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Macroeconomic environment

Summary of year 2017

The LOTOS Group is an active participant in the fuel market, influencing it with its operations, as well as responding to changes in the industry on a regular basis. Therefore, as part of defining strategic directions of development, LOTOS takes into account forecasts and megatrends affecting its business.

In 2017, the growth of the global economy by 3.7% and demographic changes in the world positively influenced the results of the global fuel sector. According to fuel market experts, the forecasts for the next years for the fuel industry seem to be optimistic as well.

The crude oil market in 2017

The increase in the world’s population (up to 7.55 billion) and the good condition of the global economy in 2017 resulted in the increase in the demand for crude oil. On average, based on available economic studies, it amounted to 97.9 mb/d in 2017, so it is about 1.5% more than in 2016.

In 2017, for the first time in over two years, global demand exceeded the global supply of crude oil. Oil consumption in the US, Europe, China and India, that is in the regions and countries responsible for more than half of the global demand for oil, has been growing over the past 4 years. The growing demand resulted in oil price increase: at the end of 2017, the price of Brent Dated crude oil amounted to $66/bbl, which was the highest in three years. On average, the prices of this raw material increased to $54.2/bbl and were higher by $11/bbl than in the previous year. The average price of natural gas amounted to $32/boe, which translates to an increase of almost 25% compared to the average prices recorded in 2016.

At the same time, in the last four years, the extraction industry has made significant cost optimization in terms of, among others, drilling and offshore services, lifting costs, costs of development of new fields (standardization of technical solutions, technological progress, improved contracting and purchasing processes for products and offshore services) – the average noted decrease in operating costs amounted to 40% compared to year 2013.

Challenges and global forecasts for the future

After a series of increases in the first and second quarters of 2018, the economists predict that oil prices in the second half of 2018 will gradually return to the range of $40-70/bbl. The producers have reduced the costs of raw material extraction using new technologies, cooperation models and innovations. Therefore, despite the decline in the valuation of deposits, the sector remains attractive to investors.

In the nearest future the industry will face challenges resulting from the introduction of new regulations. The following legislative factors may influence the results of exploration and production: changes in tax regulations regarding hydrocarbon production; changes in environmental protection regulations, including the introduction of stricter regulations and/or an increase in the amount of obligatory collaterals against the possible risk of causing damage to the environment; changes in the licensing system as well as conditions and mode of allocating new permits for exploration and extraction of hydrocarbons.

Regulatory changes and meeting new requirements, resulting in more and more stringent standards may require additional capital expenditures and/or increasing operating costs.

The challenge of the Polish oil market is still the so-called “grey economy”. Activities of the government administration – so-called “fuel package” – and of oil concerns, counteracting the illegal trade of petroleum products in Poland, contributed to its significant reduction and additionally influenced the increase in registered demand for diesel oil. After three-year long decline in registered consumption, caused by the intensive development of the shadow market, in 2017 the fuel consumption increased by 12%.

In 2017, the first „Fuel Package”, implemented on 1 August 2016, was followed by further legal provisions limiting the activity of the grey economy in fuel trade in Poland. A so-called “transport package” was implemented as well. The new regulations subjected the sender, the receiver and the carriers to the obligation to notify the commencement of transport and its termination. The Uniform Control File (JPK – similar to SAF-T) has been implemented, which allows business operation tracking. Another of the means limiting the grey economy in the fuel market are the changes that came into force in 2018 (as a part of the amendment to the Act on biocomponents and liquid biofuels), on introducing obligatory fuel blending. The solutions implemented so far and the effective enforcement of them limited the illegal import of diesel oil to Poland and caused a significant increase in the demand for this product.

According to JBC data, global demand for refinery products will continue to grow. The continuing development of the economies of Central and Eastern European countries implies further increase in fuel consumption to par with the levels of Western Europe. From the point of view of the fuel producers, the Central and Eastern European market, as it is still growing, is the most promising in the coming years. The expected improvement in the economic situation both in Poland and in the region (increase in GDP, decrease in unemployment, increase in the purchasing power of households) is also going to stimulate demand for oil products.

Situation in the sector will be affected by general macroeconomic factors (for example permanent risk of lower economic growth in China, fluctuation of the dollar against other currencies, rate of economic improvement in the euro area) and development of geopolitical situation (for example sanctions imposed on Iran, conflict in Syria, tensions between Iraq and Iran, situation in North Africa). The growing competition from refineries situated in the Middle East will be the source of the basic risks in the downstream segment. 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 possible decline and low level of product cracks, especially for medium distillates (i.e. light heating and diesel oil) might pose a threat. On the other hand, a high demand for fuels from individual customers may be a chance. The increase in gasoline consumption by retail customers may be supported by a favorable price level (derived from low, stable raw material prices, expressed in US dollars, and the weakening Polish złoty exchange rate against the US currency). Another opportunity may also be the potential closure of smaller and technologically outdated refineries, as a result of assets optimization by European fuel concerns.

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