Crude oil refining

The Grupa LOTOS refinery, with the annual processing capacity of approximately 10.5 million tonnes of crude oil, is one of the most advanced and newest refineries in Europe, ranking high relative to competitors in terms of crude oil processing complexity (Nelson Complexity Index). The upgraded refinery features a high distillate rate (due to a large share of fuels in the product mix) and focuses on medium distillates, which enables the Company to successfully adjust its output to the structure of domestic demand and to export opportunities.

In 2020, the refinery’s technological advancement was driven by the 10+ Programme completed in 2011 and the EFRA Project delivered in 2019, followed by its full integration with the refinery’s units, as well as a number of lesser capital projects designed to increase the efficiency of the refining process (e.g. the Hydrogen Recovery Unit).

The upgrade and extension of the refinery as part of the 10+ Programme resulted in increased yields of high-margin products per barrel of crude processed and an increase in the annual volumes of fuels from 4 million tonnes to 7.8 million tonnes, while enabling the Group to process more technologically demanding crude types. The EFRA Project was a continuation of the refinery’s technological upgrade, naturally complementing its configuration. The main objective of EFRA was to ensure more efficient utilisation of heavy residue, which is the heavy end of crude oil used to make heavy fuel oil or bitumens. The new units constructed under the EFRA Project have supplemented the existing oil processing line at the Grupa LOTOS refinery and enabled a flexible shift in its product mix from low-margin heavy fuel oil towards more motor fuels. As a result, the refinery gained more scope to optimise its output, which allowed it to remain competitive, also amid the extremely unfavourable macro conditions prevailing for the most part of 2020 in the wake of the COVID-19 outbreak.

Seeking to expand its capacity to dispatch fuels from the refinery extended to include EFRA units, in 2020 the Company was completing the project to construct a fourth railway loading facility with an annual capacity of 2.2 million tonnes of fuel products.

The refinery’s configuration combined with its favourable location are factors enabling flexible selection of crude types to maximise margins on their processing and sale of products.

The refinery’s location was a source of major competitive advantage in the region in terms of logistics (access to feedstock and product sales channels). The location close to the handling terminal provided the LOTOS Group with direct access to international markets, enabling it to export its oil products primarily to Scandinavia, north-western Europe and the Baltic states. It also helps the Company to optimise sales channels and purchase various types of crude oil and fuels.

The refinery also benefited from a unique combination of supply channels both by land from Russia via the PERN pipeline network, and by sea from numerous countries and the Group’s own fields. Access to two supply channels allowed the Group to diversify feedstock deliveries and to respond flexibly to volatile petroleum product and crude oil prices. As a result, Grupa LOTOS S.A. was able to effectively diversify its crude slate and improve its bargaining power for the purchases of crude oil.

Solomon Associates, which prepares the most recognised global ranking of refining plants, has placed the LOTOS refinery among the best 25% of plants, based on key competitiveness indicators, such as the refining margin, energy efficiency, maintenance team efficiency and plant availability, while classifying it as the most advanced refinery in Central and Eastern Europe.

The consequences of the pandemic had a huge impact on the environment in which Grupa LOTOS operated in the reporting period. The Company operates in the petroleum sector, whose environment is global. In 2020, strong volatility prevailed on the petroleum products market triggered by the pandemic spread and measures taken to contain its impact both in Poland, the neighbouring countries and globally.

In 2020, the Company’s market environment was going through the historically longest downturn, struggling with a very limited degree of short-term predictability and uncertainty as to future quarters. A marked imbalance and shortage of liquidity in international trade were seen.

In the first quarter of 2020, Grupa LOTOS promptly took a number of optimisation measures. The Company’s refinery was subject to intensive optimisation efforts with a view to flexibly adjusting its yields to the fast-changing market conditions. As the refinery’s complexity had been expanded by the EFRA Project, the Company was flexibly managing the stream of petroleum product yields to adjust volumes to changing demand and the best achievable prices. These included reducing the output of aviation fuel given the dramatic slump in demand, as well as increased sales of bitumens (including export sales), which in 2020 fetched exceptionally high market margins. These measures allowed the Company to continue running its refinery at almost full capacity, although most European plants were forced to significantly downscale refining production during the period. At the same time, Grupa LOTOS decided to postpone some of its planned capital projects, pending an improvement of the business environment.

In addition, the seaside location of the Grupa LOTOS refinery allowed the Company to swiftly capture market opportunities, e.g. through export sales of attractively priced naphtha for delivery by sea, which helped it maintain a high level of crude throughput and enhance the refining margin during the toughest period for the industry.

Situation on the Polish fuel and fuel products market is affected by the operations of several neighbouring refineries. Apart from the market leader, the refinery of PKN Orlen S.A. in Płock, the other refineries operating in the region also supply their products to the Polish market, thus competing with Grupa LOTOS. In 2020, due to the COVID-19 pandemic and the decline in fuel demand brought about by the restrictions introduced to counter its spread, many refineries in Europe had to limit their capacity utilisation by adjusting the volume of fuels produced to reduced consumption. According to oil sector analysts, a number of refineries, faced by a decline in refining margins, are forced to wind up their operations or close down less profitable units (as forecast by JBC Energy, at least five such plants with a processing capacity of 465 thousand bbl/d will be closed between 2021 and 2023). In addition, the trend of converting conventional refineries into plants producing fuels from feedstocks of plant origin (biorefineries) has become more pronounced since 2020. Such steps have been taken by TOTAL in France, Neste in Finland and ENI in Italy, among others. The economic recession that took hold in 2020 and continued into 2021 is a factor behind decisions of individual refineries whether to continue their operations and undertake further capital projects.

Grupa LOTOS has a technologically advanced refinery, boasting one of the highest complexity factors in the growing region of Central Europe (with the Nielsen Complexity Index of 11.1). Strong yield flexibility has enabled the Company to weather the elevated market volatility sparked by the COVID-19 pandemic, affecting demand and crack spreads.

Refineries in Central Europe: capacity and Nelson Complexity Index (NCI)

Source: In-house analysis based on Company data and data from PKN Orlen, MOL Group, Rosneft, S&P Global Platts.

Grupa LOTOS refinery vs competitors in the region

Source: Company, refining capacity (m tonnes/year)

In 2020, the Grupa LOTOS refinery processed 10.2 million tonnes of crude oil and the utilisation rate of its nominal refining capacity was 96.8% (i.e. close to full capacity). The mix of crudes resulted from the production optimisation process whose objective was to take advantage of opportunities for increasing the refinery’s processing margin.

In 2020, the Gdańsk refinery’s product output was 11 million tonnes¹. Diesel oil accounted for the largest share of production, with an output of 5.8 million tonnes, up 5.5% year on year. Its share in total production was 52%.

Company’s refining output structure

Source: Company (in million tonnes)

^{(1) The difference between the volume of crude oil processed and the refinery’s output of products stems from the fact that, apart from crude oil, the processing units and finished product blenders receive biocomponent streams, enhancing additives and middle distillates purchased from third-party suppliers.}