ORLEN Group Upstream operations

The ORLEN Group has become oil and gas producer following its acquisition of TriOil Resources of Canada in November 2013. The acquisition of Birchill Exploration assets in June 2014 allowed to increase the total 2P resources (proved and probable) of the Company at the end of 2014 to approximately 49.5 million boe of oil and gas.

Key financial and operating data of the Upstream segment

UPSTREAM, PLNm201420132012change% change
1 2 3 4 5=(2-3) 6=(2-3)/3
Segment revenue 298 17 1 281 1652,90%
Segment expenses (271) (48) (27) (223) 464,60%
Net other income/(expenses)1) (319) (7) 0 (312) (4457,10%)
Operating profit/(loss) before amortisation/depreciation (EBITDA) and impairment losses 152 (32) (24) 184 -
Operating profit/(loss) before amortisation/depreciation (EBITDA) (170) (32) (24) (138) (431,30%)
Operating profit/(loss) before impairment losses 30 (38) (26) 68 -
Operating profit/(loss) (292) (38) (26) (254) (668,40%)
Capital expenditure 499 304 124 195 64,10%

1) Including impairment losses on non-current assets of the ORLEN Upstream Group of PLN (-) 322m, recognised in 2014.

Market environment

According to the International Energy Agency’s World Energy Outlook 2014 report, global energy demand is set to double by 2035 compared with 1990 levels, with oil and gas forecast to account for over 50% of total demand.

Global energy demand in 1990−2035 [billion toe] 1)

Wykres: Globalny popyt na energię w latach 1990-2035 [mld toe].1)

1) Toe – tonne of oil equivalent. 

Source: IEA.

Crude oil currently remains the most important energy source, although RES production is increasing at an accelerated pace. According to the World Energy Outlook 2014, global oil demand will continue to grow (with the annual growth rate expected at 0.3% in 2030) despite a considerable increase in the share of natural gas and renewable energy in the mix. By 2020, global oil demand is likely to have grown by as much as 6 mbd on the end of 2013, with the Chinese, Indian and Middle Eastern economies generating the majority of the demand. In 2012−2035, transport and the petrochemical industry will be the key sectors of the economy driving oil demand, projected to account for 58.3% and 15.7% respectively of total oil demand in 2035.

Global oil demand in selected non-OECD countries [billion toe].

Wykres: Globalny popyt na ropę naftową w wybranych krajach spoza OECD [mld toe].

Source: World Energy Outlook 2014.

According to the International Energy Agency, the significance of natural gas in the global fuel consumption structure will increase steadily. In 1990−2012, global natural gas consumption grew by over 70%, up to 2.8 bn toe.

After crude oil, natural gas is the main fuel used by the EU countries. The International Energy Agency forecasts that the share of natural gas in overall primary energy consumption will grow from 21% in 2012 to around 23% in 2035, and annual gas consumption in Europe is expected to rise by 88 bcm in 2012−2035, to 595 bcm, with an estimated average demand growth of 0.7% per annum.

Petroleum companies are aware of natural gas gaining prominence − its share in overall hydrocarbon production may reach 41% in 2015. One of the growth drivers could be acquisitions of smaller entities in the unconventional resources sector. A large contribution to the rise of gas in the global energy mix has come from the US shale revolution. Natural gas produced from unconventional deposits is expected to account for as much as 24% of global gas output in 2030. 

Shale gas production and its share in global output [bcm, %]

Wykres: Produkcja gazu łupkowego i jego udział w światowym wydobyciu [mld m3,%].

Source: In-house analysis based on IEA and BCG data.

Map of largest unconventional gas deposits 

Schemat: Mapa największych złóż gazu niekonwencjonalnego

Schemat: Mapa największych złóż gazu niekonwencjonalnego

Source: In-house analysis based on IEA and BCG data.

Poland’s shale belt spreads from the Baltic coast between Słupsk and Gdańsk, towards Warsaw, all the way down to Lublin, Zamość and the border with Ukraine. Potential shale gas deposits are expected to be found at the depth of 1,200–2,500 m in the northern section of the belt, and 2,500–4,500 m in its southern part. The development of unconventional gas deposits consists in the drilling of vertical wells, and then horizontal wells which undergo multiple hydraulic fracturing procedures, and construction of surface infrastructure where the extracted gas is prepared for transport. 

Given Poland’s potential hydrocarbon reserves, progress of exploration work and constant development of new production technologies, the Geological and Mining Law had to be amended, the Act on Special Hydrocarbon Tax adopted, and the Act on Tax on Production of Certain Minerals and certain other related acts modified. The amendment to the Geological and Mining Law simplifies the licence award procedure by introducing a single licence for the exploration and appraisal of and production from hydrocarbon deposits; the new legislation has been in effect since January 1st 2015.

Pursuant to the above legislative acts, starting from 2020, a special hydrocarbon tax will be charged on the production of minerals such as crude oil and gas. Investors will have to pay fees on mineral production at a target rate of approximately 40%. The new hydrocarbon taxation system will be based on the following fiscal instruments:

  • Fixed mining royalty (in real value) of PLN 24/1,000 cubic metres of natural gas and PLN 50/tonne of crude oil; the rates are to be effective as of 2016;
  • Special hydrocarbon tax at a progressive rate of 0-25% of profit from production operations, to be charged as of 2020;
  • Tax on production of certain minerals, calculated based on the value of natural gas (crude oil) as 3% (6%) of the extracted resource, to be charged as of 2020;
  • Corporate income tax at applicable rates.

The above-mentioned regulations have been introduced under the Act on Special Hydrocarbon Tax of July 25th 2014, which will come into effect as of January 1st 2016.

In 2009−2012, unconventional hydrocarbons exploration, focusing especially on shale gas, developed rapidly in Poland. 2012 saw the peak of exploration activities, with more than 20 E&P companies operating on the market and 24 wells drilled within just one year. 

However, the results of exploration and appraisal work published by operators in recent years deviate materially from the results obtained in key unconventional hydrocarbon production areas in North America. In 2013−2014, a number of operators terminated their exploration projects on the Polish market (ExxonMobil, Marathon Oil, Talisman Energy, ENI, Nexen, Total, Mitsui, RAG, Sorgenia, Dart Energy, 3Legs Resources, and Chevron) following a revision of their strategies or decision to concentrate on more promising exploration plays elsewhere in the world.

According to data available as at January 1st 2015, there were 146 valid and effective licences issued by the Minister of the Environment for the exploration and/or appraisal of gas and oil deposits in Poland, including:

  • 51 licences for the exploration/appraisal of conventional/unconventional tight and shale gas/oil deposits,
  • 3 licences for the exploration and appraisal of unconventional gas/oil deposits,
  • 92 licences for the exploration and appraisal of conventional oil and gas deposits and coalbed methane deposits.

To compare, 218 licences were valid and effective as at the end of 2013.

Based on the Ministry of the Environment’s information, as at December 31st 2014, 67 exploration wells had been drilled in search of shale gas by gas and oil exploration and appraisal companies operating in Poland, including ORLEN Upstream (11 wells, including 4 horizontal ones), Lane Energy (8 wells, including 4 horizontal ones), PGNiG (16 wells, including 2 horizontal ones), Marathon Oil (6 wells), BNK Petroleum (6 wells, including 1 horizontal one), San Leon Energy (5 wells), Talisman Energy (3 wells), Chevron Corp. (4 wells), ENI (3 wells), ExxonMobil (2 wells), and Wisent Oil & Gas/Petrolinvest (3 wells).

Around the same time, foreign E&P companies also decided to withdraw from exploration projects in other European countries (in Lithuania, Romania, Bulgaria, Hungary, Sweden) or put their operations on hold (in Ukraine). Considering the outcome of the exploration and appraisal work performed to date, as well as the risk profile of shale gas projects in the context of low crude oil prices, we can expect that E&P companies will seek to further reduce their exposure to most cost-intensive and high-risk exploration projects as much as possible.

Operations in 2014

The ORLEN Group has become oil and gas producer following its acquisition of TriOil Resources of Canada in November 2013, and the acquisition of Birchill Exploration assets in June 2014 doubled its production potential.

Grupa ORLEN - Wydobycie

In line with the Updated ORLEN Group Strategy for 2014−2017, we plan to intensify our exploration and production efforts in order to secure access to our own resources of crude oil and natural gas. All these efforts are consistently geared towards building a diversified portfolio of exploration and production projects. The ORLEN Group has become oil and gas producer following its acquisition of TriOil Resources of Canada in November 2013, and the acquisition of Birchill Exploration assets in June 2014 doubled its production potential.

The ORLEN Group is engaged in exploration and appraisal of conventional and unconventional resources in Poland and has production operations in Canada. 

Poland

The ORLEN Group remains one of the leaders in unconventional gas exploration in Poland, holding 9 exploration licences covering a total area in excess of 7,000 sq. km. The area of the Group’s exploration operations represents approximately 10% of the total unconventional exploration area in Poland.

As at the end of December 2014, under the unconventional oil and gas projects a total of 11 wells had been drilled, including 7 vertical and 4 horizontal ones. In December 2014, the drilling of another exploration well commenced on the Wołomin licence. As part of its conventional projects in Poland, PKN ORLEN drilled 2 appraisal wells (Sieraków project) and 1 exploration well (Karbon project).

Grupa ORLEN - Obszar poszukiwan weglowodorow w Polsce

Canada

The ORLEN Group, through its Canadian subsidiary TriOil, conducts production operations using horizontal drilling and hydraulic fracturing technologies. In 2014, 36 such operations were performed, with the average production rate in Q4 2014 at over 8,000 barrels of oil equivalent per day (boe/d), 50% of which were liquid hydrocarbons (crude oil and condensate). In June 2014, the ORLEN Group, through its subsidiary TriOil, purchased production assets owned by Birchill Exploration in the Ferrier/Strachan area, with TriOil and Birchill subsequently merged through the transfer of all Birchill assets to TriOil. Since April 1st 2015, the Canadian subsidiary has operated under the name ORLEN Upstream Canada, which is in line with the Group’s strategy of building a consistent corporate identity and should increase the visibility of the ORLEN brand in the Canadian market. The new asset acquisitions and the development of existing licences have pushed the Group’s 2P reserves (proved and probable) up to 49.5 mboe.

Grupa ORLEN - Obszar wydobycia weglowodorow w Kanadzie

The acquisition on the stable Canadian market is aligned with the risk profile set out in our strategy. The confirmed profitability of production and the long operating history of TriOil help reduce operational risks involved in the project. What is more, TriOil employs effective horizontal drilling and multi-stage fracturing technologies, which will enable experience sharing and transfer of the best Canadian practices to the Polish exploration and production segment. The Canadian market also offers good access to drilling and well services, as well as qualified personnel experienced in unconventional hydrocarbon extraction. Equally important are the stable tax regime and business-friendly regulatory environment.

PKN ORLEN may acquire further oil and gas assets or buy into projects with experienced operators.

Sprzedaz wolumenowa Grupy ORLEN