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Opportunities and risks

G4-2 G4-14
Strategy and business model

Key opportunities and risks in the Downstream segment

• indications of the possibility of an upturn of the economic situation in the commodity market,

• higher profitability of developing the new deposits as a result of cost reduction in the upstream sector, among others, in the price of drilling services,

• greater availability of oil platforms due to the lower utilization rate,

• the potential for further cost optimization and increase in the efficiency of the industry as a result of implementing innovations and advanced technical and technological solutions,

• the withdrawal of some players from the mining and production area gives the opportunity to acquire attractive assets,

• the emergence of new development opportunities, eg. APA concession rounds, which give access not only to exploration assets, but now also to already discovered resources (elimination of costs and exploration risks),

• improving approach of financial institutions to the upstream sector and better prospects for raising capital for new development projects.

• the growth dynamics of oil and natural gas prices is lower than assumed in the assumptions for 2017-2022,

• high variability of macroeconomic conditions at the moment of making key decisions in strategic projects,

• growing competition in the transaction market, including from companies supported by private equity funds.

• a portfolio of attractive development projects that ensure long-term growth prospects,

• a clearly defined and transparent strategy to strengthen the position around existing hubs and the construction of new hubs in Norway,

• good knowledge of the geographical area of ​​the Baltic and Norwegian Shelves,

• constant strengthening of experience and building operator competencies,

• investments in politically secure areas with stable taxation systems and access to logistic infrastructure,

• competence in drilling and operation,

• cooperation with strong, experienced partners with international reach.

• sensitivity to changes in macroeconomic parameters and industry-specific search risks and projects due to the still relatively small scale of operations,

• delays in the implementation of development projects due to their scale and complexity,

• limited prospects for building a resource base in the Baltic Sea basin in the long term,

• a large share of relatively mature assets in the portfolio of extraction assets,

• high level of indebtedness limiting the potential of conducting exploration and acquisition activities,

• the need to develop competence in the implementation of investment projects.

Key opportunities and risks in the segment of production and trade

The situation in the production and trade sector will be affected by general macroeconomic factors (i.e. risk of permanently lower economic growth in China, further strengthening of the dollar, rate of economic improvement in the euro area) and geopolitical situation (i.e. tensions between Iraq and Iran, situation in North Africa).

The growing competition from refineries from the Middle East will be the source of the basic risks in the segment of production and trade. It should be expected that the main European market for these refineries will be the Mediterranean area, however, it will affect the total fuel balance in Europe. In addition, the risk of possible decline and low level of product cracks, especially for medium distillates (i.e. light heating oil and diesel oil) will be a threat.

On the other hand, the possibility of high demand for fuels on the part of individual customers and the potential closure of smaller and technologically outdated refineries, as a result of optimization of assets by European fuel concerns, may be a chance.

Risks of the LOTOS Group

The most important areas of risks to the operations of the LOTOS Group are strategic, operational, financial and reputational risks as well as compliance with laws and regulations.

Strategic risks
In 2017, the key risks affecting both current and long-term results were related to the implementation of strategic and development projects, such as the EFRA Project (delayed coking project), the development of the B8 field or the development of the Norwegian resources projects.

The regulatory risks at the national and European level are also important from the point of view of LOTOS’s functioning. Legal environment and procedural changes in regulations are constantly monitored in order to limit their potential negative effects and to take advantage of emerging opportunities (i.e. in the field of electromobility development).

Financial risks
The activities of the LOTOS Group are constantly accompanied by market risks, i.e. the variability of prices of raw materials and petroleum products, changes in the exchange rates and in the interest rates. Favorable macroeconomic conditions in 2017 (upward trend in crude oil prices, high margins on petroleum products) allowed to take advantage of opportunities and positively influenced the results of the LOTOS Group.

In 2017, our liquidity was at a good level. It allowed us to finance development projects in accordance with strategic assumptions, enabling conducting basic and current operations as well as further investing in the development and servicing the long-term liabilities.

Operational risks
We constantly monitor risks in every operational activity that we carry out in various areas, including, in particular, all risks related to human and environmental safety and technical risks affecting the security and continuity of operational processes. We use the available methods to limit their occurrence. Striving to meet the expectations of our clients in the best way possible, we also mitigate risks that could threaten business, logistics or sales processes and adversely affect the quality of the product, service or customer experience.
Reputation risk and compliance with regulations (compliance)
As the LOTOS Capital Group, we operate in the legal environment of many regulations and regulations. In order to minimize the risk of non-compliance with applicable legal and other requirements, a „compliance” structure was established in all LOTOS Group companies supporting activities in this area.

The good, two-sided and mutually beneficial relations are also very important to us: with the key stakeholders: shareholders and investors, society, environment, employees, suppliers and financial institutions. The way to reduce the relational and image risks is to ensure maximum transparency of our activities. We are constantly improving in conducting dialogue with our environment and within the Group, and we try to report our activities as fully and reliably as possible.

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