The Group's EBIT fell PLN 1.1bn in H1 2012, to PLN -53m, the main contributor being a PLN 1.4bn loss reported by the Trade and Storage segment, which reduced EBIT by nearly PLN 1.6bn year on year. The high cost of gas depressed the margin on gas sales to -11% in the first half of 2012. In Q2 2012, the gas sales margin was -13%, the worst result since Q4 2008.
The decline was chiefly attributable to the negative margin on sales of the main product, i.e. natural gas. Such a large loss in the Trade and Storage segment made the PGNiG Group recognise, for the first time in its history, impairment losses on stocks of gas held in the storage facilities, as the unit purchase cost of the gas was much higher than its realisable selling price.

"The poor performance of the PGNiG Group in the first half of 2012 is attributable to factors over which the Company has very limited control. Therefore, jointly with PGNiG employees, we have made a number of decisions with the aim of reversing the current trend. The arbitration procedure is under way to solve our dispute with Gazprom, and we believe that it will result in a reduction of the contractual gas prices, which are the key driver of our performance. We have initiated restructuring processes whose primary purpose is to prepare the Company for the challenges it is facing. These include in particular the imminent deregulation of the Polish gas market and the unavoidable emergence of real competition. Let me emphasise that the steps we are taking are not confined to cost-cutting -- we are making an effort to generate additional income," said Grażyna Piotrowska-Oliwa, CEO and President of the PGNiG Management Board.
The necessary restructuring initiatives designed to prepare the Company to the changes in its market environment have been commenced at the Head Office. Over the coming months they will be gradually rolled out across all other PGNiG branches. The changes, consulted with the Employees Council and the trade unions, involve flattening of the management structure and merging of organisational units which have similar scopes of competence. They should result in a reduction of the number of management staff. No mass lay-offs are planned at this stage.
Improved margin in the Exploration and Production segment
The decline in the Group's EBIT caused by the 10 p.p. drop in the margin on high-methane gas sales was partly offset by an improved margin of the Exploration and Production segment. The segment's EBIT for H1 2012 went up PLN 317m on H1 2011, mainly on the back of higher crude prices, which translated into higher revenue from sales of crude oil and helium. In H1 and Q2 2012, revenue from oil sales rose by approximately 25% year on year. The increase in H1 2012 was primarily attributable to the higher USD/PLN exchange rate, which pushed the price of crude in the złoty terms up by 23%.
In Q2 2011, the Group's revenue grew 30%, to PLN 5.8bn. The Group reported an operating loss of PLN 353m, relative to a loss of PLN 106m in the corresponding period of the previous year. Net loss stood at PLN 314m, compared with PLN 20m in Q2 2011.
Lower profitability of gas sales
In H1 2012, the cost of gas imports went up by 46% year on year. The operating loss in H1 2012 demonstrates that changes in the gas tariff were insufficient to fully accommodate for the market trends.
The new tariff, approved by the President of URE and effective since March 31st 2012, failed to cover the cost of gas in Q2 2012, primarily because of the strong depreciation of the złoty in May and June, which brought about a negative margin on gas sales.

PGNiG Group's performance in H1 2012 (PLNm)

PGNiG Group's performance in Q2 2012 (PLNm)

H1 2012 results force PGNiG into restructuring
Given the deteriorating financial performance and the approaching deregulation of the Polish gas market, a root-to-branch restructuring of PGNiG is required. The restructuring measures already taken at the Company's Head Office are to be rolled out across all other branches and units involved in the hydrocarbon exploration and production business. The changes will take effect as of September 1st 2012.
They involve flattening of the management structure and merging of organisational units with similar scopes of competence. The objective is to prepare PGNiG for the gas market liberalisation and the emergence of competition. A key change will be the formation of a Geology and Operations Division, which will be responsible for coordinating the exploration activities within PGNiG SA. The steps taken will result in a reduction of the number of the management staff and will increase the efficiency of exploration and production activities. No mass lay-offs are planned at this stage.

Higher natural gas sales to industrial customers
In H1 2012, the volume of gas sales reached 8bn cubic metres, up from 7.6bn cubic metres in the corresponding period of 2011. The strongest growth was seen in sales of gas to other industrial customers -- from 2.5 to 2.7bn cubic metres. At the same time sales to nitrogen processing plants, CHP plants and households increased by over 4%.
In Q2 2012, the volume of natural gas sales was 2.9bn cubic metres, having grown by 5%.
Gas production in H1 2012 increased by 2% year on year, to 2.2bn cubic metres. In Q2 2012, the production volume rose by 3% year on year. The steady increase in gas output was an outcome of the investment projects of varying scale executed in the area of gas exploration and production, as part of the strategy pursued by the PGNiG Group.
Diversification of gas supply sources
The consistent policy of diversifying gas supply sources and expanding storage capacities brought fruit in the entire first half of 2012. There was a significant change in the structure of imports. Thanks to the use of the extended Lasów interconnector, the virtual reverse flow at the Yamal pipeline, and the Moravia interconnector, a total of 1.2bn cubic metres of gas was sourced from countries west and south of Poland, i.e. 700m cubic metres more than in H1 2011, when imports from the west were 500m cubic metres. At the same time, imports from Russia fell 800m cubic metres, to 4.6bn cubic metres.
Consolidation of PGNiG Termika
PGNiG Termika, a company producing and selling heat and electricity, has been consolidated since Q1 2012. Revenue contributed by the Generation segment in H1 2012 was in excess of PLN 1bn, which points to a great importance of heat and electricity in the Group's overall product portfolio.
In the first half of the year the heat and electricity sales volumes rose 3% year on year, mainly due to lower air temperatures in Q1 2012, higher availability of the Siekierki CHP plant compared with Q1 2011, and a higher share of biomass in the burned fuel, which yielded a higher volume of green certificates. H1 2012 heat sales revenue grew by 8%, to PLN 527m, driven also by an increase in the heat tariff as of July 1st 2011.
Higher crude production and revenue
Crude oil output grew 3% in H1 2012, primarily on account of increased production at the Dębno facility. In May and June 2011, production of crude oil at the Dębno facility had been reduced due to the Gorzów CHP plant's limited ability to receive gas. In the corresponding period of 2012, production at the facility was back to its planned levels, hence a 13% increase in the output in Q2 2012 alone.
Plans are under way to launch production of oil and gas from the Skarv field in Norway and the LMG field in Poland, in Q4 2012 and April 2013, respectively. Domestic crude oil production in 2012 is forecast at 480 thousand tonnes, to rise to 750 thousand tonnes in 2013.
Injection of gas into underground storage facilities
As the underground gas storage facilities were expanded and, during the summer season, filled to capacity, gas stocks reached 1.5bn cubic metres at the end of December 2011. Consequently, in Q1 2012, at the time of peak demand, over 800m cubic metres of gas was withdrawn from the storage facilities. With gas being injected from the end of Q1 2012 and throughout the entire Q2 2012, the volume in storage totalled 1.46bn cubic metres as at June 30th 2012.
Joanna Zakrzewska
Spokesperson for PGNiG SA