Strategic development directions of ORLEN Group
Warsaw, 14 July 2020 Agenda
1 Energy transition in Poland
2 Strategic aspirations of ORLEN Group
3 Key investment drivers
2 The fundamental challenge of the Polish energy sector is the need for its deep transition
. Transition of the Polish energy system . The use of fossil fuel in the economy will . The key changes in the Polish system are is necessary due to economic, social and come under greater decarbonization the progress of electrification of industry, regulatory reasons. In Poland it can form a pressure, and electricity will become the insulation and cooling of buildings and greater challenge than in other EU Member leading source of energy. transportation, a strong increase in renewable States. energy and a decrease in coal energy . Natural gas will gain in importance as a . The national energy system is based on transition technology, with lower level of production. coal, has limited potential for the emissions than coal-based energy, which will . T&D grid will require modernization, development of solar and hydro power and additionally stabilize the target system based expansion and strengthening of the system does not have nuclear power. on renewable energy. The increasing role of stabilization mechanisms (using new gas will require the diversification of supply technologies such as energy storage). sources and the development of transmission infrastructure.
3 The pressure of investors, consumers and the regulator as well as the development of technology enable the energy transition based on RES and natural gas
Key factors determining the reconfiguration of the mix in Trends the fuel and energy sector
Customers: expecting low-carbon, renewable fuels Electricity, including RES
. 2/3 of the global population recognizes the changing climate as a threat to their countries. The progressive decrease in the cost of renewable energy technology and energy storage will result in . More and more customers are choosing alternative drives in the automotive industry (electric and hybrid vehicles), they also the dynamic development of the dispersed RES choose low-emission energy for homes (gas, prosumer energy and a significant increase in demand for renewable energy). electricity
Technologies: enable cost-effective energy transition Gas
. Increase in profitability of renewable energy technologies (offshore and onshore wind farms, PV): cheapest energy sources The need to reduce emissions of the industry and the after 2025. real estate segment determines the growing . After 2030 an economically profitable increase in the scale of importance of gas power and further increase in applications of electric and hydrogen vehicles in transportation, demand for this fuel. energy storage in RES is expected. Regulations: the need to decarbonise and reconfigure the assets Crude oil . Over 1200 regulations on decarbonization and climate Popularization of alternative (electric) drives, increased protection after the Paris Agreement against 60 in 1997 after demand for biofuels in aviation and maritime transport, Kyoto. development of chemical recycling determine the E S G . Institutional investors with assets worth USD 10 trillion have decrease in demand for crude oil-based feedstock pledged to limit investments in highly emission fossil fuels (coal, and petroleum fuels. oil). 4 Source: PKN ORLEN’s study The growing importance of renewable energy and gas will significantly change the European energy mix
Share of carriers in final energy consumption in Europe % Comments
CAGR . Demand and margins pressure 19% -2% . Structural oversupply Crude oil 32% 28%
25% 0% . Important transition fuel Gas 25% 26% . In the long run, a balancing medium for renewable sources (RES) Renewable 15% 40% Energy 24% +3% . The most important direction of Sources energy investments . The biggest beneficiary of new 28% 21% regulations and support systems Others 15%
Today 2030 2050
Source: IEA baseline scenario, BCG analysis 5 Central and Eastern Europe is one of the few regions in Europe with an ever increasing demand for energy resources
Electricity demand, TWh Key findings
. Central and Eastern Europe is one of the ~1,2-1,3x few regions in Europe with a constantly Electricity growing demand for electricity ~440 ~510-5501
Installed capacity in gas energy, GW
~1,3-1,5x . In Central and Eastern Europe there is currently less capacity in gas than Gas ~12 ~16-18 required for balancing future renewable energy sources.
Planned capacity installed in RES, GW . Many coal sources in mixes of Central ~2x and Eastern European countries require a change to renewable fuels. RES ~70-75 ~37 . In Central and Eastern Europe there is 2019 2030 a lower share of RES in the mix than CEE2 Western Europe.
1. Depending on scenario (lower range for Sustainable Transformation Scenario) 2. CEE: Bulgaria, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia. 6 Source: IEA, ENTSO-E, IRENA, PEP2040, ARE, BCG analysis In turn, the transition in Poland will lead to an increase in demand for electricity and natural gas
Demand for electricity in Poland, TWh Demand for natural gas in Poland, TWh Key findings 350 350 Full decarbonisation scenario Households and services . The energy transition in Poland Baseline scenario Industry will cause significant changes in the national energy system, 300 PEP 20401 300 Others especially causing an increase Electric power in demand for electricity and 250 250 natural gas as a fuel for energy 217 production. . The growing demand for 200 200 173 electricity will drive demand for gas. Gas-fired power plants 150 will gradually replace (shut 150 164 150 down due to end of life) coal- fired power plants and cogeneration plants. They will 100 100 also provide a stable source to meet new demand and stabilize 50 50 the growing share of renewable energy.
0 0 2020 25 2030 2020 25 2030
1. Electricity demand according to PEP2040 estimates, assuming own use and transmission losses in the grid of ~16% Source: Poland's Energy Policy (PEP) November 2019, Global Energy Perspective McKinsey & Company 7 The largest companies in the sector participate in the energy transition process, expanding the scope of their activities to other areas
Activity dimensions Shell BP Total Equinor Eni OMV MOL
Gas Biofuels
Conventional energy
RES
Sale of electricity (B2C)
E-mobility
Hydrogen in transportation – strategy element or area at development stage 8 Agenda
1 Energy transition in Poland
2 Strategic aspirations of ORLEN Group
3 Key investment drivers
9 ORLEN Group has a leading market position and strong financial foundations
Leading player Significant Efficiency Refinery and of refining in Europe petrochemical producer high cost position of major petrochemicals ~33 m tonnes of crude oil in Europe in all product assets throughput groups
The largest network The most valuable Over 3 mln of new in the region brand in Poland customers
>2800 petrol stations in in Retail customers on the Retail Central and Eastern Europe energy sales market1
Over 1,0 GW Over 400 MW Over 40 000 Power of installed capacity in capacity installed in RES, Prosumers connected to the gas mainly in wind and water power grid1 energy1
Strong financial High returns Low debt Financial strength position ~15% return on capital Net debt/EBITDA (PKN ~ PLN bn 111 of employed (ROACE ORLEN and Energa) revenues of PKN ORLEN LIFO, av. in 2016-19) at the level~ 1,02 and PLN bn 11 of revenues of Energa
1. As a result of acquisition of Energa 2. Index for consolidated proforma results of ORLEN and Energa for 2019, including the purchase price of Energa share. 10 The start position predestines ORLEN Group to be a leader of the energy transition in Poland and in the region
Strong financial position Experience in M&A Strong position and recognition in the . PKN ORLEN is the largest company in Central . PKN ORLEN has carried out a number of region and Eastern Europe, with high operating cash flow successful acquisitions and integrations also in . The ORLEN brand is widely recognized difficult macroeconomic conditions, e.g. Unipetrol in . PKN ORLEN has a number of project financing thanks to the strong relations of the Group with its the Czech Republic, the refinery in Mažeikiai in options, ensuring process flexibility clients, employees and cooperating institutions; Lithuania, and recently the acquisition and in the area of its activity ORLEN Group is commencement of integration with Energa and recognized as one of the best companies in the experience related to the process of acquisition of energy and fuel sector Lotos
Experience in implementing large A growing position in the energy sector Very good operating results investment projects . In years 2017-2018, PKN ORLEN has launched . PKN ORLEN’s refineries have high operational . Within the last 5 years PKN ORLEN the gas-steam units (CCGT) in Włocławek and ratios and are in the second quartile in comparison implemented three investment megaprojects, Płock; The Group also has a license to build an with their European counterparts (in terms of the including the most modern gas-steam power plants offshore wind farm with a capacity of ~1200 MW ‚Net Cash margin’); Płock is considered one of the in Poland (CCGT) in the Baltic Sea best refineries . In 2020 PKN ORLEN took over the majority share in Energa Group 11
Over the next decade, ORLEN Group will seek to take a leading position as a sustainable multi-energy group
Vision and direction of transformation of ORLEN Group by 2030
One of the leading Leader of energy Provider of A socially A stable source of players in Europe transition in Poland integrated customer responsible group attractive returns for and the region services shareholders
Geographic The largest portfolio of Handling fuel, energy Strong investments in Maximizing the value development in Europe attractive assets in and purchasing needs sustainable of the company in order along the entire value renewable and low- in an integrated manner development, to provide financing chain emission energy based on current and new decarbonization, for the energy transition channels and digital initiatives related to the technologies circular economy and social initiatives
12 ORLEN Group’s aspiration assumes active management of the business portfolio through the development of current and new areas
Strategic logic Main segment and business areas
Maximizing the results Energy and gas Upstream Refinery Fuel retail distribution
Strategic development
Renewable Petrochemicals Gas power Non-fuel retail power
Investing in the future R&D Hydrogen New mobility Recycling and technologies digitalization 13 The basis for achieving our vision is the construction of an integrated and diversified multi-energy group
ORLEN Group activity after mergers across business segments (illustrative) ORLEN Lotos Energa PGNiG
Planned: wind offshore (ORLEN) and CCGTs
Upstream Refinery and Petrochemicals Renewable and gas Distribution Retail energy of energy and gas
Source: Annual reports of the companies 14 Agenda
1 Energy transition in Poland
2 Strategic aspirations of ORLEN Group
3 Key investment drivers
15 PGNiG is one of the largest gas companies in Central and Eastern Europe
Key indicators, 2019
Exploration Trading Electricity and PGNiG Group Gas distribution and production and storage heat production
EBITDA: PLN 5.5 bn = 3.4 -0.5 2.0 0.9
Revenues: PLN 42 bn 1.2 m t 4.5 bn m3 29.8 bn m3 7 m 1.2 GW of crude oil, of natural gas of gas sales number of customers of electric generation capacity EV / EBITDA: 5.2 condensate and NGL production production
Employment: 24.8 th. 3 40 m boe 54 8.9 bn m 1 595 5.1 GW of production licenses for the of gas trading on the Polish Number of municipalities of heat generation capacity (~30 in Poland, ~10 exploration and Power Exchange connected to the gas network in Norway and production of oil Pakistan) and gas in Poland >2 th. 13.5 bn m3 11.5 bn m3 3.9 TWh of production wells of imported gas of distributed gas Electric power sales
3 858 m boe 3.2 bn m 191 th. km 39.2 PJ of gas and oil of storage capacity The length of the distribution Heat sales resources in 5 network with connections countries
Source: Annual report 2019 16 Integration of ORLEN and PGNiG will allow the joint preparation of responses to strategic challenges in both companies
Strategic challenges and benefits of integration SELECTED EXAMPLES
Reversing the trend of declining oil and gas Ensuring long-term growth production in Poland Forecast development of the Generation and Integration with PKN ORLEN will help to improve Distribution segments and PGNiG’s competences the management of fossil fuel resources in Poland in the area of natural gas will allow for long-term and implement best practices of operational and growth in fields relevant to the energy transition. investment efficiency. Limited upstream segment (in comparison with Gas power development program other companies in the sector) PKN ORLEN’s experience in managing two CCGT Integration with PGNiG will allow the consolidation units will enable PGNiG to manage the new units of the upstream portfolio in Poland and strengthen in Stalowa Wola and Żerań in the best way and use the upstream segment in ORLEN (also by the scale in development plans. smoothing out the business cycle for the downstream segment). Smoothing out the business cycle PGNiG is heavily exposed to changes in oil and gas Strengthening balance sheets and stable prices due to the dominant upstream segment. financial flows Merger with PKN ORLEN’s downstream segment The growing segment of gas distribution in PGNiG PKN ORLEN, which usually has a reverse cycle, offers stable financial flows, not dependent on the will allow one to achieve more stable financial economic situation, providing the cash necessary results. to finance investments. 17 The integration of the upstream segment in Poland will allow for better reserves management and operational transition
ORLEN Lotos PGNiG
Potential benefits of integration:
Pomorskie
EDGC Warmińsko-Mazurskie
Zachodniopomorskie Podlaskie . Implementation of cost synergies thanks to Sieraków Kujawsko- Pomorskie consolidation of operating activities, purchases and management in the short term
Wielkopolskie Mazowieckie Płotki . Enabling the increase in production and Lubuskie optimization of resource use in Poland Łódzkie Lubelskie Dolnośląskie . Strengthening operational efficiency in upstream Karbon activity Opolskie Świętokrzyskie Podkarpackie Śląskie
Karpaty Miocen Małopolskie
Bieszczady
Source: Information of the companies 18 In addition to operational and financial synergies PKN ORLEN will be able to achieve combination synergies between segments
ORLEN Lotos Energa PGNiG Example synergy opportunities between value chains 1. 2. 3.
Optimization of offshore wind Balancing of irregular production Extended commercial offering energy development by leveraging profile from renewable energy to customers in the field of fuels, existing capabilities from Lotos sources by gas units gas and energy (e.g., dual gas & Offshore E&P (in the field of Optimizing trade on the wholesale power offering, full B2B coverage exploitation of fields in the Baltic with gas, fuel and electricity – „one Sea) electricity market by managing a broad portfolio of assets invoice”, Vitay loyalty program expansion)
19 ORLEN. FUELLING THE FUTURE