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ANNUAL REPORT 2017

LETTER FROM THE PRESIDENT OF THE MANAGEMENT BOARD

This past year was full of developments and decisions that set the direction of growth for the PGNiG Group in the coming years.

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Piotr Woźniak
President of the management board PGNiG SA
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LETTER FROM THE CHAIRMAN OF THE SUPERVISORY BOARD

Our last year’s achievements show that the selected priority areas for investment and development were the right ones and that the Management Board successfully pursued its operational and financial objectives.

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Bartłomiej Nowak
Chairman of the Supervisory Board
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Key Activities

up to 10 bcm
of gas

FROM THE NORTHERN DIRECTION
– THE BALTIC PIPE

up to 2022

RENEWAL OF THE IMPORT PORTFOLIO

up to 83 million
boe

QUANTUM OF PROVEN RESERVES IN NORWAY AT THE END OF 2017

boe

Baltic Pipe

The Baltic Pipe project is a strategic infrastructure project aimed at creating a new gas supply corridor on the European market.

It is to enable the transmission of gas directly from deposits located in Norway to markets in Denmark and Poland, as well as to consumers in the neighbouring countries. In 2016, GAZ-SYSTEM and the Danish transmission system operator Energinet developed a feasibility study for establishing a new interconnector between two national markets in the form of a two-way offshore pipeline and expanding national transmission networks.

Based on the positive results of the study, the annual transmission capacity of the Baltic Pipe was determined at up to 10 bcm to Poland and up to 3 bcm to Denmark and Sweden.

According to the project assumptions, by December 1st 2018 GAZ-SYSTEM and Energinet will have taken final investment decisions whose implementation is a precondition for launching gas transmission services via the Baltic Pipe.

More information about The Baltic Pipe project can be found in the chapter Gas market.

DIVERSIFICATION OF DELIVERY DIRECTIONS

CONSIDERING THE EXPIRATION OF THE YAMAL CONTRACT IN 2022, THE GROUP AIMS TO ACHIEVE A GENUINE DIVERSIFICATION OF GAS DELIVERIES.

To this end, the Group will focus primarily on:

  • Supporting construction of the pipeline connecting Norway to Poland.
  • Once built, LNG trading and logistic competencies on the global market will help create a more flexible gas supply portfolio beyond 2022 as the Group will be able to swiftly balance its gas imports. Efforts to develop such competencies and strengthen the Company’s presence on the global LNG market will be continued. The Group intends to analyse the possibility of entering into contracts for LNG imports from new directions (e.g. from North America, Australia, Africa), expand cooperation with the existing LNG suppliers, and acquire new competencies in LNG transport by sea.
  • Expansion of the resource base in Poland and abroad accompanied by completion of the Norwegian Corridor project would enable transport of gas from the Group’s own fields directly to Poland.

More information on the diversification of gas sources is found in the chapter Strategy in Action.

NORWAY AS A DIRECTION FOR DEVELOPMENT

PGNIG UPSTREAM NORWAY HOLDS SHARES IN PROSPECTING AND MINING CONCESSIONS ON THE NORWEGIAN CONTINENTAL SHELF LOCATED IN THE NORWEGIAN SEA, THE NORTH SEA AND THE BARENTS SEA.

Jointly with partners, the company has been extracting hydrocarbons from the Skarv, Morvin, Vilje, Vale and Gina Krog fields and working on the development of the Ærfugl (formerly Snadd) and Skogul (formerly Storklakken) fields. In the other licence areas, the company is engaged in exploration projects.

In 2017, PGNiG UN recorded an increase in proven reserves in Norway, from 78 mboe at the beginning of the year to 83 mboe at the end of 2017 as a result of a positive re-evaluation of resources in the Ærfugl and Vilje fields and the acquisition of the Skogul field. In line with the PGNiG Group’s Strategy, PGNiG UN analysed other projects that may lead to further increases in production volumes.

PGNiG UN holds a diversified portfolio of production and exploration licences in the North Sea, the Norwegian Sea, and the Barents Sea, and maintaining this diversification is perceived as an important element of project portfolio management. As at December 31st 2017, PGNiG UN held interests in 18 exploration and production licences, including as the operator of two licences.

More information about the Group’s plans on the Norwegian Continental Shelf can be found in the Exploration and Production section.

Business model

Exploration
and Production

Exploration
and Production

4.5
bcm

Production of natural gas
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Generation

Generation

42.1
PJ

Heat output
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Distribution

Distribution

11.6
bcm

Volume of distributed gas
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Trade
and Storage

Trade
and Storage

26.8
bcm

Volume of gas sold
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Value creation

PRODUCTION

STARTING EXTRACTION
ON A NEW DEPOSIT
IN NORWAY

STARTING EXTRACTION
ON A NEW DEPOSIT
IN NORWAY

Since 2017, PGNiG Upstream Norway has been extracting resources from the new deposit, Gina Krog, which has been developed with the use of a new offshore platform on the North Sea.
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DEVELOPMENT
OF NEW DEPOSITS
IN POLAND

DEVELOPMENT
OF NEW DEPOSITS
IN POLAND

In 2018, in the territory of Poland, it is planned to develop and connect 12 wells and develop 3 deposits (Solec, Gryżyna, Krobielewko).
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RECORD-BREAKING
SEGMENT RESULTS

RECORD-BREAKING
SEGMENT RESULTS

EBITDA of the Exploration and Production segment reached PLN 3,865 million
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TRADE

EXECUTION
OF A 5-YEAR CONTRACT
FOR DELIVERIES
OF AMERICAN LNG

EXECUTION OF A LONG-TERM
ANNEX WITH QATARGAS
FOR LNG DELIVERIES

OPENING OF LNG
TRADING OFFICE
IN LONDON

9 SHIPMENTS OF LNG

CONTRACT WITH CENTRICA

As part of the diversification of the natural gas portfolio, the PGNiG Group executed a 5-year contract for the delivery of a total of 9 shipments of LNG with Centrica LNG Company Limited in November 2017.

The deliveries will arrive from the Sabine Pass LNG terminal in the United States. The contract will enter into force in 2018 and will be performed on DES terms (Delivery Ex Ship). This is the first medium-term contract entered into by the LNG PST trading office in London.

More information on LNG deliveries to Poland can be found in the report section on Trading and Storage.

LNG DELIVERIES

EXECUTION OF A LONG-TERM ANNEX WITH QATARGAS FOR LNG DELIVERIES

On 14 March 2017, PGNiG executed an annex to the Contract for the sale of liquefied natural gas with Qatargas of 29 June 2009.

Pursuant to the annex, which will be in force until 30 June 2034, LNG deliveries from Qatar to Poland will double in size starting from 2018. The total LNG volume under long-term contracts with Qatargas will increase by 2 million tons of LNG per annum, which is about 2.7 billion m3 of gas after regasification, and in 2018-2020, up to 2.17 million tons of LNG annually, or approx. 2.9 billion m3 of grid gas.

More information on LNG deliveries to Poland can be found in the report section on Trading and Storage.

OFFICE IN LONDON

In February 2017, PGNiG Supply & Trading started commercial activity on the global LNG market by opening a branch in London.

Ultimately, the London office will become an international competence center about LNG for the entire PGNiG Group and the main trading center for medium- and long-term contracts for liquefied natural gas. The London office will actively search for alternative sources of supplies to the President Lech Kaczyński LNG Terminal in Świnoujście, Poland, so as to use the terminal’s capacities reserved for PGNiG in the best possible manner.

The first delivery was contracted by a branch of Cheniere Energy and was the first one coming from the United States to Northern and Western Europe. Furthermore, the PGNiG Supply & Trading Branch in London executed a medium-term contract with Centrica LNG Company Limited.

Outlook

CAPITAL EXPENDITURES
IN THE DISTRIBUTION
SEGMENT

CAPITAL EXPENDITURES
IN THE DISTRIBUTION
SEGMENT

2,160 PLN
million

for 2018
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GROWTH OF THE GENERATION SEGMENT

GROWTH OF THE GENERATION SEGMENT

18
TWh

PLANNED ELECTRICITY AND HEAT SALES VOLUME IN 2022
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STRATEGIC ASPIRATIONS

STRATEGIC ASPIRATIONS

33.7 PLN
billion

ACCUMULATED EBITDA RESULT IN 2017 – 2022
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M&A DEVELOPMENT
IN NORWAY

M&A DEVELOPMENT
IN NORWAY

2.5
bcm

PLANNED OWN EXTRACTION IN NORWAY IN 2022
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INNOVATIONS

THE FIRST INCUBATOR
FOR START-UPS
IN THE OIL AND GAS SECTOR

RESEARCH PROJECT
IN GILOWICE
AND GEO-METHANE PROGRAM

SMOK
MOBILE STAND
FOR MEASURING LIQUEFIED
NATURAL GAS

InnVento PGNiG's INCUBATOR

InnVento is a project established at PGNiG’s initiative. Its aim is to support the development of start-ups from the energy industry and a joint search for new technological solutions. InnVento has been the first such project in the oil sector in Poland. We believe that a combination of the experience of an international corporation with innovative thinking of young entrepreneurs and scientists may change the face of the power industry in Poland and in the world.

We support the development of entities starting their business in the technological sector. Within the InnVento Incubator, we provide a knowledge base, technological infrastructure, office space as well as administrative support and operational assistance (including legislative and economic issues). We also help innovative entrepreneurs establish new business contacts.

What InnVento offers:

  • access to infrastructure and services within the Incubator
  • access to technological infrastructure, a customer base and PGNiG knowledge
  • advice from mentors, consultants and coaches
  • support in obtaining external funding
  • establishment of business cooperation with PGNiG SA

GEO-METHANE RESEARCH PROJECT IN GILOWICE

The project aims to investigate the possibility of intensifying the production methane from coal beds with the use of hydraulic fracturing.

This method involves injecting a hydraulic fluid to create fractures in rocks (in this case coal and surrounding rocks) where the gas is contained. PGNiG has gained experience in applying this method while seeking shale gas.

Even though the extraction of methane from coal beds is carried out in many countries of the world, in Poland no company has launched it on a broader scale. The only procedures used involve removing methane released during a mine’s operation. The application of the method tested in Gilowice will make it possible to get rid of a considerable amount of the gas prior to the commencement of mining works. This will reduce to a great extent the methane threat in the mines.

In the future, methane in coal beds may be an important element of Poland’s energy security based on exploitation of domestic hydrocarbon resources. Methane removal from the mines will also contribute greatly to improving the work safety of miners. This will also make it possible to reduce emissions of methane, an aggressive greenhouse gas.

SMOK MOBILE STAND FOR MEASURING LIQUEFIED NATURAL GAS

Engineers from the Central Measurement and Research Laboratory of PGNiG SA have designed SMOK, a mobile stand due to which it is possible to measure a required amount of shipment from a tanker transporting liquefied natural gas (LNG).

At present, the small-scale LNG market is limited only to clients who are able to collect a fully loaded tanker.

Now LNG may be transported by tankers to a regasification station and then, after regasifying, to a customer via the gas distribution grid. The SMOK mobile stand may be transported at any time to any place in Poland and the possibility of dividing one shipment into several batches may increase the number of LNG users to a significant degree. According to PGNiG’s estimates, the small-scale LNG market is approx. 65 thousand tons per year ad it could grow during 10 years to at least 200 thousand tons per year, so more than three times as much.

More information about the Group’s development projects can be found in the chapter Innovation, research and development.