PGNiGhas maintained a steady financial position mainly due to its non-regulatedbusiness: the good results of the oil production and sales segment and the servicesprovided by its exploration and drilling companies.

High profit-generatingsegments

The financial results ofthe PGNiG Capital Group for Q2 were significantly influenced by the increasedoperating result, arising mainly from a 8 percent increase in revenues on salesof crude oil and condensate. The production and sales of crude oil andcondensate constitute some of the most profitable businesses of PGNiG. Thisresults from the fact that sales of crude oil are made in market conditions, ata low discount from world prices.

The revenues on sales ofcrude oil and condensate in Q2 2008 amounted to PLN 211 million, compared withPLN 195 million in the same period of 2007.

Furthermore, the increasingmarket demand for geophysical and geological services and the outstandingreputation of PGNiG companies that provide such services led to an increase inrevenues by more than 50 percent, i.e. to PLN 134.1 million from PLN 88.3 million. 

Reasonable application for a tariff change 

As a result of the developments on the oil and oilproducts market, PGNiG SA applied on 12 August 2008 to the Chairman of the Energy Regulatory Officefor a change of the gaseous fuel tariff, effective from 1 October 2008.

Thetariff change proposed by PGNiG would result in an increase of monthly gasbills for individual customers using natural gas for cooking by ca. PLN 2.20(see the table below).

The immediate reason for the application for a tariff changeis the sudden increase in prices of oil and oil products, which led directly toincreased costs of natural gas imports. The current levels of oil productprices are markedly above the levels which were used to calculate the prices andfee rates in the current tariff.  Averageoil product prices for August-December 2008 are predicted to increase from 44 percentto more than 51 percent, compared with the forecasts from January 2008.

The new natural gas tariff introduced in April 2008 hadbeen calculated on the basis of crude oil price forecasts predictingstabilisation of prices at the level of 90-100 USD/bbl. However, the currentincrease in crude oil prices, with the average price in the first decade ofAugust at 120 USD/bbl and in July at the record level of nearly 135 USD/bbl(with the average price in May and June at 124 USD/bbl and 134 USD/bbl,respectively) could not be foreseen by the Company when the current tariff wasbeing prepared, and consequently was not taken into account in the rates.Moreover, it should be noted that based on current price trends, crude oilprices should not be expected to return to the levels of early 2008.

Considering that the natural gas purchase price isaffected by the 9-month moving average of oil products prices, PGNiG predicts asignificant increase of the price of imported natural gas starting from 3Q2008. The Company predicts the largest price increases will take place in Q42008 and Q1 2009.

The very difficult situation concerning naturalgas imports is only slightly ameliorated by the appreciation of the Polishzloty against the US dollar. However, the scale of the appreciation isdisproportionate to the increase of crude oil prices and cannot neutralise theincrease of imported natural gas prices denominated in USD. Furthermore,according to the Company forecasts, the USD/PLN exchange rate will rise in thesecond half of 2008; a number of banks forecast the exchange rate will returnto the level of ca. 2.3 USD/PLN, i.e. similar to the exchange rate on which thecurrent tariff was based. Considering that on 12 August 2008 the daily USD/PLN exchange ratewas fixed at nearly 2.21 by the National Bank of Poland, these forecasts should beexpected to be realised.

Changes in natural gas prices

The Company has applied for a tariff change effectivefrom 1 October 2008, as a result of which the new tariffswould come into effect in Q4 2008and Q1 2009.

1. Thenew natural gas prices in the tariff would mean:
   1. anaverage increase (for all customers) of total fees (gaseous fuel price +subscription fee + network rates) by 17.4%
   2. anaverage increase (for all customers) of trading fees (gaseous fuel price+ subscription fee) by 23.1%,

The detailed data concerning the impact of the tariffchange on monthly gas bills for individual customers are shown in the tablebelow:

W-1 Tariff Group -customers using natural gas for cooking

W-2 Tariff Group -customers using natural gas for heating water

W-3 Tariff Group -customers using natural gas for heating houses

W-4 Tariff Group - groupcustomers (local boiler houses, medium enterprises)

How have the prices of other energy sources been growing?

Despite theincrease in prices, natural gas is still the most economical energy source for heatingwater and houses.

The use of electric and heavy oil heating systemscosts respectively 41 percent and 34 percent more than the use of naturalgas heating (accounting for the planned increase of the natural gas price).

The changes in crude oil prices immediately resulted in increasedgasoline and diesel oil retail prices, which caused an increase of car fuelcosts that was definitely more noticeable than a planned increase of naturalgas prices. 

The average carfuel cost in July increased by more thanPLN 73 per month (from PLN 563 per month to PLN 636 per month) for gasoline,and by nearly 85 PLN per month (fromPLN 428 per month to PLN 513 permonth) for diesel oil compared with February.

JoannaZakrzewska

Spokesperson for PGNiG SA