FINANCIAL SITUATION

In the coming periods, the financial standing of the PGNiG Group will be materially affected by changes in the prices of hydrocarbons on global commodity markets and fluctuations in foreign exchange rates. These factors will be a material driver of the PGNiG Group’s performance in the Exploration and Production and Trade and Storage segments.

Any changes in hydrocarbon prices affect revenues of the Group entities engaged in production, and determine the demand for seismic and exploration services offered by the Group companies. Rising gas and crude oil prices have a positive effect on the performance of the Exploration and Production segment. Long-term forecasts of hydrocarbon prices strongly influence projected cash flows from production assets, and as a consequence entail the necessity of revaluation of property, plant and equipment.

On the other hand, since the prices of gas purchased by PGNiG under the Yamal and Qatar contracts are linked to prices of crude oil, the effect of rising oil prices on the performance of the Trade and Storage segment is opposite to the effect that rising oil prices have on the performance of the Exploration and Production segment. Any increase in crude oil prices translates into higher cost of gas purchased by PGNiG. This correlation may change following a ruling by the Stockholm Arbitration Tribunal regarding the price formula used in the Yamal contract.

The PGNiG Group’s financial results will also be influenced by the situation on the domestic currency market. Any strengthening of the złoty against foreign currencies (primarily the US dollar) will have a positive effect on the performance of the Trade and Storage segment by driving down PGNiG’s gas procurement costs, although it must be noted that the effect of exchange rate fluctuations is mitigated by the PGNiG Group’s hedging policy.

Another factor with a bearing on the PGNiG Group’s financial condition is the President of URE’s decisions on gas fuel sale and distribution tariffs and heat sale tariffs. In addition, the progressing deregulation of the gas market in Poland will continue to put pressure on the performance of the PGNiG Group’s Trade and Storage companies selling gas. In view of the competition for customers, the Group offers discount schemes to customers and adjusts pricing terms to reflect market prices. These factors may have an adverse effect on the profitability of the Trade and Storage segment by eroding its margins.

However, the PGNiG Group companies have put in place a number of initiatives to improve efficiency. These initiatives focus, among other things, on optimisation of the cost base and are expected to have a positive effect on the PGNiG Group’s financial results.

In the Generation segment, financial results will be considerably influenced by the support programmes for electricity produced from high-efficiency cogeneration sources and renewable sources. Changes in the market prices of CO2 emission allowances will have an increasing effect on the PGNiG Group’s financial condition in the segment. Another key driver of the segment’s performance is prices of the fuels used to produce heat and electricity.

In early 2020, the United States Energy Information Administration (EIA) published its 2020 Brent crude price forecast, which puts the average month-ahead contract price for Brent at USD 64.83/bbl. Based on EIA’s projections, WTI will trade at USD 59.25/bbl. EIA has explained the absence of any major price changes by pointing to the balancing of the following factors: the effects of increased supply of crude oil from non-OPEC producers and the improving outlook for global economic growth following the signing of the trade agreement between the US and China. In addition, the OPEC group stabilises the market by limiting the supply depending on the market price levels. In 2019, it imposed stricter production limits when the Brent price fell below USD 60/bbl.

In a longer term, oil prices may be driven by political factors. At the end of 2019, for the first time in history the United States became net oil exporter. Iran and Venezuela have high spare capacities but their exports are limited by sanctions. Since the sanctions were introduced, the two countries’ production has fallen by 3m bbl/d in total. OPEC’s output is also lower than permitted by the technical capabilities of its member states. At the OPEC meeting in December the Saudi Arabia’s Minister of Energy announced that if other countries fail to meet their production quotas, Saudi Arabia would start exporting oil in maximum possible quantities. This would mean that an additional 3m bbl/d of oil would be placed on the market, producing a surplus that could lead to a situation similar to that seen in Q1 2016, when the price of Brent crude month-ahead contracts did not exceed USD 40/bbl.

The average price of Brent in 2020 could be USD 61/bbl. 2020 and the beginning of 2021 may be a period of lower prices, followed by a slow but consistent growth in the crude value for approximately 15 years, the reason being production from less and less profitable sources. The global demand for crude is expected to peak in the second half of the 2030s.

According to analysts, the price of natural gas in Europe will remain at the H2 2019 levels. Increased shale gas production in North America and Australia and launch of new units for liquefying natural gas will result in a continued rapid growth of the LNG output. In 2020, liquefaction capacities of approximately 364 TWh are planned to be put into service, of which 307 TWh will be located in the United States. An oversupply of LNG on the global market and higher volumes of Russian gas delivered to Germany will be offset by declining production in continental Europe (including from the Groningen field), periodic profitability of gas exports to Asia, and greater demand for gas in the power sector. The entry into force of the IMO 2020 regulations may also increase demand for LNG from maritime transport. Some LNG tankers use liquefied gas to power their engines, and that fuel complies with the environmental requirements provided for in the regulations. Liquefied gas may also be used as main fuel by conventional maritime transport. In view of the increasing environmental standards, further growth of this segment may be expected. Analysts estimate that in the current decade global consumption of LNG as fuel in maritime transport will rise at 23% annually, reaching 318 TWh in 2030. The strongest growth in demand for LNG will be seen in Asia, although it will be almost two times slower than in 2018–2019. Europe will continue to be a balancing market for global LNG supplies.

The price of CO2 emission allowances (EUAs) will largely depend on the final provisions of the agreement on the withdrawal of the United Kingdom from the European Union, the ratio of the natural gas price to coal price, and the pace of economic growth in Europe. In 2019, the EUA price growth was mitigated by the risk of UK’s exit from the European Union Emissions Trading System (EU ETS) during the term of contracts held by UK companies. This scenario would result in a large oversupply of EUAs in the continental part of Europe, driving a strong price decline. Currently, it is considered most likely that the UK will leave the EU ETS at the end of 2020, so the supply of contracts for 2021 would reflect the lower demand. In such a case, the price of CO2 emission allowances will depend on the coal price to gas price ratio. Generation of one unit of electricity from natural gas results in the release of carbon dioxide into the atmosphere in an amount that is on average more than two times smaller than in the case of coal-fired generation, so low gas prices may lead to reduced demand for EUAs, and thus to the price remaining at the levels seen in the second half of 2019 (approximately EUR 25).

Based on analysts’ forecasts, in 2020 electricity prices in Poland will not be higher than the average prices in 2019. The launch of new generation capacities at the power plants in Żerań and Stalowa Wola (gas-fired generation) and Jaworzno (coal-fired generation), connection of the Polish system to the European Single Intraday Coupling Market (SIDC/XBID), and development of the RES market are expected to prevent price growth. Increasing popularity of photovoltaic technologies may lead to a change in price seasonality patterns, as the largest amounts of energy from solar sources are generated in the second and third quarters of the year, when the prices generally reach their highs.

In 2019, PGNiG reported EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion of PLN 1,241m, down PLN 1,396m year on year. 

Change in PGNiG’s EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion: 2018 vs 2019 [PLN m]

The year-on-year decline in EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion (down PLN 1,288m) in the Exploration and Production segment was attributable to a lower result on sales of high-methane gas and crude oil, driven by lower prices on commodity exchanges (TTF, PPX, Brent), as well as smaller volumes of crude oil production and sales. The segment’s EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion was also affected by the change in impairment losses on property, plant and equipment and property, plant and equipment under construction forming part of exploration and evaluation assets.

EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion in the Trade and Storage segment fell PLN -107m year on year, driven by a lower result on sales of high-methane gas, due to lower commodity prices on exchange markets. The segment’s EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion was also affected by a change in gas inventory write-downs.

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