Grupa LOTOS Management's Discussion and Analysis And

Grupa LOTOS

Management’s Discussion and Analysis and supplementary information for the consolidated financial results for the first quarter of 2019 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

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PLLOTOS00025 LTS LTSP.WA LTS PW

MARKET ENVIRONMENT ...... 3 UPSTREAM SEGMENT ...... 6 DOWNSTREAM SEGMENT ...... 14 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ...... 19 SUPPLEMENTARY INFORMATION ...... 26

An excel file with the operating and financial data for Q1 2019 and the previous reporting periods is published in the Investor Relations section of our website at → inwestor.lotos.pl as → databook

2 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

MARKET ENVIRONMENT

The macroeconomic factors that particularly affect the LOTOS Group’s results include oil and gas price trends, changes in crack spreads for key petroleum products (gasoline, diesel oil, heavy fuel oil), as well as changes in the USD/PLN exchange rate. In Q1 2019, crack spreads for petroleum products saw significant volatility. In January, the crack spreads for naphtha were negative, and those for motor gasoline hit record low levels. In late February and early March, the heavy fuel oil crack spread reached an all-time high, and the crack spreads for middle distillates were the highest in four years.

• Crude oil and natural gas prices down year on year, respectively by -5.9% or USD -3.97/bbl1 and -21.8% or USD -9.73 USD/boe2 • Year-on-year increases in crack spreads for diesel oil (+16.3% or USD +2.5/bbl), light fuel oil (+12.8% or USD +1.83/bbl), and aviation fuel (+1.7% or USD +0.28/bbl) • Considerable year-on-year improvement in negative crack spread for heavy fuel oil (+64.6% or USD +6.14/bbl) • Strong year-on-year decline in crack spread for gasoline (-75.1% or USD -8.86/bbl) • Year-on-year narrowing of quarterly average Brent/Urals spread, from USD 1.59/bbl to USD 0.24/bbl • Year-on-year increase in model refining margin, from USD 6.38/bbl to USD 6.98/bbl (up +9.4%) • Year-on-year appreciation of the USD/PLN average quarterly exchange rate by PLN 0.39 (+11.5%)

Brent prices (USD/bbl), natural gas prices (USD/boe) and the Brent/Urals spread (USD/bbl)

81 77 79 74 74 72 69 72 65 66 65 64 66 57 59 53 50 46 48 46 42 45 45 39 40 42 41 41 34 29

2,91 2,38 1,89 2,02 1,61 1,92 2,06 0,61 1,02 0,98 0,21 0,02 0,03 0,25 0,46

January February March April 2018 May 2018 June 2018 July 2018 August September October November December January February March 2018 2018 2018 2018 2018 2018 2018 2018 2019 2019 2019

Brent/Ural differential Brent Natural gas

Source: In-house analysis based on Refinitiv data.

Brent crude prices, Brent/Urals spread, gas prices and Grupa LOTOS’ model refining margin

USD/bbl Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

DATED Brent FOB prices 62.90 68.22 66.87 -7.8% -5.9%

Brent/Urals spread 0.24 0.82 1.59 -70.7% -84.9%

UK NBP natural gas prices 3 35.00 46.58 44.73 -24.9% -21.8%

Model refining margin 4 6.98 8.47 6.38 -17.6% 9.4%

Source: The Company and Refinitiv.

1bbl – barrel of crude oil 2boe – barrel of oil equivalent 3To ensure comparability, the UK NBP natural gas prices were converted from USD/MWh to USD/boe using the conversion factor of 1.6282 MWh/boe. 4 In line with the methodology applied by the Company, → the model margin was computed based on Refinitiv data, which reflect long-term trends in prices used by the Company in its trading activities. In a shorter term, the prices used to compute the model margin may differ from the actual trading prices.Since the presented margin model does not account for differences in selling prices on various geographical markets, the model margin amount is an estimate rather than the actual refining margin generated by Grupa LOTOS S.A.’s refinery.

3 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Grupa LOTOS’ daily model refining margin (USD/bbl) and the USD/PLN exchange rate

9,2 9,2 8,9

8,9

8,8

8,7

8,5

8,4

8,1

7,9

7,6

7,5

7,4

7,1

7,0

6,9

6,8

6,7

6,6

6,5

6,4

6,3

6,2

6,1

6,0

5,9

5,6

5,4

5,3

5,2

5,0

4,9

4,8

3,85 3,85

3,84 3,84

3,83 3,83

3,82 3,82

3,81 3,81

3,80 3,80

3,80 3,80 3,80

3,80 3,80

3,79 3,79

3,79 3,79 3,79

3,79 3,79

3,78 3,78

3,77 3,77

3,76 3,76 3,76

3,76 3,76

3,75 3,75 3,75

3,75 3,75

3,74 3,74

3,73 3,73

3,72 3,72

7.02 2.01 4.01 8.01 1.02 5.02 1.03 5.03 7.03

10.01 14.01 16.01 18.01 22.01 24.01 28.01 30.01 11.02 13.02 15.02 19.02 21.02 25.02 27.02 11.03 13.03 15.03 19.03 21.03 25.03 27.03 29.03

Model refining margin (5day average) exchange rate USD/PLN

Source: Based on the Company’s methodology and the National Bank of Poland’s data.

Crack spreads5 USD/bbl Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Motor gasoline 2.93 5.09 11.79 -42.4% -75.1%

Naphtha -6.89 -5.03 -0.86 - -

Diesel oil (10 ppm) 17.88 20.73 15.38 -13.7% 16.3%

Light fuel oil 16.08 17.79 14.25 -9.6% 12.8%

Aviation fuel 16.76 19.33 16.48 -13.3% 1.7%

Heavy fuel oil -3.36 -4.20 -9.50 20.0% 64.6%

Source: Refinitiv.

Exchange rates USD/PLN Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

PLN/USD exchange rate at end of period 3.84 3.76 3.41 2.1% 12.6%

Average PLN/USD exchange rate 3.79 3.77 3.40 0.5% 11.5%

Source: In-house analysis based on National Bank of Poland data.

5 Product crack spread is calculated as the difference between the price per barrel of a given product (price per tonne computed using the appropriate density factor) and the price of Urals crude (the Brent crude price adjusted for the Brent/Urals spread).

4 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Presented below are key factors contributing to the LOTOS Group’s performance in Q1 2019.

• Feedstock and products

o Downstream segment Ca. 9.4% year-on-year growth in model refining margin, with the refinery’s capacity utilisation at the maximum rate, translated into the Downstream segment’s Q1 2019 adjusted LIFO-based EBITDA of approximately PLN 433.3m (+33.9% year on year). o Upstream segment Lower y/y UK National Balancing Point prices of natural gas (down -21.8%) and lower y/y crude oil prices (down -5.9%) had an adverse effect on the Upstream segment’s performance, partly offset by higher y/y hydrocarbon sales volume (up 4.2%). As a result, the Upstream segment’s adjusted EBITDA reached PLN 205.6m (up 0.4% year on year).

• Exchange rates

o An increase in the average USD/PLN exchange rate in the quarter (up +11.5% year on year) had a positive impact on crack spreads in the złoty, and thus on the LOTOS Group’s operating performance.

5 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

UPSTREAM SEGMENT

• Hydrocarbon production at 20.5 thousand boe/d6 (down 6.5% year on year) • Upstream segment’s adjusted EBITDA at PLN 205.6m, up +0.4% year on year • Upstream segment’s adjusted EBIT at PLN 153.1m, up +4.9% year on year • Hydrocarbon sales up 4.2% year on year

Crude oil and natural gas reserves, production and sales

Crude oil and natural gas reserves as at (mboe)7 Mar 31 2019 Dec 31 2018 Mar 31 2018

Norway 36.0 37.3 37.8

Poland 49.1 49.6 50.8

Lithuania 2.9 2.9 3.5

Total 88.0 89.8 92.2

Production (boe/d) Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Norway 14,830 15,258 16,741 -2.8% -11.4%

Poland 4,980 4,535 4,358 9.8% 14.3%

Lithuania 702 743 832 -5.5% -15.7%

Total 20,512 20,536 21,931 -0.1% -6.5%

Production (boe) Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Norway 1,334,729 1,403,747 1,506,719 -4.9% -11.4%

Poland 448,204 417,262 392,195 7.4% 14.3%

Lithuania 63,149 68,324 74,873 -7.6% -15.7%

Total 1,846,082 1,889,333 1,973,787 -2.3% -6.5%

Oil and gas sales (boe) Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Norway 1,195,811 1,324,107 1,288,251 -9.7% -7.2%

Poland 276,630 414,209 169,972 -33.2% 62.8%

Lithuania 98,772 101,926 49,843 -3.1% 98.2%

Total 1,571,213 1,840,242 1,508,066 -14.6% 4.2%

6daily production = production in a period / number of calendar days. 72P – proved and probable reserves (SPE-PRMS classification).

6 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Upstream segment’s organisation

The LOTOS Group’s Upstream segment is organised as follows:

Business structure of the Upstream segment as at March 31st 2019

Grupa LOTOS

LOTOS Petrobaltic (B3 LOTOS Upstream field, exploration licences)

technical LOTOS resources LOTOS Norge Baltic Gas LOTOS UK SPV B8 Geonafta (platforms, vessels)

LOTOS Upstream (“LUPS”), a holding company, pursues the segment’s development plans with the support of the following subsidiaries: LOTOS E&P Norge AS (operations on the Norwegian Continental Shelf), AB LOTOS Geonafta and its subsidiaries (onshore operations in Lithuania), Baltic Gas Sp. z o.o., Baltic Gas i wspólnicy sp. z o.o. sp.k. (B4/B6 gas field development project), and LOTOS Upstream UK Ltd (vehicle for potential development in the UK).

LUPS’s key roles include business development, economic analyses of new and ongoing projects, potential acquisitions/divestments, asset portfolio management, corporate supervision, management of the B4/B6 project, technical supervision and controlling, and provision of guarantees and sureties. LUPS also serves as a platform for arranging external financing for the segment’s activities.

LOTOS Petrobaltic and its subsidiaries focus on upstream operations and services in the Baltic Sea, including production from the B3 field, development of the B8 field to start full production, and exploration projects in the Baltic Sea and onshore licence areas in Poland. Concurrently, the segment’s current business structure supports development of engineering, execution and design capabilities for the offshore sector at LOTOS Petrobaltic, which may ultimately be used in providing services outside Grupa LOTOS S.A.

7 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Exploration and production activities in Poland Licences held by the LOTOS Group companies in Poland as at March 31st 2019

Source: In-house analysis.

In Q1 2019, LOTOS Petrobaltic S.A. continued to produce crude oil and natural gas from the B3 field in the Baltic Sea at an average rate of 1,686 bbl/d.

B8 Project

The B8 Project consists in the development of an oil field located in the Baltic Sea and is being implemented by special purpose vehicle B8 Sp. z o.o. Baltic S.K.A. (“SPV B8”), which is now engaged in initial oil production on the B8 field and is continuing the development work in the field, including conversion of the Petrobaltic oil platform into an offshore production hub. Currently, crude oil is produced using the LOTOS Petrobaltic platform. In Q1 2019, the average production volume from the B8 field was 3,294 bbl/d.

On March 1st 2019, in → Current Report No. 4/2019 Grupa LOTOS S.A. announced a delay in completing the development of the B8 field. As a result of the B8 Project turnaround plan, certain risks were identified that were attributable to, among other factors, design errors and modifications of the platform conversion and field development concept in 2013–2015. As corrective action is required, the platform is expected to go to sea and offshore start-ups are planned to be performed in the third quarter of 2019. To maintain the upward trend in production yield and formation pressure through parallel water injection, the offshore production hub start-up operation in cooperation with the LOTOS Petrobaltic platform has been planned to be carried out at the first stage of the B8 field development project. Full-scale production from the B8 field is expected be launched no earlier than in Q2 2021.

Key parameters of the B8 project (LOTOS interest): • LOTOS interest 100% • 2P reserves 35.6 mboe as at March 31st 2019 (91% crude oil, 9% natural gas) • current production volume 3.3 boe/d (average production volume in Q1 2019) • full-scale production not earlier than in Q2 2021 • planned output 5.0 thousand boe/d (average production volume in the first five years from full-scale production launch)

B4/B6 Project

The B4/B6 project consists in the development of natural gas deposits in the Baltic Sea, in partnership with CalEnergy Resources Poland Sp. z o.o. The project is being run by an SPV – Baltic Gas LLP, and LOTOS holds a 51% interest in the project. The recoverable reserves of the B4/B6 fields are estimated at 4.8 bcm (100% interest).

8 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

At the moment, the project is pending a final investment decision (FID), which is expected to be taken after the risks associated with connecting the project to the onshore gas transmission network have been mitigated, i.e. a 30km long pipeline between Władysławowo and Kosakowo has been designed and constructed. In Q1 2019, the third stage of the preparatory phase was continued, including the design of an onshore pipeline, administrative, environmental and land property-related proceedings, as well as finance raising, and preliminary work (along the critical path) of the construction stage. Negotiations with OGP Gaz System on a grid connection agreement were completed and the process to execute the agreement was started. Work on obtaining an environmental decision for the onshore gas pipeline was finalised. According to the current project schedule, the final investment decision is to be made in the second half of 2019. Key parameters of the B4/B6 project (LOTOS interest):

• LOTOS interest 51% • 2C resources 17.9 mboe as at March 31st 2019 (74% natural gas, 26% NGL) • first gas production Q4 2022 • planned output 4.3 thousand boe/d (average production volume in the first five years from production launch)

Exploration projects as part of exploration activities in:

• The Gotlandia, Łeba and Rozewie offshore licences (LPB’s interest: 100%) – following completion of 2D/3D seismic data analysis and a geophysical survey feasibility study, interpretation work is now underway along with work on preparation of the regional tectonic setting and geological structure model for the sea part of the Baltic Basin as part of performance of licence commitments. • The Młynary onshore licence (LPB’s interest: 100%) – following completion of 2D seismic data acquisition, steps are now being taken to have the exploration and appraisal licence converted into an exploration, appraisal and production licence (a combined licence). • The Górowo Iławeckie onshore licence (PGNiG’s (operator) interest: 51%; LPB’s interest: 49%) – following completion of 3D seismic data acquisition, the companies are now working on a recommended work programme for the licence area.

9 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Exploration and production activities in Norway Licences held by LOTOS Exploration & Production Norge AS as at March 31st 2019

Source: In-house analysis.

10 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

In Q1 2019, LOTOS Norge, operating in a consortium, produced natural gas and condensate from the Atla, Skirne, and Heimdal fields (Heimdal assets) and from the Sleipner Ost, Sleipner Vest, Loke and Gungne fields (Sleipner assets). The average output of the Norwegian assets in Q1 2019 was 14.8 thousand boe/d. In Q1 2019, work was also conducted on the Utgard and Yme field development projects, and on preparations for the development of the Trell and Trine discoveries as well as of other deposits located in the Greater Heimdal area (the NOAKA project).

Utgard Project

The Utgard Project, which consists in development of a gas and condensate field in Norway, is highly advanced. The field’s operator is Equinor (formerly Statoil), and the development is carried out under a fast-track model, leveraging synergies with the existing Sleipner hub infrastructure. In Q1 2019, work was under way to modify the Sleipner T platform and prepare the subsea parts of the production systems and flowlines (their installation has already started). In parallel, work was performed to analyse the results obtained from the two production wells drilled in Q4 2018. The project proceeds as scheduled and within the budget. The Operator has indicated a possibility to launch hydrocarbon production in Q4 2019, but Grupa LOTOS contimues to assume that production will start in Q1 2020.

Key parameters of the Utgard project (LOTOS interest): • LOTOS interest 17.36% • 2P reserves 8.1 mboe as at March 31st 2019 (54% condensate, 46% natural gas) • production to be launched in Q1 2020 • planned output 4.1 thousand boe/d (average production volume in the first five years from production launch)

Yme Project

The project, currently under way, aims to develop the Yme oil field. The field operator is Repsol, and the development activities are being carried out in accordance with the approved new development plan, using a leased platform – Maersk Inspirer. In Q1 2019, work was performed at the shipyard to modify the platform and on field to install a caisson wellhead system. The next stage will involve caisson reinforcement (planned for May/June 2019) and mounting of the wellhead (September 2019). Judging by the progress of the work, the project is likely to be completed on schedule and production may be launched in mid-2020.

Key parameters of the Yme project (LOTOS interest): • LOTOS interest 20% • 2P reserves 12.9 mboe as at March 31st 2018 (100% of crude oil) • production to be launched in Q2 2020 • planned output 5.0 thousand boe/d (average production volume in the first five years from production launch)

NOAKA Project

The NOAKA project involves the development of discoveries north of Heimdal, including Frigg Gamma Delta, Langfjellet, Rind, Fulla and Froy, in which LOTOS holds an average interest of 10% and AkerBP is the operator. The project may also cover Krafla and Askja reserves, in which LOTOS does not currently hold any interest, whose operator is Equinor. At the current stage, an optimum development concept for the project is to be selected. In Q1 2019, AkerBP presented to its partners technical documentation for the preferred option to develop the reserves. For Grupa LOTOS, the project represents an attractive opportunity to increase production in the long term, as potential hydrocarbon reserves of the NOAKA area are estimated at 30 mboe for the LOTOS interest. Production from the fields may commence in 2023.

Estimated parameters of the NOAKA8 project (LOTOS interest): • LOTOS interest approximately 10% • potential hydrocarbon reserves approximately 30 mboe • first production 2023 • potential output approximately 9,000 boe/d (average production volume in the first five years from production launch)

Trell/Trine Project

The project involves development of the Trell and Trine fields, in the Heimdal licence area (in which LOTOS Norge holds interest of 10% and 16%, respectively). The fields have not been included in development plans in the past, but following the change of the operator (currently AkerBP), they may be developed. At present, a development concept for the Trell/Trine project is being selected, with the base option to connect the reserves to the nearby Floating Production Storage and Offloading of the Alvheim area. The estimated hydrocarbon reserves of the Trell/Trine fields is approximately 5.5 mboe for LOTOS interest. According to the operator, the fields may be developed in a fast-track model and production may start in 2021.

8 The presented parameters are estimates and may be reviewed / changed in the course of formulation of an optimal field development concept. The final project parameters will be presented after the Final Investment Decision is approved.

11 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Exploration and production operations in Lithuania Licences held by the AB LOTOS Geonafta Group as at March 31st 2019

Source: In-house analysis.

In Q1 2019, companies of Lithuania’s AB LOTOS Geonafta Group focused on optimising production from their existing onshore oilfields: Girkaliai, Kretinga, Nausodis and Genciu, Vezaiciai, Liziai, Ablinga.

12 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Upstream − key financial data

PLNm Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Revenue 310.7 423.7 296.7 -26.7% 4.7%

EBIT 153.1 577.8 146.0 -73.5% 4.9%

Depreciation and amortisation 52.5 55.5 58.7 -5.4% -10.6%

EBITDA 205.6 633.3 204.7 -67.5% 0.4%

Adjusted EBIT 9 153.1 205.0 146.0 -25.3% 4.9%

Adjusted EBITDA 205.6 260.5 204.7 -21.1% 0.4%

The year-on-year growth in revenue of the Upstream segment in Q1 2019 (4.7% y/y) was driven primarily by higher sales volumes (up 4.2% y/y), mainly of crude oil, and a higher quarterly average USD exchange rate (up 11.5% y/y), with lower natural gas and Brent crude prices (down by -21.8% and - 5.9% respectively). The decline in revenue (down -26.7% quarter on quarter) was mainly attributable to a 14.6% sales volume drop and lower prices of natural gas (down -24.9%) and crude oil (down -7.8%). In Q1 2019, the Upstream segment’s adjusted EBITDA was close its level in the comparative period and down by 21.1% on Q4 2018. The quarter-on-quarter decline in the segment’s adjusted EBITDA was attributable to lower hydrocarbon sales volumes and lower prices of gas and crude oil.

9 Net of non-recurring items: In Q4 2018 – reversal of impairment loss on expenditure on the Yme field, receipt of proceeds from insurance of defective platform, revision of estimated volume of reserves in Heimdal and Sleipner assets and Lithuanian fields

13 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

DOWNSTREAM SEGMENT

• Maximum capacity utilisation of the Grupa LOTOS S.A. refinery • Downstream segment’s Q1 2019 adjusted LIFO-based EBITDA of PLN 433.3m (up +33.9% year on year)

Crude slate

‘000 tonnes Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Crude oil processed by the Gdańsk refinery 2,610.5 2,775.1 2,560.2 -5.9% 2.0% including:

Urals crude 1,930.9 2,297.7 1,566.5 -16.0% 23.3%

Rozewie crude 38.5 67.2 41.6 -42.7% -7.5%

Lithuanian crude 12.6 14.0 8.6 -10.0% 46.5%

Lubiatów crude 59.8 84.5 76.3 -29.2% -21.6%

Other 568.7 311.7 867.2 82.5% -34.4%

In Q1 2019, the refinery’s capacity utilisation rate was 100.8%. The refining operations were stable, with throughput at 2,610.5 thousand tonnes of crude oil. EFRA (Effective Refining), Grupa LOTOS’ key investment project, is a continuation of a wider effort to upgrade the LOTOS refinery and supplements the deep crude oil processing configuration achieved under the 10+ Programme. In Q1 2019, construction, assembly and start-up activities were continued on individual units, including installations, auxiliaries and general infrastructure. On the DCU unit, the installation of pipelines was completed and work to install an electric heating system and pipeline insulation was continued. Pre-commissioning work was continued (tests and trials of the units following completion of construction and assembly and pending the RFSU status). KT and LOTOS are monitoring the progress of work so as to meet the new RFSU date for the DCU: May 31st 2019 → Current Report No. 32/2018 of December 4th 2018). The following facilities were declared ready for testing and trials: • SRU I unit 10(the ‘old’ Claus plant 0820; the unit was adapted to operate using oxygen-enriched air), • a new caustic soda lye pumping station, • a DCU vacuum residue feed system, • a DCU import feed system, • new inter-unit pipeline connections.

The following facilities were placed in service: • a new power supply building, • a hydrowax pumping station, • an upgraded sludge tank, • roads, road lighting and underground networks, • new inter-unit pipeline connections.

As at March 31st 2019, 17% of the project’s total capex (including 81% of Grupa LOTOS’ and 1% LOTOS Asfalt’ capex) was transferred to assets. All the EFRA Project facilities are planned to be transferred to assets by the end of Q4 2019. Taking into consideration the design, procurement, construction and assembly work, the overall EFRA Project progress status was 99.6%. Immediately upon confirmation of the RFSU status and accpetance of the DCU from KT, the start-up process with the use of hydrocarbons and hazardous substances will commence. The first DCU feed is planned for July this year. After the feedstock is introduced, the next step will be test runs with the participation of the general contractor and the institutions financing the Project, aimed at confirming the contractual production parameters of the Project units.

10 SRU – Sulphur Recovery Unit

14 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Refining products 11

Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018 ‘000 tonnes 2,797.2 3,005.5 2,729.5 -6.9% 2.5%

Gasolines 407.2 401.8 412.4 1.3% -1.3%

Naphtha 106.1 133.8 154.7 -20.7% -31.4%

Diesel oils 1,245.4 1,374.3 1,155.6 -9.4% 7.8%

Light fuel oils 67.5 84.5 84.8 -20.1% -20.4%

Jet fuel 102.8 150.6 139.8 -31.7% -26.5%

Heavy products12 538.6 528.5 465.5 1.9% 15.7%

Other13 329.6 332.0 316.7 -0.7% 4.1%

Sales structure in the downstream segment

Q1 2019 Q4 2018 Q1 2018 Q12019 /Q4 2018 Q1 2019 /Q1 2018 thousand tonnes 2,720.1 2,933.6 2,795.9 -7.3% -2.7%

Gasolines 396.8 404.9 415.7 -2.0% -4.5%

Naphtha 106.1 133.8 154.7 -20.7% -31.4%

Diesel oils 1,291.7 1,401.5 1,167.3 -7.8% 10.7%

Light fuel oils 71.3 80.9 84.0 -11.9% -15.1%

Jet fuel 116.6 140.9 126.7 -17.2% -8.0%

Heavy products14 508.4 555.8 448.0 -8.5% 13.5%

Crude oil (commodity/material) 0.0 0.0 194.9 - -100.0%

Other15 229.2 215.8 204.6 6.2% 12.0%

Petroleum products market in Poland and LOTOS Group’s sales in 2019 − Q1 2019 data

After the first three months of 2019, consumption of liquid fuels (diesel oil, gasolines and light fuel oil) in Poland grew 4.8% year on year. Diesel oil and gasoline consumption grew 6.8% and 3.1%, respectively, while light fuel oil consumption fell 19.3%.

Motor gasoline

After the first three months of 2019, gasoline consumption rose by 3.1% year on year. The LOTOS Group’s total sales of gasoline fell 4.5% year on year in Q1 2019, mainly in connection with production optimisation measures undertaken to maximise the refining margin. In Q1 2019, the average global crack spread for gasoline fell by USD 8.86/bbl year on year.

11The difference between the volume of crude oil processed and output of products stems from the fact that, apart from crude oil, the processing units and finished product blenders receive biocomponent streams, enhancing additives and middle distillates purchased from third-party suppliers. 12Heavy fuel oil and bitumen components 13Other products include fuel and industrial gases, sulfur, base oils, xylene fraction, LPG, bunker fuel, extracts, refinates, and slack wax.

15 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Motor gasoline – average monthly crack spread, USD/bbl Jan 2018−Mar 2019

17,27

14,85 13,89 13,31 13,07 12,60 11,87 10,54 10,26

6,16 6,42 5,18 3,70

1,03 1,15

January February March April 2018 May 2018 June 2018 July 2018 August September October November December January February March 2018 2018 2018 2018 2018 2018 2018 2018 2019 2019 2019

Source: In-house analysis based on Refinitiv data.

Diesel oil

Since the beginning of 2019, domestic demand for diesel oil has been growing. A 6.8% increase was observed after the first three months of the year. Aware of the growing demand for the product in Poland, the LOTOS Group increased its domestic sales of diesel oil by 11% in Q1 2019. In Q1 2019, the average global crack spread for diesel oil went up by USD 2.50/bbl year on year.

Diesel oil – average monthly crack spread, USD/bbl Jan 2018−Mar 2019

23,74

18,79 18,93 18,46 17,71 17,07 17,17 16,94 17,55 17,33 15,98 16,07 15,03 15,20 15,39

January February March April 2018 May 2018 June 2018 July 2018 August September October November December January February March 2018 2018 2018 2018 2018 2018 2018 2018 2019 2019 2019

Source: In-house analysis based on Refinitiv data.

Heavy fuel oil

Sales of heavy fuel oil by the LOTOS Group in Q1 2019 improved by 11% in comparison with Q1 2018. In Q1 2019, the average negative crack spread for heavy fuel oil on global markets was USD -3.36/bbl, having improved by USD 6.14/bbl year on year.

16 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Heavy fuel oil – average monthly crack spread, USD/bbl Jan 2018−Mar 2019

January February March April 2018 May 2018 June 2018 July 2018 August September October November December January February March 2018 2018 2018 2018 2018 2018 2018 2018 2019 2019 2019

-2,14 -2,55 -2,92

-4,59 -4,69 -4,97 -5,89 -5,85

-7,04

-8,55 -8,72 -9,44 -10,34 -10,95 -11,06

Source: In-house analysis based on Refinitiv data.

Downstream − key financial data

PLNm Q1 2019 Q4 2018 Q1 2018 Q12019 /Q4 2018 Q1 2019 /Q1 2018

Revenue 6,533.8 7,639.2 6,091.2 -14.5% 7.3%

EBIT 216.1 184.1 290.3 17.4% -25.6%

Depreciation and amortisation 160.6 125.3 124.4 28.2% 29.1%

EBITDA 376.7 309.4 414.7 21.8% -9.2%

LIFO-based EBIT 257.5 350.9 115.3 -26.6% 123.3%

LIFO-based EBITDA 418.1 476.2 239.7 -12.2% 74.4%

Adjusted LIFO-based EBITDA14 433.3 609.1 323.7 -28.9% 33.9%

The Downstream segment’s revenue was up 7.3% year on year as a result of higher average net selling prices, offset by a 2.7% decrease in sales volumes. In Q1 2019, the segment’s average net selling price was PLN 2,402 per tonne, having increased 10.2% year on year, chiefly on the higher average USD/PLN exchange rate in the quarter. A 14.5% quarter-on-quarter revenue decline in the Downstream segment reported in Q1 2019 was led both by lower sales volumes (down 7.3%) and lower net selling price (down 7.8%), an effect of falling prices of petroleum products. In Q1 2019, adjusted LIFO-based EBITDA of the Downstream segment came in at PLN 433.3m, up 33.9% year on year and down 28.9% quarter on quarter. The adjusted LIFO-based EBITDA growth was driven mainly by:

• higher model refining margin, • increase in the average USD/PLN exchange rate for the quarter, with an effect on the refining and sales margins. The quarter-on-quarter decrease in adjusted LIFO-based EBITDA was primarily attributable to:

• lower model refining margin, • lower sales volumes of petroleum products.

14EBITDA including the LIFO effect of inventory measurement and excluding theoretical write-downs on LIFO-measured inventories, net of exchange differences on operating activities and, additionally for Q4 2018 – impairment losses on service stations, provisions recognised for CO2 emission allowance deficit and for tax risk and, additionally for Q1 2018 – including the effect of pricing some crude oil at prices significantly higher than current prices on the LIFO effect.

17 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Number of service stations in the LOTOS network as at December 31st 2018

Mar 31 2019 Dec 31 2018 Mar 31 2018 Q1 2019 - Q4 2018 Q1 2019 - Q1 2018

493 495 488 -2 5

CODO 307 306 304 1 3

including: LOTOS OPTIMA 121 121 121 0 0

DOFO 186 189 184 -3 2

including: LOTOS OPTIMA 74 76 81 -2 -7

As at the end of Q1 2019, the LOTOS Group operated a network of 493 service stations.

Polish retail market as at March 31st 2019

IDS; 14 AS 24; 30

Total; 34 AMIC (former Lukoil); Independent; 3 760 115 Market service stations; 192 Circle K (former Statoil; 352 SHELL; 417

BP; Orlen; 1 783 LOTOS 550 493

Source: Polish Organisation of Oil Industry and Trade (POPiHN).

Retail − key financial data

PLNm Q1 2019 Q4 2018 Q1 2018 Q1 2019 /Q4 2018 Q1 2019 /Q1 2018

Sales volume (‘000 tonnes) 284.3 318.3 283.8 -10.7% 0.2%

Revenue 1,546.6 1,769.8 1,421.1 -12.6% 8.8%

EBIT 35.7 2.0 9.0 1,685.0% 296.7%

Depreciation and amortisation 27.8 16.9 17.2 64.5% 61.6%

EBITDA 63.5 18.9 26.2 236.0% 142.4%

Adjusted EBIT 35.7 35.3 9.0 1.1% 296.7%

Adjusted EBITDA 63.5 52.2 26.2 21.6% 142.4%

EBIT posted in Retail for Q1 2019 reached PLN 35.7m. The significant quarter-on-quarter and year-on-year increases in operating profit were attributable to higher unit margins earned on fuel sales through the Group’s CODO stations.Adjusted EBITDA in Q1 2019, of PLN 63.5m, was 21.6% higher than in Q4 2018.Profit/(loss) for Q1 2019 reflects changes in the accounting records related to the introduction of IFRS 16. Following these changes, a portion of lease costs was recognised as long-term lease and, consequently, additional depreciation and finance costs were recognised.

18 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Key financial results of the LOTOS Group

PLNm Q1 2019 Q4 2018 Q1 2018 Q12019 /Q4 2018 Q1 2019 /Q1 2018

Revenue 6,741.0 7,922.0 6,324.7 -14.9% 6.6%

EBIT 362.3 768.7 447.8 -52.9% -19.1%

Depreciation and amortisation 213.1 180.8 183.1 17.9% 16.4%

EBITDA 575.4 949.5 630.9 -39.4% -8.8%

LIFO effect15 41.4 166.8 -175.0 - -

LIFO-based EBIT 403.7 935.5 272.8 -56.8% 48.0%

Adjusted LIFO-based EBIT 418.9 695.6 356.8 -39.8% 17.4%

Adjusted LIFO-based EBITDA16 632.0 876.4 539.9 -27.9% 17.1%

In line with its inventory measurement policies, the LOTOS Group uses the weighted average method to measure changes in inventories. This method defers the impact of changes in crude oil prices on the prices of finished goods. Thus, an increase in crude oil prices has a positive effect on financial performance, while a decrease adversely affects the performance. Operating results computed using this inventory measurement method are presented in the EBITDA and EBIT lines of the table. The table also presents estimated inventory decreases measured using the LIFO method, as well as the LIFO effect, LIFO-based EBIT, adjusted LIFO-based EBIT, and adjusted LIFO-based EBITDA. In Q1 2019, the LOTOS Group posted an operating profit (EBIT) of PLN 362.3m, being the combined result of the Upstream segment’s EBIT of PLN 153.1m, the Downstream segment’s EBIT of PLN 216.1m and PLN -6.9m in consolidation adjustments (mainly adjustment of the realised margin on sales of Rozewie and Lithuanian crudes for the margin on crude stocks held by the Group). LIFO-based EBITDA (excluding theoretical LIFO-based write-downs), net of non-recurring items and exchange differences on operating activities (adjusted LIFO-based EBITDA) was PLN 632.0m. In Q1 2019, the LOTOS Group reported net finance costs of PLN -69.8m, with the main contributors being a negative net balance of interest on debt, interest income and commissions of PLN -63.3m, foreign exchange losses of PLN -21.9m, and a PLN 16.4m gain on measurement and settlement of hedging transactions. In Q1 2019, the effect of measurement and settlement of market risk hedging transactions at the LOTOS Group included mainly a PLN 55.0m net gain on settlement and measurement of transactions hedging petroleum product prices, a PLN -44.4m net loss on settlement and measurement of exchange rate hedging transactions, a PLN 9.6m net gain on settlement and measurement of transactions hedging CO2 emission allowances, and a PLN -3.8m net loss on settlement and measurement of IRS transactions hedging interest rate risk.

15 LIFO effect = LIFO-based EBIT (estimated with the LIFO, or Last In First Out, method) - EBIT 16EBITDA including the LIFO effect of inventory measurement and excluding theoretical write-downs on LIFO-measured inventories, net of foreign exchange differences on operating activities and additionally net of the events referred to in the commentary in individual segment results.

19 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Transactions hedging the risk related to petroleum product prices as at March 31st 2019

Purchase Sale Purchase Sale Purchase

Heavy fuel oil Heavy fuel oil Light fuel oil Light fuel oil Ethanol

Period Product/Feedstock Gasoil .1 Gasoil .1 Ethanol T2 3.5 PCT Barges 3.5 PCT Barges Cargoes CIF Cargoes CIF FOB Rdam FOB Rotterdam FOB Rotterdam NWE / ARA NWE / ARA Barge Eur/cm

Volume (mt) 45,015 -4,159 7,700 Q2 2019

Price range (USD/mt) 287 - 401 488.25-613.5 499 - 499

Volume (mt) 74,944 -1,895 175 -6,924 6,400 Q3 2019

Price range (USD/mt) 265.5 - 421.8 300 - 300 566 - 566 521-717.6 499 - 499

Volume (mt) 26,426 -2,441 5,100 Q4 2019

Price range (USD/mt) 265.5 - 370.5 527.75 - 643.25 499 - 499

Volume (mt) 2,585 -239 Q1 2020

Price range (USD/mt) 261.85 - 284.25 549 - 578.75

Volume (mt) 37,876 -3,500 Q2 2020

Price range (USD/mt) 253.3 - 337.5 549-677

Volume (mt) 43,305 -4,001 Q3 2020

Price range (USD/mt) 234 - 326.5 548.35 - 660.75

Volume (mt) 18,974 -1,753 Q4 2020

Price range (USD/mt) 234 - 288.5 548.35 - 644

Volume (mt) 1,082 -100 Q1 2021

Price range (USD/mt) 299 - 299 575 - 575

Volume (mt) 6,657 -615 Q2 2021 Price range (USD/mt) 292 - 299 570.8 - 584

Volume (mt) 3,604 -333 Q3 2021 Price range (USD/mt) 299-299 575-575

20 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Transactions hedging foreign exchange risk as at March 31st 2019

Currency pair Instrument Volume Currency Exchange rate range

EUR/USD exchange Forward 159,500,000 EUR 1.1350 - 1.2187 rates EUR/PLN exchange Forward -1,000,000 EUR 4.3072 - 4.3075 rates USD/PLN exchange Forward -234,354,824 USD 3.6275 - 3.8367 rates

Transactions hedging interest rate risk as at March 31st 2019

Instrument Start date range End date range Notional amount Currency Interest rate range Reference rate

from Dec 21 2018 from Jun 21 2019 3M LIBOR – 6M IRS 324,500,014 USD 1.52% - 2.89% LIBOR to Sep 21 2021 to Dec 21 2021

Transactions hedging the risk related to prices of carbon dioxide (CO2) emission allowances as at March 31st 2019

2019 2020

Volume Price range Volume Price range (mt) (EUR/mt) (mt) (EUR/mt)

EUAs Futures 1,619,000 7.64-23.69 119,000 19.54-23.80

21 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Structure of the LOTOS Group’s consolidated results in Q1 2019 (PLNm)

-7 26 -96 0

216 -120

362 292

153 173

EBIT upstream EBIT Consolid adjust. EBIT Finance income Finance costs Joint ventures Gross profit Tax Net profit downstream

In Q1 2019, the LOTOS Group posted a consolidated net profit of PLN 172.5m.

EBIT, profit before tax and net profit/(loss) of the LOTOS Group

PLNm Q1 2019 Q4 2018 Q1 2018

EBIT 362.3 768.7 447.8

Profit/(loss) before tax 292.2 617.4 499.1

Net profit/(loss) 172.5 99.9 320.8

22 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Consolidated statement of financial position – assets

Mar 31 2019 Dec 31 2018 Change % PLNm 23,982.7 22,223.9 1,758.8 7.9%

Non-current assets 14,291.3 13,078.0 1,213.3 9.3%

Property, plant and equipment of the downstream segment 9,771.4 8,742.4 1,029.0 11.8%

Intangible assets of the downstream segment 149.1 151.9 -2.8 -1.8%

Property, plant and equipment of the upstream segment 3,196.8 3,044.0 152.8 5.0%

Intangible assets of the upstream segment 359.1 338.0 21.1 6.2%

Equity-accounted joint ventures 116.9 117.2 -0.3 -0.3%

Deferred tax assets 143.7 149.6 -5.9 -3.9%

Derivative financial instruments 16.4 9.1 7.3 80.2%

Other non-current assets 537.9 525.8 12.1 2.3%

Current assets 9,691.4 9,145.9 545.5 6.0%

Inventories 4,525.0 4,848.9 -323.9 -6.7%

Trade receivables 2,653.0 1,880.4 772.6 41.1%

Current tax assets 16.6 2.4 14.2 591.7%

Derivative financial instruments 38.4 15.3 23.1 151,0%

Other current assets 374.3 457.6 -83.3 -18.2%

Cash and cash equivalents 2,084.1 1,941.3 142.8 7.4%

As at March 31st 2019, the LOTOS Group carried total assets of PLN 23,982.7m (up PLN 1,758.8m on December 31st 2018).

Key changes in assets: • PLN 1,029.0m increase in the Downstream segment’s property, plant and equipment related mainly to the implementation of IFRS 16 • PLN 772.6m increase in trade receivables related to Grupa LOTOS S.A.’s and LOTOS Paliwa sp. z o.o.’s sales, due to the absence of factoring transactions in the reporting period • PLN 323.9m decrease in inventories, primarily of crude oil, caused by a decline in the volume of crude oil stored at Grupa LOTOS S.A. • PLN 152.8m increase in the Upstream segment’s property, plant and equipment, related to the YME Project and B8 • PLN 142.8m increase in cash and cash equivalents.

23 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

Consolidated statement of financial position – sources of funding

Mar 31 2019 Dec 31 2018 Change % PLNm 23,982.7 22,223.9 1,758.8 7.9%

Equity 12,206.0 12,034.8 171.2 1.4%

Share capital 184.9 184.9 0.0 0.0%

Share premium 2,228.3 2,228.3 0.0 0.0%

Cash flow hedging reserve -301.2 -288.2 -13.0 -4.5%

Retained earnings 9,998.6 9,826.1 172.5 1.8%

Translation reserve 95.3 83.6 11.7 14.0%

Non-controlling interests 0.1 0.1 0.0 0.0%

Non-current liabilities 5,008.2 4,044.3 963.9 23.8%

Borrowings, other debt instruments and finance lease liabilities 3,252.8 2,345.3 907.5 38.7%

Derivative financial instruments 1.8 6.9 -5.1 -73.9%

Deferred tax liabilities 353.8 324.9 28.9 8.9%

Employee benefit obligations 173.3 170.4 2.9 1.7%

Other liabilities and provisions 1,226.5 1,196.8 29.7 2.6%

Current liabilities 6,768.5 6,144.8 623.7 10.2%

Borrowings, other debt instruments and finance lease liabilities 1,794.5 1,538.7 255.8 16.6%

Derivative financial instruments 61.1 47.4 13.7 28.9%

Trade payables 2,116.3 1,913.7 202.6 10.6%

Current tax payables 472.3 565.3 -93.0 -16.5%

Employee benefit obligations 133.8 156.2 -22.4 -14.3%

Other liabilities and provisions 2,190.5 1,923.5 267.0 13.9%

The increase in the LOTOS Group’s equity as at March 31st 2019 to PLN 12,206.0m (up by PLN 171.2m on 2018) was driven primarily by higher retained earnings (up by PLN 172.5m), which were reduced by foreign exchange losses on valuation of cash flow hedges recognised in capital reserves, adjusted by the tax effect of PLN -13.0m.

The share of equity in total equity and liabilities fell by 3.3pp year on year, to 50.9%.

Key changes in liabilities (up by PLN 1,587.6m):

• PLN 1,163.3m increase in borrowings, other debt instruments and finance lease liabilities, mainly due to the implementation of IFRS 16 Leases • PLN 296.7m increase in other liabilities and provisions (mainly liabilities under excise duty, fuel charge, emission charge and VAT) • PLN 202.6m increase in trade payables • PLN 93.0m decrease in current tax payables.

24 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

As at March 31st 2019, the LOTOS Group’s financial debt totalled PLN 5,047.3m, up by PLN 1,163.3m on the end of 2018, following the implementation of IFRS 16.The ratio of financial debt adjusted for free cash to equity was 24.3% (including lease liabilities representing 10.4% of equity), up 8.1pp on December 31st 2018. Net debt stood at PLN 2,963.2m (including lease liabilities of PLN 1,268.5m). The ratio of net debt to adjusted LIFO-based EBITDA was 0.9 as at March 31st 2019.

CONSOLIDATED STATEMENT OF CASH FLOWS

PLNm Q1 2019 Q4 2018 Q1 2018

Cash flows from operating activities 494.5 631.8 -136.2

Cash flows from investing activities -230.6 -505.6 -184.4

Cash flows from financing activities -120.1 -310.8 -233.9

Effect of exchange rate fluctuations on cash held 1.9 4.9 0.3

Change in net cash 145.7 -179.7 -554.2

Cash at beginning of period 1,938.3 2,118.0 1,920.6

Cash at end of period 2,084.0 1,938.3 1,366.4

As at March 31st 2019, the LOTOS Group’s cash balance (including current account overdrafts) was PLN 2,084.0m. Net cash flows in Q1 2019 added PLN 145.7m to cash and cash equivalents. In Q1 2018, net cash flows from operating activities were positive at PLN 494.5m, driven mainly by net profit increased by depreciation and amortisation, income tax, decrease in inventories, increase in trade payables and increase in provisions and other liabilities, and reduced by higher trade receivables. Negative net cash flows from investing activities (PLN -230.6m) were mainly attributable to purchases of property, plant and equipment and other intangible assets, chiefly for the Upstream segment and the EFRA Project. Net cash flows from financing activities in Q1 2019, of PLN -120.1m, chiefly comprised net repayments of borrowings and related outflows on principal and interest payments of PLN -51.9m, decrease in finance lease liabilities of PLN 51.9m, and losses on the settlement of financial instruments of PLN 16.3m.

25 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

SUPPLEMENTARY INFORMATION

I. Grupa LOTOS S.A. shares

On January 30th 2019, the Company was notified by Nationale-Nederlanden Otwarty Fundusz Emerytalny S.A. that its share of total voting rights at the Company’s General Meeting fell below the 5% threshold (→ Current Report No. 2/2019).

There were no changes in major holdings of the Company shares in the period from the date of issue of the report for Q4 2018 and FY 2018 (March 12th 2019) to the date of issue of the Q1 2019 report (April 30th 2019).

Grupa LOTOS S.A. shareholding structure as at April 30th 2019, i.e. the date of issue of the Q1 2018 report

Number of shares/voting rights Share of total voting rights equivalent to par value of equivalent to percentage of share Shareholder shares capital held

State Treasury 98,329,515 53.19%

Other 86,543,847 46.81%

Total 184,873,362 100%

II. Changes in the number of Company shares or rights to Company shares held by the management and supervisory staff, in accordance with the information available to the Company

To the best of the Company’s knowledge and based on the representations of April 23rd 2019 made for the purposes of the Q1 2019 report, as at this report issue date no Management Board or Supervisory Board members held any Company shares or rights to Company shares. Their holdings in the Company did not change from March 12th 2019, i.e. the date of publication of the report for the fourth quarter and for the entire year 2018.

III. Material court, arbitration or administrative proceedings concerning liabilities or claims of the Company or its subsidiaries, and material settlements under court proceedings

In the period between the end of the previous financial year, i.e. December 31st 2018, and the date of issue of these interim financial statements, there were no significant changes with respect to pending material court, arbitration, and administrative proceedings or with respect to other risks to the Company or its subsidiaries. For information on pending material proceedings, see Note 29.1 to the consolidated financial statements for 2018.

Tax settlements

In 2015, the Company’s VAT settlements for 2010 were subject to inspection by tax inspection authorities. On June 23rd 2015, the Company received a post-inspection report and challenged some of the findings contained in the report. On September 30th 2015, the Company received a decision issued by the Director of the Tax Audit Office in Bydgoszcz, in which the Tax Audit Office assessed the VAT amount payable by the Company for the period from January to December 2010, identifying VAT arrears of PLN 48.4m. The Company dismissed the allegations of the Director of the Tax Audit Office as entirely groundless and on October 14th 2015 filed an appeal with the Director of the Tax Chamber in Gdańsk. The Director of the Tax Chamber in Gdańsk upheld the decision of the Director of the Tax Audit Office in Bydgoszcz, whereas the complaint lodged by the Company with the Provincial Administrative Court on June 8th 2016 was dismissed. On August 25th 2016, the Company lodged a cassation complaint with the Supreme Administrative Court of Warsaw. On April 17th 2019, the Supreme Administrative Court dismissed the Company’s complaint against the ruling of the Provincial Administrative Court of Gdańsk.

Agreement to which LOTOS Exploration and Production Norge AS is a party

LOTOS Exploration and Production Norge AS (“LOTOS E&P Norge AS”) was a party to proceedings held before an arbitration court in Norway in connection with claims filed by Single Buoy Moorings Inc. (“SBM”), the supplier of the MOPU (Mobile Offshore Production Unit) for operation of the YME field, against Talisman Energy Norge AS, the operator of the YME field (“Talisman”, “Operator”) and the other YME licence holders. The share of SBM’s claims attributable to LOTOS E&P Norge AS was 20%.

In 2013, Talisman Energy Norge AS (“Talisman”, the then operator of the YME field) and Single Buoy Moorings Inc. (“SBM”, owner of the MOPU) announced that an agreement was reached to terminate all existing contracts and agreements executed by the parties in connection with the YME project and remove the defective MOPU from the YME field.

SBM paid USD 470m to the consortium members, and Talisman Energy, on behalf of the licence holders, agreed to make the necessary preparations and remove the platform from the field. Under the agreement, SBM was responsible for towing the MOPU to the port and its scrapping, whereas following completion of certain works, the ownership of elements of the YME field in situ subsea infrastructure delivered by SBM should be transferred to the consortium members, who would be required to perform site restoration (and disassembly) activities related to the subsea infrastructure. Each of the parties will cover the costs of its scope of decommissioning work as set out in the agreement.

26 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

In accordance with the agreement made with SBM, the balance of the Group’s share in the amount due to the consortium members under the agreement (USD 81.78m) was transferred to the YME project escrow account, to be gradually released to finance the removal of the MOPU and related infrastructure from the field, in accordance with the agreement.

On August 22nd 2016, the YME project partners completed evacuation of the defective MOPU from the field. In Q1 2017, the caisson (element of the subsea infrastructure) was inspected. As a result of the inspection it was found that the caisson can stand without additional support until 2019 (provided that it is inspected on a semi-annual basis and its condition remains unimpaired).

As at March 31st 2019, available cash deposited in the escrow account, denominated in the presentation currency, was recognised in the amount of PLN 0.7m under other assets in the statement of financial position. The remaining provision for future costs of removal of the MOPU and disassembly of the related fixed assets amounted to PLN 2.4m and was recognised under the short-term portion of Other liabilities and provisions.

On August 11th 2017, SBM Offshore confirmed the conclusion of an agreement with a majority of MOPU insurers to settle insurance claims relating to the faulty execution of the MOPU. On September 10th 2018, SBM announced that the insurance claim concerning the YME project was fully and finally settled. The gross amount received by SBM as insurance compensation was USD 390m. The share of LOTOS E&P Norge AS (net of the cost of legal services and other expenses) was expected at USD 30.7m. In 2018, the Group recognised its share in the compensation under Other income, in the amount of PLN 118.3m.

On March 5th 2019, LOTOS E&P Norge AS received cash of USD 31.1m as the final settlement of insurance claims.

In the three months ended March 31st 2019, there were no material settlements under court or other proceedings, save for those presented above.

IV. Loan sureties or guarantees, or other guarantees issued by Grupa LOTOS S.A. or its subsidiaries jointly to one entity or its subsidiary, where the aggregate value of such sureties or guarantees is significant

An unconditional and irrevocable guarantee issued by LOTOS Upstream Sp. z o.o. for the benefit of the government of Norway, covering the exploration and production activities of LOTOS Exploration and Production Norge AS on the Norwegian Continental Shelf, was effective as at March 31st 2019. In the guarantee, LOTOS Upstream Sp. z o.o. undertook to assume any financial liabilities which may arise in connection with the operations of LOTOS Exploration and Production Norge AS on the Norwegian Continental Shelf, consisting in exploration for and extraction of the natural resources from the sea bottom, including their storage and transport using means of transport other than ships.

On August 8th 2017, the Head of the First Tax Office in Gdańsk issued confirmations of acceptance of a lump-sum flat-rate excise bond valid for the period from August 20th 2017 to August 19th 2019 for a total lump sum of PLN 240m. The excise bond was submitted in the form of two promissory notes.

On March 29th 2019, banks issued two letters of credit for LOTOS Exploration and Production Norge AS under a new reserve based lending (RBL) facility:

• NOK 991.4m guarantee in respect of Sleipner DSA decommissioning liabilities, issued by Bank BNP Paribas in favour of Exxon Exploration and Production Norge AS,

• NOK 148m guarantee in respect of Heimdal decommissioning liabilities, issued by PKO Bank Polski in favour of Spitit Energy Norway AS.

V. Information material to the assessment of the personnel, assets, financial condition and financial results of the LOTOS Group and their changes, and to the assessment of Grupa LOTOS S.A.’s ability to fulfil its obligations

Credit facility signed by LOTOS Exploration and Production Norge AS

On March 21st 2019, LOTOS E&P Norge AS signed a reserve based lending facility agreement with a credit limit of USD 220m with a bank syndicate comprising BNP Paribas (as the arranger), PKO BP, Pekao S.A., BGK and SEB. The term of the facility is seven years. Under the facility, a guarantee sub-facility of USD 145m was originated, under which guarantees will be issued to secure the payment of future liabilities associated with the decommissioning of the fields in the Heimdal and Sleipner portfolios, arising from the agreements for the purchase of the portfolios. Pursuant to the agreement for the sale of the Sleipner portfolio, the security consists of the funds deposited in an escrow account, which will be released after a guarantee is provided. The credit facility will be used by the Company to fund, among others, the expenditure required to complete the development of the Utgard and YME fields.

Purchase of electric locomotives

On February 28th 2019, following a mediation procedure, LOTOS Kolej Sp. z o.o. signed a settlement agreement with NEWAG S.A. of Nowy Sącz concerning the purchase of two Griffin locomotives and three Dragon 2 locomotives. Dragon 2 is Europe’s first six-axle electric locomotive, fully compliant with the Technical Specifications for Interoperability (TSI 2014), equipped with ETCS Level 2. It is designed to pull heavy freight trains, employs state-of-the-art and reliable technologies and provides high work comfort for the train driver. The main advantage of Dragon 2 is its very high tractive force enabling it to pull heavy freight trains. Silicon carbide (SiC) converters have been installed in the locomotive, ensuring uninterrupted operation in high temperatures, noise reduction, 50% reduction of energy losses and 60% reduction in size and weight of equipment. Griffin is a four- axle electric locomotive, designed to pull freight and passenger trains, equipped with ETCS Level 2. The locomotive’s modular structure allows it to be adapted to the specific needs of individual carriers. Griffin locomotives can be used to pull freight trains weighing up to 3,200 tonnes at a speed of up to 160 km/h and passenger trains.

27 Grupa LOTOS Management’s Discussion and Analysis of Q1 2019 consolidated results

The liability under the above agreement is approximately PLN 72m. On March 4th 2019, the Management Board of LOTOS Kolej and ING Lease (Polska) Sp. z o.o. signed agreements for financing the purchase of those locomotives. VI. Management Board’s position regarding the feasibility of meeting forecasts published earlier for a given year in the light of the results presented in this quarterly report in relation to the forecast results

The Management Board of Grupa LOTOS S.A. did not publish any financial guidance for 2019.

At present, the Company is analysing selected investment projects and their profitability, taking into account the due diligence process leading to the merger of Grupa LOTOS and PKN Orlen. The KPIs for the second strategic perspective in Grupa LOTOS Strategy for 2019–2022 will be updated.

VII. Factors with a bearing on the Group’s results in the next quarter or in a longer term, according to Grupa LOTOS S.A.

The key factors which, in the Company’s opinion, may affect Q1 2019 performance include: • Macroeconomic environment, including in particular prices of crude oil, natural gas and petroleum products and the USD/PLN exchange rate, which has a bearing on the LOTOS Group’s financial performance as the prices of crude oil and of some products are quoted in the US dollar and Grupa LOTOS S.A. has US dollar-denominated debt; • Changes in the supply of and demand for petroleum products in Poland and globally; The demand for diesel oil in Europe is expected to rise in the long run, with a continued drop in demand for motor gasolines and lower demand for heavy fuel oil; these trends are reflected in the strategy implemented by the LOTOS Group; • Continuation of projects in the Downstream segment (EFRA Project) and projects in the Upstream segment (Utgard, Yme, B8); • Optimisation measures in the Downstream segment to maximise the refining margin of Grupa LOTOS S.A.; • Further consolidation of the LOTOS Group’s market position, with special emphasis on the improvement of profitability in Retail.

VIII. Material developments after the reporting date

On March 21st 2019, LOTOS Exploration and Production Norge AS signed an RBL credit facility agreement (financing for upstream projects) with a bank syndicate, with a limit of up to USD 220m. The consortium comprises BNP Paribas, Skandinaviska Enskilda Banken AB, PKO BP S.A., PEKAO S.A. and Bank Gospodarstwa Krajowego. Under the RBL, the banks issued guarantees for a total amount of NOK 1,140m, following which Nordea Bank Norge ASA released funds from the escrow account in the amount of NOK 995m.

Furthermore, on April 10th and April 15th 2019 LOTOS Exploration and Production Norge AS made prepayments of NOK 88.6m and USD 20.6m, respectively, under the loans granted by LOTOS Petrobaltic S.A. The loans were originally due on June 30th 2019.

IX. Transaction or series of transactions concluded by Grupa LOTOS S.A. or its subsidiaries with related parties other than at arm’s length

In the reporting period, Grupa LOTOS S.A. did not enter into any related-party transactions on non-arm’s length terms.

X. Overview of changes in the LOTOS Group’s organisation and consolidated entities as at April 30th 2019

In the reporting period, there were no material changes in the organisation of the Group or in the list of consolidated entities. For the list of companies making up the LOTOS Group, see the Q1 2019 financial report, Section 2, pages 8–10.

XI. Brief description of Grupa LOTOS S.A.’s and of the LOTOS Group’s significant achievements or failures in the reporting period, including identification of key achievements and events related to the Company and the Group

Delay in B8 field development

On March 1st 2019, Grupa LOTOS announced a delay in development of the B8 field (→ Current Report No. 4/2019). The main reason for the delay is that the field infrastructure needs to be modified as a result of design errors and changes to the concept for the conversion of the platform and development of the field, which were made in 2014–2015 and whose combined adverse effects have affected the project in the current period. Grupa LOTOS received information that the project is scheduled to reach the RFO status (Ready for Operation) no earlier than in the fourth quarter of 2019, and full production from the B8 field is expected to start no earlier than in the second quarter of 2021.

XII. Factors and events, including of a non-recurring nature, having a material bearing on these condensed financial statements

There were no other factors or events of a non-recurring nature having a material bearing on the condensed financial statements. For a discussion of changes to material reporting items and factors with a bearing on the Group’s financial performance in the reporting period, as well as a short summary of results achieved by each business segment, see this Management’s Discussion and Analysis.