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Poland Oil and Gas Report Q4 2008

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Report Summary

The latest Poland Oil & Gas Report from BMI forecasts that the country will account for 9.57% of Central and Eastern European (CEE) regional oil demand by 2012, while providing less than 0.2% of supply. CEE regional oil use of 4.65mn barrels per day (b/d) in 2001 rose to 5.32mn b/d in 2007. It should average 5.42mn b/d in 2008 and then rise to around 5.99mn b/d by 2012. Regional production of 12.92mn b/d in 2007 is forecast to reach 15.03mn b/d by 2012. In terms of natural gas, the region in 2007 consumed 619bn cubic metres (bcm), with demand of 735bcm targeted for 2012, representing 18.8% growth. Production of 756bcm in 2007 should reach 888bcm in 2012, which implies net exports rising from 137bcm in 2007 to 153bcm by the end of the period. Poland’s share of 2007 gas consumption was 2.21%, while it provides an insignificant contribution to regional supply. By 2012, its share of demand is forecast to be 3.13%.

In Q208, we estimate that the OPEC basket price averaged just under US$115 per barrel (bbl) – up around 24% from the Q108 level. The OPEC basket price had exceeded US$127 on May 22, slipping back towards US$121/bbl later in the month. In June, we assumed an average of around US$120, to deliver our quarterly estimate of US$114.98/bbl. The estimated Q208 average prices for the main marker blends are now US$118.63 for Brent, US$119.61 for WTI and US$115.89/bbl for Russian Urals (Mediterranean delivery). Our projections for 2008 as a whole have been revised upwards from the last quarterly report. We are now assuming an OPEC basket price average of US$106 per barrel for 2008, compared with the US$81 estimate provided by our last quarterly report. Based on recent price differentials, this implies Brent at US$109.71, WTI averaging US$110.64/bbl, and Urals at US$106.88/bbl.

Polish real GDP growth is now estimated by BMI at 5.4% for 2008, down from 6.6% in 2007. We are assuming 4.6% growth in 2009, followed by 3.9% in 2010. 4.4% in 2011 and 4.8% in 2012. A small but growing motor vehicle population and renewed economic activity should push oil demand to 573,000b/d by 2012, representing annual growth of around 2%. Given a bleak outlook for local supply, despite efforts by state explorer Polskie Górnictwo Naftowe i Gazownictwo (PGNiG) and some international oil company (IOC) partners, the end-period import volume can be expected to reach 560,000b/d. We are assuming gas consumption reaching 23.0bcm by 2012, requiring imports of 18.4bcm.

Between 2007 and 2018, we are forecasting an increase in Polish oil consumption of 17.8%, with import volumes rising steadily from 515,000b/d to 617,000b/d by the end of the 10-year forecast period. Gas consumption is expected to up from 13.7bcm to 27.5bcm by 2018, met by 23.5bcm of imports. Refining capacity is expected to increase 51% between 2007 and 2018. Details of the new BMI 10-year forecasts can be found in the Appendix of this report, which provides global, regional and country-specific projections.

Poland occupies a surprising fourth place in BMI’s updated Upstream Business Environment rating, in spite of its humble hydrocarbons potential. Its licensing regime, privatisation progress, and healthy country risk environment help offset a modest reserves position and limited output growth prospects.

Russia is now just two points behind in the regional upstream ranking, so Poland’s longer-term position isn’t secure. The country tops the league table in BMI’s updated Downstream Business Environment rating, sharing first place with Russia. It has some high scores that should protect it over the medium term from Ukraine and Romania below. The high level of oil demand represents a strong suit, along with healthy gas demand growth prospects and a region-topping competitive landscape.

Table of Contents

Executive Summary .........7
SWOT Analysis.................9
Poland Political SWOT.......................................................... 9
Poland Economic SWOT........................................................ 9
Poland Business Environment SWOT .................................. 10
Poland Energy Market Overview ..........................................................11
Global Oil Market Overview ....................................................14
Table: Global Oil Consumption (000b/d) ............................ 16
Table: Global Oil Production (000b/d)................................ 17
Oil Price Outlook ............18
OPEC Intransigence ................................................................. 18
Table: Crude Price Assumptions 2007/08............................ 20
Revised Forecasts ..................................................................... 20
Table: Oil Price Forecasts................................................... 21
Regional Energy Market Overview ..........................................................22
Oil Supply And Demand............................................................ 22
Table: Central/Eastern Europe Oil Consumption (000b/d) . 23
Table: Central/Eastern Europe Oil Production (000b/d)..... 24
Oil: Downstream ...................................................................... 25
Table: Central/Eastern Europe Oil Refining Capacity (000b/d).......................................................................................................................... 25
Gas Supply And Demand .......................................................... 26
Table: Central/Eastern Europe Gas Consumption (bcm) .... 26
Table: Central/Eastern Europe Gas Production (bcm)........ 27
Liquefied Natural Gas............................................................... 28
Table: Central/Eastern Europe LNG Exports/(Imports) ( 28
Business Environment Ranking ...................................................................29
Central/Eastern Europe Region........................................... 29
Composite Scores................................................................. 29
Table: Regional Upstream Business Environment Rating.... 30
Table: Regional Downstream Business Environment Ratin 31
Upstream Scores.................................................................. 31
Downstream Scores ............................................................. 32
Poland Upstream Rating – Overview................................... 32
Poland Upstream Rating – Potential Returns ...................... 32
Poland Upstream Rating – Risks to Potential Returns......... 32
Poland Downstream Rating – Overview.............................. 33
Poland Downstream Rating – Potential Returns ................. 33
Poland Downstream Rating – Risks to Potential Returns .... 33
Business Environment ....................................................34
Legal Framework...................................................................... 34
Infrastructure............................................................................ 35
Labour Force............................................................................ 36
Foreign Investment Policy ........................................................ 37
Tax Regime ............................................................................... 37
Industry Forecast Scenario ....................................................39
Oil and Gas Reserves................................................................ 39
Oil Supply and Demand............................................................ 39
Gas Supply and Demand........................................................... 39
LNG.......................................................................................... 40
Refining and Oil Products Trade .............................................. 41
Revenues/Import Costs.............................................................. 41
Table: Poland Oil & Gas – Historic Data & Forecasts....... 42
Other Energy ............................................................................ 43
Table: Poland Other Energy – Historic Data & Forecasts.. 45
Key Risks to BMI’s Forecast Scenario...................................... 45
Long-Term Oil & Gas Outlook ................................................. 45
Macroeconomic Outlook ..........................................................46
Table: Poland - Economic Activity ...................................... 48
Regional Case Study......49
Growth By Eni Means Necessary.............................................. 49
Eni Exploration & Development (E&D) Acreage End-2007 (sq km)................................................................................................................... 52
Competitive Landscape.....................................................57
Executive Summary................................................................... 57
Key Players – Poland Oil & Gas Sector .............................. 58
Overview/State Role.................................................................. 58
Key Upstream Players ......................................................... 60
Key Downstream Players..................................................... 60
Company Monitor...........61
PKN Orlen................................................................................ 61
Grupa Lotos.............................................................................. 65
Polskie Górnictwo Naftowe i Gazownictwo (PGNiG)............... 68
BP Poland................................................................................. 72
Shell Poland.............................................................................. 74
StatoilHydro – Summary...................................................... 76
MOL – Summary.................................................................. 76
ExxonMobil – Summary....................................................... 76
Neste Oil – Summary ........................................................... 76
FX Energy – Summary......................................................... 76
Aurelian Oil & Gas – Summary........................................... 77
Gaz System – Summary........................................................ 77
Operator Logistyczny Paliw P³ynnych (OLPP) – Summary. 77
Glossary of Terms..........79
Oil & Gas Ratings: Revised Methodology ......................................................80
Introduction .............................................................................. 80
Ratings Overview...................................................................... 80
Table: BMI Oil & Gas Business Environment Ratings: Structure ....................................................................................................................... 81
Indicators.................................................................................. 81
Table: BMI Oil & Gas Business Environment Upstream Ratings: Methodology................................................................................................. 82
Table: BMI Oil & Gas Business Environment Downstream Ratings: Methodology ............................................................................................ 83
Oil & Gas Outlook: Long-Term Forecasts ...............................................85
Global Oil Demand................................................................... 85
Global Oil Demand (000b/d) ............................................... 85
Global Oil Production (000b/d)........................................... 86
Global Oil Supply ..................................................................... 86
Global Gas Demand ................................................................. 87
Global Gas Demand (bcm) .................................................. 87
Global Gas Supply.................................................................... 87
Global Gas Production (bcm).............................................. 88
Regional Oil Demand ............................................................... 88
CEE Oil Consumption (000b/d) ........................................... 89
Regional Oil Supply.................................................................. 89
CEE Oil Production (000b/d) .............................................. 90
Regional Refining Capacity ...................................................... 90
CEE Oil Refining Capacity (000b/d) ................................... 91
Regional Gas Demand .............................................................. 91
CEE Gas Consumption (bcm) .............................................. 92
Regional Gas Supply................................................................. 92
CEE Gas Production (bcm) ................................................. 93
Poland Country Overview......................................................... 93
Poland Oil & Gas – Long-Term Forecasts .......................... 94
Poland Other Energy – Long-Term Forecasts ..................... 95
Methodology & Risks To Forecasts .......................................... 95
BMI Forecast Modelling .....................................................97
How we generate our industry forecasts ................................... 97
Energy Industry ........................................................................ 98
Cross checks ............................................................................. 98
Sources ..................................................................................... 98