Changes in the PGNiG Group’s environment in early 2022

Thanks to an increase in LNG supplies to Europe since December 2021 and the relatively mild winter, gas prices on the Amsterdam futures market began to steadily inch down, stabilising in January and February 2022. Until Russia’s invasion of Ukraine, the prices remained below EUR 80/MWh. However, what we have seen since February 24th 2022 are the spiralling and highly volatile prices. By March 7th 2022, they rose to EUR 227/MWh (by 284%). A local peak recorded on March 7th 2022 was EUR 354/MWh.

In response to the Russian Federation’s military attack on Ukraine, the international community, including the United States, the European Union and individual countries, such as the United Kingdom, imposed a barrage of economic and financial sanctions as well as entry restrictions on some Russian nationals. The sanctions were imposed on specific activities or specific entities, including a number of Russian and Belarusian banks (among them the Central Bank), financial institutions, and representatives of the public administration, the military and business.

Commodities, with several exceptions, have experienced strong price increases since Russia’s invasion and sanctions implemented against entities established in or controlled by the Russian Federation and individuals involved in the exercise of authority. Both Russia and, to a certain extent, Ukraine are significant suppliers of commodities for the global economy, and so the current situation caused by the armed conflict has triggered an abrupt spike in commodity prices and significant turbulence on the energy markets.

Given the global importance of crude oil as a production factor for the entire economy, its prices are the first to rise. From February 24th to March 8th 2022, crude oil prices surged 36% (from USD 95 to 129/bbl).

As mentioned above, a range of economic sanctions have been imposed on Russia in response to its aggression on Ukraine, concerning mainly banks and financial institutions. Sanctions imposed before March 10th 2022 did not prevent the transfer of commodities and exclusion from the SWIFT system did not cover Sberbank or Gazprombank, as they were involved in energy supply transactions to the European Union. Consequently, Russian commodities worth hundreds of millions of euro have been imported into Europe every day since Russia’s invasion of Ukraine, the transfers being even higher than before war driven by increased demand from customers, who fear a reduction or complete stoppage of deliveries as the military conflict escalates. In view of the uncertain supply situation, further sharp price fluctuations are to be expected on the exchanges over the coming weeks.

The United States, United Kingdom and Canada have already decided to impose a full embargo on Russian crude oil. Some European Union countries (including Poland) have also declared their readiness to immediately stop all imports of Russian commodities. On the other hand, other EU countries are against the imposition of such far-reaching sanctions, being largely dependent on Russian raw materials and justifying their decisions with concerns about the risk of plunging into a severe economic recession if supplies are cut off. Given that member states cannot see eye to eye on this matter, it is unlikely that such sanctions will be imposed by the European Union.

At the same time the Russian market is being increasingly isolated, as a number of oil companies have abandoned their operations and all projects conducted in Russia. Plans to divest Russian assets have already been announced by BP, Shell, Equinor and Exxon, among others. The World Bank has suspended all its programmes in Russia and Belarus. In response to the war in Ukraine and the market’s uncertainty over future gas supplies to Europe, many supply diversification and energy transition projects have been fast-tracked. The chancellor of Germany announced that the country had plans to build two regasification terminals. On March 4th 2022, Kreditanstalt für Wiederaufbau (KfW), Gasunie and RWE signed a Memorandum of Understanding concerning an LNG terminal project in Brunsbüttel. In the long term, it should therefore be expected that the current conflict will accelerate Europe’s energy transition and the process of overcoming its current dependence on Russian energy supplies. This direction was also outlined in the Communication from the European Commission ‘REPowerEU: Joint European Action for more affordable, secure and sustainable energy’ (COM(2022) 108), published on March 8th 2022.

In view of the current geopolitical developments investors have been turning to safe haven assets, including the strongest convertible global currencies. Since the outbreak of the war in Ukraine, the value of the Russian rouble has plummeted (relative to the US dollar) (by approximately 50%). The armed conflict has also had its toll on the value of the Polish currency, which is placed in the same basket as other Eastern European currencies. Despite currency interventions by the National Bank of Poland, since February 24th 2022 the Polish złoty has lost 13% relative to the US dollar (at the end of March 8th 2022, the exchange rate was 4.51), 8.4% against the euro (4.91) and nearly 12% against the Swiss franc (4.86).

December 10th 2021 and January 29th 2022 saw the entry into force of legislative measures for the protection of certain categories of end users from significant rises in gas fuel prices attributable to the accumulation of a number of market factors, including supply disruptions caused by the dominant gas supplier to the EU. The Act of December 7th 2021 Amending the Energy Law allows sellers of gas fuel to households to take advantage of a mechanism whereby the price tariff approved by the President of URE can cover only a part of the cost of gas fuel purchase with recovery of the actually incurred cost spread over three consecutive years from the end of the effective period of the tariff approved under these regulations. The mechanism was applied by PGNiG Obrót Detaliczny sp. z o.o., whose tariff will remain in effect until the end of 2022.

The Act of January 26th 2022 on Special Measures to Protect Gas Fuel Customers in View of the Situation on the Gas Market, provides for the following mechanisms:

The unprecedented surge in commodity prices since September 2021 and the level of price tariffs approved for the fourth quarter of 2021 and for 2022 have caused the cash requirements of companies to rise as a result of an increase in liabilities under gas purchases, high volumes of gas stocks held in underground storage facilities, and increased margin requirements for gas trading exchange and financial transactions.

In December 2021, PGNiG entered into three new credit facility agreements with Bank Gospodarstwa Krajowego, PKO Bank Polski S.A. and CaixaBank S.A. Poland Branch, increasing its ability to mobilise short-term finance for a period of nine months by a total of PLN 2.7bn. Further short-term credit facility agreements were executed in January 2022 with Societe Generale SA Polish Branch (for PLN 750m) and in February 2022 with a bank syndicate of Bank of China Limited, acting through Bank of China Limited Luxembourg Branch, and Bank of China (Europe) S.A., acting through Bank of China (Europe) S.A. Polish Branch (for PLN 1.2bn), with Deutsche Bank Polska S.A. (for PLN 400m) and with Credit Agricole Bank Polska S.A. (for PLN 200m). As a result, as at the date of this Report, PGNiG SA had access to sources of financing totalling PLN 15.25bn.

The Company is monitoring the price and regulatory environment and will take further steps if needed to increase the available sources of financing.

It is keeping a close eye on how the situation is developing and remains in contact with institutions responsible for international financial flows. The PGNiG Group’s financial performance and liquidity will depend on the evolution of commodity prices following the imposition of the sanction regime, which, depending on their scope, may result in reduced supplies to Europe. If any sanctions affecting the settlement of gas supplies are imposed, PGNiG will adapt to the applicable regulations.

PGNiG is also monitoring the situation related to natural gas supplies to the Polish transmission system. Since the beginning of 2022, natural gas has been supplied from across Poland’s eastern border in quantities nominated by PGNiG SA.

The Company has a diversified natural gas portfolio based on its own production sources and import contracts. Thanks to the reserved transmission capacity, PGNiG can source natural gas from various directions, including via the  in Świnoujście, from the west and south of Poland. Depending on its balancing needs, the Company books additional interconnector capacities and makes supplementary purchases of gas.

In addition, PGNiG holds stocks of natural gas in underground storage and maintains emergency stocks, which remain at the disposal of the Minister of Energy.

The PGNiG Group’s priority is to ensure continuous gas supplies to customers in and outside of Poland.

In Ukraine the operates through the PGNiG SA Representative Office in Kiev, the Exalo Drilling Group (Exalo Drilling Ukraine LLC) and LLC Karpatgazvydobuvannya (exploration and production activities carried out in cooperation with ERU Management Services). As at the date of this Report, the value of assets engaged in Ukraine did not represent a material part of the Group’s total assets. Employees of the PGNiG Group and their families have been evacuated from areas at risk of being affected by the military conflict. The PGNiG Group is actively involved in the provision of humanitarian aid.