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Integrated Annual Report 2012
The Culture of Values


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Grupa LOTOS S.A. - Integrated Annual Report 2012

Win the future. An interview with Paweł Olechnowicz, CEO of Grupa LOTOS S.A.


- The past year was, for the LOTOS Group, a period of building a corporate culture underpinned by ethical values, an approach which is also reflected in the title of this Integrated Annual Report.

Yes. 2012 saw the ultimate success of the 10+ Programme, an investment project which gave the Grupa LOTOS refinery completely new capabilities in terms of volumes of crude oil processed and the quality of the crude distillation itself. The business strategy adopted towards the completion of the investment project defined the shape of the company in subsequent periods – in 2015 and in 2020. However, the strategy said little about the values that needed to be embraced and awareness demonstrated by the LOTOS workforce in order to accomplish all of the strategy's objectives. Those aspects were looked at in 2012, and drew on all our experience in the last decade, common to all of our employees.

The first ten years of building the LOTOS Group were abundant in particularly noteworthy and important events. We had set out to create a strong corporate group, a vertically integrated oil concern, at a time when even the phrase "oil concern" itself sounded unrealistic in Poland. When we completed the 10+ Programme, the largest economic investment project in our part of Europe, it was because we shared a vision and belief in our ultimate success. That experience helped crystallise our attitudes for the coming years and lay the foundations for a clearly defined code of values - not one imposed on us externally, but developed by ourselves, for ourselves. Last year, that code became an official part of our corporate policy.

So, in 2012, we were focused on creating formal grounds for the internal, qualitative development of the company. We need to develop it further in order to effectively leverage the potential built over the past decade, and these days, a coherent and unifying system of values is a source of competitive advantage on the market.

Grupa LOTOS is set to embark on many ambitious and far-reaching plans, which we want to implement just as eagerly and sincerely as we did the 10+ Programme. Our positive experiences in the past should enable us to make the changes necessary for the company's growth, and reinforce a management style based on values shared by all employees.

Our goal in 2012 was to develop a system of ethical values that would guide our workforce and make their work more efficient and effective. 2012’s 'strategy spotlight' was on soft skills and competencies, so a representative group of our employees and management staff contributed to the development of the CSR Strategy for the LOTOS Group until 2015. One of the principal goals of the strategy was to set up an Ethical Conduct Programme, with the Code of Ethics at its core.

In the course of public consultations encompassing all our employees, both in Poland and abroad, we then arrived at a set of ethical principles for LOTOS. These principles define the values by which our employees are expected to work, irrespective of their position, assigned tasks or place in the LOTOS Group's structure, and are the basis for further indispensable changes within it. Having now developed a culture based on values and social responsibility, we are moving ahead, well-prepared to tackle the potential challenges of the future. The time we spent enhancing our soft skills was a necessary phase that prepared LOTOS for another transformation. And so, with many businesses trying to figure out how to get by in hard times, we have already positioned ourselves to win the future.

What will the next transformation actually involve?

For 2013, we have initiated 'Efficiency and Growth', a new growth-oriented programme. The name itself indicates the goals behind its planned changes. Drawing on the last decade's work and experience, we want to take a big step forward and free the investment potential of the LOTOS Group companies. On one hand, the programme will enable some of the companies to function under a new organizational and capital framework, which will facilitate finding them strategic partners able to effectively boost their market positions in areas not directly connected with the oil industry. On the other hand, it will enable other LOTOS Group companies to increase their operational efficiency while mitigating investment risk, which is very important given the current market climate.

When talking about the meaning of the change, I must stress that it will involve strong incentives, both for management staff and other workers. In these challenging times, when most would rather wait and see, we are proposing a growth programme that is also of interest to our employees and business partners. We communicate responsibly with the workforce, explaining how we intend to redefine our capital, including our intellectual capital. Man lies at the core of these changes. That is the focal point of the new programme.

LOTOS has had positive experiences from its times of change. Don't forget, the Gdańsk Refinery was transformed into a globally recognised oil concern by essentially the same people. It is this social capital that provides the grounds for our long-term growth and offers us the opportunity to create new jobs and develop innovative business models that are also beneficial to our environment.

Can you please comment on the situation of the Yme field and the prospects of LOTOS producing its own crude oil from deposits under the Norwegian Sea?

As we have repeatedly reported, serious technical problems occurred on the Yme field, which could not be successfully resolved by the two companies responsible for its development and launch of production, SBM Offshore (the production platform’s owner) and Talisman Energy (the Yme field’s operator). The dispute between these two entities has had serious stock market repercussions and grave financial consequences for them and in this situation, LOTOS could only choose between two courses of action: either start a legal battle and fight it over many years to come with an uncertain outcome or take steps which are both constructive and pragmatic from an economic perspective aimed at resolving the problem. We opted for the second option, which turned out to be absolutely the correct decision. Under the agreement concluded on March 12th 2013, the defective platform will be removed from the Yme field, which will open the way for the future exploitation of the field. Also, the Yme licence holders, including LOTOS Norge, received a total of USD 470m in damages. I wish to stress that we were not only the initiator but also one of the main driving forces behind the conclusion of this agreement.

At the initiative of Grupa LOTOS, negotiations between the parties aimed at resolving the dispute over the future exploitation of the field started in June 2012 in Gdańsk and, owing to the rational cooperation and good will expressed by all licence holders, an agreement was reached. The involvement of Grupa LOTOS managers responsible for the project as well as of legal and financial advisors of the Company proved to be crucial to the success of this complicated operation.

Thanks to the concluded agreement, LOTOS regained the possibility to develop the field in an alternative way or to sell its stake in the Yme licence on the free market.

In 2013, LOTOS plans to further expand its Norwegian Continental Shelf activities and acquire stakes in production licences, which will allow us to activate the ‘tax shield’ and recover most of capital invested in the Yme field.

The CSR Strategy and the Ethical Conduct Programme, as well as the above-mentioned Efficiency and Growth Programme, are not the only commitments undertaken by LOTOS towards society in the previous year. The company is among the signatories of the Declaration of Polish Businesses for Sustainable Development, also announced in 2012.

The commitment to operate taking into account the perspective of sustainable development is not only a part of our strategy - it is written into our mission as well. Considering how important sustainable development is to us, we have responded to an invitation extended by the Ministry of Economy to collaborate on a document defining the key challenges for Polish entrepreneurs up to what seems to be the long-term perspective of 2050.

The vision of sustainable development described in the Declaration prioritises the following six key areas: social capital, human capital, infrastructure, natural resources, energy, and the quality of the state and its institutions.

We mentioned one of the priorities - energy - in June 2012 after signing the Declaration, when we highlighted the energy security aspect of ensuring stable energy supplies to the Polish market. Equally important for the LOTOS Group's operations are natural resources, including energy carriers such as natural gas and crude oil, as well as soil, water, air, biomass and the ecosystem. One must be aware that it is business that has largely been responsible for the way natural resources have been used to date - the industry, transport, service and agricultural sectors use approximately 70% of the world's energy resources. We must alter production and consumption patterns to make them more sustainable and embrace recycling as a means of curbing wastage of materials and energy.

We are always open to new solutions. Partnering with companies such as PGNiG or CalEnergy creates opportunities for us to operate on a wider scale in the feedstock and materials market. We are also interested in taking advantage of the opportunities offered to the Polish economy by the new Polish Investments programme. In 2012 we began working with Azoty Tarnów, which lead to us becoming one of the first beneficiaries of the programme. We are also now in the process of analysing the terms of various potential investment projects.

Numerous innovative solutions are also being developed at the refinery, and we are striving to maximise the reuse of natural resources. We seek to constantly improve the efficiency of energy use by replacing old equipment with new and more efficient facilities, monitoring energy consumption and identifying ways to save energy, as well as by recovering energy from flared gas.

Businesses are surrounded by the natural environment and frequently have a negative impact on ecosystems. This fact cannot be ignored and we must not irresponsibly pollute the environment with waste energy and dirty water. Frugal management of resources, environmental protection, use of modern, low-emission technologies, as well as educating customers and subcontractors is not merely a fashionable trend available to just a few. It is a challenge for all companies in Poland, notwithstanding their size. We are guided by this principle at LOTOS.

Ignoring major challenges, such as climate change, and treating them as remote issues not only leads to environmental degradation and impacts future generations, but also hampers our efficiency and competitiveness. In 2012, Grupa LOTOS made an environmentally beneficial change by introducing natural gas as the main energy carrier and feedstock in our hydrogen production. In this way we accomplished two goals: we lowered our emissions of hydrocarbon dioxide – which is the most common greenhouse gas – by 100,000 tonnes in 2012 alone, and achieved a significant reduction in the emission of other pollutants, including an almost 1,500 tonne and 150 tonne reduction of sulphur dioxide and particulate emissions. Such actions are clear evidence that declarations of care for sustainable development are not just words, but also everyday practice for LOTOS.

- Even so, the oil sector is now facing sustainable development challenges with respect to which the efforts of a single company are definitely not enough, and decisions by both national government and the European Commission have substantially affected the operations of businesses active in the oil industry.

In the sector in which we operate, there are indeed several major challenges resulting from these decisions, and Grupa LOTOS is actively engaged in devising appropriate solutions to them. We play a key role in the national energy security system. Consequently, issues related to national energy security are taken into account both in our business strategy and in the LOTOS Group's CSR strategy.

One example of the issues which require our attention is the existence in Poland of the National Indicative Target (NIT), which is met through the use of biocomponents and biofuels. These are more expensive than mineral fuels, so achieving NIT targets has a tangible effect on the cost of energy in the transport sector. We believe that the potential reduction of the NIT would be a good solution, and we are also looking forward to the possibility of achieving our NIT target by using new technologies, such as co-hydrogenation technology, and by making use of renewable sources, such as biogas and green electricity.

Another important change may follow from the European Commission’s proposals aimed at changing the energy taxation system, which are designed to tie tax rates to a fuel's calorific value and CO2 emissions. Such modifications may entail the risk of altering the structure of transport fuel's demand. Together with the Polish government and also as a member of the Central Europe Energy Partners (CEEP), we have taken steps to prevent any unfavourable solutions. Our activity in the EU forums finds confirmation in the growing number of industry representatives within the CEEP. We expect that together, we will ensure that the CEEP favours prospects which take into account the challenges of sustainable development.



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