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The Warsaw Voice » Special Sections » August 29, 2012
Special Section: LOTOS
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Lotos: Modern, Thoroughly Professional, Socially Responsible
August 29, 2012   
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Paweł Olechnowicz, president of Grupa Lotos, talks to Andrzej Ratajczyk.

How would you evaluate the Lotos group’s development over the past 10 years? What is the group’s current position on the Polish and European markets?
Without being unduly humble, I would say that the Lotos group’s development over the past 10 years—a period that included many of dramatic moments—has been systematic, rapid and carefully planned. We turned an outdated refinery—which couldn’t have continued to operate under the old organizational model—and old technologies into one of Europe’s most advanced petroleum corporations. In terms of the international oil sector, Lotos is a small company, but it is extremely dynamic with huge prospects for growth. We are not only the showpiece of Pomerania and the entire Polish economy but also an example of rapid development in Central and Eastern Europe.

Lotos’ position on the Polish and European markets is stronger than suggested purely by its production and sales figures. Lotos is certainly an ultramodern company, very well managed, with a cohesive and realistic strategy and knowledgeable and dedicated employees. At the same time, this is a company that thinks and operates in much broader terms than its own issues and problems. Our top priorities are: constant strengthening of Poland’s energy security, maximum reduction of the negative impact of technological processes on the environment and establishing wide-ranging international cooperation on matters of the highest importance for the oil industry and energy sector.

Lotos is a founding father of Central Europe Energy Partners, an international think tank. It brings together an ever-growing group of companies and government institutions from this part of Europe with the aim of strengthening energy security and extending the friendly cooperation of energy suppliers and buyers. Taking this into consideration, Lotos is simply a thoroughly modern company, socially responsible and very professional.

Did the Lotos group’s 10+ Program from last year fulfill its purpose?
It fulfilled it perfectly, faster than we expected and more cheaply than we planned. The 10+ Program was founded on what later turned out to have been an accurate assumption that oil prices would remain in a long term growth trend. Of course, substantial fluctuations on the market do occur sometimes, which is inevitable when you’re dealing with oil, but prices are climbing relentlessly upwards. What does this mean?
The more expensive oil gets, the more thoroughly it has to be processed in order to achieve the best financial and marketing effects. To put it graphically, we have to squeeze a maximum of light fractions from every drop of crude oil, as these yield the highest margin and sell well. This is exactly what we have achieved. Our systems deliver oil refining figures that are higher than planned. They turn more oil into diesel fuel and valuable chemical substances, which means higher margins for us. We are left with a smaller amount of heavy fractions which yield low margins and are a problem for the environment.

I can safely say we are one of the “greenest” refineries in the world. Saying this not only creates a sense of having fulfilled a civic duty but also has a positive impact on financial results. It’s a good combination of business and pleasure.

How does the current situation on the global energy market affect the company’s operations? How is financial liquidity maintained in a crisis? How does the company compensate for dropping margins on fuel?
We aren’t very pleased with the current situation on the global energy market. There is too much tension, lack of predictability and too many speculative deals. On the other hand, though, the oil price level is relatively stable at around $100 per barrel and this stability has to be taken as a positive thing. What the oil market likes the least is sudden surprises, whether financial, political or military, because then everything goes topsy-turvy, rational thinking goes out the window, panic and speculation rule. We haven’t seen anything like that recently, so we can view this aspect of the market as being relatively sensible.

Things are worse on the demand side. The European economy is hovering around zero growth, Poland isn’t rushing forward like it was a year or two ago, which of course reduces the demand for fuels. Luckily, thanks to the state-of-the-art refinery we have, these trends are less painful for us than for other oil companies that use older technology. Even so, we would rather see growth accelerate and demand for fuels grow. I hope this will happen quickly, because next to gloomy economic forecasts there are some positive signals as well.

Lotos has never had and does not have any problems with financial liquidity, which has been satisfactory for years. Moreover, we are continuing our investment process, adjusted to current capacity, especially in accessing oil deposits and extracting them. Thanks to thorough refining of crude oil, even with lower margins we maintain a reasonable profit level that enables us to service our investment debts and undertake cautious development measures for the future. We have launched a cost-rationalization program that our employees have received well and are applying systematically. In the briefest terms, Lotos has a healthy, safe financial situation and knows how to use it to its advantage.

What are the results of the Lotos Optima economy fuel station project?
Lotos Optima economy petrol stations are an excellent idea and the project has been very well implemented. Within a short time, we responded to a need that customers had voiced, that they needed to be able to buy fuel at slightly lower cost than at a premium station. We opened 50 Optima stations in 2011; they have a slightly smaller choice of fuels and limited shopping facilities but lower prices for gasoline and diesel fuel of the same quality. The other parameters of the high standard of Lotos stations have been maintained: the sales staff are polite, fuel sales are very efficient, and the stations are located conveniently for drivers.

This year we plan to open another 50 stations, maybe even more. We are not changing our principle of providing the highest quality for a reasonable price. I’m convinced this is the right direction to develop in and one that enables us to adapt the service—from the simplest fuel sales to other retail proposals—to customer preferences and affluence. Actually, this is our hallmark as a company: we analyze the changing situation, draw conclusions and act upon them quickly.

The Lotos group has invested substantial funds in gaining access to oil deposits. How is this segment in the group’s operations developing? Does the company intend to continue investing in drilling for new oil deposits as well as unconventional resources? How does this impact Poland’s energy security?
I will answer the last question first. Everything we do is governed by the priority of Poland’s energy security. This is not just about a sense of responsibility for the sustainable economy of the country where we operate, but also—I think—a sensible business approach. Business in the oil sector develops well when there is economic balance, optimism, security and a predictable future. It’s very hard to do business if things are otherwise. That’s why we consider Poland’s energy security to be a priority in our operations strategy.

Developing the segment of drilling for and then extracting our own oil deposits is the most important goal of our strategy up to 2015. Whatever efforts are made to take advantage of alternative fuels, for many decades to come the world will be based on hydrocarbons. At the same time, these will become less accessible and the costs of extracting them will increase. In this tough battle, only those oil companies will survive that have access to their own resources.

Lotos is focused on building its position on the Baltic and the Norwegian shelf of the North Sea. Lotos owns oil deposits there in the Yme oilfield (a total of 13.6 million barrels). Extraction keeps being delayed due to disputes between the oilfield operator, Talisman Energy, and platform builder SBM Offshore. Lotos will be claiming its rights as a shareholder owning 20 percent of the whole deposit.

This doesn’t change the fact that the deposits are fully documented and constitute a valuable asset in terms of extraction or sales, with prospects for growth in its value. The plans of the Lotos Exploration and Production Norge AS company include the acquisition of further shares in deposits on the Norwegian shelf, some that are being prepared for extraction and others that are already pumping oil. We intend to meet the targets of our strategy up to 2015, which says: “Strategic goals will be achieved through increasing the security of raw material deliveries thanks to direct access to hydrocarbon deposits and increased production as a result of the extraction program.”

The Lotos group is actively investigating the possibilities for extracting shale gas in Poland, Lithuania and on the Baltic Sea. These are operations with unusual potential to generate profits while being very costly and high-risk. That’s why our approach to the problem is one of calmness, prudence and responsibility.

Have the Treasury Ministry’s repeated failed attempts to privatize and enlist an investor for the group affected the company’s day-to-day operations?
I wouldn’t describe the ministry’s privatization concepts as “failed attempts.” On the contrary, these measures—prudent and free from time constraints—are part of the best tradition of a strategic business involving crude oil production and refining. The Lotos group will certainly be fully privatized one day, but this will take place when the market conditions are optimal, the price is the highest possible to achieve, and the synergy effect for the Lotos group is at its maximum.

The ideal partner for future privatization operations would be the owner of extensive oil deposits, familiar with the oil business, who understands its economic, social and even political determinants. We at the management board of the Lotos group are creating rising value for the owner and shareholder and we feel no time pressure. I think we could even say it’s the other way round. The longer we build this value, the higher it will be, the more funding for public spending will be generated by the sale of Lotos shares to a strategic investor.

What is the priority for the company in terms of its development today? What is the paramount strategic goal for the coming years?
The priority for the company is to ensure conditions for its safe and rapid development with simultaneous measures strengthening Poland’s energy security. We want to develop our share of the domestic retail market, increasing it from today’s 8 to 10 percent, and to expand our share of the wholesale fuel market. Our share of the latter market at the start of 2012 was more than 35 percent. This testifies to the refinery’s high production capacity as well as widespread approval for the top quality of the fuels we sell.

We also want to expand our services to include aviation fuel and to develop our own chain of fuel stations because only they give us complete control over the quality of the products we sell as well as enabling us to generate an attractive margin.

In the briefest terms, Lotos wants to be a growing, important, socially responsible Polish company that creates value for its shareholders and serves the entire economy.
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