Grupa LOTOS S.A. - Annual Report 2010

A key element of the Company’s market offering is service quality, understood not only in terms of basic parameters, such as uninterrupted supplies and adequate logistic infrastructure, but also as openness to novel solutions designed to facilitate mutual cooperation and settlement of accounts (e.g. electronic transfer of data, e-invoices). Another vital element of the Company’s offering is the ability to deliver products tailor-made to meet specific requirements.

In 2010, the LOTOS Group achieved a 31.3% share in the Polish fuel market, the target planned in the LOTOS Group’s strategy to be achieved only in 2012. In line with the new strategy for the years 2011–2015, unveiled in November 2010, this market share is to be upheld in the coming years.

In 2010, the LOTOS Group’s total sales volume amounted to 8.8 million tonnes on a consolidated basis, having grown 16% on the previous year. The major contributor to the increase were higher sales of diesel and heavy fuel oils. As the successive units constructed as part of the 10+ Programme were being launched, the volume and structure of Grupa LOTOS’ turnover on the international markets was also changing. The more crude oil was being processed, the higher was the output of petroleum products for domestic and export sale. For instance, an increase was recorded in exports of engine gasolines, reformate and heavy fuel oil. In July 2010, export sales of naphtha – a new product in the LOTOS Group’s portfolio – were launched.

Sales of engine fuels

In 2010, engine fuels were sold mainly on the Polish market to retail customers, foreign companies, institutions and petrol station operators.

The total volume of engine gasolines sold was 11% higher than a year before. Domestic sales of Grupa LOTOS’ gasoline remained on a par with the 2009 level, which means that the market for the product was quite stable. Exports of engine gasolines grew 75% year on year, and were transported by sea to the UK, Swedish and Dutch markets.

In 2010, a 2% year-on-year rise was recorded in sales of premium LOTOS Dynamic 98 gasolines.

In 2010, there was a nearly 10% growth in total sales of diesel oil relative to the previous year. This level of growth is mainly attributable to domestic sales of the product.

In the category of diesel oils, in addition to standard fuels for diesel engines, which are highly valued by operators of delivery vehicle and lorry fleets, another important product was the LOTOS Dynamic Diesel premium fuel. In 2010, its sales rose by 23% year over year.

Sales of light fuel oil¹

2010 brought an 18% year-on-year increase in sales of light fuel oil produced by the LOTOS Group. Sales better than initial expectations resulted from higher demand for the product as the heating season – due to the long and harsh winter – was prolonged.

Sales of aviation fuels

The total volume of JET aviation fuel sold by the LOTOS Group fell in 2010 by 31% from the previous year’s level. The decline was caused by lower sales on the Polish market and in seaborne export. In the domestic market, the decrease was the effect of lower demand for Grupa LOTOS’ aviation fuel from Poland’s key player on that market.

Seaborne exports were sent to Sweden, Finland and Denmark. As for export by land, in 2010 two new customers for aviation fuel were acquired on the Czech market, which translated into a 77% year-on-year rise in sales through that channel.

Sales of engine, industrial and process oils

In 2010, a 17% increase was reported in total sales of lubricating and process oils on a year-on-year basis, of which the domestic volume remained basically flat, whereas export sales surged by 56%. The rise in total sales was driven largely by higher sales of process oils.

2010 was another year of slackening consumption of industrial oils in the wake of the crisis. While businesses were slowly rebuilding their production capacities, purchases of lubricants – a material cost item - were kept at a level lower than before 2009. Concurrently, increased market interest in innovative industrial products was recorded.

On the market of engine oils, interest in one-season mineral oils weakened further, chiefly on the back of modernisation of the agricultural machinery base. Similarly in the automotive market, a shift of demand from mineral engine oils to semi-synthetic or synthetic oils was seen. As the leader of the mineral oils segment, LOTOS Oil was hit the hardest by the falling demand for that product category. By adding LOTOS Quazar oils to its offering and focusing on sales of semi-synthetic and synthetic products, the Company is seeking to steadily increase its share in the market for those products.

Sales of bitumens

Relative to 2009, 2010 saw a 5% growth in total sales of bitumens, driven by the launch of regular seaborne sales, which led to a nearly 50% growth in exports on a year-on-year basis. Bitumens were exported to such countries as Romania, the Baltic States, Nordic countries, Switzerland and the Czech Republic. Lower domestic demand for bitumens, due principally to the long and harsh winter followed by floods, pushed down sales by 8% year on year. It should be noted that in September 2010 demand for bitumens began to grow at a brisker rate, as road contracts planned under the National Roads Construction Programme were started.

In 2010, sales of modified bitumens remained flat relative to the year before.

Sales of heavy fuel oil

In 2010, total sales of Grupa LOTOS’ heavy fuel oil surged 137% relative to the previous year, with domestic sales staying largely flat compared with 2009. As the units built under the 10+ Programme were being launched and the product yield grew, the Company needed to secure markets for those products with a favourable relationship between demand and prices. Consequently, in addition to the existing foreign markets, such as the Netherlands or Sweden, sales of heavy fuel oil were also launched on markets outside Europe.

Sales of paraffin

In 2010, total sales of paraffin remained unchanged compared with the previous year. Candle paraffin was sold mainly domestically, to leading manufacturers of candles and votive candles. Additionally, cooperation was developed with manufacturers of artificial fertilisers, wood-based products, paints and varnishes, rubber and building materials. The main export markets were Germany, the Netherlands and Slovenia.

Development of the chain of petrol stations

• 154 own stations,
• 109 partner stations, and
• 61 patronage stations.
 

The aggregate number of own and partner stations rose by 21 relative to 2009. Within the chain of own stations, six new Motorway Service Areas were opened in 2010 – two pairs on the A4 motorway (Rachowice – Kozłów and Witowice – Oleśnica) and one pair at the Police- Łęka interchange on the A2 motorway.

The range of products available through the LOTOS petrol stations included both standard and premium (LOTOS Dynamic) fuels. Sales through own and partner stations grew by 17% year over year.

In addition to fuels, LOTOS petrol stations sell a wide range of products typically offered by convenience-style shops – small retail outlets offering mainly groceries, confectionaries, beverages and other consumer staples such as newspapers and magazines, cigarettes, batteries, etc. Some stations have dedicated food service areas where snacks and refreshments may be bought. The offering is complemented by additional services, such as car wash or compressor services.

The Company’s priority objective is to develop the chain of own stations. The target number of own stations which Grupa LOTOS plans to achieve is supposed to allow it to effectively run and develop customer loyalty schemes, intended to boost sales.

In 2011, the Company will resume plans to work towards entering the segment of low-cost stations. This should allow it to effectively acquire potential locations in areas with relatively lower purchasing power.

Plans also include further, gradual withdrawal from the patronage stations channel, assuming that cooperation with selected stations would be carried on under the partner stations formula.

Logistics

One of the logistics function’s primary goals, both in 2010 and in subsequent years, is to develop a flexible system to accommodate changing needs in the area of sales and production. The logistics function’s success is measured as a level of support it is able to provide for the Company’s commercial activities, taking into account the seasonal nature of petroleum product sales, and the ability to flexibly respond to an unforeseen rise or fall in sales.

In 2010, Grupa LOTOS focused its efforts on adapting the logistics system so that it could handle the distribution of new products obtained following the completion of the 10+ Programme, the creation and replenishment of substantial amounts of mandatory stocks, as well as projects aimed to expand the handling capacities of its fuel depots. The Company completed the upgrade of two depots, as part of which the fuels handling technology was adapted to meet the latest requirements.

Following the refinery’s expansion as part of the 10+ Programme and the significant increase in fuel sales, the Company needed to increase the level of inventories and feedstock, which required adjustment of inventory levels to both current and future needs.

The network of depots used in 2010 was being optimised on an ongoing basis. The number of third-party depots, fuel volumes and fuel types distributed by independent operators were regularly adjusted to account for market needs and newly secured sources of supplies. Work was undertaken to control and minimise losses throughout the supply chain. A plan of mandatory stock turnover was implemented with a view to replenishing mandatory stocks in the most cost-effective way. Work on those projects is expected to be continued in the coming years.

In 2010, efforts were also made to identify potential synergies within the LOTOS Group in the logistics area, which would enable economies of scale to be achieved with respect to transport and storage.

Rail transport

In order to ensure highly effective use of their assets, as well as economically efficient, smooth and secure distribution of their products, the LOTOS Group companies commission rail transport services from a subsidiary, LOTOS Kolej.

Apart from the provision of services to other members of the LOTOS Group, the strategic objective of LOTOS Kolej is to diversify its revenue structure into internal and external sources of income. The minimum target share of external customers for rail transport services has been set at 10% (in 2010, the figure was 26%).

LOTOS Kolej offers its customers a comprehensive portfolio of services, which combines freight transportation (petroleum and chemical products, and intermodal transportation services), lease of freight cars, and rail siding management services in Gdańsk, Czechowice, Jasło and at the Rypin storage depot. This model guarantees low costs and high service quality.

LOTOS Kolej ranks third among the leading freight rail carriers in Poland (second among private carriers). According to the data of the Polish Rail Transportation Authority from December, after the first three quarters of 2010, the company’s share in the domestic market for intermodal freight transportation services was 22% (as measured by freight activity).

Key transportation routes

• Zduńska Wola Karsznice
• Tarnowskie Góry
• Gniezno
• Emilianów
 

Sea transport

Freight transport by sea is a vital element of Grupa LOTOS’ logistics chain. The Company enjoys a considerable market advantage offered by the direct access to product pipelines linking the Gdańsk refinery to the liquid fuel handling facilities at Port Północny. In 2010, nearly 300 tankers docked at the Naftoport, Port Północny and Siarkopol terminals to unload crude oil, petroleum products and biocomponents, and to load petroleum products from Grupa LOTOS intended for exports. A major year-on-year rise in the number of ships handled at the facilities was caused by stronger export sales driven by the projects implemented as part of the 10+ Programme.

The liquid fuel handling terminal operated by Naftoport handles tankers with maximum draught of 15 metres and the capacity to load up to 150 thousand tonnes of crude oil or petroleum products. This allows Grupa LOTOS to export the surplus products and sell them on the markets in Scandinavia and Northern and Western Europe. The direct connection to the port also makes it easier to arrange for and carry out import deliveries of petroleum products, including diesel oils and the light fuel oil component.

Grupa LOTOS is in an advantageous position of having a refinery in a short distance from a cargo handling terminal, which allows it to diversify the sources of supply and facilitates the shipping of crude oil from the Company’s own reserves under the Baltic Sea and, in the near future, crude oil produced from the reserves under the North Sea.

Grupa LOTOS is consistent in its efforts to take over the management of cargo transportation by sea. Apart from ensuring greater control, this would help streamline the planning process as regards cargo handling at ports and also reduce the frequency and costs of ship detention.

LOTOS brand

Building a strong brand and a distinctive brand image is a key theme of the LOTOS Group’s strategic assumptions for 2011–2015 and development directions until 2020.

The corporate brand strategy is consistent with Grupa LOTOS’ business strategy, with all individual product brands being subordinated to it. Our strategic goal is to enhance the brand value by building the image of:

• a brand relying on the key values: modernity, development and partnership,
• a brand with international presence,
• a brand which stands for top quality products,
• a socially responsible brand.

Efforts have been undertaken to increase the LOTOS brand awareness and to position the Company as an organisation recognised for its professional management style which builds on quality, innovation, environmental awareness and security.

In the 7th edition of the Most Value Polish Brands Ranking published by the Rzeczpospolita daily in December 2010, the value of LOTOS brand was estimated at PLN 675m, which was 9.8% more than a year earlier. A consistent and dynamic upward trend in the brand value has prevailed since the first valuation was performed.