Refining

ORLEN Group refining assets and key competitors in Central Eastern Europe / processing capacity [million tonnes]:

Source: In-house analysis

For more information on the competitive environment, see ‘Competitive Environment’.

Fuel yields

Source: In-house analysis

Source: In-house analysis

• (2.8)pp decrease in the fuel market share, to 49.8%, as a result of relatively low margins on diesel oil continuing in the first six months of 2021, which necessitated optimisation of procurement and sales.
• Despite the temporary decline in the diesel oil market share, PKN ORLEN remained the main supplier for major foreign fuel companies operating in Polnad (BP, Shell, Amic), while expanding its sahre in the market of end customers by supplying fuel to a growing number of companies through ORLEN Paliwa.

Source: In-house analysis

• The ORLEN Group is the leader in fuel sales in the Czech Republic.
• (1.8)pp decrease in the market share in the Czech Republic, to 52.1%, mainly as a result of maintenance shutdowns in the second half of the year and periodic gasoline shortages due to limited availability of components. The negative effects of the COVID-19 pandemic, i.e. high volatility of consumption and fluctuations in prices and margins, also played a part.

Source: In-house analysis

• ORLEN Lietuva holds on to its strong leading position in the Baltic Sea Region despite a year-on-year (2.7)pp decrease in its total market share.
• Stepping up sales efforts helped improve the share in the gasoline market by 1.1pp. The diesel oil market share fell by (3.0)pp, driven by low supply of the product after its production was reduced to the minimum for the most part of the first half of 2021 due to adverse macroeconomic conditions and a maintenance shutdown in Mažeikiai.
• It should be noted that in the key Lithuanian market, the share grew, both with regard to gasolines and diesel oil, to a total of 80.7%, representing a 2.7pp increase year on year.

For a description of the ORLEN Group’s sales by product groups, see below.

In 2021, the ORLEN Group’s Refining sales totalled 24,389 thousand tonnes, up 3.5% on 2020.

Revenue structure of the ORLEN Group Refinery segment

In 2021, 2020 and 2019 none of the ORLEN Group’s leading customers accountedfor more than 10% of the Group’s total revenue.

A gradual year-on-year recovery in consumption was recorded in 2021. The gasoline and diesel markets grew by 10% and 8%, respectively, but the significant impact of the COVID-19 pandemic was still noticeable. In the case of gasoline, the winter and spring wave of COVID-19 and the resulting mobility constrains and remote work adversely affected sales, while the summer holiday season saw (as in 2020) a material rise in consumption and sales. This was to a large extent attributable to uncertainty about changing regulations governing international travel (mainly air travel) and the resulting increase in popularity of domestic travel at the expense of foreign destinations. Diesel oil consumption was less impacted by the pandemic, primarily because of the more cautious approach to restrictions placed on the economy than last year: there was no full lockdown. As a result, diesel oil consumption expanded by 10% year on year, to a level higher by about 4.5% than in 2019.

Jet-fuel market remained the market where the effects of COVID-19 were most strongly felt. It grew by about 17% year on year, but that is still about 50% below the level seen in 2019. Improvement was recorded mainly in the cargo and SME business segments, but a similar recovery in the large corporations segment is yet to be seen. The current situation and new mutations of the coronavirus mean that it may take longer than originally anticipated, even until 2024–2025, for the jet fuel market to recover to pre-pandemic levels.

In 2021, the light fuel oil market grew by 15% year on year, mainly as a result of an exceptionally cold winter (January and February) and to some extent the situation on the gas market in the second half of the year (limited supply, market price hikes, use of alternative heating sources).

In view of the COVID-19 pandemic PKN ORLEN was forced to manage supply and inventories accordingly. The Company had to prepare, on the one hand, for limited demand caused by successive waves of the coronavirus and restrictions introduced ad hoc, while on the other, for periodical increases in consumption of e.g. gasoline during holiday periods (even above the levels recorded in the pre-pandemic period). This, coupled with high uncertainty regarding market prices of refinery products and margin levels, required appropriate management of logistics, production, purchases and intra-group allocations. In order to protect itself against significant fluctuations in demand, PKN ORLEN increased the scale of product transfers within the ORLEN Group. In 2021, it purchased the Mockava fuel terminal, the only rail transshipment terminal on the Polish-Lithuanian border, which enabled a further increase in the allocation of gasoline and diesel volumes from Lithuania.

In 2021, domestic sales of the ORLEN Group’s Refining segment reached 12,845 thousand tonnes, up 366 thousand tonnes year on year. This growth was driven by increased sales of mainly light and middle distillates, with lower year-on-year sales of heavy fractions.

Light distillate sales in the Refining segment alone went up by 5.8% year on year as a result of a 13.7% year-on-year increase in gasoline sales, which even exceeded 2019 levels, with significantly lower (down 23.9% y/y) LPG sales.

In the case of middle distillates, sales rose by 4.7%, primarily as a result of a 16.1% increase in jet fuel sales. It should be noted, however, that sales in this product group currently represent only about 87% of the respective 2019 figure, largely due to the situation on the jet fuel market, which is still being affected by the pandemic. Confidence in air travel declined, and there was a great deal of uncertainty about travel rules, which sometimes changed a few times within a month. The Group continued into-plane fuel sales and supplies to strategic customers, including the Polish Army and US Army. PKN ORLEN has the status of a Strategic Partner of the International Air Transport Association (IATA), thanks to which it has a platform for communication with leading industry representatives from all over the world.

The 1.6% year-on-year increase in light fuel oil sales was due mainly to the cold winter weather and rotational/remote work system, which had a positive impact on demand.

In 2021, sales of heavy fractions decreased by (10.6)% year on year, including chiefly sales of low-margin heavy fuel oil down by (9.6)% year on year, which had a positive effect on the segment’s result.

2021 saw a significant improvement in key macroeconomic indicators. Compared with the weak 2020, hit hard by the effects of the pandemic, there were signs of an economic recovery. The ORLEN Group has a strong competitive position in Lithuania, operating the only refinery in the Baltic states and enjoying a well-established position as a reliable fuel supplier. ORLEN Lietuva is a supplier for most of the key players on the local market. However, the Baltic States are attractive markets for Scandinavian, Russian and Belarusian fuel producers, who have large surpluses of diesel oil and gasolines, and are constantly looking for opportunities to place the fuels abroad.

For Lithuania’s GDP and fuel consumption data, see section ‘Market environment’.

Despite the negative impacts of the COVID-19 pandemic in 2021, ORLEN Lietuva reported a year-on-year increase of 3.8% in sales of the Refining segment, to 7,538 thousand tonnes. The best performance was seen in the light distillates group, where sales went up by 5.9% year on year, mainly as a result of gasoline sales growing by 6.5% year on year due to the lessening of COVID-19 restrictions in 2021.

A 4.0% year-on-year growth in sales was also recorded for middle distillates, driven chiefly by a year-on-year increase in sales of light fuel oil by 18.8% and aviation fuels by 15.1%, which was made possible by ORLEN’s dominant position in the Lithuanian market and an increase in consumption due to more charter, business and cargo flights in the second half of 2021. The 3.3% year-on-year increase in diesel oil sales was achieved as a result of the imposition of sanctions on Belarusian oil products, economic growth and very high demand from the agricultural sector. In 2021, sales of heavy fractions grew by 0.7% year on year.

The Ukrainian market is open to suppliers from other countries, which results in intense competition. ORLEN Lietuva’s sales strategy assumes building strong business relations with major retail chains operating on the Ukrainian market. A vital element of the ORLEN Group’s strategy was to build the image of a stable supplier, independent of the geopolitical situation in the region, who sticks to its commitments even when faced with serious macroeconomic headwinds. As a result, the ORLEN Group is perceived as a modern, reliable and stable European company. Some important advantages of ORLEN Lietuva are its ability to quickly respond on the volatile Ukrainian market, stable supplies and reliable logistics, which allows the company to compete with alternative suppliers.

As in previous years, also in 2021 ORLEN Lietuva actively participated in balancing PKN ORLEN deficits in the Polish market: significant volumes of diesel oil were delivered from this direction to Poland, both by land (via the Mockava transhipment terminal purchased in 2021) and by sea.

The key factor driving consumption of refinery products in the Czech market in 2021 was COVID-19. The Czech Republic struggled with the social and economic consequences of the pandemic. Its successive waves had a negative impact on the Czech economy and Unipetrol Group’s export markets. Lockdown was in place for the first four months of 2021. At the beginning of May, the restrictions were lifted and demand returned to normal levels, naturally supported by the summer and fall seasons. However, long-term (in some sectors) constraints, deteriorating public sentiment and uncertainty held back demand and investment. A gradual recovery is expected in 2022. The Czech economy, which depends heavily on the automotive industry, was strongly affected by the crisis in the semiconductor market, with the Skoda factory suspending production of new cars for several months. In 2021, the Unipetrol Group continued to sell its products to a wide portfolio of customers, including large fuel companies and hypermarket chains. Unipetrol also sold its products on foreign markets: Slovakia, Hungary, Germany, Austria and Poland, as part of the strategy to optimise product flow management within the Group. PKN ORLEN continued its aircraft refuelling operations at the Prague airport, with fuel supplied by Unipetrol, but the traffic was weak for most part of the year (ca. 35% of the pre-pandemic volumes).

The macroeconomic climate and market conditions (GDP and consumption levels) had a material effect on the ORLEN Group’s sales performance in the Czech Republic. For details, see section ‘Macroeconomic environment’.

In 2021, the Unipetrol Group’s sales volume expanded by 4.8% year on year, to 4,006 thousand tonnes, benefitting from periodic shutdowns of competing refineries in the region, including Slovnaft in Slovakia, and a failure at the Petromidia refinery in Romania.

Middle distillate sales increased by 5.6% year on year, primarily as a result of higher Jet A-1 fuel sales up by 62.5% (y/y), but it still represented only about one-third of the 2019 volumes. A 5.2% year-on-year growth in sales of diesel oil was recorded, albeit without reaching the pre-pandemic levels. Sales of light distillates rose by 1.2% year on year: the recovery was mainly seen in the LPG market up 18.6% (y/y), while gasoline sales volumes remained around the 2020 levels.