Letter from the President of the Supervisory Board
Ladies and Gentlemen,
The coronavirus pandemic has left its mark on all aspects of social and economic life. 2020 will be remembered as a year in which healthcare systems around the world faced the worst crisis in living memory, causing the closure of many sectors of the economy. Poland’s GDP declined by approximately 3%, much less than in the case of most EU member states, where the GDP contracted on average by more than 6% in that period. This good result would not have been possible without the government’s large-scale assistance programmes targeted at mitigating the negative economic effects of the pandemic.
The uncertainty generated by the pandemic crisis and significant price movements across global commodity markets became a major challenge for oil & gas companies, particularly those operating in the upstream segment. The average annual prices of natural gas and crude oil declined by as much as approximately 25% year on year, affecting the profitability of extraction operations. The PGNiG Group was no exception, having reported a substantial decrease in the operating results of its Exploration and Production segment. However, thanks to its well-designed sales strategy, it was able to mitigate the negative impact of low commodity prices in the Trade and Storage segment.
A major contributor to the record-high EBITDA, not only of the segment, but also of the entire PGNiG Group in 2020, was the favourable award issued by the Stockholm Arbitration Institute, bringing the five-year dispute over gas price between PGNiG and Gazprom to a resolution.
The Arbitration Institute changed the formula for setting the price of Russian gas by linking it more closely with gas prices on the European market. For PGNiG, this means importing a significant portion of gas on arm’s length terms. The Annex to the Yamal contract executed in June 2020 set the seal on the Arbitration Institute’s decision and ???rendered it into specific contractual provisions. Under the Annex, the parties abandoned the previous price setting formula, which was strongly aligned with oil prices and which in 2014–2020 significantly inflated the cost of gas imports from Russia. What is more, PGNiG received from Gazprom approximately PLN 6bn as refund of the overpayments for gas supplied in that period.
With the price formula in the Gazprom contract revised, lower cost of gas imports from Russia, and the overpayments for gas supplied for more than five years refunded by Gazprom, the Trade and Storage segment posted a record EBITDA of almost PLN 10bn in 2020.
Considering the highest ever consolidated EBITDA of PLN 13bn earned in 2020, I have no doubt that the Group was able to weather the pandemic storm, as demonstrated by broadly defined economic and organisational efficiencies – amid the crisis, our company managed to maintain the continuity of processes and ensure the safety and health of its employees.
Obviously, the pandemic hampered the pursuit of the objectives envisaged in the PGNiG Group’s strategy for 2017–2022. However, the capex spend of PLN 6.8bn confirms the Group’s ability to carry on with key investment project in spite of economic headwinds. This amount is close to the pre-crisis capex in 2019.
Moreover, we succeeded in increasing the reservation of regasification capacity of the LNG terminal in Świnoujście, which in the next few years will significantly expand the possibility of importing gas by sea, and signed a contract with Ørsted for the purchase of a significant volume of gas from the Danish continental shelf. Once the Baltic Pipe comes on stream, the Danish gas will be transported to Poland as a vital component of a diversified supply portfolio.
Our Group and the entire Polish energy and fuel sector are facing further challenges related to Poland’s transition towards zero and low carbon economy. For Poland, whose energy sector has so far relied heavily on coal, this entails the need for major investments. The first stage will mainly involve investing in capacities based on a transition fuel, that is natural gas. Ultimately, renewable energy sources, alternative fuels and nuclear power generation will prevail in the energy mix. The PGNiG Group, as the largest player in the Polish gas market, has for many years been engaged in the process, also by taking steps to reduce the energy sector’s environmental impacts.
This trend is supported by PGNiG’s initiatives implemented in 2020, such as the launch of renewable energy projects and the hydrogen programme, continued transformation of our own heating assets by switching from coal to gas, as well as the announced construction of a CCGT unit at the Ostrołęka Power Plant and a network of biogas plants, jointly with PKN Orlen.
The PGNiG Group will continue to support Poland’s energy transition by ensuring energy security, uninterrupted gas supplies and a diversified import portfolio, as well as by developing the distribution network by both expanding its reach and adapting the network to transport alternative fuels – biomethane and hydrogen.
As a listed company, we constantly improve our internal processes related to corporate governance. In 2020, we followed a vast majority of the principles laid down in the ‘Code of Best Practice for WSE Listed Companies 2016’, effective in 2020. This demonstrates the PGNiG Group’s above-average level of transparency and shows its openness towards stakeholders.
Last year, the PGNiG Group was also faced with a prospect of a major change in its ownership structure in connection with planned merger with PKN Orlen and Grupa LOTOS – leaders of Poland’s fuel market. A planned and well executed merger may bring benefits to the shareholders of the merging companies, and the new entity will have the opportunity to leverage the PGNiG Group’s immense potential and technological know-how, as well as business synergies to further grow the Polish fuel and energy sector, especially on the eve of environmental and climate challenges facing Poland.
Looking forward to another challenging year, I would like to extend my thanks to members of the Management Board and all employees of the PGNiG Group for their exceptional effort and hard work in 2020, which was a most difficult year for us all.
Chairman of the Supervisory Board
Bartłomiej Nowak