022.

At the same time, as part of its Strategy for 2017–2022, Grupa LOTOS is developing projects related to alternative fuels, in line with the second stage of CONCAWE’s model refinery transformation. Their objective is to diversify the Group’s business and build competitive advantages in new segments of the energy market, given that traditional fossil fuels are expected to play a gradually less prominent role in Europe within a dozen or so years.

Grupa LOTOS is pursuing research and development projects focused on environmentally-friendly fuels of the future, i.e. electricity and gaseous fuels: CNG (compressed natural gas), LNG (liquefied natural gas) and primarily hydrogen, which can be used in transport, as well as in refining and for energy storage.

The Grupa LOTOS refinery is Poland’s leading producer of hydrogen, with an output of approximately 16.5 tonnes/hour. The HRU unit will increase this capacity by an additional 1 tonne/hour.

The Company’s response to the changing business environment and market trends is a project to construct a large-scale hydrogen production facility.

The first step under the Green H2 project is to build a pilot plant, i.e. a smaller-scale electrolysis unit, extended to include functionalities such as hydrogen storage and fuel cells. The facility would be a target configuration for the largescale project, designed not only to deliver hydrogen for the refinery’s needs, but also to enable Grupa LOTOS S.A. to gain a share in the power capacity market, render services on the balancing market and, in the future, provide services to wind farm operators on the Baltic Sea. The Grupa LOTOS refinery has a uniquely advantageous location for potential cooperation with the operators of planned offshore wind farms. The geological structure of its location would allow it to store hydrogen inside salt caverns for subsequent use in electricity production during periods of increased demand. The project partner is Polskie Sieci Elektroenergetyczne, the operator of the Polish transmission system.

The Company intends to collect electricity via the transmission network, separate hydrogen through an electrolysis process and store it inside caverns. During periods of increased grid demand, e.g. in the event of power shortages (which are becoming a normal occurrence on Western markets with a strong RES exposure), the Company would flexibly use the stored hydrogen and generate electricity.

In the electrolysis process, the Company would use renewable energy sources to obtain green hydrogen, which would help it bring down CO2 emissions and meet the National Indicative Target for motor fuels production.

The Company has already selected strategic and technical advisers and completed preliminary analyses of the Green H2 project, under which it plans to build a large-scale green hydrogen production facility. It has also applied for funding to the EU Innovation Fund.

In order to power hydrogen fuel cells driving electric motors, hydrogen of very high purity is needed (99.999%).Therefore, Grupa LOTOS is implementing the Pure H2 project to build a hydrogen purification and distribution unit, as well as two hydrogen refuelling points.

The Company’s target production rate is approximately 160 kg of pure hydrogen per hour. The value of the project is close to PLN 40 million, of which 20% will be covered with EU funds under the Connecting Europe Facility (CEF).

Grupa LOTOS is also involved in implementing the Clean Transport Package and in the Climate Ministry’s work on a national hydrogen strategy, while exploring possible hydrogen applications – primarily in urban transport. The Company has signed letters of intent to supply hydrogen and refuelling infrastructure with the municipalities of Rzeszów, Gdynia, Tczew and Wejherowo, and a letter of intent with Toyota Motor Poland and Autosan, a bus manufacturer working to develop a hydrogen-powered vehicle and intending to test Grupa LOTOS’s hydrogen for powering that vehicle.

Research and development project carried out in consortium with the Institute of Energy and the AGH University of Science and Technology in Kraków, with an aim to construct a pilot installation for highly efficient hydrogen production based on solid-oxide electrolyzers (the project obtained co-financing from the National Centre for Research and Development).

The project will include R&D work focused on the development, construction and testing under actual operating conditions of a system with an electrolyser integrated into the refinery process, which will supply process steam for hydrogen production. The electrolyser will be designed to produce approximately 16 kg of 99.999% pure hydrogen per day, an amount sufficient to fill the tanks of several hydrogen-powered cars.

The project is co-financed by the European Union under the Intelligent Development Operational Programme 2014–2020, Measure 1.1 R&D projects of enterprises, Sub-Measure 1.1.1 Industrial research and development work implemented by enterprises.

Depending on market factors, the project portfolio may also include construction of a motor gasoline complex, an olefins and ETBE complex, a marine petroleum products handling terminal on the Martwa Wisła river or a waste oils unit.

Retail

At the end of 2021, the LOTOS retail chain comprised 520 service stations, including 327 CODO and 193 DOFO locations. The chain comprised 30 Motorway Service Areas, offering a wide range of non-fuel products.

520

service stations

As one of Poland’s leaders in advancing electric mobility, Grupa LOTOS S.A. launched a pilot network of 12 EV charging stations between the cities of Gdańsk and Warsaw, along the A1 and A2 motorways. In line with its strategy, the Company plans to continue to expand its EV charging network under the LOTOS Blue Trail project. More chargingstations will be built along Poland’s main routes in order to extend the distance that can be covered by EV motorists.

As part of the LNG station construction project, locations have been selected where LNG and CNG refuelling facilities are expected to become operational in 2022 (including. Gdańsk).

Gradual and consistent reduction of operating expenses and optimisation of margins

Due to the COVID-19 pandemic and geopolitical situation, among other reasons, the year 2021 saw unusual macroeconomic conditions. The average annualised prices of crude oil were approximately 6% above the strategic assumptions, and almost 70% higher than in the previous year. Prices of natural gas were 119% higher than assumed in the strategy and more than 410% higher than in 2020. Also the product crack spreads were below long-term projections. The deviation was over 50% for diesel oil and over 25% for gasoline. In 2021, the annual average PLN/USD exchange rate was 3.86 vs the expected 3.70. Optimising the refinery operations under these market conditions proved to be a key measure to earn profit and limit the extent of losses caused by the significant unpredictability of crude oil prices and the volatile product market.

In 2021 we conducted the first stage of the refinery’s partial refurbishment shutdown. We completed the latter half of that in March and April of this year. The outcome of the newly-implemented concept is raising the degree of detail in diagnostic tests and inspections on plant, which will extend the period between the next maintenance-related shutdowns from 4 to 5 years.

Piotr Walczak Vice-President of the Management Board, Refining & Marketing

An important measure taken by Grupa LOTOS S.A. to ensure the continuity and stability of crude oil supplies is to diversify their sources. In 2021, the supply source diversification served as a tool to improve production efficiency and further build experience in processing diverse grades of crude oil, including Arab Light, Grane, Jones Creek, Novy Port, Catcher, and Egina.

EBITDA was boosted by the Efficiency Improvement Programme, designed to support the identification and reporting of efficiency improvement measures at the LOTOS Group.

As part of its efforts to optimise crude oil processing, the Company took measures to maintain competitive advantages and strengthen Grupa LOTOS S.A.’s position in the Solomon Associates global refining industry ranking. The Company carried out initiatives to improve the refinery’s energy efficiency, and deployed state-of-the-art IT solutions consistent with the Industry 4.0 concept (the Competence Centre operated in partnership with Microsoft, using cloud computing solutions).

Readiness to embrace innovation

In terms of investments, the launch of the flagship project to continue ramping up the level of oil conversion, i.e. the Hydrocracking Oil Block should be considered to be significant in 2021, as should extraction from the Yme deposit in Norway.

Jarosław Wróbel Vice-President of the Management Board, Investments and Innovations

In 2021, Grupa LOTOS S.A. continued its initiatives focused on fuels of the future, designed to promote hydrogenbased technologies, and actively participated in implementing the Clean Transport Package, aimed to strengthen Poland’s energy security and reduce emissions from transport.

LOTOS Group representatives also regularly participate in working meetings with regional organizers and operators of urban transport and support them in their preparations for the hydrogen transition of urban transport. This is confirmed by the letters of intent concluded with the local governments of Tczew, Gdynia, Wejherowo and Rzeszów. At the initiative of the Group, the Hydrogen Technologies and Clean Energy Technologies Cluster was established, thus initiating the Pomeranian Hydrogen Valley concept. The objective of the project is to increase the share of hydrogen in the transport fuel energy mix in the Gdańsk Province.

Grupa LOTOS S.A. is also active in undertaking other projects related to new generation alternative fuels, including LNG/CNG. The Company is involved in continued work to prepare project documentation for the construction of a small scale LNG terminal in Gdańsk; studies are also under way concerning the Group’s entry into the biomethane market.

The Pure H2 project and the Feasibility Study on the Construction of a small scale LNG Terminal in Gdańsk and Innovative LNG Bunkering Facilities received EU funding as part of the Connecting Europe Facility (CEF).

2021 also saw the further digitalization of LOTOS. As we treated security issues as a top priority, we continued work making it possible to utilize in full the potential offered by cyberspace. We also meticulously tracked the amendments to EU legislation, mostly including the Fit for 55 package and incorporated them in our activities and plans.

Jarosław Wittstock Vice President of the Management Board, Corporate Affairs

Having forged ties between science and business, in late November 2020 a consortium comprising LOTOS Asfalt and the Gdańsk University of Technology signed an agreement with the National Centre for Research and Development for co-financing of the ‘Environmentally-friendly bitumens’ project. The project aim is to develop an innovative road surface capable of reducing air pollution levels near the roadway. As part of the project, on October 7th 2021, LOTOS Asfalt and the Ostróda County Local Government signed a letter of intent to build an experimental section of the road using smog-reducing bitumen.

In 2021, Grupa LOTOS S.A. prepared and adopted documents on the Strategic directions for innovation and the Strategic Research Agenda. The documents set out priorities for the Group’s innovation initiatives for the next two years with an outlook until 2030, focusing on:

  • modern refining technologies and oil products;
  • developing a portfolio of new products and services;
  • digitisation and improvement of organisational efficiency.

In the following year, Grupa LOTOS S.A. plans to continue alternative fuels projects and to implement the initiatives defined in the Strategic Research Agenda.

In 2021 the Innovation Division in the Lotos Group ran projects consistent with the Strategic Research Agenda and the Lotos Group’s Innovation Strategy. It continued to pursue initiatives in the fuel of the future area, i.e. it took action to promote hydrogen-based technologies and was actively involved in the implementation of the Clean Transport Package aimed at strengthening Poland’s energy security and reducing pollution in transport.
In 2021 the Lotos Group continued to run earlier projects facilitating the production of green hydrogen. The Innovation Division kicked off the execution of the Vetni research and development project co-funded by NCBR. The purpose of the project is to run a pilot installation for the highly efficient production of hydrogen based on fixed oxygen electrolyzers powered by RES. A co-funding application was submitted to the EU Innovation Fund under the Green H investment program as part of which there is a plan to build a large-scale installation for the production of green hydrogen.
Additionally, in 2021 the Innovation Division took numerous efforts to establish cooperation with leading Polish scientific entities.

Sylwia Pawlak Innovation Director

Active opportunity and risk management

The LOTOS Group is constantly developing its management culture based on the analysis of both risks and opportunities.

This helps to address major challenges in the changing environment and in an increasingly demanding market. Openness in risk communication supports decision-making process at strategic and operational levels. In 2021, competitive advantage was determined not only by avoiding threats, but by consciously taking risks and effectively leveraging identified opportunities.

One of the key challenges affecting the Company’s business in 2021 was the market situation caused by the COVID-19 pandemic. The procedures and preventive measures in place helped maintain operational efficiency across all business areas of the LOTOS Group. It is anticipated that in the near term the pandemic will continue to have implications for the Group’s day-to-day operations and macroeconomic trends that affect its business and performance.

 

No less relevant to the activities and development of Grupa LOTOS has been the global trend towards low- and zeroemission economy

When it comes to regulations, 2021 was marked by consultations and discussions concerning the draft legislation put forward by the European Commission and related to the Fit for 55 packet aiming to implement the economy’s transition towards climate neutrality. The solutions in this packet will have a crucial long-term impact on the business of entities operating in the fuel and energy sector. In addition, a new regulatory obligation concerning energy efficiency has been imposed on fuel companies. In the field of corporate risk management numerous activities were taken to mitigate threats due to the COVID-19 pandemic and the unstable macroeconomic situation. Other activities were undertaken to take advantage of the emerging opportunities.

Przemysław Bielecki Manager of the External Regulation Department

The ‘Fit for 55’ legislative proposal presented in July 2021 under the New Green Deal policy entirely changes the Group’s business environment. The planned changes in such areas as the share of renewable energy in transport, taxation of fuels and energy, electrification of transport, the principles of sustainable financing or stricter limits on greenhouse gas emissions in manufacturing and transport will have a direct impact on the business activities of the entire industry and the development of the LOTOS Group. In 2022, the Company intends to continue to take an active part in legislative processes at both the national and EU level and to strengthen the effectiveness of communication of risks that arise from changes in the regulatory environment. At the same time, development and investment projects are planned and implemented to take advantage of identified opportunities.

In an effort to further develop active management of opportunities and risks, the Company plans to more closely integrate and comprehensively manage individual risk categories, especially those driven by global megatrends, such as climate change. In addition, project risk management methodologies are improved, which support further development and safe operation of the LOTOS Group.

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