On June 16th 2008, the Supervisory Board of Grupa LOTOS S.A. approved the updated Strategy of the LOTOS Group until 2012. In line with the updated Strategy, the Group will continue its policy focused on stimulating sustainable development of its core business, with an overriding strategic goal of creating value for shareholders.
The Strategy of the LOTOS Group until 2012 was updated 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 S.A., 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 LOTOS 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, we are implementing the two-stage 10+ Programme. Additionally, the Group will build the necessary facilities which are not covered by the scope of the 10+ Programme, 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. 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, whose 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 subordinated to 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 contemplated projects 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 financing/equity arrangements 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:
| 2009 | 2012 | |
|---|---|---|
| Oil price (2008 fixed prices): | ||
| - dtd Brent (USD/bbl) | 112,52 | 128,02 |
| - Ural CIF Rotterdam (USD/bbl) | 108,8 | 124,52 |
| Crack spreads for products (2008 fixed prices): | ||
| - Premium gasoline 10 ppm – Cargoes CIF NEW (USD/t) | 145 | 145 |
| - Diesel 10 ppm – Cargoes CIF NWE (USD/t) | 178 | 178 |
| - Gasoil 0.1% – Cargoes CIF NWE (USD/t) | 140 | 140 |
| - Fuel Oil 3.5% – Barges FOB Rotterdam (USD/t) | (271) | (271) |
| EUR/PLN | 3,5 | 3,2 |
| USD/PLN | 2,56 | 2,48 |
51.2. Special Rights Vested in the State Treasury and How
These Rights Should Be Exercised in Companies
The Act on Special Rights Vested in the State Treasury and How These Rights Should Be Exercised in Companies of Material Importance to Public Order or Safety (“strategic companies”), dated June 3rd 2005 (Dz.U. No. 132, item 1108) (“the Act”) introduced the institution of observers on behalf of the State Treasury. Grupa LOTOS S.A. was included in the list of strategic companies referred to in Art. 8 of the Act, published in the Polish Council of Ministers’ Regulation on the list of companies of material importance to public order or safety, dated December 13th 2005 (Dz.U. of December 29th 2005). The responsibility of the observers acting on behalf of the State Treasury at strategic companies is to monitor the operations of these companies regarding, among other things, the following issues:
- management of company assets of material importance to its operations,
- changes of the actual business profile, changes of the intended use or discontinuation of the use of a company’s asset of material importance,
- adoption by the General Shareholders Meeting of resolutions concerning dissolution of the company, relocation of its registered office abroad, change of its business profile, sale or lease of its business or an organised part of its business, or encumbrance of the business or its organised part with limited property rights.
if there is reasonable suspicion that such a legal action would violate public order or safety.
The assumptions of the state’s policies concerning social or economic life spheres of material importance to public order or safety will be published in Monitor Polski.
The observers are authorised to request from companies any documents or explanations regarding the above issues, and, having analysed them, they are required to submit the obtained materials to the Minister of the State Treasury, together with their position expressed in writing and the statement of reasons.
The State Treasury Minister is required in certain cases, and in other cases he is authorised, to voice his objection to an action of a given strategic company of which he has been notified by the observers. Provided that it is not appealed against, such an objection renders a given legal action invalid as of the date on which it was performed.
Until the approval of the consolidated financial statements, Grupa LOTOS S.A. has received no statement on the appointment of an observer for the Company.
51. Other information 
