In 2020, the average crack spreads on petroleum products fell significantly relative to 2019. For gasoline the decrease was USD 5.6/bbl (-66.4%), for diesel oil – USD 8/bbl (-69.9%), and for aviation fuel – USD 12.3/bbl (-81.4%). On the other hand, the crack spread on heavy fuel oil grew by USD 4.9/bbl. The declines in crack spreads on gasoline and diesel oil were driven primarily by the imposed restrictions (closed land borders, with crossing limited at times only to freight transport, restrictions on public gatherings and mobility). However, it was the aviation industry that suffered the worst impact in 2020. With the introduction of the pandemic-related restrictions, the global number of flights fell dramatically, down 41% year on year in 2020. At the same time, Revenue Passenger Kilometres plunged by 61% in 2020. Industry organisations, including IATA (the International Air Carriers Association), and analytical agencies foresee that the situation on the aviation market will not improve until 2023 or 2024. In 2020, the crack spread on heavy fuel oil (HSFO) improved unexpectedly, despite the entry into force of new regulations of the International Maritime Organisation (IMO) regarding the sulfur content cap for bunker fuel, which was reduced from 3.5% to 0.5%. In 2019, there were concerns about whether all market participants, including shipping companies, refineries and ports, would be prepared for such a large change and what its consequences would be. The prices of HSFO with a higher sulfur content (3.5%) were expected to decline significantly, while those of VLSFO fuel with a lower sulfur content (0.5%) were expected to rise, with the price spread between those two products expected to range from USD 200 to USD 300 per tonne. However, the spread was ultimately only slightly above USD 90/tonne, for several reasons. The major one was the OPEC+ countries’ decision to reduce crude oil output. As a result, fewer oil grades were available from which a large amount of HSFO could be produced. In addition, there was increased interest in the product from US refineries, which started buying HSFO from Russia as feedstock for their units or for blending HSFO with light crude oil. At the same time, refineries, anticipating low HSFO prices in 2020, reduced their output of the product.
Macroeconomic environment of Grupa LOTOS and the LOTOS Group in 2020
Impact of the COVID-19 pandemic on the global fuel market
In 2020, the COVID-19 pandemic brought about unprecedented and very rapid changes in the crude oil market. The restrictions imposed by many governments altogether prohibited or impeded the movement of people and goods, which caused a decline in fuel demand by 8.8 million b/d throughout 2020 compared with 2019 (based on IEA estimates). The worst situation was seen on the market during the first wave of the restrictions, which resulted in a decline of fuel consumption in the first quarter of 2020 by a staggering 20 million b/d. Fuel demand declined across all regions, although in China, where the first coronavirus infection was identified, positive economic growth was actually recorded in 2020. As at the date of this report, only minor restrictions are in place in the Asia-Pacific region and, therefore, many agencies estimate that fuel consumption in China and India should return to pre-pandemic levels as soon as in 2021.
With the decline in fuel demand, the prices of crude oil fluctuated widely on international exchanges. In 2020, the average price of Brent crude was down by USD 22.3/bbl on 2019. Similar price reductions were recorded for Urals crude (down USD 22/bbl). Given the significant share of Russian oil in the crude slate of Grupa LOTOS S.A.’s refining units, the Urals-Brent spread changed adversely compared with 2019, having narrowed year on year, to USD -0.58/bbl, from USD -0.89/bbl (up USD 0.3/bbl). A major driver of such developments were activities of the states-parties to the OPEC+ Agreement, including Russia. The agreed production limits caused Russia to reduce its exports of crude oil (including through oil terminals on the Baltic Sea), which, combined with reduced market supplies of comparable grades (from Saudi Arabia, Iraq, Iran and Venezuela), had an adverse impact on the relation between the two grades.
The COVID-19 pandemic has led to major transformations in the oil sector, especially in terms of global refining operations. Given the considerable excess of existing capacities over current demand for refining products, and, consequently, the persistently low margins and crack spreads, some refineries are expected to close down in the coming years, while some will be transformed into biorefineries (producing fuels based on feedstock of plant origin). This is confirmed by HSBC’s analyses and estimates of December 2020, according to which, since the beginning of 2020, 14 refineries with combined capacities of approximately 1.7 million b/d have announced permanent cessation of their operations (of which 0.7 million b/d were no longer in operation at the date of issue of this report, and approximately 1 million b/d were still operational but planned to be closed down by the end of 2021), while 4 refineries with combined capacities of 0.4 million b/d are to be converted into biorefineries (3 in the US and 1 in France). Moreover, according to HSBC, the process is much faster than previously expected, but the market returning to pre-pandemic conditions would require the closure of another 1.8 million b/d of refining capacity. On the other hand, as indicated by JBC in its January 2021 report, despite the fact that global refining capacities have declined rapidly since the second quarter of 2020 (down by 2.2 million b/d in total since June 2020), in 2021 they are expected to go back up (due mainly to new capacities coming on stream in the Middle East and China), leading to a 2.5 million b/d increase in overall refining capacities by December 2022 relative to December 2019.
Demand for crude oil and natural gas
In 2020, the average global demand for crude oil was 91.3 million b/d, compared with 100.3 million b/d in 2019 (down 9%).
Crude oil demand in 2016–2020 (million b/d)
Figure 10. Key crude oil consumers in 2020 (million b/d)
Source: In-house analysis based on International Energy Agency (IEA) data.
Despite the coronavirus pandemic, the US remains the world’s largest crude oil consumer. In 2020, the smallest drop in demand for crude among the world’s top three consumers (US, China, India) was recorded for China (down 0.2% relative to 2019). In the US, a significant portion of crude processed is sourced from domestic reserves (mainly unconventional shale deposits).
The key drivers of oil and gas demand include:
- global population growth – according to data published by the United Nations (UN), in 2020 the world’s population reached approximately 7.8 billion people, compared with 7.7 billion a year earlier. Over the past decade, the global population rose by 12% (i.e. at an average yearly rate of 1.1%), due mainly to population growth in developing countries (especially in Asia and Africa). By 2060, that number is estimated to exceed 10 billion;
- urbanisation rate trends – with access to energy closely linked to urbanisation. According to the UN data, in 2020 urban areas were inhabited by 56.2% of the world’s population, with the most urbanised regions being North America (82.6% of the global population), Latin America and the Caribbean (81.2%), Europe (74.9%), and Oceania (68.2%). The urbanisation rate in Asia reached 51.1%, while Africa remains primarily rural, with 43.5% of its inhabitants living in urban areas in 2020. The urbanisation rate is expected to increase steadily in the coming years (to 68.4% worldwide by 2050), including in Asia and Africa (to 66.2% and 58.9% by 2050, respectively);
- economic growth rate – due to the COVID-19 outbreak and the resulting restrictions on social and economic activities introduced by many countries, in 2020 the global economy was pushed into a recession, with a negative GDP growth rate at -4.4%. According to the International Monetary Fund, global economy is expected to rebound in 2021, with the GDP growth reaching 5.2%;
- climate protection measures – in December 2020, the EU summit decided to increase the EU target for reducing greenhouse gas emissions by 2030 to at least 55% relative to 1990, compared with the previous 40% reduction target. In 2005, an international CO2 emission trading system was established to help bring down greenhouse gas emissions into the atmosphere. The number of emission allowances is being gradually reduced, which, coupled with sizeable demand, is driving their prices up (to EUR 33/tonne as at the end of 2020, vs approximately EUR 25/tonne the year before). The high and steadily rising price of CO2 emission allowances is stimulating a shift in the energy mix towards an increased share of renewables. Demand for crude oil is also contingent on legal regulations regarding the minimum share of renewable energy in transport and exhaust emission limits for vehicles. In this respect, the EU regulations provide that a minimum share of renewable energy in transport should reach 14% by 2030 (with a proposal to raise that target to 24%), with a minimum share of advanced biofuels at 3.5%. In 2020, new CO2 emission limits for passenger cars were also introduced, with the European Commission planning a 90% reduction in overall emissions from transport by 2050 (with road transport currently accounting for one-fifth of the EU’s total greenhouse gas emissions, of which 70% are generated by passenger cars and light commercial vehicles). Local measures are also taken, such as bans on entry into city centres for vehicles with internal combustion engines (ICE). In addition, amendments to the existing fuel and energy taxation regimes are planned to create preferences for alternative fuels and biofuels;
- changes in population preferences – a growing number of societies, especially in highly developed countries, are aware of the problems related to environmental pollution and climate warming. This translates, among other things, into growing interest in vehicles powered by alternative energy sources, and leads to more frequent use of public transport services and car sharing. Energy-saving and energy-efficiency practices are also observed in other areas of life;
- technology advances – in addition to the use of new alternative fuels, innovations are being introduced to reduce fuel consumption by traditional propulsion systems, e.g. by improving the efficiency of automotive engines, reducing the weight of commercial vehicles, recovering power during braking, or streamlining vehicle bodies. Technology advances have also an effect on the cost and efficiency of such solutions.
Growth rate of Gross Domestic Product in 2020 (%)
Source: In-house analysis based on Statistics Poland and IMF data (estimate).
In 2020, consumption of fuels (gasoline, diesel oil, light fuel oil, LPG, and aviation fuel) in Poland totalled 32.3 million cubic metres, down 6.9% on 2019. Due to the pandemic and numerous resulting restrictions, demand for fuels declined across all product categories, including gasoline (down 8.5%), diesel oil (down 1.6%), aviation fuel (down 57.6%), and light fuel oil (down 8%).
Fuel consumption in Poland (million cubic meters)
Source: In-house analysis based on Polish Organisation of Oil Industry and Trade (POPiHN) data.
Supply of crude oil and natural gas
In 2020, the OPEC+ agreement was still in force, but was heavily modified in the wake of the COVID-19 outbreak. The OPEC+ countries responded to market developments: although in March 2020, Russia claimed that the pandemic was unlikely to have a significant market impact and did not agree to any further production cuts (waging a price war with Saudi Arabia), the following month saw another agreement and greater coordination of policies aimed at reducing crude production levels. In April 2020, the OPEC+ members decided to cut crude oil output by 9.7 million b/d (in May and June), by 7.7 million b/d (from July to December), and by 5.8 million b/d (from January 2021 to April 2022). In 2020, the US sanctions on Iran and Venezuela continued in force, limiting the availability of heavy and sour oil grades. 2020 also saw a nine-month blockade on oil terminals in Libya, which led to a decline in Libyan oil production from 1.2 million b/d to 100 thousand b/d during the year (export of crude oil was resumed at the end of 2020, obstructing to some extent the OPEC+ market balancing efforts).
Crude oil production in 2016–2020 (million b/d)
Main crude oil producers in 2020 (million b/d)
Source: In-house analysis based on IEA and OPEC data.
In 2020, the volume of crude oil produced globally fell from 100.6 million b/d to 94.5 million b/d. Despite the outbreak of the COVID-19 pandemic, the US remains the world’s largest oil producer. In recent years, the US crude output rose significantly, from 5.5 million b/d in 2010 to 12.3 million b/d in 2019, although it went down to 11.3 million b/d in the aftermath of the recent events. However, the decline in oil demand did not affect the exports of crude oil produced in the US, which averaged 3.1 million b/d in 2020 (compared with 3.0 million b/d in 2019). Other key global oil producers included Russia (10.4 million b/d), Saudi Arabia (9.2 million b/d), Iraq (4.0 million b/d), and Canada (3.4 million b/d).
As at the end of 2020, a total of 87 oil fields were documented in Poland, including in the Carpathian mountains – 29 fields, in the Carpathian foreland – 12 fields, in the Polish Lowlands – 44 fields, and in the Polish economic zone of the Baltic Sea – 2 fields. The Carpathian oil fields are nearing depletion, while in the other areas production and enhanced oil recovery measures are continuing. In 2019, Poland’s recoverable reserves of crude oil and condensate (both economic and subeconomic) amounted to 23 million tonnes, down 0.9 million tonnes year on year.
In 2019, crude oil and condensate production from all fields was 936.8 thousand tonnes, down by 0.3 thousand tonnes year on year. Domestic reserves cover only 3% of the total domestic oil demand.
In 2020, crude oil continued to be supplied to Polish refineries (due to their geographical location, oil availability, existing supply infrastructure, and the types of units operated by the refineries) mainly from Russia. However, the share of Russian oil in total supplies fell to 70%, from 89% in 2015. Crude oil is also supplied to Poland from Saudi Arabia (approximately 16%), Nigeria (5%), Kazakhstan (3%), Norway (2%) and the United Kingdom.