Operations in 2021

The exploration and production activities in Poland are carried out by PGNiG, with the involvement of its subsidiaries Exalo Drilling and Geofizyka Toruń. The Geology and Hydrocarbon Production Branch serves as the competence centre for geological exploration, geological work, investments in well mining facilities, and hydrocarbon production. It oversees the production of crude oil and natural gas, underground storage of waste, and underground non-reservoir storage of gas for production purposes. The PGNiG structure includes three leading domestic branches, located in Sanok, Zielona Góra and Odolanów, and two foreign branches: the Operator Branch in Pakistan and the branch in the United Arab Emirates.

As at December 31st 2021, PGNiG held 200 licences, including 188 production licences, three underground waste storage licences and nine underground gas storage licences. In 2021, the Company received three investment decisions in connection with the ransition to the production phase, i.e. investment decisions to produce crude oil and associated natural gas. In 2021, PGNiG was granted two new production licences (Miłosław, Miłosław E), nine licences were amended, and three were terminated (Grabina Nieznanowice Liplas hor., Grodzisk-26 and Zielin). At the end of 2021, PGNiG also held 47 licences: 11 licences for exploration for and appraisal of oil and gas deposits and 36 combined licences (for exploration, appraisal and production).

In the reporting period, two licences were relinquished (the Murowana Goślina-Kłecko combined licence for exploration, appraisal and extraction and the Międzyrzecze licence for exploration, appraisal and production of coal bed methane). Two new combined licences were secured, namely Lubycza Królewska and Krotoszyn. In 2021, 70 proceedings were conducted at the Polish Ministry of Climate and Environment for obtaining / amending licences and approving plans of geological operations. Currently, 39 administrative procedures are still pending.

Source: In-house analysis based on data from the Geology and Hydrocarbon Production Branch.

In 2021, PGNiG continued crude oil and natural gas exploration and appraisal projects in the Carpathian Mountains, Carpathian Foothills, Przedsudecka Monocline, and Polish Lowlands, both on its own and jointly with partners. Out of the 26 boreholes drilled in 2021, the target depth was reached by 22, including: one test, three exploration, six appraisal and 12 production wells.

As at the end of 2021, formation test results were obtained from 22 wells (four exploration, eight appraisal and ten production wells). The 22 wells with known formation test results included 17 which returned positive results (including one exploration, six appraisal and ten production wells) and five dry wells (including three exploration wells and two appraisal wells) that did not yield an industrial flow of hydrocarbons. In addition, one test well (due to their research nature, such wells are not subject to reservoir classification) was abandoned.

In 2021, workovers, formation tests and decommissioning operations were also performed on wells drilled in previous years, including on: seven test wells (including five abandoned wells: Gilowice-3K, Gilowice-4H, Gilowice-1, Międzyrzecze-3, Orzesze-1, with formation tests completed on two wells: Kramarzówka-1K, Kramarzówka-3), four exploration wells (including three abandoned wells and one well on test production), and three appraisal wells (of which one was abandoned and two had formation tests completed and were awaiting further work.)

In 2021, three new fields were brought on stream at the Sanok Branch of PGNiG: Jastrzębiec ( Jastrzębiec-2 and Jastrzębiec-3 wells – as part of a long-term production test), Wielgoszówka (Wielgoszówka-1K well – as part of test production), Kramarzówka ( Kramarzówka-3H and Kramarzówka-1K wells) and six wells on the already producing fields: two wells on the Pruchnik-Pantalowice field (Pruchnik-36 and Pruchnik-37K – as part of a long-term production test), and four wells on the Przemyśl field (Przemyśl-287K, Przemyśl-289K, Przemyśl-290 and Przemyśl-15 – as part of a long-term production test).

In 2021, a total of 11 wells were tied in at the Sanok Branch. In the Zielona Góra Branch region, a new field Wielichowo W (Wielichowo-8 well) and one well on the Brońsko field (Brońsko-30) were brought on stream.

In 2021, after the expiry of the relevant licences, production from the Grabina Nieznanowice Liplas hor., Grodzisk-26 and Zielin).

In 2021, in its licence areas PGNiG cooperated with other entities, including: LOTOS Petrobaltic S.A. and ORLEN Upstream Sp. z o.o.

Under licences held by PGNiG, work was continued in the following areas:

As at December 31st 2021, the total recoverable reserves (including reserves covered by geological prospecting documentation as well as clearance documentation submitted to the Ministry of Climate and Environment, pending approval by the Minister) were 15.7 million tonnes of crude oil (approximately 115.4 mboe) and 89.1 bcm of natural gas (high-methane gas equivalent) (ca. 574.3 mboe).

The main products sold by the Exploration and Production segment are high-methane gas, nitrogen-rich gas and crude oil. Some of the produced nitrogen-rich gas is further treated into high-methane gas at the Odolanów and Grodzisk Wielkopolski nitrogen rejection units, yielding also such products as LNG, gaseous and liquid helium, and liquid nitrogen. Other commercial products derived from crude purification include sulfur and propane-butane.

As regards trading in crude oil extracted in Poland, in 2021 PGNiG continued its trading partnership with major Polish and foreign players in the fuel sector. Crude oil was delivered by rail to ORLEN Południe S.A.’s Trzebinia Production Plant and the Grupa LOTOS refinery in Gdańsk. Supplies to ORLEN Południe S.A.’s Jedlicze Production Plant were delivered by road. Crude oil was also supplied, via the PERN pipeline, to TOTSA TOTAL ENERGIES TRADING S.A. PGNiG sells crude oil at market prices.

Source: In-house analysis based on PGNiG UN data.

PGNiG Upstream Norway holds interests in production and exploration/production licences on the Norwegian Continental Shelf in the Norwegian Sea and in the North Sea. Together with its partners, the company is producing hydrocarbons from the Skarv, Ærfugl, Ærfugl Nord, Morvin, Vilje, Vale, Gina Krog, Skogul, Kvitebjørn, Valemon, Duva, Ormen Lange, Marulk and Alve fields, while developing the Tommeliten Alpha field and implementing the third development phase on the Ormen Lange field. Nearing completion is the work on development concepts for the Shrek, Alve Nord, Cape Vulture, Fogelberg and King Lear fields. In addition, PGNiG UN holds interests in the Tambar Øst field, from which production has temporarily been suspended, and the Nyhamna terminal, where gas is finally separated from the well streams of Ormen Lange and other fields. Within the other licence areas, PGNiG UN is engaged in exploration projects and working to ensure stable and predictable long-term gas supplies to Poland. These efforts include involvement in the construction of infrastructure between Norway and Poland (the Baltic Pipe project), and also potential acquisitions of gas fields in Norway. For more information on the Baltic Pipe project, see section 3.2.2.

In 2021, the company produced a total of 732 thousand tonnes of crude oil with condensate and NGL (measured as tonnes of crude oil equivalent), and 1.4 bcm of natural gas from its producing fields. The production volumes were higher than in 2020, mainly as a result of the acquisition of INEOS on September 30th and the launch of production from the Duva, Ærfugl and Ærfugl Nord fields (phase 2).

2021 saw the launch of development work on the Tommeliten Alpha field and the third development phase on Ormen Lange, where PGNiG UN is a partner. The respective field operators are ConnocoPhilips and Shell. First oil from the Tommeliten Alpha field is expected in 2024, and an increase in production from the Ormen Lange field is expected following completion of the third development phase in 2025.

In late September 2021, PGNiG UN completed the acquisition of INEOS E&P Norge AS. INEOS E&P Norge AS (“IEPN”) held interests in 22 licences on the Norwegian Continental Shelf covering, among others, three production fields (Alve, Marulk and Ormen Lange), and owned the Nyhamna gas terminal. The estimated volume of hydrocarbon resources attributable to IEPN’s licence interests as at the effective transaction date was approximately 117 mboe (as at January 1st 2021), of which over 94% were natural gas resources. Following the transaction, PGNiG UN’s estimated average gas output in Norway may increase by some 1.5 bcm per annum over the next five years. In addition, PGNiG UN will acquire a portfolio of exploration licences in which IEPN was the operator under six licences.

The contractual purchase price for IEPN was agreed at USD 615m (PLN 2,275m) with the effective transaction date set on January 1st 2021. The final purchase price was reduced by revenue earned by IEPN in the period from the effective transaction date, i.e. January 1st 2021, to the date on which PGNiG UN acquired operational control of IEPN (September 30th 2021), and amounted to approximately USD 323m (PLN 1,289m).

As a result of the transaction to acquire IEPN, in 2021 PGNiG UN also achieved a significant increase in proven reserves, from 214 mboe at the beginning of the year to 309 mboe at the end of 2021. The increase in reserves, in addition to the acquisition described above, was also driven by the recognition of reserves of the Fogelberg field and the re-evaluation of reserves at the other fields held by PGNiG UN.

In January 2021, another APA 2020 (Awards in Pre-defined Areas) round was concluded, as a result of which PGNiG UN obtained interests in four exploration licences:

All four licence areas are located close to the existing production and pipeline infrastructure, so if a decision to proceed with their development is made, the process will be simpler and faster. All four licences are also located in the immediate vicinity of the fields where PGNiG UN is already present (Skarv and King Lear). In the case of commercial discoveries, their potential tie-back to Skarv and King Lear would offer additional synergies in the form of incremental revenue derived from the provision of access to the existing infrastructure of the Skarv and King Lear fields.

In January 2022, another APA 2021 (Awards in Predefined Areas) round was concluded, as a result of which PGNiG UN obtained interests in four exploration licences:

Jointly with its partners, PGNiG UN also continued work in other exploration licence areas. In the second half of 2021, PGNiG UN was involved in the drilling of two wells. Under the PL939 licence, in which PGNiG UN holds a 30% interest, the company drilled an exploration well discovering a new deposit (Egyptian Vulture), located in the vicinity of the Åsgard and Tyrihans fields. At present, the resources of the discovery and the viability of their commercial development are being assessed. A second well was drilled within the PL937 licence area (obtained as part of the acquisition of INEOS), in which the company holds a 65% interest. As it had encountered no hydrocarbons, the well was classified as dry and the related capital expenditure was written off in 2021.

As at December 31st 2021, PGNiG UN held interests in 58 exploration and production licences on the Norwegian Continental Shelf, in eight of them as the operator. At the beginning of 2022, the number of licences grew to 62 following the APA 2021 licensing round.

Crude oil is sold directly from the fields to Shell International Trading and Shipping Company Ltd (crude from the Skarv Unit, Vilje, Vale, Skogul, Kvitebjørn, Valemon, Ærfugl Nord and Gina Krog fields) and to TOTSA Total Oil Trading S.A. (from the Morvin field). All fields, except for Vilje, also produce associated gas, which is transferred via gas pipelines mainly to Germany, where it is received by PST, a PGNiG Group company.

2021 is the second year in which temporary uplifts to support the oil industry in the economic downturn caused by COVID-19 apply. In 2021, as in 2020, the uplifts apply for all investment projects. From 2022 onwards, only new investment projects approved between June 2020 and December 2022 will be subject to tax credits.

Temporary changes to the tax system include:

• direct expensing of development capital expenditure incurred under the special petroleum tax regime (56%) in the year in which the expenditure was made;
• uplift for the directly expensed investments of 24% of the investment – in the investment year (previously the uplift was 20.8%, spread over four years);
• the direct expensing and the uplift apply for all costs incurred in 2020 and 2021 and for all expenditure on new projects approved for execution (until the end of 2022);
• refund to oil producers of the tax value of losses for income years 2020 and 2021. The refund is paid in bi-monthly tranches, starting from August 2020.

These amendments significantly affect the profitability of investment projects and accelerate the return on invested funds. The regulations have a positive effect on the rate of return on projects and the liquidity of PGNiG UN. They also encourage new investments on the Norwegian Continental Shelf.

In addition, at the end of August 2021 the Norwegian ministry in charge of the taxation system proposed amendments to the special petroleum tax. The key elements of this proposal are as follows:

• investment costs are to be expensed immediately in the tax base, replacing the current six-year tax depreciation and four-year uplift;
• the rate of the special petroleum tax is to be raised to 71.8%, while the normal income tax is to be deductible against the special petroleum tax base. Combined, these changes are intended to keep the marginal tax rate unchanged at 78%;
• the tax value of special petroleum tax losses is to be fully offset in cash in the following year;
• any losses under the ordinary income tax regime carried forward between years will be free of interest accrued to increase the tax shield as a result of the losses carried forward;
• the amendments will not apply to investments covered by the provisional tax rules introduced in 2020.

At present, the proposal is still pending approval. The Company believes that the proposed changes are neutral from the perspective of the rate of return on its current and future investment projects.

At the same time, the Company does recognise the positive impact of the proposed tax regime on its financial charges. In the case of projects for which a final investment decision is to be taken after 2022, the proposed amendments will significantly accelerate returns on invested capital, and investment projects will consequently represent a lower financial burden for investors.

Through its Operator Branch, PGNiG is engaged in exploration work in Pakistan under an agreement for hydrocarbon exploration and production in the Kirthar licence area. The work is conducted jointly with Pakistan Petroleum Ltd. (PPL), with production and expenses shared pro rata to the parties’ interests in the licence: PGNiG (operator) – 70%, PPL – 30%. In addition, PGNiG acquired a 25% non-operator interest in the Musakhel exploration licence. The other shareholders are PPL as the operator, with a 37.2% interest, as well as Oil and Gas Development Company Limited (OGDCL) and Government Holding Private Limited (GHPL), with 35.3% and 2.5% interests, respectively.

Reserves as at the end of 2021 (nitrogen-rich gas converted to high-methane gas, attributable to PGNiG) reached approximately 6.31 bcm (40.7 mboe), including the Rehman field with 4.68 bcm (30.1 mboe) and the Rizq field with 1.64 bcm (10.6 mboe).

Gas from the Rehman and Rizq fields is produced via facilities located in the Rehman field. PGNiG’s share in the production from the Rehman and Rizq fields, carried out from ten wells in 2020, was approximately 326 mcm of gas (measured as high-methane gas equivalent). As part of the Rehman field development, drilling of the Rehman–8 well was launched, and preparation work for drilling the Rizq–4 well is also under way. The Rehman-7 well was plugged, as the flow of gas was non-commercial. In total, approximately 3.3 km were drilled in the Rehman–8 well in 2021.

As part of the continuing exploration work within the Kirthar licence area in 2021, the Pakistan Branch and the Geology and Hydrocarbon Production Branch completed the interpretation of a 3D seismic profile of the Rayyan prospect and 2D seismic profile of the W2 prospect.

In 2021, acquisition and interpretation of gravimetric data was completed within the Musakhel licence area.

In December 2018, PGNiG’s bid for the acquisition of hydrocarbon exploration, appraisal and production rights in onshore block 5 in the Emirate of Ras Al Khaimah was selected. Following the selection of its bid, the Company acquired a 90% interest in the block, with an area of 619 km2. Agreements between PGNiG and the Ras Al Khaimah Petroleum Authority and RAK GAS LLC were signed in January 2019. The PGNiG Branch was registered in the Emirate of Ras Al Khaimah, obtained a relevant licence to conduct operations, and commenced seismic surveys.

In 2021, intensive work was undertaken to process and interpret seismic data, whose acquisition in Block 5 was completed in May 2020. As a result of the analytical work, the existing geological structures and potential hydrocarbon accumulations were identified, and the location of the first exploration well was determined. In addition, preparatory work was carried out relating to market research and the outsourcing of well drilling services. The drilling project plan was drawn up and approved by the partners. As part of the acquisition work, resource analysis and economic modelling of the viability of Block 7 investment in Ras Al Khaimah were carried out, as well as the possibility to commence seismic acquisition work within other blocks in the emirate of Ras al Khaimah. The PGNiG Branch in UAE is also engaged in ongoing negotiations concerning the acquisition of exploration rights in other emirates.

PGNiG and ERU Management Services signed an agreement providing for the purchase by PGNiG of a controlling 85% interest in Ukraine’s Karpatgazvydobuvannya, the sole holder of the Byblivska licence located in Western Ukraine, in an area adjacent to the Polish border. Karpatgazvydobuvannya holds a licence to explore for and produce hydrocarbons in the western part of the Lviv Oblast. In terms of geology the area is an analogue of Przemyśl, Poland’s largest natural gas field operated by PGNiG for more than 60 years. Its attractiveness and potential have been confirmed through PGNiG’s preliminary analyses of geological and geophysical data.

Due to mounting safety issues in Libya in early second half of 2014, PGNiG UN gave notice of force majeure to the National Oil Corporation (NOC). In October 2020, a ceasefire agreement was signed between the parties to the conflict and universal presidential and parliamentary elections were announced to be held in December 2021, and the unification of Libyan governmental institutions was also declared. Due to late announcement of the legal basis for the presidential election and the unexpectedly high number of candidates, the election date was first postponed to January 2022 and then to a later unspecified time.

The Company continuously monitors political developments in Libya, particularly the security of its operations in the country. Taking advantage of the 2021 stabilisation of the political situation in Libya, PGNiG UN took preparatory steps to resume its exploration works as soon as the force majeure is revoked: between May and October 2021, three reconnaissance trips were made to the Tripoli area, during which a meeting was held with the management of National Oil Corporation and representatives of Zallaf, the company conducting exploration and appraisal work within a licence area adjacent to CA113.

Geofizyka Toruń S.A. is a supplier of innovative geophysical, geotechnical and geological and drilling solutions to the multi-utility and RES sectors in Poland and abroad. In 2021, the company engaged in the following activities:

• • acquisition of seismic data in Poland, Croatia, Ireland, Colombia and Mozambique;
  • processing and interpretation of seismic data for partners from Poland, Australia, Belgium, Bulgaria, the Netherlands, Colombia, Mexico, Norway, Rwanda, Ukraine and the United Arab Emirates;

well logging and interpretation of well geophysical measurements in Poland and Germany;

• geotechnical, geological and drilling services, and engineering geophysical works in Poland.

In connection with its principal business activity, Geofizyka Toruń also engaged in R&D and innovation work through a number of innovation projects for the energy and RES sectors. The company has implemented, among other projects, the SeaBed Research (SBR) technology and smart energy management based on renewable energy sources (Eco Processing Center).

Geofizyka Toruń also delivered contracts for the PGNiG Branch in Ras Al Khaimah in the United Arab Emirates, and for PGNIG UN.

In Poland, in 2021 the company was engaged mainly in the services delivered to the PGNiG Geology and Hydrocarbon Production Branch (GHPB). In addition, Geofizyka Toruń executed orders for Exalo Drilling S.A., Gas Storage Poland Sp. z o.o., Lotos Petrobaltic S.A., ORLEN Upstream Sp. z o.o., PGE EJ1 Sp. z o.o. and other companies in Poland.

In 2021, the company completed approximately 206.0 km of 2D seismic acquisitions and 638.3 km² of 3D seismic acquisitions in Poland for PGNiG GHPB. In total, the company completed approximately 206.0 km of 2D seismic surveys and 2,196.9 km2 of 3D seismic surveys during the year,

while PGNiG GHPB delivered around 214.8 km of 2D seismic surveys and approximately 637.2 km² of 3D seismic surveys in Poland.

EXALO Drilling S.A., a subsidiary of PGNiG, offers well and drilling services both for the PGNiG Group and for third parties. The company is one of the leading European onshore drilling companies, offering the full range of professional well services.

The EXALO Group’s most important contracts in 2021 included:

• for PGNiG: operation of the 2000 KM drilling rig, and provision of oilfield and drilling services, including drilling of wells in Pakistan;
• for external customers: drilling of wells for customers in Pakistan, Tanzania and the Czech Republic, and provision of cementing services (cementing of casing pipes) in Ukraine.

The company also completed orders for the PGNiG Branch in Pakistan.

In 2021, the PGNiG Group was EXALO’s largest customer. The company’s other major business partners include Orlen Upstream Sp. z o.o., Przedsiębiorstwo Budowy Kopalń PeBeKa S.A., as well as municipalities and companies producing heat.

In 2021, EXALO carried out works on 29 boreholes with a total depth of approximately 52.2 kilometres and 41 workover wells.

In 2021, PGNiG’s Geology and Hydrocarbon Production Branch (GHPB) carried out drilling operations on 26 wells with a total depth of 39.6 km.

The segment’s operations are supported by two nitrogen-rich gas storage facilities (Daszewo UGSF and Bonikowo UGSF), whose main role is to regulate the operation of the nitrogen-rich gas system and store gas from nitrogen-rich gas production facilities.

The classification of these storage facilities is different from the high-methane gas storage facilities (which are part of the Trade and Storage segment) because of the different type of gas stored and their different function.