financial impact
mainly in terms of EBITDA of the LOTOS Group
Opportunities and risks associated with climate change
Climate-related risks and opportunities are one of the elements of a comprehensive Enterprise Risk Management (ERM) system in the LOTOS Group. As part of this system there is a Corporate Risk Committee chaired by the President of the Management Board of Grupa LOTOS S.A. The Committee’s role is to ensure that corporate risk management activities are carried out in a manner consistent with the functioning of the entire LOTOS Group. The Committee monitors the implementation and assesses the effects of the actions undertaken to manage the most important corporate risks in the LOTOS Group, including those related to climate change.
In addition, after the end of each quarter, the Compliance and Risk Department prepares for the Management Board and Supervisory Board reports on risk management in the Group, which cover the most important issues related to threats and opportunities, including those related to climate and regulatory changes in this area.
A review of the up-to-dateness and assessment of all risks, including climate risks identified within the ERM system, is conducted at least twice a year.
From 2020, the LOTOS Group has defined the so-called climate risks. This is aimed to highlight their importance and facilitate the development of an approach to comprehensive management of this risk category. The key risks following from climate change that could result in significant changes to the organization's operations, revenues, or costs are transformational (not physical) risks.
Within the framework of the Integrated Management System, which includes, among others, the Environmental Management System, the LOTOS Group has an Environmental Monitoring Plan in place, monitoring, among other things:
- emission of gaseous and particulate pollutants discharged in a channeled manner into the air from the LOTOS Group emitters,
- hydrocarbon emissions and weather conditions,
- the volume and quality of deep-water intake,
- the volume and level of intake of the Motława River and the retention reservoir, and the quality of surface water abstracted for industrial purposes,
- the level of near-surface groundwater around the retention reservoir in Przejazdowo,
- the quantity and quality of discharged water and wastewater,
- measurement of the quality of rainwater and snowmelt,
- the quality of water in the Rozwójka and the Martwa Wisła rivers,
- the amount and type of waste generated,
- the quality of land in the LOTOS Group sites,
- the noise level.
Within the framework of corporate risk management in the LOTOS Group, risks are identified and assessed in two time horizons: annually (short-term perspective) and in the horizon of the implementation of the current strategy of the LOTOS Group, i.e. currently until the end of 2022 (medium-term perspective).
The process also included risks whose characteristics and assessment extend beyond 2022 and which are long-term in nature up to 2030.
To determine the level of materiality for individual climate risks a corporate risk assessment matrix is used. Each risk is measured in terms of its likelihood of materialization and potential impact based on the following criteria:
impact on safety of people
the environment, and reputational issues
The risks that are currently likely to have a significant financial impact on the organization relate to the medium and long term. This is mainly related to the planned changes in the legal regulations at the national and EU level. These regulations will translate into the need to incur higher costs associated with meeting targets for, among others, NIT, NRT, energy efficiency, including the cost of investments in projects supporting a low-carbon economy.
Key risks for the LOTOS Group arising from climate change.
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The National Indicative Target (NIT) defines the minimum share of renewable energy in transport and is an implementation of the amended RED Directive (the so-called RED II Directive) through amending the Act on biocomponents and liquid biofuels |
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| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The RED II Directive provides for, among other things, increase of the obligation regarding the minimum share of renewable energy in transport to 14% (as compared to 10% at Present) and the minimum share of advanced biofuels at the level of 25% by 2030. |
– increased operating costs as a result of increased renewable energy requirements for transportation (e.g. need for more biofuels, possible penalties) | + entry into a new market for advanced biofuels, the demand for which in the EU is expected to grow | Striving forthe maximum reasonable level of achievement of the NIT target through purchase and use of biocomponents.
In addition, if economically justified, itis possible to use co-hydrogenation. In addition, analytical work on the use of biohydragen from biomethane is underway. Ongoing contact with the national regulator, presenting results of analyses and positions, proposing requlatory solutions favorable to the LOTOS Group. |
HIGH |
N/D
from 2025, the goals following from RED II directive should be replaced with the RED III directive |
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| Revision of the directive on the promotion of the use of energy from renewable sources (RED III) | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| Increase in the obligation regarding the share of renewable energy in transportation, resulting in increased use of low-carbon fuels, including advanced biofuels, synthetic liquid and gaseous fuels, and hydrogen. | – increased costs associated with the purchase and production of biofuels and potential penalties for not meeting renewable energy targets for transportation | + opportunity to enter new markets for advanced biofuels or hydrogen
+ opportunity to attract dedicated support for low- carbon projects and the ‘opportunity for new investments in a sector for whose products there may be increassed demand in the EU |
Undertaking investment projects (e.g. in the area of advanced biofuels, hydrogen) to reduce emissions and increase the share of renewable energy.
Monitoring and active participation in the legislative process (presenting results of analyses and positions, Proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level. |
MARGINAL | VERY HIGH | VERY HIGH |
| Revision of the Energy Taxation Directive (ETD) | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The contemplated changes to the fuel and energy taxation system will result in an increase in the minimum tax thresholds and their differentiation in such a way as to make altemative fuels as cheap as possible relative to petroleum- based fuels. | – possible gradual decline in demand for traditional fuels
– increasing tax burdens on traditional fuels, disturbing the current relationship between taxation of diesel, gasolines and LPG |
+ increased interest in low-emission alternatives such as electricity, hydrogen or fuels with higher content of advanced biocomponents
+ potentially higher profitability of projects related to the production and use of alternative fuels in transport due to their preferential |
Undertaking investment projects in the area of alternative fuels and biofuels that will be subject to preferential taxation.
Monitoring and active participation in the legislative process (presenting results of analyses and positions, proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level. |
MARGINAL | HIGH | VERY HIGH |
| Introduction of EU regulations on sustainable aviation fuels, the so called “ReFuelEU Aviation” | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The initiative involves the development of Sustainable (low- carbon) Aviation Fuels (SAF) – various options are being considered, including a commitment for the refining industry to produce a certain volume of low-carbon aviation fuels. | – high costs of compulsory production of SAF (if this option is eventually found in the regulations) – due to, inter alia, limited availability of raw materials and the costly certification procedure for such fuels; it is estimated that the cost of introducing SAF is several times higher than for traditional fuels | + entry into the emerging, prospective and likely high-margin sustainable aviation fuel market | Analysis of opportunities to enter the emerging sustainable aviation fuels market
Monitoring and active participation in the legislative process (presenting results of analyses and positions , proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level |
MARGINAL | HIGH | VERY HIGH |
| Revision of the directive on alternative fuels infrastructure | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The initiative pertains to setting mandatory targets for the development of altemative fuels infrastructure at the EU level – the aim is to increase the number of electric car charging stations, hydrogen, CNG and LNG refueling stations and liquefied natural gas (LNG) refueling stations in ports for the needs of LNG-fuelled ships. | – the growing number of electric vehicles may consequently contribute to a decline in demand for traditional fuels, especially gasoline
– the need to incur costs related to the construction of the new infrastructure |
+ development of the electromobility segment creates opportunities related to the offering of charging services and development of non- fuel business (longer charging time for electric vehicles in relation to combustion engine cars means more time spent by customers in the station’s commercial space)
+ development of the alternative fuels market and earning revenues from the sale of these fuels (electricity, hydrogen, CNG/LNG gas) |
Investments in projects related to the alternative fuels infrastructure, e.g. construction of fast charging networks: LOTOS Blue Route and Pure H2 hydrogen filling stations.
Monitoring and active participation in the legislative process (presenting results of analyses and positions, solutions favorable to the LOTOS Group), both at the EU and national level. |
MARGINAL | HIGH | HIGH |
| Revision of the EU ETS system | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The planned amendments to the ETS system are aimed at accelerating the rate of growth of CO2 emission allowance prices and, consequently, at stimulating greater investment in emission-free technologies. | – higher operating costs of Grupa LOTOS S.A. as a result of an increase in the price of emission allowances and a decrease in the number of free allowances | + increased profitability of decarbonization projects (eg. Green H2) | Investments in projects improving energy efficiency and reducing COz emissions, e.g. emission-free production of hydrogen in electrolysis process for refineries (LOTOS Green H2, Vetni project)
Monitoring and active participation in the legislative process (presenting results of analyses and positions, proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level. |
MODERATE | HIGH | HIGH |
| EU Hydrogen Strategy and legislative acts an the promotion of hydragen use | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The strategy aims to identify barriers to increasing the production and use of clean hydrogen, define actions to remove these barriers, and support large-scale production and use of clean hydrogen, or the development of the hydrogen market and the necessary cost- efficient infrastructure.
Proposed legislation, comprehensively regulating the production and use of hydrogen in the economy should appear in 2021. |
– setting too strict criteria for considering energy for hydrogen production as renevable
– the production of binding targets for the share of hydrogen, without adequate tools on the demand side |
+ opportunity to enter the prospective green hydrogen market
+ opportunity to meet the (growing) targets imposed on Grupa LOTOS S.A related to the share of renewable energy in transport + access to preferential financing models for hydrogen projects |
Investments in projects related to zero emission production and use of hydrogen (LOTOS Green H2, Pure H2, Vetni).
Monitoring and active participation in the legislative process (presenting results of analyses and positions, proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level. |
MARGINAL | MODERATE | HIGH |
| Introduction of a legislative package on sustainable financing (the so-called taxonary) | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The legislative package introduces a general framework that will allow for gradual development of a classification system for environmentally sustainable business activities. This classification will be used to redirect capital flows from private market and EU programs to investments classified a climate sustainable | – increase in the costs of financing and possible difficulty in financing investments. not qualified as sustainable („green”)
– increase in the cost of insuring activities that do not conform to the taxonomy |
+ preferential funding for projects that are consistent with the taxonomy, ie. designed to reduce emissions, such as green hydrogen production, advanced alternative fuels, or renewable energy generation | Implementation of projects that are consistent with the taxonomy, ie. designed, among other things, to reduce greenhouse gas emissions or increase the use of renewable energy.
Monitoring and active participation in the legislative process (presenting results of analyses and positions, proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level. |
MODERATE | HIGH | VERY HIGH |
| Fuel emission standards | ||||||
| Risk factors | Threats | Opportunities | Risk management methods | Risk impact level | ||
| Short-term | Medium-term | Long-term | ||||
| The legislation package that sets emissions standards for light passenger cars and trucks, as well as emissions targets for new vehicles to reduce emissions by 100% by 2035, which means a de facto ban on the sale of internal combustion vehicles | – indirect impact on the LOTOS Group through a decrease in demand for refinery products due to the growing number of zero-emission vehicles at the expense of those running on traditional fuels (if the proposed mechanisms prove to be effective) | + increase in profitability and decrease in risk of transportation electrification and hydrogenization projects
+ competitive edge and a new source of revenue provided they have an adequate network of EV charging and hydrogen refueling stations (if the designed mechanisms prove successful) |
Undertaking investment projects in the area of alternative fuels (EV charging and hydrogen refueling network)
Monitoring and active participation in the legislative process (presenting results of analyses and positions, proposing regulatory solutions favorable to the LOTOS Group), both at the EU and national level. |
MARGINAL | LOW | MODERATE |
