Polski Koncern Naftowy ORLEN S.A.

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Polski Koncern Naftowy ORLEN S.A.

ul Chemikow 7
Plock,
Poland
Telephone: +48 024 365 0000
Fax: +48 024 365 4040
Web site: http://www.orlen.pl

Public Company
Incorporated: 1999
Employees: 14,398
Sales: PLN 30.57 billion ($9.26 billion) (2004)
Stock Exchanges: Warsaw London
Ticker Symbol: PKN
NAIC: 324110 Petroleum Refineries; 324199 All Other Petroleum and Coal Products Manufacturing; 325188 All Other Inorganic Chemical Manufacturing; 326122 Plastics Pipe and Pipe Fitting Manufacturing; 424720 Petroleum and Petroleum Products Merchant Wholesalers (Except Bulk Stations and Terminals); 447110 Gasoline Stations with Convenience Stores

Polski Koncern Naftowy ORLEN S.A. (PKN) is the largest refiner and marketer of petroleum products in the Central European region. The company operates six refineries, three in Poland and three in the Czech Republic, with a total processing capacity of 21.7 million tons per year. The company processes crude oil, producing oil, diesel and gasoline, heating oil, aviation fuel, ethylene, and other petroleum derivatives and plastics. The company, the former state-owned oil monopoly, remains the dominant player in Poland, controlling some 70 percent of the domestic processing market and, depending on the end product, between 40 and 100 percent of the domestic market. PKN is also Poland's largest service station operator, with nearly 2,000 gas stations in Poland operating under the ORLEN, Petrochemia Plock, and Bliska brands. PKN has begun an effort to expand internationally, with 500 ORLEN and Star service stations in northern and northeastern Germany and 300 stations in the Czech Republic. The company intends to become the dominant Central European player, and in pursuit of that goal has been engaging in merger talks with Hungarian counterpart MOL. A merger between the two companies could occur as early as 2006. PKN is listed on the Warsaw and London (ADR) stock exchanges. The Polish privatization agency, Nafta Polska, retains a 17.3 percent stake in PKN. In 2004, the company's revenues topped PLN 30.5 billion ($9.25 billion). Igor Chalupec is company president and CEO.

POST-WORLD WAR II NATIONAL OIL COMPANIES

PKN originated as two companies established by the Polish government following World War II. The first of these was founded in 1944 as Polski Monopol Naftowy and charged with taking control of the country's shattered oil supply and its distribution. The following year, that body was transformed into a state-owned company, Centrala Produktow Naftowych (CPN). By 1948, CPN had been transferred to the Ministry of Industry and Trade, and became the state monopoly for the distribu-tion of fuel and petroleum-based lubricants. CPN's oversight was later transferred among various ministries, before being brought under the Ministry of Chemical Industry in 1959. In the meantime, CPN had been building a national network of service stations, introducing electric-powered pumps in 1957. The company also began distributing automotive parts and accessories at this time.

By the 1980s, CPN's service station network had topped 1,000, and the state-owned body employed more than 17,000 people. CPN had also developed facilities for the production of an end-user automotive lubricant oil.

In 1983, CPN's status was changed again, to that of a public utility enterprise with control of the national market. The company now provided oversight to 17 regional directorates, as well as tanker operations, and Naftoprojekt, which provided engineering and design services, as well as construction and assembly operations. Also included under the "new" CPN were Poland's petroleum pipeline operations, including the "Friendship" crude oil pipeline.

With the end of Soviet domination, and the institution of a free market system in Poland, the Polish government launched the privatization process of the country's oil sector in the mid-1990s. CPN was then restructured as a state-owned limited liability company in 1995. By the end of the decade, CPN's operations included more than 1,400 service stations and related facilities, 156 fuel depots, a 600-strong fleet of tanker trucks, port operations, and 22 research laboratories. The next step in CPN's privatization process took place in 1999, when the company was merged into its petroleum refining counterpart, Petrochemia Plock.

Plock had been the result of the Polish government's determination to develop a national petrochemicals industry in the early 1950s. At that time the country had only five small refineries, which produced a combined total of less than one million tons annually.

The decision to construct the country's first large-scale refinery was taken in 1954, when the country's Oil Refining Industry oversight body was given instruction to begin planning a new facility. The original plan called for a facility with a capacity of one million tons. Those plans were scaled upward, however, and the final design boasted an initial capacity of six million tons, with further expansion to reach up to ten million tons. In 1958, Plock was chosen as the site for the new refinery, to be developed under the auspices of a new company, Mazovia Refinery and Petrochemical Plant, which was established in 1960.

Production at the new site was launched in 1964, with an initial capacity of two million tons. Production at first focused on gasoline and diesel oil, before expanding to include a wide range of refined fuels, including automotive and airplane fuels, xylene, diesel oil, oil coke, bitumen, lubricant oil, and hard and soft paraffin. By the late 1960s, the company had begun production of a number of petrochemical products as well, including ethylene oxide, ethylene glycol, phenol, acetone, sulfuric acid, and the like. In 1971, the company initiated polyethylene production and, later, polypropylene and other plastics and plastic component materials. The company's petrochemicals production took off especially after production was launched at a new catalytic cracking plant in 1976, which became the largest single facility on the Plock site.

In 1978, the Plock operation posted its first major milestone, producing its 100 millionth ton since its launch in 1964. The company continued to improve and expand the site, and less than ten years later had produced its 200 millionth ton. In 1993, Mazovia Refinery and Petrochemical Plant became one of the early targets for the Polish government's privatization plans. In that year, the company was restructured as a limited liability company, and changed its name to Petrochemie Plock. By the end of the decade, the Plock site had grown to encompass more than 710 hectares, employing 7,700 people and boasting an annual production of more than 11 million tons per year.

COMPANY PERSPECTIVES

Mission Statement: Aiming to become the regional leader, we ensure long-term value creation for our shareholders by offering our customers products and services of the highest quality. All our operations adhere to "best practice" principles of corporate governance and social responsibility, with a focus on care for our employees and the natural environment.

PRIVATIZATION PROCESS IN THE 1990S

In 1996, the Polish government created a new body, Nafta Polsky, to oversee the privatization of the country's oil industry and to serve as an oversight body for the newly liberalized market. Nafta Polsky set into place the restructuring of the industry, which resulted in the merger of Petrochemie Plock and CPN in 1999. That company was then renamed Polski Koncern Naftowy (PKN). In November of that year, the Polish government listed PKN's stock on the Warsaw Stock Exchange, selling a 30 percent stake. A percentage of that offering was earmarked for foreign investors and placed on the London Stock Exchange in the form of depositary receipts.

In the year 2000, PKN launched a new brand name, ORLEN, which became its flagship service station brand. As part of the branding effort, the company changed its own name, becoming Polsky Koncern Naftowy ORLEN that year. At the same time, the Polish government continued the privatization process, placing an additional 40 percent stake of PKN on the Warsaw Stock Exchange. By the mid-2000s, Nafta Polsky's shareholding in PKN had been reduced to slightly more than 17 percent.

PKN also began a restructuring effort in 2000, as a run-up to its effort to position itself not only as a Polish petroleum products leader, but as a leader in the Central European region. In the meantime, the company began a modernization effort, which included the launch of the Flota Polska fuel card for the corporate market, and a loyalty card, Vitay, for the consumer market. Both schemes were introduced in 2001.

PKN's move into the international market came in 2002, when the company bought nearly 500 service stations in northern and northeastern Germany from British petroleum giant BP (as part of its requirement to reduce its share of the German market to less than 26 percent). The acquisition of the German network, placed under the ORLEN and Star brand names, gave PKN a 7 percent share of the local market and a 3 percent share of the national market.

Back at home, PKN had been investing in its refining capacity as well. In May 2002, the company inaugurated production at its new DRW III crude oil processing facility. That facility, the largest in Central Europe, more than doubled PKN's crude oil capacity to reach 6.7 million tons.

PKN maintained its search for external growth opportunities. In 2003, the company formed a joint venture partnership with polypropylene giant Basell Europe Holdings. The new company, called Basell ORLEN Polyolefins, enabled PKN to begin marketing and distributing its own petrochemicals products on an international level.

KEY DATES

1944:: Polski Monopol Naftowy, which takes control of the country's oil supply and its distribution, is founded.
1945:: The company is renamed as Centrala Produktow Naftowych (CPN).
1948:: CPN is placed under the Ministry of Industry and Trade.
1954:: The Polish government announces the intention to build the country's first large-scale refinery.
1958:: Plock is chosen as the site of the new refinery.
1960:: The state-owned Mazovia Refinery and Petrochemical Plant is incorporated.
1964:: Crude oil processing is launched.
1971:: Polyethylene production is launched.
1983:: CPN is restructured as a state utility, taking control of the country's oil and petroleum products retail, wholesale, and logistics operations.
1993:: The Mazovia Refinery is reincorporated as a limited liability company and is renamed Petrochemie Plock as the first step in the privatization of the Polish petroleum industry.
1995:: CPN is restructured as a limited liability company.
1996:: Natfa Polsky is created to oversee the privatization of industry.
1999:: Plock and CPN are merged into Polski Koncern Naftowy (PKN); the government sells a 30 percent stake on the Warsaw and London Stock Exchanges.
2000:: The ORLEN brand name is launched; PKN changes its name to Polski Koncern Naftowy ORLEN.
2002:: The company forms a distribution joint venture with Basell Europe Holdings.
2003:: The company acquires 500 service stations in Germany from BP.
2004:: Nearly 63 percent of Unipetrol in the Czech Republic is acquired; the company signs a memo of intent to merge with Hungary's MOL.
2005:: The acquisition of Unipetrol is completed.
2006:: The merger between MOL and PKN is expected before the end of the year.

CENTRAL EUROPEAN MARKET LEADER IN THE 2000S

At the same time, PKN, in large part restricted from further expansion at home, launched an effort to build itself into the Central European market leader. The company's plans took a major step forward in 2004 when PKN won its bid to acquire nearly 63 percent of Unipetrol from the Czech Republic government. That purchase gave PKN control of Unipetrol's national network of more than 300 service stations, as well as joint ownership of Unipetrol's three refineries. The company's share of that production boosted its total annual refinery output to nearly 22 million tons; by the end of 2005, PKN celebrated its 400 millionth ton of processed crude oil since the launch of production in 1964.

At the same time, PKN continued to plan for its future expansion. The company launched a new strategy for the second half of the 2000s, confirming its commitment to becoming a true regional leader. The company also launched an effort to expand its production, including the doubling of its ethylene production in mid-2005.

External growth, however, appeared PKN's likeliest path to expansion. In 2004, the company reportedly signed a memorandum of agreement with Hungarian counterpart MOL to merge the two companies. That merger was expected to take place before the end of 2006, and would likely include MOL's control of a majority stake in Slovnaft, a refinery group based in Slovakia, and its 25 percent stake in INA, in the Czech Republic. Meanwhile, PKN continued to scout for other acquisition possibilities in the region, eyeing potential candidates in the Czech Republic, Romania, and Serbia. Although some observers remained skeptical of PKN's expansion strategy, primarily because an enlarged PKN would become a more attractive takeover target for one of the petroleum giants, PKN had shaken off the dust of its Communist past and emerged as one of the European region's most vibrant petrochemical groups in the 2000s.

PRINCIPAL SUBSIDIARIES

ORLEN Deutschland AG; ORLEN Deutschland GmbH; ORLEN Gaz Sp. z.o.o.; ORLEN PetroCentrum Sp. z.o.o.; ORLEN Medica Sp. z.o.o.; ORLEN Budonaft Sp. z.o.o.; ORLEN Powiernik Sp. z.o.o.; ORLEN KolTrans Sp. z.o.o.; ORLEN Transport Szczecin Sp. z.o.o.; ORLEN ASFALT Sp. z.o.o; ORLEN Petro-Tank Sp. z.o.o. (90%); Energomedia Sp. z.o.o.; Euronaft Sp. z.o.o.; Nafto Wax Sp. z.o.o.; RAF-LAB Sp. z.o.o.; RAFENERGIA Sp. z.o.o.; RAF-KOLTRANS Sp. z.o.o.; RAF-REMAT Sp. z.o.o. (96%); RAF-EKOLOGIA Sp. z.o.o. (93%).