Updated “Strategy of the LOTOS Group until 2012”
Report no. 96/20052008-06-16

Further to Current Report No. 46/2006 of June 27th 2006, the Management Board of Grupa LOTOS S.A. reports that the Company’s Supervisory Board, whose meeting was concluded yesterday, approved the updated “Strategy of the LOTOS Group until 2012”. In line with the updated Strategy, the Group will continue its policy focused on ensuring sustainable development of its core business, with an overriding strategic goal of creating value for shareholders. We have updated the “Strategy of the LOTOS Group until 2012” with respect to key objectives for each of the three main areas of the Company’s operations: - exploration & production segment, - operating segment, - marketing segment. 1. Key Objectives of the Updated Strategy in the Area of Exploration & Production Are to: - improve security of crude oil supplies processed by the refineries by securing direct access to hydrocarbon reserves, - achieve stable growth of hydrocarbon production by 2012 through the implementation of programmes aimed at increasing production rates from the Baltic Sea deposits, which are covered by licences held by Petrobaltic, as well as through the execution of new projects outside of Poland, - increase the share capital of Grupa LOTOS S.A. by way of a contribution in-kind of shares in Petrobaltic S.A. held by the State Treasury. According to the updated Strategy, the total output of the exploration & production segment will reach at least 10% of the Group’s crude throughput volume in 2012 and will rise above 20% by 2015. The average ROACE (return on average capital employed) for the whole segment will be over 15%. The related investment expenditure in 2006-2012 is estimated at PLN 5.1bn. 2. Key Objectives of the Updated Strategy in the Operating Area In the operating area, the key objective is to improve the economic effectiveness of crude oil processing, through increasing throughput volumes, with a concomitant increase in the conversion ratio and reduction in sulphur content. To this end, the two-stage 10+ Programme is implemented. Additionally, the necessary facilities which are not covered by the scope of the 10+ Programme will be built, while upgrading some of the existing units. These projects will yield the following outcomes: - the annual crude processing capacity will have risen to 10.5 million tonnes, with a concomitant increase of the conversion ratio, - universal configuration of the facilities will allow the Company to produce various types of fuels in response to market demand, - the production of heavy fuel and bunker oil with high sulphur content will be minimised to comply with new environmental regulations which are being implemented, - the Company will have gained more flexibility with respect to its overhaul policy, and thus the operational availability of its production units will increase, - the existing fuel storage depots will be expanded and new logistics infrastructure will be created for shipment of large consignments by sea, - it will become possible to simultaneously process various types of crude oil, - the LOTOS Group’s competitive position in relation to other European refineries will improve. The expenditure on the implementation of the strategic objectives in the operating area in 2006-2012 is estimated at approx. PLN 6.7bn, including approx. PLN 5.2bn for the implementation of Stage I (scheduled for 2006-2010) of the 10+ Programme. 3. Key Objectives of the Updated Strategy in the Marketing Segment Are to: - secure a 30% share in the Polish market of fuels by 2012, - secure a 40% share in the Polish market of aviation fuels by 2012, - enhance LPG sales efficiency, - secure a 10% share in the retail market of fuels by 2012, - enter the self-service filling stations segment, - secure a 20% share of sales of fuels on motorways, once the main stage of the motorway construction programme is completed, - expand the Group’s network of filling stations by flexibly taking advantage of market opportunities, including opportunities for organic and non-organic growth. The estimated expenditure on the strategic objectives in the marketing area in 2006-2012 may reach PLN 1.1bn. 4. Key Objectives of the Updated Strategy in relation to Financial Activities It is assumed that the Company will use external financing to fund the implementation of its strategy, however, the debt to equity ratio should not at any time be higher than 0.8. The assessment of effectiveness of the LOTOS Group’s operations will be based on an analysis of the EBITDA margin (excl. excise duty) and return on capital employed, which value until 2012 should not be lower than 9% and 12%, respectively. According to the LOTOS Group’s strategy, the aggregate capital expenditure in 2006–2012 will total approx. PLN 12.9bn. The payment of dividend will be dependent on the optimisation of the financing structure of the LOTOS Group. During the implementation of the key strategic programmes, the dividend will not exceed 10% of net profit. Following the implementation of the programmes, the dividend is intended to grow up to 30% of net profit. The dividend policy for subsidiary undertakings is determined by the Management Board of Grupa LOTOS S.A., upon taking into consideration their financial standing and development programmes. 5. Development Directions for 2013–2020 The most important step aiming at increasing the Company’s value – following the implementation of the strategic objectives until 2012 – is the development of the exploration and production segment, and the strengthening of the market position. The projects under consideration include: - continuation of efforts aiming at increasing crude oil production, to exceed 20% of the processing capacities by 2015, with an upward trend in the subsequent years, - construction of a heavy residue gasification unit, focused on hydrogen and energy carrier generation – Stage 2 of the 10+ Programme, - launch of new-generation biofuel production, - CO2 sequestration – depositing CO2 in geological structures, - continuation of activities supporting construction of underground storage facilities for oil and petroleum products (caverns), - development of technologies contributing to margin growth. Decisions related to the development activities will be based on feasibility studies, and will be implemented in line the LOTOS Group’s financing capabilities. The Group does not exclude the possibility of entering into capital transactions or establishing a joint venture with a strategic partner. Key macroeconomic and price-related assumptions adopted by Grupa LOTOS S.A. for the purpose of formulating the key assumptions of its financial policy until 2012 Oil price (2008 fixed prices) unit 2009 2012 dtd Brent (USD/bbl) USD/bbl 112.52 128.02 Ural CIF Rotterdam USD/bbl 108.81 124.52 Crack spreads for products (2008 fixed prices) unit 2009 2012 Premium gasoline 10 ppm – Cargoes CIF NEW USD/t 145 145 Diesel 10 ppm – Cargoes CIF NEW USD/t 178 178 Gasoil 0.1% – Cargoes CIF NEW USD/t 140 140 Fuel Oil 3.5% – Barges FOB Rotterdam USD/t -271 -271 Year 2009 2012 EUR/PLN 3.50 3.20 USD/PLN 2.56 2.48 Legal basis for the publication of this current report: Art. 56.1.1 the Polish Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies, dated July 29th 2005 (Dz. U. No. 184 of 2005, item 1539).