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The Warsaw Voice » Special Sections » August 29, 2012
Special Section: LOTOS
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We’ve Built a Modern Refinery
August 29, 2012   
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Here is how various Lotos executives evaluate the company’s development in individual business segments:

Marek Sokołowski, vice-president of the management board/director for production and development:
The previous board term was an exceptional period for our company. We overcame many adversities and completed our largest development program. Our refinery has been reshaped and expanded, allowing Lotos to become a major player in the oil refining industry, one admired by its partners for what it has achieved. We keep being invited to attend many international conferences where presentations made by our staff are applauded and attract great interest.

I’m very glad that the previous board term was a time well spent. For a year and a half now we have been using the new refinery facilities constructed under the 10+ Program. The results we are achieving, both in terms of profit margins, and product quality and volume, are much better than expected. An especially important thing is that we have achieved a much higher conversion rate for mild hydrocracking (MHC), and consequently a much higher margin and better base oils. I think we are utilizing our production assets very well. This applies to not only our new facilities, whose capacity is being used to the full, but also the innovative use of the know-how acquired under licenses, as well as the skills of our engineers.

The beginning of the new board term sees the launch of a new facility for the production of xylenes. The product will enable us to enter a new petrochemical market and put our surplus gasoline component to a good use. We are in the last stage of a process that began five years ago and involves converting the refinery into one fired by natural gas. This marks a huge change for the refinery in terms of the technology and the way it is powered—a change designed to produce substantial financial and environmental benefits.

We now have a modern refinery, which is competitive in terms of efficiency and structurally adapted to the market, as confirmed by a recent Solomon report. But progress knows no limits. In order to remain competitive, refineries have to invest. We have started design work on another large project—a coking facility utilizing the heavy residue now sold as low-value furnace oil and low-quality asphalt. Seventy percent of this residue would be turned into fuel. The increase in the profit margin from this facility is very high. We are also working on a project in which an outside investor will build a gas-fired heat and power generating plant within the refinery compound. Among other projects, it is also worth mentioning the construction of a wharf by the Martwa Wisła section of the Vistula river.

An intelligent approach to repairs, both those conducted on an ongoing basis and those requiring stoppages, is another priority for the management board. We want to develop a system for monitoring our facilities so as to minimize the number of stoppages, shorten the repair time as much as possible and maximize the time of the refinery’s operation without a stoppage.

For many years our facilities have been used very efficiently and we must spare no effort to maintain this high efficiency—especially at a time when the refinery margin is high. Another important challenge for the coming years is the need to further reduce our costs, especially the costs of energy. There is a special team working on this. I hope we will remain among the 10 most energy-efficient refineries in Europe.

These are just a few of the many priorities for the management board when it comes to growing the company’s business. Of course, the full range of priorities is much broader.

Mariusz Machajewski, vice-president of the management board/finance director:
In terms of finance, there are two main challenges we have to deal with. The first is the need to increase the efficiency of our assets, which is associated with focusing on our core business. At present, a significant portion of our capital is employed outside our core business. It is valid to ask whether we should release this capital and employ it in areas where it can be used more efficiently and serve our strategy better. The other challenge is the need to find financial resources for the development of our drilling and extraction segment.

Apart from these main thrusts of our business, it is also worth mentioning several other objectives. One of them is to lower our debt indicators, which are now at relatively high levels. Of course, there is no danger that Lotos will stop meeting its liabilities. Cash generated from our oil refining operations is quite sufficient for us to service the loans we have taken out for the 10+ Program. The fact that a significant portion of our capital has been invested in upstream operations in Norway is a major burden.

This is why solving the problems we have with the Yme deposit is important from the point of view of our finances.

We will be also focusing on processes supporting management at the company, using modern IT solutions. We are going to introduce new functionalities based on the SAP system and to apply a new transaction and analytical system for financial risk and trading management. The world has made much progress in this area and we must not lag behind. We have to apply modern systems in our company. They will make management easier and first of all offer an opportunity to create value in areas which we have yet to utilize.

We will also continue to centralize financial processes across Grupa Lotos. We started this process last year and want to complete it this year or next. The centralization will involve not only executive but also managerial functions by concentrating cash flow and debt management in one place, and by applying tools that will enable us to make an optimum use of cash across the group. One example is a single currency exchange system for the whole group. The single system will mean more favorable terms for these operations compared with the situation when each company conducts such operations with financial institutions on its own. Additionally, this will result in lower costs of such transactions. We are introducing these new solutions to reduce the costs of financial operations and at the same time improve financial liquidity.

Maciej Szozda, vice-president of the management board/commercial director:
We have built efficient sales channels through which we are now offering far more products. We should continue our work to further strengthen our retail chain to make sure it absorbs as much of our output as possible. The company’s retail chain is a loyal and stable partner. The more output is sold through this channel, the more comfortable we will be in negotiations with other operators on the market. We have good ideas for the expansion of our retail chain and, most importantly, we have demonstrated that we can successfully put these ideas into practice. We have already opened 56 petrol stations under the Optima brand and will have a total of 100 or more stations by the end of the year. We are launching a new kind of fuel station, called a Premium station, and our share in the retail market has already reached 8 percent. We will continue to expand our non-fuel product sales, which will enable us to avoid the consequences of the often volatile retail margins on fuels. On mature markets, these margins are steadily shrinking. This is precisely why many chains are seeking to earn a profit from selling non-fuel products and related services. In our case, an excellent example is our new Premium station near the opera house in Gdańsk. This station has recorded a several-fold increase in sales of non-fuel products.

We have managed to create a new attractive brand of food service at this station, which will be gradually introduced to other stations together with new décor. Surveys show that the new station, its décor and functionality have been well received by the market. It is worth moving further in this direction.

We will continue to develop our retail chain, in terms of both the number of petrol stations and their quality. These efforts not only contribute to strengthening the company and raising its market share but also promote the Lotos brand. The perception of our company largely depends on the quality of our retail chain. But today, we should also focus on building up the sales margin across the business, starting with oil extraction or purchase to processing and sales of final products.
We have a good logistics system, which, however, should be improved continually. We have to further develop our sales companies. It is worth strengthening the product potential of Lotos Oil so that the company can place more and more high-margin products on the market. It is also worth continuing to strengthen Lotos Kolej, a company that is now doing superbly on the market.

One of the top priorities for us is trade in aviation fuel. We want our fuel to be used to refuel airplanes not only at the airports in Gdańsk, Wrocław and Rzeszów, but also in Warsaw, Warsaw-Modlin, Katowice and Cracow.

We will be developing our trading operations to maximize our sales margin. We are now focusing on building IT systems to support our efforts in this area. Trading is a process that has not been completed yet. We are still strengthening the team and its expertise, and providing it with the right tools to support its operations. In this area, it is impossible to achieve success swiftly and cheaply. One needs to work diligently and patiently. Everything’s possible.

Zbigniew Paszkowicz, vice-president of the management board in charge of exploration and production operations:
I’m tasked with managing the further development of our upstream operations. This job involves a lot of responsibility and is a real challenge. After all, further rapid growth of our upstream segment is now the main strategic goal for Grupa Lotos. I took on this task because I have chaired the supervisory board of the Lotos Petrobaltic company since the beginning of this year and have been able to find out about the special nature of this area of our operations. I have also been able to meet exceptional people committed to pursuing these tasks.

I am confident that further intensive development of our upstream operations is of key importance to Lotos because it will enable us—in line with our strategy for the 2011-2015 period—to contribute to Poland’s energy security and to successfully create value for shareholders thanks to a relatively high margin from extraction. By the end of 2015 we want to be able to extract 1.2 million metric tons of oil annually from our own sources.

To achieve this goal, we have to strengthen our position in all the regions where we are active—on the Baltic Sea, in the Norwegian continental shelf, and in Lithuania. We also need to search for new regions for our global operations. Certainly, one of the first challenges will be to solve the complex issue of the Yme project. This would enable us to intensify work in other concession areas located in the Norwegian shelf and elsewhere. We will also be searching for liquid and gaseous hydrocarbons on the Baltic. We are going to develop the B8 deposit, whose potential has already been confirmed. We want to further expand our operations in Lithuania. We are carrying out our first project there based on drilling for unconventional hydrocarbons on the basis of on-shore concessions.

We are going to carry out all these undertakings by relying on our own know-how and experience. Other projects, especially those requiring large investments and specialist know-how and equipment, including projects associated with unconventional hydrocarbons and the development of Baltic gas deposits, will be carried out together with Polish and foreign partners, the best ones in the industry—in partnership, consistently, effectively and with optimism, as we did in the case of the 10+ Program.
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