In making business decisions, the companies of the LOTOS Group are guided by the principles of the CSR strategy, which requires them to give due consideration to the indirect impact they may have on local communities and the economic development of their respective region. This is particularly true for provinces and counties where we are the largest employer, and therefore have the ability to affect the local labour market and vocational education related to the industry’s needs. We also contribute to the development of entrepreneurship and economic potential in the communities in which we operate through the substantial amount of taxes we pay and our choice of trading partners.

The impact of Grupa LOTOS on the community may be illustrated by the amount of taxes paid by the Company in 2012 (including corporate income tax, value added tax, excise tax, fuel charge and property tax), which totalled PLN 10,867,600 thousand (2011: PLN 10,852,431 thousand). Taxes for the entire LOTOS Group amounted to PLN 11,362,086 thousand, against PLN 11,324,650 thousand in 2011.

As a player in high-tech industries, the LOTOS Group cooperates with higher education institutions as part of the LOTOS Scholarship programme, thus contributing to the development of solutions which are beneficial not only to Polish industry, but also to the academic community. Given the nature of our operations and the key role we play in ensuring Poland's energy security, we share the knowledge and experience of our employees with students, because we feel committed to securing the future of our industry by training the next generation of experts.

In the academic year 2004/2005, we began working with the Gdańsk University of Technology, as part of which we sponsor scholarships, provide work placement opportunities under the supervision of industry experts, and help students write their MSc dissertations on topics connected with our operations, which are later reviewed by the Company’s experts. In the academic year 2011/2012, we granted ten scholarships to the best students from the Chemical Faculty, the Faculty of Electronics, Telecommunications and Informatics, the Faculty of Electrical and Control Engineering and the Faculty of Mechanical Engineering. Additionally, we granted a scholarship to a doctoral student from the Chemical Faculty and two awards in recognition of the best Chemical Faculty MSc theses.

In the academic year 2007/2008, a similar relationship was forged with the AGH University of Science and Technology in Kraków, leading to five scholarships being granted in the academic year 2011/2012 to outstanding students of the Faculty of Geology, Geophysics and Environment Protection, the Faculty of Mining Surveying and Environmental Engineering, the Faculty of Drilling, Oil and Gas and the Faculty of Energy and Fuels. We also granted two awards for the best MSc theses written at the Faculty of Drilling, Oil and Gas.

In the academic year 2012/2013, we continue to support the LOTOS Scholarship Programme at both institutions. To date, we have granted some PLN 1.2m to fund scholarships and awards for 234 undergraduates and doctoral students.

As part of our cooperation with higher education providers, we also organise unpaid summer work placements, during which students have a chance to expand their knowledge under the supervision of a tutor – an industry expert. In 2012, work placements were provided to 118 undergraduates, including 66 students of the Gdańsk University of Technology and 12 students of the AGH University of Science and Technology in Kraków. At the same time, students from the Faculty of Oceanography and Geography of the University of Gdańsk could enrol in an internship programme at LOTOS Petrobaltic. Last year, work placements at that company were offered to 20 students, who had the opportunity to gain knowledge and experience by working both on offshore rigs and at the operation maintenance unit. LOTOS Petrobaltic also collaborated with the AGH University of Science and Technology in Kraków during the 22nd OIL-GAS AGH 2012 International Scientific and Technical Conference, whose central theme was “Unconventional gas in Poland”. The conference was organised by Fundacja Wiertnictwo-Nafta-Gaz, Nauka i Tradycje (Drilling-Oil-Gas, Science and Traditions Foundation) with LOTOS Petrobaltic as an event partner.

In a similar vein, AB LOTOS Geonafta of Lithuania helps to train engineers and specialists at the Kaunas University of Technology, as well as prospective geologists at the University of Vilnius. In the course of their education, these students can benefit from new equipment purchased with funds provided by AB LOTOS Geonafta. Furthermore, they have the opportunity to gain knowledge and professional experience during internship programmes. The company also responds to other needs of the community and promotes initiatives designed to develop skills and knowledge.

In addition, as part of a joint scheme with the Food and Chemical Industry Vocational School in Gdańsk, in 2012 we funded seven scholarships for future chemical engineering technicians and analytical chemists who distinguished by having the best performance at the school, provided prizes in the “Chemistry is all around us” competition and organised work placements for students.

Our companies also affect the quality of professional training by using state-of-the-art technologies and improving production and management processes.

For instance, LOTOS Kolej has been steadily increasing its number of in-service locomotives and making consistent efforts to upgrade its rolling stock. At present, the company boasts the most advanced locomotive fleet among freight rail carriers in Poland. The upgrade of its operational motive stock requires the company to adapt its existing technology infrastructure to be able to service highly advanced locomotives. One of the crucial steps in this process is developing the expertise and skills of the technical staff responsible for engine overhauls and repairs. With the raising of their qualifications, the company was able to partially service their advanced locomotives on its own. LOTOS Kolej launched a modernised rail tank wash plant in Gdańsk, which is the most advanced facility of its kind in Poland. In 2012, the company initiated the certification process for quality improvement, safety and rolling stock maintenance systems. Maintenance Management Systems (MMS), the Safety & Quality Assessment System (SQAS) and the Quality in welding management system will act as tools enabling the safe and efficient maintenance of rolling stock, while improving the company's competitive position on the market and fostering the constant professional advancement of the employees.

LOTOS Group companies have a positive effect on the economic potential of their local communities.

LOTOS Oil is one of the leaders on the Polish engine oil market. Apart from high-quality technologically advanced lubricants, the company offers top-class, but less expensive equivalents. As a result, lubricants are easily available and purchasable by a wide group of people, including low-income customers. In distributing its products, LOTOS Oil supports employment at its business partners operating locally and nationally. Thanks to cooperation agreements executed at home and abroad, LOTOS Oil also secures access to new technologies. The company makes efforts to upgrade its processes, enhance the quality of its products and services, and provide employees with opportunities to improve their professional qualifications through training. These efforts make the company an employer of choice, offering prospects for improvement and development and, therefore, attracting specialists with extensive professional experience. LOTOS Oil’s positive image as an employer is indirectly reflected in the high opinions of the company’s products among its customers.

LOTOS Paliwa is also a major employer with significant impact on the local markets. In 2012, the company consistently expanded the extent of its operations through dynamic expansion of the LOTOS service stations chain, thus creating further new jobs. The station chain's development involved both the construction of new service stations and acquisition of existing sites. After taking over an existing service station, LOTOS Paliwa expands its business with the addition of new services, the introduction of modern management methods and improvement of customer service quality. In the end, all these efforts translate into increased employment at the stations, which is of particular importance in regions affected by high unemployment.

The staff at own stations are employed by a Dealer who has entered into a station management agreement with the company, whereas at partner stations the staff are employed by the Partner running the station. Employees working at the stations attend a series of courses designed to advance their skills.

For the last two years, LOTOS Paliwa has been gradually expanding its economy service stations chain, which offers less expensive fuels. In 2012, another 51 such stations were added to the chain, which means that in 2011-2012 a total of 101 own and partner LOTOS Optima stations were launched, with a total headcount of approximately 900 persons. Such strong expansion of the service station chain also translates into higher demand for general construction work.

Investment and procurement practices

Due to the nature of our operations and our production facilities, we have developed precise procurement procedures. As a result of both legal and procedural considerations, including the principle of equal treatment of business entities, the selection of suppliers is chiefly based on their business profile, contract delivery potential, and knowledge and experience. Therefore, any preference for local suppliers does not come into play. However, we constantly monitor the market, including the local one, which allows us to develop and regularly update a list of qualified suppliers and manufacturers complying with our requirements.

We apply the most exacting quality and safety standards. Entities, including local businesses, rendering their services at our production facilities receive technical standards documentation applicable to the works to be performed, which provides them with detailed information on the engineering process. Also, personnel employed by such companies undergo regular mandatory safety training. In this way, we share our knowledge, experience and best practices with our partners, whom may then apply and pass them on in the course of their local market operations, thus enhancing the quality of the services they provide. This particularly applies to SMEs.

The companies of the LOTOS Group carry out procurement processes taking into consideration, to the furthest extent possible, potential local market providers. The nature of the operation of individual companies does not allow the LOTOS Group to adopt uniform criteria in this area.

In the process of executing contracts for the delivery of products and services, as well as selecting suppliers, Grupa LOTOS takes into account all business entities, including those operating locally in the Province of Gdańsk. In 2012, purchases from suppliers based in the Province accounted for 3.56% of total orders.

LOTOS Asfalt does not apply the locality criterion in its procurement policy. Instead, it is internal procedures that define the rules when purchasing products and services, with the key criteria being the quality and environmental impact of the product or service, compliance with occupational health and safety regulations by the supplier, and the proposed payment and warranty terms.

LOTOS Kolej takes steps to optimise its purchasing process, for example by choosing local suppliers from the Province of Gdańsk. In the case of spare parts for newer locomotives, such efforts are limited given that during warranty periods the company is forced to choose the suppliers specified by the rolling stock's manufacturer. However, whenever it has the opportunity and permission to substitute spare parts or consumables, LOTOS Kolej always tries to buy them from local suppliers. In other cases, when faced with prospective suppliers offering similar business terms, the company gives priority to local enterprises.

LOTOS Oil’s key suppliers are based in Poland and Europe. Given that the company has production and distribution branches throughout Poland and taking into consideration the specific nature of supplies and services involved, any supplier operating in Poland will be considered a local supplier. The company follows a supplier selection policy whereby it seeks to secure at least two sources of supplies in each product category. In the case of a monopoly, the company periodically takes steps to verify its monopoly status by looking for an alternative supplier. In line with the currently applied procurement policy, the company searches local markets for potential suppliers, and if a reliable prospective partner is found, it is invited to participate in a tender procedure.

In 2012, LOTOS Oil contracted 88% of all deliveries from local businesses, including Grupa LOTOS, which is the company’s strategic supplier. In the same period, 100% of overhaul and project delivery services were provided by local contractors.

LOTOS Paliwa purchases nearly 100% of its fuel stocks for resale from Grupa LOTOS, with the vast majority of the fuel being produced domestically, at the Gdańsk refinery. Rail transport is handled exclusively by LOTOS Kolej. Road fuel transport is fully outsourced to entities outside the LOTOS Group, selected in a tender procedure. In the case of fuel shipments to LOTOS service stations, the company cooperates with entities with a nationwide presence. Fuel deliveries to wholesalers are also handled by local transport firms due to their familiarity with their regions and local transport considerations. LOTOS Paliwa outsourced all fuel wholesale deliveries to local freight service providers in the Provinces of Wrocław, Rzeszów, Gdańsk, Szczecin and Olsztyn. The selection of building contractors is carried out by entities outside the LOTOS Group, appointed by way of a tender procedure. The company gives no preference to local or national suppliers and awards contracts to bidders offering the best value for money. For several years now, LOTOS Paliwa's own stations have operated on the basis of a dealership model, whereby the company enters into an agreement with a Dealer who is to run a service station. Dealers, as well as station staff, are recruited from local communities.

Given that LOTOS Petrobaltic procures goods and services from businesses located in nearly all parts of the world, and taking into account the specific, even unique (in Poland) nature of its operations, the company does not apply the locality criterion in its procurement policy. As the company cooperates with many trading partners, and frequently foreign enterprises, its contribution to the development of local businesses is limited. Contracts are awarded in compliance with the Public Procurement Law. In 2012, 27% of its contracts, including those related to investment projects, were executed with entities based in the Province of Gdańsk, representing 4.48% of the total value of all contracts. 99% of LOTOS Norge's suppliers are Norwegian companies. Energobaltic's local market covers Puck county. Services contracted from local providers do not exceed 1% of total purchases.

Anti-competitive behaviour

In 2011, Grupa LOTOS was a party to an anti-trust decision issued by the President of the UOKiK (Polish Office for Competition and Consumer Protection) on March 21st 2005 in connection with a suspected agreement between Polski Koncern Naftowy ORLEN of Płock and Grupa LOTOS of Gdańsk concerning simultaneous termination of the production and distribution of the universal U95 gasoline, as described in detail in the 2010 Annual Report. The case was finally closed.

Furthermore, in 2012 Grupa LOTOS was a party to proceedings described in greater detail in the 2010 Annual Report, initiated following a petition filed in 2001 by PETROECCO JV Sp. z o.o., in which PETROECCO JV Sp. z o.o. sought to be awarded compensation for damage it had allegedly suffered as a result of the Company’s monopolistic practices. As a result of further hearings in 2009-2013, after evidence was taken based on the opinion of an expert witness from the Instytut Nafty i Gazu (Oil and Gas Institute) of Kraków, which was favourable to Grupa LOTOS, and after the parties exchanged process letters, the Court dismissed the action filed by PETROECCO J. Sp. z o.o. in its entirety on February 22nd 2013. The ruling is not final.

Compliance

In 2012, Grupa LOTOS and the companies of the LOTOS Group did not pay any significant fines. Similarly, no significant non-monetary sanctions were imposed on any of the companies for legal or regulatory non-compliance. However, the proceedings described above were still pending in 2010-2011, and on March 10th 2011 Grupa LOTOS paid a liability of PLN 1,000 thousand, imposed under the court ruling of February 11th 2011, using a provision created earlier for that purpose.