Grupa LOTOS S.A. - Annual Report 2010

In 2010, the key tasks of the operating segment included:

• successful completion of the 10+ Programme,
• optimum use of production assets,
• research and development of new technologies.

The major achievements of the LOTOS Group’s operating segment centred around the implementation of the 10+ Programme. In 2010, the Programme entered its final stage, as the construction of all production units was completed. 2010 was also the first year in which the refinery reached its nameplate refining capacities of 10.5 million tonnes, which was related to the launch of the CDU/VDU unit.

10+ Programme

The 10+ Programme is the largest CAPEX project to have ever been undertaken by the LOTOS Group. Its goal was to increase the throughput capacities and depth of conversion of the Gdańsk refinery, and consequently to improve the Company’s competitive position. 2010 saw the completion and launch of a number if key units constructed as part of the 10+ Programme. As at the end of December 2010, the progress of work under the 10+ Programme came to 100%, which means that the project was completed within schedule. The scope of engineering, procurement and construction work was completed with respect to all key and ancillary units.

MHC (mild hydrocracking) unit, the largest facility constructed as part of the 10+ Programme, was assigned the RFSU (Ready For Start Up) status on October 10th 2010. On October 27th, feedstock was fed into the unit. The first product streams obtained from this facility in mid-January 2011 were of very high quality, with the conversion ratio – measured as a percentage of the highest value products – standing at 70% (the design conversion ratio is 60%). The main purpose of the MHC unit is to intensify oil processing and obtain a higher yield of top quality fuel components from each barrel of crude, which is a distinguishing parameter of the most advanced refineries in Europe and globally.

The residuum oil supercritical extraction (ROSE) unit, as the last of the 10+ Programme facilities, was assigned the RFSU (Ready For Start Up) on December 31st 2010, in line with the schedule.

Work on the 10+ Programme was executed without major disruptions, while the defined execution risks were kept to a minimum. The work was entrusted to experienced contractors with sound technical and financial standing, able to execute projects irrespective of changing market conditions. The ongoing financial and economic crisis had no material impact on the implementation of the 10+ Programme.

Progress of work on the individual units of the 10+ Programme in 2010

		I	II	III	IV	V	VI	VII	VIII	IX	X	XI	XII
1	Nitrogen Production Unit (stage 2)		RFSU		PDU
2	Upgrade of wastewater treatment plant and tanks for process waste		PDU
3	HRU (Hydrogen Recovery Unit)			MC, RFSU			PDU
4	Amine-Sulphur Recovery (ASR) unit – Sulphur Recovery Units (SRU)			PDU
5	Amine-Sulphur Recovery  (ASR) unit – the ARU (Amine Regeneration) and SWS (Sour Water Stripper) Units			PDU
6	Systemy rurociągów IC - faza III				MC, RFSU
7	P24 pumping station				MC, RFSU			PDU
8	Nitrogen Unit (stage 1)				PDU
9	Steam systems				PDU
10	Boiler water system				PDU
11	LPG storage tank (V=1.700m3)				PDU
12	Hydrowax pumping station				PDU
13	Kerosene, light fuel oil and diesel pumps at P20 pumping station					MC	RFSU				PDU
14	Pipeline to R7 port					PDU
15	Hydrogen Generation Unit (HGU)					PDU
16	IHydrocracking Diesel Desulphurisation (HDS) unit
17	Upgrade of condensate stations 1 and 5					PDU
18	Pyrolyse gasoline storage tanks (V=2x20.000m3)					PDU
19	Upgrade of existing power substations					PDU
20	Warm cooling water unit						PDU
21	Fan coolers							PDU
22	Demi water storage tank							PDU
23	VR/VGO heavy oil fraction storage tanks (V=4x20.000m3)							PDU
24	Amine-Sulphur Recovery (ASR) unit – LPG amine scrubbing unit							PDU
25	Upgrade of water systems							PDU
26	Diesel oil storage tanks (V=3x32.000m3)								PDU
27	Underground network systems									PDU
28	MHC										MC, RFSU
29	S31 station buildings										RFSU
30	Crude and Vacuum Distillation Unit (CDU/VDU)										PDU
31	S32/S33/TIR and H2S TIR station buildings										PDU
32	P3 pumping station (1900-P96B pump)											MC, RFSU
33	ROSE unit and ROSE tank												MC, RFSU
34	Road systems and yards												RFSU

MC – Mechanical Completion

RFSU – Ready For Start Up

PDU – Transfer For Use

Other projects

In addition to the 10+ Programme, Grupa LOTOS was implementing other projects designed to enhance the efficiency, safety and technical performance of its assets, while mitigating their environmental impact. The key projects included:

• construction of a railway loading facility: to increase the loading capacities of the refinery operated by Grupa LOTOS. The project’s deliverable is a railway loading facility capable of handling up to 2.6 million tonnes of diesel oil per year;
• replacement of existing burners in CHP boilers with low-emission ones: 2009 saw replacement of burners in the first boiler and 2010 – in the second boiler. The project increased the availability of steam used to power production units, in line with the emission caps specified in the Integrated Permit;
• air-tight sealing for tanks of the wastewater treatment plant: to mitigate the odour nuisance. The scope of work included the mounting of roof coverings, as well as the construction and launch of biofilters designed to purify the air coming from covered tanks of the refinery’s wastewater treatment plant. Based on operational experience, assumptions were prepared for air-tight sealing for the remaining tanks of the wastewater treatment plant in 2011;
• upgrade of the fuel depots located in Rypin and Piotrków Trybunalski – as part of the project, gasoline vapour recovery units were built at the depots and road tanker loaders were upgraded by equipping them with systems for overfill prevention, monitoring and vapour collection.

Refining

At over 8 million tonnes, the crude throughput volume in 2010 grew substantially relative to previous years. The growth is attributable to the launch in the first quarter of 2010 of a new crude distillation unit with a nameplate annual capacity of 4.5 million tonnes. Taking into account the existing unit, the refinery’s nameplate capacities now amount to 10.5 million tonnes of crude oil per year.

However, the relatively low refining margins in 2010 disinclined the Company to maximise crude throughput. The impact of the worldwide economic crisis was still being felt, while some of the units built as part of the 10+ Programme were not yet fully operational in 2010, which affected the efficiency of the refining process. The refinery’s work load was being optimised based on market-derived data and for the better part of the year ranged around 23-27 thousand tonnes per day.

The dominant type of crude being processed by Grupa LOTOS was Russian REBCO crude, however it was the processing of other crudes that was intensified. With two independent crude distillation lines, the refinery had more flexibility in selecting crude blends, as a result of which it was able to optimise output. Hence the highest in years share of crudes imported by sea in the refinery’s total mix of processed crudes.

While in 2010, Russian REBCO crude still accounted for the largest share of Grupa LOTOS’ total mix of processed crudes, its share was markedly reduced – especially in favour of Troll, Volve and Aasgard – crude types with well proven qualities, produced from North Sea offshore fields. The sources of feedstock were more broadly diversified, which had an added benefit of significantly enhancing Poland’s energy security.

Apart from crude oil, other production inputs included components and feedstock purchased for further processing, as well as enhancing additives. As a result, the total production volume of the Gdańsk refinery exceeds the volume of processed crude, although in 2010 the gap narrowed compared with 2007–2009. However, fuel components (such as ethanol, ETBE and FAME) and enhancing additives still remain indispensable production inputs.

The increase in the volume of crude processed by the Gdańsk refinery led to a significant reduction of imports of finished diesel oil to Poland. In previous years, Grupa LOTOS imported diesel oils so as to – through higher supply – develop a market for the product, which was introduced in 2010. The result of the 10+ Programme was the replacement of imported diesel oil with diesel output from the Gdańsk refinery.

A major success, related chiefly to the 10+ Programme but also to the ongoing output optimisation, was the maintenance in 2010 of a very high share of diesel oil in the fuel mix produced by Grupa LOTOS. This was accomplished despite the fact that the mild hydrocracking unit, a key one in diesel production, is not yet operating at its full capacity.

In 2010, the utilisation rate of the refinery’s installed capacities was adjusted to the prevailing market conditions. The greatest success was a record high (105.8%) utilisation rate of the capacity of the refinery’s hydrocracker unit, which attests to both its excellent technical condition, as well as high qualifications of the operating staff.

With the start-up of the remaining 10+ Programme units, the refinery’s configuration will be complemented, while the bottleneck related to the use of vacuum distillates in the hydrocracking process will be eliminated.

Grupa LOTOS Meets the National Indicative Target

Methyl esters produced by LOTOS Biopaliwa in Czechowice-Dziedzice play an important role in implementation of the National Indicative Target. In 2010, the FAME unit ensure a stable production process, and produced 101.3 thousand tonnes of biocomponents, thus exceeding the project assumptions. The consumption of materials and chemicals, as well as energy consumption, was more advantageous than originally assumed. The quality of FAME produced was markedly higher than the applicable standards. LOTOS Biopaliwa made a registration filing under the REACH Regulation for the produced chemicals, and the chemicals were subsequently registered. This also means that production of FAME in 2011 will not be disrupted, and its volume and efficiency should be on a par with the 2010 level.

Research and Development

Following the launch of the Crude and Vacuum Distillation Unit (CDU/VDU) built under the 10+ Programme, in 2010 Grupa LOTOS started to produce and market a new product – naphtha. Additionally, the Company’s R&D efforts focused on developing technologies for production of speciality products, based on further conversion of feedstock from the oil unit. The key R&D achievements in 2010 included:

• launch of the commercial production and sale of reduced-toxicity oil plasticizer for use in caoutchouc and rubber products, QUANTILUS T50. The new plasticizer type is a TDAE (treated distillate aromatic extract) plasticizer which meets the EU requirements for plasticizers used in the tyre industry, effective from January 1st 2010,
• launch of the production and sale of low-oil paraffin 64/25/0.5 as the main component for paraffin products (waxes),
• production and sale of the first batch of Ceresine as a component for production of white ceresine meeting the requirements set by the American Food and Drug Administration (FDA),
• launch of the sale of Filtrates made of medium and heavy slack wax, used as inputs for production of paraffin emulsions and anti-caking agents for artificial fertilisers. They are also used as impregnation agents for chipboard and kindling,
• launch of the sale of V1500 Bitumen used in production of various aggregate and bitumen mixtures,
• launch of the sale of 50 SDA Bitumen used for bitumen production based on air oxidation or blending.

In 2010, development work also focused on oil products produced by LOTOS Oil. The most important R&D activities related to lubricants included:

• commencement of research into ways of improving the quality of oils for passenger cars, in reliance on the Company’s own base oils – the research is scheduled to be completed in 2011,
• introduction of ten new types of engine oils (including LOTOS Quazar C-4, LOTOS Quazar S, LOTOS Quazar K, LOTOS Traffic PRO 025A/B, LOTOS Traffic PRO 505.01),
• extension of 42 Approvals for lubricants,
• obtaining 6 Approvals for new oils.