Integrated Annual Report 2020
LOTOS Group
PL EN

Climate change strategy

GRI:
TCFD:

Year after year, climate and related topics are becoming increasingly important, especially for fuel and energy companies.

  • 102-15

In its operating activities, the Grupa LOTOS focuses on continuously improving energy efficiency. Thanks to these activities, as well as (or above all) thanks to the introduction of natural gas into refineries, the Grupa LOTOS’s emission benchmark, expressed as CO2/CWT (Complexity Weighted Tonne), matches the level achieved by the best European refineries.

  • TCFD Governance Disclosure A
  • TCFD Governance Disclosure B

The LOTOS Group implements many projects which support the reduction of the negative impact of the organisation on the environment and use of the opportunities arising in connection with climate change. The Management Board of the Grupa LOTOS monitors and supervises the progress of key projects on an ongoing basis. Additionally, a Report containing the status of key initiatives and projects and identified risks is discussed at the Management Board’s meeting on a monthly basis.

Both the Management Board and the Supervisory Board are involved in the operation of the risk management system aimed at identifying and reducing all risks related to the operations of the LOTOS Group, including risks and opportunities related to climate change. In accordance with the division of competences of the Management Board, Piotr Walczak, Vice-President of the Management Board, is responsible for the environmental area in respect of issues related to the organisation’s impact on climate, emission level or energy use.

The LOTOS Group is currently implementing its strategy for 2017–2022, where changes in climate policy have been identified as one of the key long-term challenges. One of the objectives of this strategy is to carry out activities on the market for innovation related to, inter alia, hydrogen, liquid and compressed natural gas (CNG/LNG) and new areas of activity such as electromobility.

  • TCFD Targets and Metrics Diclosures A
  • TCFD Targets and Metrics Diclosures C

As part of the Integrated Management System, which includes, among others, the Environmental Management System, the LOTOS Group has in place an Environmental Monitoring Plan, according to which the following aspects are monitored, among others:

  • emissions of gaseous and particulate pollutants discharged in an organised manner into the air from emitters of the Grupa LOTOS,
  • hydrocarbon emissions and meteorological conditions,
  • the intake amount and the quality of deep water used,
  • the intake amount and level of Motława and the retention tank waters, as well as the quality of surface water used for industrial purposes,
  • the level of near-surface groundwater around the retention tank in Przejazdowo
  • quantity and quality of water and sewage discharged,
  • measurement of rainwater and thaw water quality,
  • water quality in Rozwójka and the Martwa Wisła,
  • the quantity and type of waste generated,
  • the quality of soils within the Grupa LOTOS’s land,
  • noise level.

As part of the climate-related risks, the Grupa LOTOS is obliged to meet the objectives within the scope of:

  • the minimum share of other renewable fuels and bio-components contained in fuels used in all modes of transport in the total quantity of liquid fuels and liquid biofuels consumed during the calendar year in road and rail transport, calculated at calorific value. This obligation, called the National Indicative Target (NCW), arises from the Act of 25 August 2006 on bio-components and liquid biofuels;
  • Target and nominal values have been set for individual years
    • 8.5%
      in 2020
    • 8.7%
      in 2021
    • 8.8%
      in 2022
    • 8.9%
      in 2023
    • 9.1%
      in 2024

So far, the Grupa LOTOS has achieved the National Indicative Target in accordance with the applicable regulations (taking into account the reduction coefficient and the substitution fee);

  • reduction of greenhouse gas emissions per unit of energy throughout the lifecycle of fuels. This reduction should be at least 6% compared to the average EU lifecycle greenhouse gas emissions per unit of energy from fossil fuels in 2010. This obligation, called the National Reduction Target (NCR), arises from the Act of 25 August 2006 on the fuel quality monitoring and control system.

Reviews of the implementation of the Strategy of the LOTOS Group set out for 2017–2022 shall take place with the Management Board on a quarterly basis. The main issues related to the implementation of the current strategic objectives are discussed, along with the circumstances, including climate-related issues, which may affect the functioning of the LOTOS Group in the future.

Due to the fact that LOTOS is undergoing a process aimed at change of ownership, at the time of drawing up this information, a strategy for the organisation’s conduct in various climate change-related scenarios after 2022 has not been developed.

  • 201-2
  • TCFD Strategy Disclosure A
  • TCFD Strategy Disclosure B
  • TCFD Risk Management Diclosures A
  • TCFD Risk Management Diclosures B
  • TCFD Risk Management Diclosures C

Climate-related risks and opportunities are one of the elements of a comprehensive Enterprise Risk Management (ERM) system in the LOTOS Group. This system includes the Enterprise Risk Committee, chaired by the President of the Management Board of the Grupa LOTOS. The role of the Committee is to ensure that enterprise risk management activities are carried out in a manner consistent with the functioning of the entire LOTOS Group. The Committee monitors the implementation and assesses the effects of the measures taken to manage the key enterprise risks in the LOTOS Group, including those related to climate.

Additionally, after the end of each quarter, the Compliance and Risk Office, operating within the department of the Member of the Management Board in charge of corporate affairs, prepares reports on risk management in the LOTOS Group for the Management Board and the Supervisory Board. These include key issues related to risks and opportunities, including those associated with climate and regulatory changes within this scope.

A review of the validity and evaluation of all risks, including climate-related risks identified under the ERM system, takes place at least twice a year. In 2020, the LOTOS Group introduced a new risk category — so-called climate-related risks. Its purpose is to underline their importance and facilitate development of a comprehensive approach to the management of this risk category. Key risks arising from climate change that may result in significant changes in the organisation’s activity, revenues or costs of the organisation are transformational (not physical) risks.

Within the framework of enterprise risk management in the LOTOS Group, risks are identified and assessed in two time perspectives:

  • annual
    (short-term perspective)
  • within the implementation horizon of the current strategy of the LOTOS Group
    currently until the end of 2022 (medium-term perspective)

In addition, risks whose characteristics and evaluation go beyond 2022 have also been registered in 2020. These long-term risks, with a perspective reaching until 2030.

The enterprise risk assessment matrix is used to determine the materiality level for individual climate-related risks. Each risk is assessed in terms of probability of its materialisation and potential impact on the basis of the following criteria:

  • financial impact, mainly in terms of EBITDA of the LOTOS Group,
  • impact on safety: of people, the environment and reputational issues.

Risks that may currently have a significant financial impact on the organisation concern the medium- and long-term perspective. This is mainly due to the planned legislative changes at both national and EU level. These regulations will translate into higher costs related to the achievement of objectives such as NCW, NCR, energy efficiency, including costs of investments in projects supporting the low-emission economy.

  • 102-15

Type of risk and what it pertains to Opportunities for the organisation Risks for the organisation Risk management methods
Revision of the provisions of the Renewable Energy Directive (RED) revision of the directive will increase the obligation relating to the share of renewable energy in transport, leading to an increase in the use of low-emission fuels Opportunity: possibility to enter new markets for advanced biofuels or hydrogen Risk: increase in operating costs  

Undertaking investment projects (including within the scope of advanced biofuels, hydrogen) aimed at reducing emissions and increasing the share of energy from renewable sources.

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level.
Revision of the Energy taxation Directive (ETD) — the drafted changes to the fuel and energy taxation system will result in raising the minimum tax thresholds and diversifying them in such a way that low-emission alternative fuels are as cheap as possible compared to petroleum fuels. Opportunity: due to the planned and ongoing development projects in the LOTOS Group and the development of competences in this area, it is possible to take advantage of the opportunity arising from increased interest in low-emission alternatives, such as electricity, hydrogen or fuels with higher content of advanced bio-components — due to their preferential taxation. Risk: gradual decline in demand for traditional fuels Undertaking investment projects within the scope of alternative fuels and biofuels, which will be subject to preferential taxation.

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level
Introduction of EU regulations concerning sustainable aviation fuels, the so-called ReFuelEU Aviation — the initiative concerns development of sustainable (low-emission) aviation fuels (SAF) Opportunity: generating demand for sustainable aviation fuels, which means opportunities to enter a new, probably high-margin market. Risk: the drafted regulations will result in high costs of mandatory SAF production (if this option is ultimately included in the regulations). The high cost stems, inter alia, from the limited availability of raw materials and the costly certification procedure for such fuels. Analysis of the possibility of entering the emerging market for sustainable aviation fuels.

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level.
Revision of the Alternative Fuels Infrastructure Directive — it concerns the establishment of mandatory targets for the development of alternative fuels infrastructure at the EU level. The aim is to increase the number of electric car charging stations, hydrogen, CNG and LNG fuelling stations and liquefied natural gas (LNG) fuelling stations in ports for LNG-fuelled vessels. Opportunity: the development of the electromobility segment offers opportunities in terms of offering charging services and the development of non-fuel business (longer charging time of electric vehicles vs. vehicles with combustion engines means more time spent by customers at stations). Risk: if the assumptions are fulfilled, the result may be an increasing number of electric vehicles, which is likely to reduce demand for traditional fuels, especially petrol, as a consequence.
In addition, costs may have to be incurred on the mandatory construction of new infrastructure.		 Investments in alternative fuel infrastructure projects, e.g. construction of a fast charging network: LOTOS Blue Trail and Pure H2 hydrogen fuelling stations.

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level.
Revision of the EU ETS — the drafted amendments aim to accelerate the pace of increase in CO2 emission allowance prices and consequently stimulate greater investments in zero-emission technologies Opportunity: an increase in profitability of innovative decarbonisation projects Risk: a consistent increase in emission allowance prices should be expected, which will mean increasing costs for the Grupa LOTOS. Currently, the LOTOS Group emits approx. 1.9 million tonnes of CO2 per year. A portion of the emissions is eligible for free allowances, which will, however, be phased out over time. Investments in projects that improve energy efficiency and reduce CO2 emissions, e.g. zero-emission hydrogen production in the electrolysis process for refineries (LOTOS Green H2 project).

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level.
The EU hydrogen strategy and legislation on the promotion of hydrogen use. Opportunity: The strategy indicates that hydrogen production in zero-emission technologies will be one of the EU’s key economic priorities. Due to the fact that the LOTOS Group already has competences in this respect, there is an opportunity to develop on a new, forward-looking market. Green hydrogen applications will be much wider than the refinery sector on its own, so the potential of this business area seems to be very high. Risk: There is a possibility of excessively strict criteria being established for the recognition of energy for hydrogen production as renewable and introduction of binding targets for the share of hydrogen without adequate tools on the demand side. Investments in projects involving zero-emission production and use of hydrogen (LOTOS Green H2, Pure H2).

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level.
Introduction of a legislative package concerning sustainable funding (so-called taxonomy). Opportunity: projects considered to be sustainable in terms of climate will benefit from preferential funding. Risk: the financing and insurance of projects that do not qualify as sustainable in terms of climate (“green”) will be severely hampered and much more expensive than before.

In addition, large enterprises (over 500 employees) will be required to identify and determine whether their activities comply with the directive.

 Implementation of projects consistent with the assumptions of taxonomy, i.e. aimed at, among others, reducing greenhouse gas emissions or increasing the use of renewable energy.

Monitoring and active participation in the legislative process (presenting the results of analyses and positions, proposing regulatory solutions advantageous to the Grupa LOTOS), both at the EU and national level.
The National Reduction Target (NCR) — sets the minimum fuel greenhouse gas emission reduction throughout the fuel lifecycle. Amendment to the Act on the fuel quality monitoring and control system — provides for a change in the manner of charging the penalty for non-accomplishment of the NCR target (absolute value instead of reference to the prices of emission allowances) and almost twofold increase of the penalty.

In addition, the amendment provides for confirmation of the applicability of the NCR target beyond 2020, easier joint settlement of liquefied gas (LPG) and establishment of a register of documents confirming the achievement of greenhouse gas emission reduction in the extraction segment (upstream emission reduction — UER).

 Opportunity: the possibility to use a substitution fee, reduction of the risk of application of UER certificates (reduction of emissions in the extraction sector) and facilitation of the joint settlement of LPG after the amendment enters into force. Risk: additional costs for the LOTOS Group resulting from the extension of the obligation beyond 2020 and the increase in the penalty level Pursuit of the maximum reasonable level of objective achievement — contacts with UER traders, negotiations with entities marketing LPG for the purpose of joint settlement, use of bio-components offering the maximum reduction possibilities.

Ongoing contact with the national regulator, presenting the results of analyses and positions, proposing regulatory solutions advantageous to the LOTOS Group.
The National Indicative Target (minimum share of renewable energy in transport), implementation of the revised RED directive (the so-called RED II) by amending the Act on bio-components and liquid biofuels. RED II provides, inter alia, for an increased obligation in terms of the minimum share of renewable energy in transport (NCW) to 14% (compared to 10% at present) and a minimum share of advanced biofuels at 3.5% by 2030.  

Opportunity: entry on the new market for advanced biofuels, for which demand in the EU should increase.

 Risk: Increase in operating costs as a result of increased requirements for the share of renewable energy in transport (e.g. the need for using more expensive, advanced biofuels, possible penalties). Pursuing a maximum, reasonable level of achievement of the NCW target through purchase and use of bio-components.

In addition, if economically justified, it is possible to apply co-hydrogenation. Analytical works on the use of bio-hydrogen from biomethane are also ongoing.

Ongoing contact with the national regulator, presenting the results of analyses and positions, proposing regulatory solutions advantageous to the LOTOS Group.
Amendment to the Act on energy efficiency — aims at extending the catalogue of entities obliged to fulfil the obligation to improve energy efficiency.
The affected entities will have to demonstrate appropriate reduction in the energy supplied to end customers every year.		 Risk: an increase in costs due to the necessity to achieve the efficiency objectives set by the Act, which will most likely require the payment of the substitution fee and purchase of so-called white certificates. Due to the limited tools, it will be necessary to purchase white certificates or pay the substitution fee.

The Grupa LOTOS analyses the implementation of various renewable energy source (RES) technologies. The company primarily seeks to develop projects supporting the implementation of the National Indicative Target in its refinery. The company also implements RES-based solutions at its petrol stations. Since 2019, electric vehicle charging points have been operating at selected stations. There are also plans to supply the station with energy generated by photovoltaic panels located on the station’s buildings.

The Grupa LOTOS carries out conceptual works on hydrogen production. These concern not only steam reform of natural gas, but also use of hydrogen from renewable sources in production. One option is the use of biogas as a raw material for hydrogen production, from which, after purification, biomethane with a composition similar to natural gas is produced. Biohydrogen (renewable hydrogen) produced from biomethane will be viable for use as an independent hydrogen fuel in the future or as biohydrogen embedded in liquid fuel molecules and for serving as a component of conventional fuels. This project has enormous potential for achieving EU targets for the use of bio-components/advanced biofuels in Poland, as the main raw material would be gas produced in biogas plants from agricultural or municipal waste.

A project which fits within the context of the climate change strategy is active entry onto the electromobility market. The Grupa LOTOS was involved in the first socio-educational campaign promoting electromobility in Poland. The initiative of the National Centre for Climate Change and the Polish Alternative Fuels Association took place on 27 October 2020. The aim of the elektromobilni.pl campaign is to foster knowledge and social trust towards zero- and low-emission means of transport. The website elektromobilni.pl, which provides information on electromobility in Poland, was prepared as part of the campaign. Anyone who is interested may visit the portal to learn about the tools that will help them make informed decisions about switching to an electric vehicle. Additionally, the Electromobile Poland Programme was establish, addressed to the central administration, local governments, industry organisations and the Polish industry. The project shows places that are electric vehicle-friendly and promote electromobility.

As part of our activities, we create the so-called Blue Trail, where the first 12 electric vehicle charging stations were launched at LOTOS stations along the motorways between the Tri-City and Warsaw. Each of the 12 Grupa LOTOS charging stations, operating along the Blue Trail between Gdańsk and Warsaw, has 4 connections enabling power supply for electric cars and plug-in hybrids of almost all brands. The total power of each station reaches 150 kW. Electric vehicle charging stations can be found on the virtual map of Electromobile Poland, which can be found on the project’s website elektromobilni.pl.

The next stage of the project is currently being implemented, aimed at launching further charging points at the Grupa LOTOS stations.

 

As part of its strategy, the Grupa LOTOS strives to become a leader in next-generation fuels. In its activities, it focuses on areas such as CNG and LNG ecological fuels. At the same time, it is constantly working on new projects. In order to implement these plans, in March 2019, representatives of the concern signed documents with the Gdańsk University of Technology (and in 2018 — also with the Warsaw University of Technology) initiating joint research and development activities. This cooperation consists in preparation of prototypes of selected devices in the area of low-emission transport and energy storage.

The LOTOS Group supports the development of hydrogen economy

The Grupa LOTOS is active in the area of raising awareness within the scope of hydrogen application. Our initiative led to the establishment of the Cluster of Hydrogen Technologies and Clean Coal Technologies, whose mission is to initiate measures to increase the importance of hydrogen technologies.

The concern also participates in the Clean Transport Package and in the works of the Ministry of Climate on the National Hydrogen Strategy. In July 2020, the Ministry of Climate announced the commencement of works on this strategy, while in January 2021, the draft of the Polish Hydrogen Strategy until with a view to 2040 was submitted for public consultations. Key objectives of the programme were announced and a letter of intent to establish a partnership for the development of hydrogen economy was signed with key companies from the energy and transport sectors. The Grupa LOTOS is also a signatory of this agreement.

The development of the hydrogen sector over the next decade may significantly contribute to Poland’s reduction of greenhouse gas emissions and other atmospheric pollution, in particular from the transport sector. Hydrogen consumption in the heating sector is also expected to increase thanks to the development of power-to-gas/liquid.

  • The main objectives of the Polish Hydrogen Strategy
    • Creating a value chain for low-emission hydrogen technologies
    • Strengthening the role of hydrogen in building Polish energy security
    • Introduction of hydrogen as a transport fuel
    • Preparation of new regulations for the hydrogen market

Another element of the hydrogen strategy will be the construction of new distribution infrastructure in the country.

The Grupa LOTOS is constantly launching new research and development projects in this area. It cooperates, inter alia, with the Polish Electricity Networks. This project envisages the development of a cost-effective, but above all environmentally-friendly, hydrogen production method. Here, an important role is played by electrolysers and checking how they interact with the variable generation of electricity from RES. The Grupa LOTOS launched an investment programme under the Green H2 project to build a large-scale green hydrogen plant. The production of an organic hydrogen variety will reduce CO2 emissions in the refinery and, at the same time, fulfil the National Indicative Target for the production of motor fuels. According to the assumptions of the project, hydrogen will be generated in the process of water splitting with the use of electricity.

The Grupa LOTOS works with Polish scientific institutions on projects aimed at increasing the efficiency of clean hydrogen production. It is also applying for a subsidy from the Innovation Fund or the IPCEI Recovery Fund.

The year 2020 has shown that innovation is not only a forward-looking slogan of the Polish economy, but also a very practical present. The Innovation Department worked intensively on implementing the latest achievements of science and technology in its activities. LOTOS Group developed a portfolio of innovative projects, in particular in the area of ​​alternative fuels: from research projects implementing Polish technological thought, through large-scale projects using a well-known technologies (GREEN H2), to projects developing this market (PURE H2). At the same time, LOTOS Group focused on the development of R&D projects in the area of ​​refining technologies. In cooperation with Gdańsk University of Technology, we have started a new project „Ecological Asphalts” to create an innovative surface that will contribute to the reduction of air pollution in the area of ​​the road lanes.

Sylwia Pawlak
Innovation Director

Hydrogen as a way of ensuring clean air in cities

The Grupa LOTOS’s representatives regularly attend working meetings with local carriers and support them in preparations for “hydrogenation” of public transport. Letters of intent on this matter were signed with representatives of Gdynia, Wejherowo and Tczew. Rzeszów is another city with which the Grupa LOTOS will cooperate in the supply of hydrogen and the related infrastructure for fuel cell vehicles. A letter of intent on this matter was signed in October 2020. The agreement also applies to the related infrastructure for fuel cell vehicles: Fuel Cell Electric Bus — FCEB, which, inter alia, Rzeszów and its subordinate units intend to purchase. At the same time, an agreement was signed with Autosan, a Polish bus manufacturer, which is supposed to test the hydrogen generated by the Grupa LOTOS in its buses.

The Grupa LOTOS wants to promote hydrogen as a future zero-emission fuel. It is the subject of the Pure H2 project, implemented within group. Hydrogen, being the most common element, is at the same time one of the key substances used in the modern refinery and petrochemical industries. The Gdańsk refinery currently produces approx. 17.5 t/h.

On the other hand, hydrogen of extremely high purity (99.999%) is needed for hydrogen cells propelling an electric motor. This is why the Grupa LOTOS is implementing the Pure H2 project, according to which installation of a hydrogen purification and distribution plant and two fuelling points is planned at the refinery site (in Gdańsk and Warsaw). LOTOS intends to produce as much as approx. 160 kg of pure hydrogen per hour — which is a unique achievement in Poland. The value of the investment is almost EUR 10 million, but 20% of the project’s budget will come from EU funding under the Connecting Europe Facility (CEF).

In November 2019, the Grupa LOTOS and Toyota Motor Poland signed a letter of intent to intensify works on the development of technology for hydrogen use in road transport. The essence of this cooperation is the construction of hydrogen fuelling stations in Poland. This will bring about a real and practical dimension for transport hydrogenation in Poland, that is felt by car users.

The LOTOS Group has also engaged in the development of the Pomeranian Hydrogen Valley, the purpose of which is introduction of hydrogen into bus, rail and maritime transport (short sea passenger transport — Tri-City–Hel connection). Thanks to the support of the LOTOS Group, the consortium of local governments from Pomerania received full EU support for comprehensive advice on the implementation of hydrogen vehicles in public transport. The use of hydrogen as an alternative energy source will help to reduce air pollution caused by the emissions of exhaust gases from vehicles with conventional engines, particularly in urban agglomerations.

In the era of energy transition, the Grupa LOTOS is intensifying its efforts to develop hydrogen technologies. It is therefore actively seeking new business opportunities in this area and expanding its circle of partners. Only thanks to the cooperation of all participants of this value chain can the Group realistically influence the pace of transport hydrogenation in Poland.

Fuel in maritime transport

Further environmental restrictions entered into force in 2020. The International Maritime Organisation (IMO) has introduced a new global limit on the sulphur content of marine fuels from the current 3.5% to 0.5% m/m. Therefore, the Grupa LOTOS has launched a number of projects to increase the share of low-emission fuels by using LNG as a fuel for ships.

Another response to the new regulations is the EFRA Project, thanks to which the concern solved the problem of so-called heavy oil residue. Previously, it used it to produce asphalt, which is important for road construction, as well as high-sulphur heavy fuel oil, used mainly as a marine fuel. It is a product with a so-called negative margin, i.e. sold cheaper than oil, and also non-ecological. Thanks to the EFRA project, approx. 1.1 million tonnes of excellent quality fuels, mainly diesel fuel, were produced from the heavy residue.

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