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Administrative regulation of natural gas prices and deregulation of Polish gas market

 

Gas trading on the exchange market has been excluded from the tariff regime. Prices of gas paid by end users have also been gradually liberalised as the process of gas market deregulation advances. The first customer groups in respect of which the tariff requirement has been abolished are wholesale and business customers. As regards gas trading on the Polish Power Exchange or direct sales to customers at prices similar to those quoted on the exchange, there is a risk that revenues from such sales will be lower than gas procurement costs due to The growing disconnect between the market prices of gas and of petroleum products, to which gas prices under the long-term import contracts continue to be linked. As a consequence, revenue is subject to forecasting risk. Inaccurate estimates of costs (particularly the cost of gas purchase) may result in a risk of miscalculation of selling prices and charges, which may adversely affect financial results.

Dependence of PGNiG OD’s revenue on tariffs approved by the President of URE is the key factor affecting the company’s regulated business. Tariffs are crucial to the Company’s ability to generate revenue that would cover its reasonable costs and deliver a return on the capital employed. Currently, a significant portion of that revenue depends on the selling prices of gas fuel and is regulated. Inaccurate estimates of demand for gas (affecting the accuracy of projected purchase volumes) and changes in prices of gas purchased on the Polish Power Exchange, which cannot be accurately projected, may have an adverse effect on the financial performance of PGNiG OD.

Disruptions to gas supplies from countries east of Poland

 

On June 20th 2017, the dew point of natural gas supplied to and through the territory of Poland over the Yamal gas pipeline changed, which adversely affected the quality of the fuel. As a result, GAZ-SYSTEM stopped supplying gas to the Polish transmission system through the Interconnection Point from 6.00 am on June 21st 2017 to 6.00 am on June 23rd 2017. During that period PGNiG drew gas from the underground storage facilities to secure continuity of supplies to the PGNiG Group customers.

Apart from the above situation caused by technical reasons, in 2017 there were no disruptions in gas supplies from the east. However, given the continuing political instability in Ukraine, there is a risk of limitation in gas supply, as was the case in the period from September 2014 to March 2015.

Take-or-pay gas supply contracts

 

PGNiG S.A. is a party to two long-term take-or-pay contracts for gas supply to Poland − the Yamal Contract and the Qatar Contract. Assuming that PGNiG’s customer portfolio remains unchanged, the volume of gas imports specified in the take-or-pay contracts will limit its purchases of spot gas. If PGNiG loses its market share, there is a risk that it would be forced to look for new ways to utilise the surplus volumes of gas in its portfolio.

Competition

 

Competitors seek to increase gas fuel sales by offering competitive prices of the fuel or dual fuel (gas and electricity) deals. In 2017, the amendment to the Energy Law took effect, whereby the obligation to have the tariffs for final users, with the exception of households, approved by the President of URE was abolished. Considering the above, in coming years, the gas prices for consumers will be fully liberated, which will undoubtedly affect the situation of the PGNiG Group, in particular that of PGNiG OD. It is to be expected that the liberalisation will in particular result in a reduction of PGNiG’s share in the gas market, as has been observed in all countries where consumer gas prices have been deregulated. The mitigate the adverse effects of liberalisation, the PGNiG Group primarily intends to prepare an attractive and competitive offering for customers.