In 2011, the PGNiG Group's sales revenue was PLN 23bn, up 8% on 2010.

Negative margin on gas sales

The margin decline was caused by a higher unit purchase price of imported gas which gained 24% year on year. It was also an effect of the regulator's refusal to approve a change of the tariff in Q4 2011, which was to factor in market developments and reflect the cost of gas.

In Q4 2011, net profit was PLN 302m, down 73% year on year. Revenue came in at PLN 6.97bn, up 5% on Q4 2010.

A sharp increase in the purchase price of imported gas (up by 44%), combined with the unchanged gas fuel tariff, drove down the margin on sales of high-methane gas, which fell by 9 pp, to -7% in Q4 2011.

Strong performance of the Exploration and Production segment

The Exploration and Production segment doubled its operating profit to PLN 1.13bn in 2011, as a result of an improved profitability of crude sales driven mainly by the rising crude prices on global markets. The segment's EBIT advanced also on higher revenue from sales of geophysical/geological, drilling and maintenance services, related to the intensified exploration for shale gas in Poland.

In Q4 2011, the segment's operating profit was PLN 328m, up from approximately PLN 2m in Q4 2010. The improved performance reflected higher profitability of crude sales, higher volume of exploration services and lower impairment losses.

Factors contributing to high gas prices

The prices of crude oil remain high, having stayed above the USD 100 per barrel mark since February 2011. In Q4 2011, the value of the nine-month average price reached 111.6 USD/boe, up 44% relative to Q4 2010. Despite a 21% quarter-on-quarter rise in PLN-denominated crude prices in Q4 2011, the gas tariff had not changed since July 15th 2011 and remained at PLN 1,107 per 1,000 cubic metres in the period under review. PGNiG optimised the costs by purchasing gas from other sources which became available thanks to the virtual reverse flow services and the launch of a new pipeline on the Polish-Czech border.

In Q4 2011, the average USD/PLN exchange rate was 3.28, up by almost 12% relative to Q3 2011 and by 12% year on year. Taking into account the average USD/PLN exchange rate, the value of the nine-month average price of petroleum products in Q4 2011 was 366 PLN/boe, up by 21% on Q3 2011 and by 62% year on year.

The rise in crude prices in 2011 had an adverse effect on the cost of gas purchased by PGNiG, which translated into the negative margin on gas sales and a PLN 1bn decline in operating result of the Trade and Storage segment relative to 2010. Concurrently, demand for gas remained at a high level seen in 2010, i.e. 14.4bn cubic metres.

PGNiG Group's performance in 2011 (PLNm)

PGNiG Group's performance in Q4 2010 (PLNm)

Steady rise in gas production and sales

PGNiG has consistently pursued its development strategy with respect to a planned increase of gas production from domestic reserves through execution of investment projects of varying scale in the area of gas exploration and production. In 2011, new domestic fields came onstream, whose production capacities are estimated at approx. 290 million cubic metres of high-methane gas equivalent in the first year of production. As a result, gas production rose by 2.6%, to 4.33 bn cubic metres in 2011.

A significant increase in gas imports allowed PGNIG to fill the underground gas storage facilities to capacity before the winter season.  The lower gas consumption by households in times of higher air temperatures was offset by increased demand for gas from industrial customers, particularly nitrogen plants. The increase in revenue from gas sales was a result of a 9% average annualised rise of the gas tariff; however, the higher tariff failed to reflect the rise of unit purchase prices of imported gas.

Strong increase in revenue on crude sales

The significant rise of crude prices translated into higher revenue from crude sales. In 2011, the price of crude oil rose on average by 40% year on year, whereas the revenue was up by 31%.

The year-on-year decline of crude output was caused by the lack of new fields going on-stream in 2011 and by the natural decrease in output from the producing fields. In mid-2012, new wells are to be connected at the Barnówko-Mostno-Buszewo field (at present our largest field), whereas the launch of production from the LMG field is scheduled for April 2013. PGNiG's crude production forecast for 2012 is 660 thousand tonnes.

Progressive implementation of the strategy

In 2011, PGNiG continued to implement its ambitious development strategy. The Company has been actively involved in shale gas exploration.  In 2011, PGNiG saw its first success in this area.  The first shale gas was produced from the Lubocino-1 well in Pomerania. Exploration for shale gas is also continued in south-eastern Poland, where the drilling of the Lubycza Królewska well has just commenced.

One of PGNiG's key projects designed to build the power generation segment within the Griup was the purchase of a 99.8% interest in Vattenfall Heat Poland, which currently operates as PGNiG Termika. The transaction was seen as a positive development by S&P, which in November 2011 upgraded PGNiG's outlook from "negative" to "stable", confirming the "BBB+" rating.

PGNiG's another power project is the construction of a 400 MW unit in the Stalowa Wola CHP, which is to commence in 2012.  Finally, an important aspect for the Group's operations was the consolidation of four construction and assembly companies into a single entity - PGNiG Technologie.

Joanna Zakrzewska

Spokesperson for PGNiG SA