More expensive petroleum is a challenge for the Polish importers. For the time being, the biggest players in Poland are still calm. Meanwhile, Brent barrel price oscillates around $70, which induces them to search for new deposits – writes Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.
More expensive petroleum has an impact on margins
Fears of the increasing petroleum price were visible during the presentation of PKN Orlen’s results from the last quarter of 2017. Although the company achieved sales and production records, it is still suffering losses due to the price per barrel.
– At the end of the year, the rising petroleum price put increasing pressure on refining and petrochemical margins. We supported the government’s policy with suggestions to combat the grey economy. We have noted the positive impact of regulations in this area. We have an important share in this – said Wojciech Jasiński, CEO of PKN Orlen.
– If you look at petroleum prices, it is almost twice as high as a year ago. There is an oil agreement, but on the other hand there is an increase in production in the US. This year the prices should remain on average of the last six months, but with a slight deviation – said Mirosław Kochalski, Vice President of the Management Board.
– We felt worse macro results, i. e. lower Brent/Ural differential, higher price of petroleum, lower margins on heavy fractions – added Director Dariusz Grębosz, responsible for investor relations at PKN Orlen.
The significance of oil prices is explained by the press office of the Lotos Group. – It is important for the petroleum industry that any changes in petroleum prices do not happen rapidly. The growing price of the raw material adversely affects processing, but at the same time increases the profitability of petroleum production. To compensate for these phenomena, the Lotos Group has been developing the mining segment for years. One of the key parameters of the strategy adopted a year ago by Grupa LOTOS S. A. for 2017-2022 is precisely the achievement of the level of hydrocarbon production at the level of approximately 30 – 50 thousand boe/d (i. e. barrels of oil equivalent as at the date of production).
The answer is new extraction
The price per barrel alone has no one-dimensional effect on the profitability of the refinery activity. A key factor in this respect is the refinery margin, which is the difference between revenues generated from the sale of petroleum processing products and the price the company pays for the raw material. In practice, the increase in petroleum prices is not accompanied by a simultaneous increase in the price of products, and so until the prices of products increase the profitability of the refinery area decreases – says Lotos’ office. – Today we are dealing with such a situation, which is reflected in the model refinery margin of Lotos Group, which in December amounted to USD 5.46 per barrel, USD 7.08 in November and USD 8.55 in October respectively. The increase in the price of a barrel improves the profitability of the exploration and production activities of the Lotos Group, hence the strategic goal is to increase the production potential in order to smoothly offset the decline in production and trade.
In response to more expensive petroleum, companies will invest in production. This can be seen in the Lotos’ policy, which has bought new concessions in the North Sea, which may make the Yme field profitable. We informed about it on BiznesAlert.pl
According to Kochalski, Orlen predicts that demand for petroleum will be balanced by an increase in petroleum supply from other regions. In his speech for journalists, he stressed that PKN does not expect “rapid price changes,” which is supposed to guarantee the stability of the business that it conducts. All of this will depend on the balance between demand, which is mainly created in China, and supply. In this respect, there is competition between the status quo camp with OPEC, led by Saudi Arabia, and Russia, and North American producers, including Canada, where PKN Orlen is present. However, an additional factor there is the price of gas, which is not lacking in the New World, so it is cheap. – Our Canadian assets are half gas and half petroleum. A significant drop in gas prices by over 40 percent translated significantly into the result – admitted Grębosz. He recalled that mining in the USA and Canada was increasing, which increased supply, and demand was not high during the mild winter. The director reported seven fracking operations, five production wells, and an expansion of the transmission infrastructure in Canada.
Technology transfer from North America?
More expensive petroleum provides business grounds for relying on new deposits. The profitability of shale oil production in the U.S., falling below $40 in some wells, is a prerequisite for seeking similar profitability in Poland. For this to happen, we need a stable law and low taxes, which was forgotten by Poles during the days of the slate revolution, which they mainly talked about in the media. The Supreme Chamber of Control confirms that due to the lack of a clear tax policy and bad concession policy, Poland has missed a period during which it was possible to keep foreign giants, such as Exxon Mobil and Chevron, on concessions. You can read more about this in the text of BiznesAlert.pl.
Will the more expensive petroleum cause Poles to learn a lesson from the failure of the shale revolution in our backyard? Will it be possible to transfer unconventional technologies to Poland? The new raw materials policy is only announced for 2019. If the International Energy Agency predicts that petroleum will continue to be expensive by the end of the decade, this will be the last call to prepare the ground for investors’ return to concessions, not just shale gas concessions. It is worth remembering that Poland has diversified resources of unconventional deposits, e.g. PGNiG may boast a growing potential of tight gas deposits. More expensive petroleum justifies further exploration.