August 29, 2013
Paweł Olechnowicz, CEO of Polish fuel group Lotos, talks to Andrzej Jonas and Andrzej Ratajczyk.
How do you assess the current condition of the Polish economy compared with other countries in the region and Europe? To what extent does the functioning of a large oil company such as Lotos depend on what happens in the economy?
Poland had excellent ratings when it recorded growth as the only economy in the European Union. It was a “green island” in recession-stricken Europe. We still have a great reputation, but the macroeconomic indicators are worse now. Poland’s GDP growth has slowed down, the rising public debt is a growing problem, and high unemployment is creating social and economic problems. But we still have one big advantage. Poles are dynamic, hungry for success and have an entrepreneurial instinct. If this business acumen is supported and put to good use, then the current slowdown will be just an insignificant episode.
All this is accompanied by the problems in the euro zone. EU officials are trying to find solutions to help overcome the crisis, while supporting the most vulnerable economies, such as Greece. The EU is currently unable to create comprehensive development programs because a lot of energy is being used up to solve individual problems. But without solving these problems, common, sustainable growth is out of the question.
The state of the economy as a whole has an impact on the functioning of companies such as Lotos. We have an interesting, realistic program of constant development, however, its effectiveness will depend on what happens in the world around us. And not just in Polish industry, but also in Europe at large—because Lotos is determined to grow on the European market.
Does this mean that Lotos’s effectiveness as a business depends on what happens both at home and abroad?
Of course. In order to carry out any development project, whether in manufacturing or services, we need to consider and follow certain rules set for the European Union market. These rules apply to not only the economy, but also environmental protection, social affairs, etc.
It seems that a large company like Lotos should not only be obligated to respect certain rules but also be given the opportunity to take part in the process of formulating rules for the sector. Is that the case?
Leaders who think in the long term and are development-oriented must think about appropriate market regulations. They must want to have an impact on how these rules are improved in order to make them more friendly to businesses and their development. That’s why representatives from Lotos are involved in various processes regarding the adaptation of EU law.
How does Lotos make its case in the European Union?
The European Union does not accept individualists. Therefore, in order to be heard, you have to act in a group. You need to build alliances and partnerships. You have to create organizations that bring together people and companies whose voice can and should be heard. In 2010, as an initiative by Lotos, Central Europe Energy Partners (CEEP) was set up, the first sector organization in Central Europe that is permanently represented in the European Union. CEEP vigorously supports legislative processes related to energy in Europe. It aspires to strengthen stability and security in the supply of fuels and play a key role in initiating and reviewing EU directives related to energy security and governance. CEEP is a well thought-out system of support for the international expansion policy of the Lotos group, congruent with the fundamentals of Poland’s energy security and EU policy.
Lotos today is a strong and stable corporation, the second largest company in Poland in terms of sales revenue and the sixth largest in Central and Eastern Europe. This position is due to efforts including large-scale investment projects carried out by the company in recent years. What is the most important part of your investment program?
The Lotos group began to develop dynamically in 2002-2003 after a decision was made to redesign the refinery and build a vertically integrated corporation. In the following years, we carried out our strategic Program 10+ for the technological development of our refinery, which is the basis of the whole group. Today, our refinery is one of the best in Europe in terms of technology. But the program would not have produced the expected results if our investment in industrial installations had not been accompanied by efforts to secure a strong position on the market for lubricants, motor oils, bitumen, and paraffin waxes—and, above all, on the retail fuel market, meaning the fuel station network. Lotos also started to develop a new area of business: drilling for and extraction of crude oil. Due to the scarcity of domestic resources, we decided to invest in this segment in the north of Europe.
How much did your Program 10+ cost and what results has it produced?
Spending totaled $2.15 billion. As a result of the program, Lotos’s revenue increased from under zl.6 billion in 2002 to zl.30 billion in 2012. This is due to an increase in our refining capacity from 4.5 million metric tons to 10.5 million metric tons per year. At that time, we also managed to increase our share in the Polish fuel market from 14 percent to 34 percent. Also impressive was an increase in employment from 2,500 to 5,500. This program was a great challenge, because it was carried out without stopping the refinery and with the normal operation of more than 100 companies and 3,500 people.
It is worth noting that the program was carried out at a time when the global crisis was at its worst, and yet the program was completed to schedule. This was largely thanks to an anti-crisis package that we introduced and which provided for either halting or slowing most other less important projects in order to carry out the main development program without a delay. After the completion of Program 10+ we decided to launch our Optimal Expansion Program to integrate the new installations with the old ones. This allowed us to reaffirm Lotos’s status as a stable company that keeps thinking of further development and expansion. This is confirmed by our next development project, called Effective and Rising 2013-15.
Press reports indicate that this new project may cost up to zl.8 billion. How accurate are these estimates?
It is possible that the cost will be even higher than that. However, for various reasons, we cannot give specific figures today because going ahead with most these projects depends on decisions at the government level. It has not yet been decided which projects will be approved and how we create the financing structure to carry them out. It is necessary to keep in mind that Lotos is the second largest Polish group controlled by the state and that the company’s large-scale projects are of national importance.
Does this mean that Lotos’s investment projects are part of Poland’s energy policy?
All our projects are and must be closely linked with the government’s energy policy. This is the essence of their economic importance and attractiveness to both the authorities and the public. Otherwise no one would be launching these projects.
Will the Lotos group focus on drilling for, extracting and processing hydrocarbons, or is it also thinking of investing in other segments of the energy market as part of its strategic plans—for instance wind power, nuclear power, and production of fuel biocomponents?
Our Effective and Rising program calls for even greater consolidation of the group around its core business. We want to convert all the non-core businesses into independent companies that will be supporting us, possibly with Lotos as a shareholder. Lotos itself will focus on drilling for and extracting hydrocarbons: oil and gas, including shale gas.
Do you expect any revolutionary changes in the energy sector in the coming years or decades? Are there chances that a new source of energy will be found or some innovative technology will be developed?
The world is developing faster and faster. And today we are seeing some major changes from one decade to the next, for example when it comes to the development of new technology. It seems that completely new technologies will appear in the energy sector in the next 20-30 years. The only question is to what extent these new solutions will be used. And it’s necessary to remember that innovation is when something is not only invented but can also be put to practical use.
Is Lotos involved in any research work aiming to develop new technology for the energy sector?
We support the process of developing solutions for shale gas by being part of a consortium of a number of Polish companies and institutions. We are also involved in work to organize a similar consortium internationally. But for now, all these efforts are limited to research and are to a large extent being financed from both domestic and EU funds set aside for scientific research. But once this research yields tangible results, we will join it to a much greater extent, also in terms of financial involvement.
Does Lotos plan to enlist any foreign partners to help it carry out its development program?
Working together with foreign companies will be possible in the case of individual projects. We have a situation like this in the Norwegian Sea shelf, where there is an open market system created by the Norwegians. It is based on the organization of rounds of bidding for concessions that are only open to consortiums consisting of two or more partners.
Does Lotos plan to take over other companies to spur its development?
I do not exclude that, but these must be companies that will give us the chance to develop our core business in line with the rules of the country’s energy security. But we will be focusing to a greater extent on partnership projects, such as those we are carrying out together with the CalEnergy company, for example, in extracting gas from the Baltic Sea.
Lotos is active on many markets abroad. Is it thinking of having its shares listed on stock exchanges other than Warsaw?
Before we decide to enter another stock exchange we need to answer the question of what benefits this will produce for the company and at what cost. The same is true of bond issues, which increase the company’s debt and deteriorate its balance sheet. This is expensive. Therefore we are looking for other ways to raise funds to finance development. If, however, it turns out that placing the company’s shares on another stock market will produce benefits—aside from those related to marketing—we will certainly consider that.
Lotos Effective and Rising
The supervisory board of the Lotos group in July approved the guidelines of the corporation’s 2013-15 Effective and Rising program, which aims to facilitate the implementation of the company’s strategy and deliver steady value growth for shareholders.
The primary objectives of the 2013-15 Effective and Rising program are to improve the company’s financial indicators and achieve continued growth through restructuring and investment in the core business.
Key investment projects
Lotos is consistently pursuing its investment and development program throughout 2013. Work is under way to launch commercial production from the B8 field in the Baltic Sea, which will be brought on stream in 2015. Its production potential stands at 3.5 million metric tons of crude oil, and its average annual output is estimated at 250,000 tons.
The Lotos Petrobaltic company continues production from the B3 field. After the repair of PG-1 Lotos unmanned platform, production from the field is expected to increase by 15,000 tons per annum by 2026. Overall, Lotos plans to produce about 100,000 tons of crude oil from the B3 field.
Baltic Gas, a special-purpose vehicle (SPV) company established in April 2013, is working on the development of the B4 and B6 gas fields, both of which have a production potential of 4 billion cubic meters of natural gas. Under the preparatory work schedule, acquisition of seismic data and selection of a preliminary field development concept are scheduled for 2013.
As part of an agreement with the Polish Oil and Gas Company (PGNiG) on exploration for and production of conventional and unconventional oil and gas, as well as on commercial cooperation, Lotos and PGNiG have conducted joint operations in three license areas in the Pomerania and Warmia regions (Kamień Pomorski, Górowo Iławeckie and Bartoszyce).
In the refining segment, Lotos is working on a petrochemical project with the Azoty group, which is key to Lotos’s growth. The two corporations are working on an initial feasibility study for two alternative projects: a pyrolysis (steam cracker) complex with polyolefin production, and an aromatics complex. If the results of the feasibility study are positive, design work on the selected options can begin. The Azoty group will be the main customer for the new units’ products.
In order to fully leverage the benefits of the successful implementation of its Program 10+, Lotos plans to build a delayed coker unit (DCU) at its Gdańsk refinery. This will directly enhance processing efficiency and help phase out production of unprofitable heavy fuel oil.
Instead, the annual output of motor fuels and coking coal will rise by about 900,000 tons and 350,000 tons per year respectively. The DCU unit will enter commercial operation in 2017. Estimates suggest that it will add an additional $2.20 per barrel to the company’s refining margin.
Furthermore, Lotos intends to upgrade its Gdańsk refinery with a hydrogen recovery unit. The unit will enable the company to significantly increase its hydrogen output (a key feedstock in production processes) and further widen its refining margin. Moreover, construction of an ATS unit will facilitate the transition from fuel gas to natural gas (for economic and environmental reasons), and production of ammonium thiosulphate for the Azoty group.
Furthermore, to fully optimize the assets of its Gdańsk refinery, Lotos has implemented a plan to outsource the supply and collection of products and utilities (such as heat and electricity) which lie outside the company’s core business.
In the retail segment, Lotos envisages further rapid expansion of its service stations, especially in the budget segment. It is planned for the Lotos Optima chain to include more than 260 stations by 2015. Another 18 Lotos stations are to comprise the Motorway Service Area (MOP) network. The rapid growth of its retail chain will help the group achieve its strategic target of a 10-percent share in the retail fuel market.
In the area of logistics, Lotos plans to construct a marine terminal on the Martwa Wisła river, one of the branches of the Vistula, which will serve as its own wharf for handling components and products and diversifying its product dispatch and raw material import channels, as well as reducing costs.