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G4-2

The operations of the PGNiG Group largely depend on external factors which also pose challenges for the Group. Those factors include:

In recent years, the changes taking place in the Polish gas market have been accompanied by steep price declines elsewhere in Europe. In addition, the past few years have seen increasingly weak correlation between the market prices of natural gas and petroleum products. The falling prices of crude oil also had major implications for the Group in recent years − the unwanted concomitant of lower gas procurement costs under long-term contracts were deteriorated economics of our foreign upstream projects with a predominant share of oil in total reserves, leading to a downward valuation of the E&P segment’s foreign operations.

LNG infrastructure has been expanding rapidly on global markets, with new projects built to increase both export capacities (liquefaction terminals), mainly in North America and Australia, and import capacities (regasification terminals), mainly in Europe. Capacity expansion has also created an excessive supply in global LNG markets, leading to price declines.

As an active participant of the global LNG market, PGNiG will be able to take advantage of the favourable pricing conditions and secure additional gas supplies for Poland. With the abundant LNG supply, the importance of trading in gas under spot, short-term and medium-term contracts is growing, as destination clauses are being increasingly abandoned, the number of market participants is growing, and the global fleet of LNG vessels is becoming more available.

As the requirement to sell a specific portion of gas volumes on the exchange market has come into force, PGNiG is required to sell high-methane gas on commodity exchanges or other regulated markets. In the context of the above requirement, the deregulation process poses a risk of significant customer loss. PGNiG also faced the need to amend customer contracts in terms of contracted capacity, offtake amounts, and the procedure for switching suppliers.

The Group’s current mix of gas supply sources was structured to cover the whole of demand for natural gas in Poland. However, considering the risk of losing a part of the Group’s market share and given the insufficient diversification of supplies, there was a risk of imbalance in the Group’s gas portfolio. Currently, the Group’s gas supply mix is largely made up of contracts priced partly by reference to prices of oil products (Yamal and Qatar contracts), and differences in the gas sale pricing formulas applied by PGNiG and its competitors entail a risk of price pressures.

Therefore, it has become imperative that the Group explore opportunities for diversifying its gas supply sources and analyse the feasibility of related projects. With the Yamal contract nearing expiry, a need arises to build a flexible portfolio of supply sources for Poland beyond 2022.

Significant changes are taking place in the PGNiG Group’s regulatory environment, particularly with respect to taxation of hydrocarbon production, the exchange sale requirement, and uncertainty surrounding the support model for gas-fired cogeneration, all of which may adversely affect the profitability of the Group’s segments.