Development Prospects

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Development Prospects

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Financial
Manufactured

sdgs:

Goal 9
Industry, innovation and infrastructure

The last two years have been marked by significant changes and challenges – both for the ORLEN Group and the fuel and energy market. After four years of hard work, we have finally completed the mergers with the Energa Group, Grupa Lotos, and the PGNIG Group. These integrations create new opportunities for development. The most significant of them is the opportunityto to support the energy transformation by coordinating a broad range of assets and leveraging the investment power to undertake large-scale projects. Additionally, the integration of the entire oil and gas value chain in Poland will increase efficiency and streamline operations. Poland's failure to create a large player with international impact placed it behind other countries, which had done so 10 to 15 years earlier. We recognized the need to catch up with other countries, to prepare for the challenges of energy transformation. This can be achieved more effectively by a large player that integrates energy from multiple sources.

Energy transition is accelerating due to the intersection of technological advancements, changing societal attitudes, and new regulatory frameworks such as Fit for 55, REPowerEU, and RED3. In addition, some processes, such as the electrification of industry, are being further accelerated by the ongoing commodity crisis. At the same time, significant changes have been observed in the energy and fuel markets. On one hand, long-term trends are solidifying, as the inevitability of the energy transition is no longer a matter of debate. The question now is when it will happen, rather than if it will happen. Newincentives for energy transition are also emerging, driven by regulatory frameworks such as Fit for 55, REPowerEU, and RED III, as well as the EU's expanded taxonomy. In addition, rising emission allowance (EUA) prices and the availability of new funding sources, such as European funds and ESG, arecontributing to the transition.

Compliance with regulatory requirements may necessitate significant investment in the production of renewable fuels.

On the other hand, geopolitical changes and economic cycles also rapidly impact our markets, such as the war in Ukraine, restrictions on energy and commodity flows, and disruptions in fuel and commodity markets (e.g., crude oil and gas), along with fluctuating energy and commodity prices.

At the same time, there is a growing interest in exploring new business opportunities for oil companies, such as petrochemicals (including advanced recycling), low-emission fuels (such as bio and synthetic fuels), e-mobility (including charging infrastructure), and low-emission hydrogen for use in transport, industry, and energy (both green blue hydrogen).

Despite the current turmoil, the goal and rationale remain the same: to achieve the objectives of energy transition and ensure energy security our part of Europe. As the ORLEN Group, we have committed to achieving climate neutrality by 2050 in our new strategy. Given the size and scope of our operations, achieving this objective will have a significant impact on the economy of our region.

Decarbonisation remains our primary objective, although at first glance, it may seem that our focus should be on overcoming the current turbulence in the oil gas markets. Therefore, the new strategy is much more ambitious than before in terms developing renewable energy sources. Our objective is to strengthen the new Green Division of the Group

The CO2 emission allowances." data-popup>EU ETS reform may lead to EUA prices reaching around 150 EUR/tCO₂ eq by the end of the decade.

Past and projected future changes in EU ETS allowance prices [EUR/t].

Secondly, after completion of the M&A process, we have a clear understanding of the pace and direction of the strategic transformation of our assets. Also this process may now be better coordinated and complementary. Building resilience to market turbulence and accelerating the energy transition is currently crucial. The speed of evolution is crucial as the power sector is confronted with numerous long-term challenges at the European level, resulting from the increasing proportion of variable renewable energy sources and the gradual shift towards fully decarbonized electricity by 2050.

This includes investing in measures to support energy supply continuity until large-scale energy storage and other flexibility tools become available. This is necessary not only for renewable energy sources but also for intermittent low-carbon technologies, such as gas.

That's why we put such a strong emphasis on energy security. In the medium term, it is important to secure supplies through the upstream segment by increasing production in Poland and Norway as we reduce our reliance on Russian supplies. In the downstream segment, we are strengthening the potential for liquid fuel production by investing in increasing crude oil throughput, developing bio-refineries and biofuel production, as well as producing biogas and biomethane. This is supported by the recent upswing in investor sentiment towards investment in liquid fuels, including both traditional fuels (likely due to the prolonged prospect of their use in the transport sector, particularly heavy transport and aviation) as well as life-cycle zero-emission alternative fuels (such as higher-generation biofuels and synthetic fuels).

At the core of the increase in investor sentiment is the realization that the key to energy security (or its price, which must be paid) is to build surplus energy capacity relative to demand. This is what was missing, as premature divestments in the Oil & Gas sector due to fears of stranded assets have created a gap in the required energy capacity. The lesson learned from the shocks of the pandemic and the war in Ukraine is that certain assets that may have been considered stranded in the future are a fair price to pay for today's energy security.

In the long term, achieving energy security is aligned with technological progress and the selection of suitable technologies that are adapted to local conditions and possibilities.

The ORLEN Group recognizes the potential for decarbonization and the business of renewable sources, which is why they play a significant role in the updated strategy until 2030. We have raised our ambition from 2.5 GW to 9 GW of installed capacity in renewable energy sources. We are aiming for an almost thirteen-fold increase in installed capacity, from the current 0.7 GW.

Given the need to stabilize the energy system and the aging of existing conventional power plants that mostly rely on coal, theGroup is working to develop coal-fired CCGT units that emit approximately half theamount of CO₂ compared to traditional coal-fired sources. The ORLEN Group is currently constructing CCGT power plants in Grudziądz and Ostrołęka, which have secured 17-year capacity contracts. Other investments in the renewable energy sector are in the early stages of development. The Group's strategy is to increase installed capacity to 4 GW, from the current 1.7 GW

The execution of these projects will allow the ORLEN Group to more than triple its power generation capacity, increasing it from 15.9 TWh in 2022 to 54.4 TWh in 2030

The year 2022 highlighted the importance of ensuring the security and diversification of gas supplies. The ORLEN Group's strategy until 2030 also addresses the challenge of ensuring security and diversification of gas supplies. The plan includes an increase in gas production from 8 bcm to 12 bcm. LNG supplies will also increase – from 5.8 bcm to 15 bcm. The ORLEN Group's strategy until 2030 also provides for the development of a direct, low-carbon substitute for natural gas - biomethane. An alternative use for biogas is transport, where bioLNG can be used. By 2030, 1 bcm of biogas will be produced. We are also developing new technologies that can solve other ills of the sector. The first small modular reactor (SMR), with a capacity of 300 MW, is expected to be operational by 2030. This will allow us to provide a stable base for the electricity system and can also help to decarbonize district heating.

War and its impact on security and transformation

For the ORLEN Group, the war in Ukraine will have the following effects in 2023:

Supply-side effects: Diversification of supply The conflict has caused an energy market crisis of a scale not seen in decades. As a result of the Russian invasion of Ukraine, imports of oil, finished fuels (such as diesel), and natural gas from Russia to the EU have been significantly reduced. Poland, as an importer of fuels, had to diversify its sources of supply, resulting in increased complexity and costs of logistics, including longer shipping distances. This process was carried out efficiently as Poland and the ORLEN Group had already started diversifying their sources of supply long before the conflict erupted.

Demand-side effects: The ongoing conflict at Poland's border (and the border of other countries on the eastern edge of the European Union) has coincided with the post-pandemic economic recovery. Therefore, demand pressures in our region are much greater than in Western countries.

Strategic implications: The significance of safety and risk mitigation has been elevated by the war and its consequences. If we strengthen our leadership position in the energy transition, as is our objective, the diversified group that generates cash flows from various businesses, which often serve as natural hedge for each other, will be able to achieve much better profits across the Group.

Market prospects in 2023

Macroeconomic factors

Brent crude – in 2023, we expect oil prices to decrease to USD 85-95/ bbl. The base case scenario assumes that OPEC+ will manage supply to support prices above USD 80/bbl and that mainland China will return to a growth path. According to S&P, global oil demand is expected to increase by 1.9 million barrels per day in 2023, with continental China being responsible for 1.1 mbd of that growth.

Refining margin – in 2023, we expect refining margins to fall to approximately USD 11/bbl (y/y). In the upcoming quarters, the fuel markets are expected to reach a balance as global economic activity slows down and new refineries in the US, Africa, the Middle East, and Asia gradually increase their fuel supply. The surplus of refining capacity over demand will restore the flexibility of refineries to respond to changes in refinery margins.

Differential – in 2023, we expect a decrease in the differential (YoY) to around USD 5/bbl as a result of reducing the share of REBCO in the ORLEN Group's refining.

Petrochemical margin – in 2023, we expect petrochemical margins to decline year on year to approximately EUR 1,100 per tonne due to lower demand for petrochemical products resulting from economic slowdown and continuing inflation.

Natural gas – in 2023, we expect gas prices to decline to approximately PLN 200/MWh year on year. Gas prices in the coming quarters will depend on weather conditions and geopolitical risks.

Electricity – in 2023, we expect electricity prices to fall to approximately PLN 450/MWh year on year as a result of higher stocks of fossil fuels, lower prices of CO₂ emission allowances, lower gas prices, and consequently, lower electricity prices.

Economy

GDP – Poland 0.4%, the Czech Republic 0.1%, Lithuania 0.3%, Germany 0.2% (European Commission projections of February 15th 2023).

Fuel consumption – lower demand for fuels and petrochemical products due to economic slowdown.

Regulations

EU fuel import on fuels imporst from Russia – as of February 5th 2023.

The Act on Special Protection of Certain Gas Fuel Consumers – gas contribution to the Fund for Disbursement of Price Differences paid by the Upstream segment with respect to gas production in Poland (negative impact on the segment's results) and compensation received by the Gas segment for the maximum price of the fuel in Poland being fixed below the tariff (positive impact on the segment's results).

National Indicative Target – the base level to increase from 8.8% to 8.9% (the reduced indicator for ORLEN Group is 5.8384%).

Investing activities of the ORLEN Group

The amount of capital expenditure planned for 2023 is PLN 36.2 billion, including PLN 26.2 billion development capex and PLN 10.0 billion maintenance capex.

The Group plans to allocate the largest expenditures to the following segments: Petrochemicals at PLN 6.5 billion, Refining at PLN 9.0 billion, Energy at PLN 7.0 billion, Upstream at PLN 6.4 billion, Gas at PLN 4.0 billion, Retail at PLN 1.9 billion, and Corporate Functions at PLN 1.4 billion.

Key development projects in 2023:

Refining

Construction of hydrocracking unit – Lithuania
Construction of second-generation bioethanol plant – ORLEN Południe
Construction of visbreaking unit – Płock
Construction of HVO unit – Płock
Construction of Hydrocracking Base Oils Unit – Gdańsk
Construction of marine petroleum products handling terminal on the Martwa Wisła river – Gdańsk