The stronger return on sales of high-methane gas is reflected by an increase in high-methane gas sales margin from -16% in H1 2009 to 4% in H1 2010. This increase was the key driver of the Group's operating profit, which rose by PLN 1.9bn year on year. In Q2 2010, just like a year earlier, the sales margin on high-methane gas was negative at -3%.

PGNiG is reporting a steady growth in natural gas production: in H1 2010 and Q2 2010 the production expanded by 4%. Thanks to the higher throughput capacities of the denitriding plants for nitrogen-rich gas, the Group is able to increase production of natural gas from the existing mines.

The changed tariff for gas fuels and higher volumes of natural gas sold drove the sales revenue up by 4% (PLN 373m) in H1 2010 and by 5% (PLN 177m) in Q2 2010 alone, relative to the corresponding periods of 2009.

PGNiG Group's Performance in H1 2010 (PLNm)

PGNiG Group's Performance in Q2 2010 (PLNm)

PGNiG SA's Intensified Exploration Activity

PGNiG SA continues to implement investment projects in the area of exploration and production, including the development of Poland's largest hydrocarbon reserves Lubiatów-Międzychód-Grotów. These projects may be completed as early as one year ahead of schedule, i.e. in late 2012, which would result in doubling domestic crude oil production already in 2013.

In addition, PGNiG SA commenced active exploration for unconventional gas reserves. In H1 2010, the Company performed two fracturing operations on the Markowola-1 well on an unconventional gas reserve in the Lublin region, which flowed gas. Currently, the Company is carrying out analyses to drill further wells in that region. The strategy of exploration for unconventional gas reserves involves rationalisation of expenses and due to the fact that the appraisal of such a reserve requires drilling of more than ten expensive wells the Company intends to drill test wells in other licensed areas to be able to decide where to expand exploration. In autumn 2010, the Company will commence drilling of another well in northern Poland.

Higher Natural Gas Production and Sales Volumes

In Q2 2010, the Exploration and Production segment earned operating profit PLN 198 mln higher than in the corresponding period of the previous year, chiefly thanks to the surge in revenue from sales of geophysical, geological and exploration services.

In H1 2010, natural gas production rose by 4% on H1 2009. In Q2 2010, the production volume of natural gas also grew by 4%, following an increase in the throughput capacity of denitriding plants.

The 7% rise in natural gas sales volumes, both in H1 2010 and Q2 2010, is attributable to increased consumption by retail customers, due to air temperatures in the period from January to April being lower than a year earlier. In H1 2010, households purchased 9% more gas than in the corresponding period of the previous year. Industrial customers, which purchased 6% more gas than a year earlier, also contributed to the increased sales of natural gas.

Crude Oil

Production of crude oil has been stable and has proceeded as planned. The production of crude oil and condensate in the second and third quarter of each year is affected by a month-long overhaul stoppage at the largest crude mine in Dębno. In 2010, the stoppage - as previously announced - took place in May, while in 2009 the overhaul had been carried out in the third quarter. In connection with the overhaul stoppage, the production volume in H1 2010 fell by 13%, to 233 thousand tonnes, and in Q2 2010 by 26%, to 96 thousand tonnes, year on year. The lower production volumes in H1 2010 and Q2 2010 resulted in lower volumes of crude oil being sold, with the reduction in sales volumes corresponding to the decrease in production. The decrease will not affect the company's oil production annual plans at the level of 0,5 mln tonnes.

A nearly 50% increase in the price of crude oil on global markets between H1 2009 and 2010, and the złoty weakening against the dollar by 19%, brought about a growth of the unit price of gas sold by PGNiG. Therefore, revenue from sales of crude oil rose by 18% in H1 2010. Likewise, in Q2 2010, despite a 26% reduction in both production and sales, sales revenue fell by only 3%.

Stronger Dollar Drives Down Profitability of Sales

The appreciation of the US dollar, combined with a rise in the nine-month moving average price of oil derivative products on which the purchase price of Russian gas is based, have an adverse effect on the profitability of sales of high-methane gas, and thus affect the PGNiG Group's performance. A further appreciation of foreign currencies would pose a significant risk of high-methane gas trading becoming unprofitable. That is why the Company has filed an application with the Energy Regulatory Office requesting an increase of the gas fuel tariff. The requested increase of natural gas selling prices is justified by the appreciation of the US dollar. Since May 2010, there has been a reversal of the situation on the currency market, with the dollar growing sharply. In addition, the nine-month moving average price of oil derivative products has risen in Q3 2010 by 5% relative to Q2 2010.

Joanna Zakrzewska