Regulatory environment

Under their regulatory risk management policies, PKN ORLEN and the other ORLEN Group companies  engage in a fully transparent and open dialogue based on applicable laws, which involves reviewing drafts of legislative solutions at the national and EU legislation level. In addition, the Group’s relations with the regulators, control and supervisory authorities are coordinated on an ongoing basis, and the Group operates a process of obtaining and managing permits and authorisations.

Below are presented key opportunities and risks arising from the regulatory environment in Poland in connection with the ORLEN Group’s business.

The Group is subject to numerous obligations involving maintenance of emergency stocks of crude oil and fuels, imposed by the Act on Stocks of Crude Oil, Petroleum Products and Natural Gas, and on the Rules to Be Followed in the Event of Threat to National Fuel Security or Disruptions on the Petroleum Market of February 16th 2007 (the “Act on Emergency Stocks”).

Under new regulations in this area, since January 1st 2015 producers and traders have been under the obligation to pay a stocks charge in exchange for a gradual reduction of the level of physical stocks required to be maintained for the Material Reserves Agency.

As a manufacturer and importer of liquid fuels, since December 31st 2017 the Group has been obliged to maintain minimum stocks equal to the equivalent of 53 days of the average daily production or imports in the previous calendar year. Furthermore, to comply with statutory requirements on emergency stocks of crude oil and liquid fuels, it pays a stocks charge to the Emergency Stocks Fund, managed by the President of the Material Reserves Agency.

Failure to maintain the required stock levels or breach of other obligations under the Act on Emergency Stocks entails the risk of high penalties being imposed.

The Act on Biocomponents and Liquid Biofuels imposes the requirement to achieve the National Indicative Target (“NIT”), i.e. to ensure the required minimum share of biocomponents in the total volume of liquid fuels and biofuels, both sold on the market and used for own needs. Provisions of the Act define the legal transactions which trigger the obligaton to achieve the NIT as well as the entities subject to that obligation. Starting from 2015, only those biocomponents which meet the criteria of sustainable development set out in the EU and Polish laws may be used to fulfil the NIT obligation.

If NIT is not met, a penalty may be imposed on the Group, calculated on the basis of the formula defined in the Act on Biocomponents and Liquid Biofuels.

The ORLEN Group companies are subject to the EU regulation establishing the greenhouse gas emission allowance trading scheme (the “EU ETS Directive”) that forms part of the EU climate and energy package.  The purpose of the EU ETS Directive is to promote an annual reduction of GHG/CO₂ equivalent emissions until 2030.

Three Polish production complexes owned by the ORLEN Group, i.e. the refinery, the CHP plant, the olefins unit in Płock (PKN ORLEN) as well as the ammonia unit in Włocławek (ANWIL) are the ORLEN Group’s largest carbon dioxide emitters. All those and other installations participating in the EU Emissions Trading Scheme are included in the list of installations prepared by Poland and submitted to the European Commission for the purpose of free allocation of emission allowances in the third trading period (covering the years 2013–2020). The list of installations and the indicated amounts of free allocations have been approved by the European Commission. The total number of emission allowances allocated to the ORLEN Group companies free of charge is insufficient for their needs and, in consequence, they purchase additional emission allowances, which generates additional costs.

In 2018, the European Parliament and the Council of the European Union adopted Directive (EU) 2018/410 of the European Parliament and of the Council of March 14th 2018 amending Directive 2003/87/EC, which implements changes as part of Phase 4  of the EU ETS (2021–2030). The amended CO₂ emissions trading system provides for a more ambitious reduction of emission volumes in the energy and industrial sectors in the European Economic Area. The new regulations introduce a higher linear emissions reduction factor (2.2% annually, up from 1.74%) and a revision of benchmarks based on which free allocation levels are set in the sectors exposed to a risk of carbon leakage. Starting from 2019, some of the allowances from the market are placed in the market stability reserve, which reduces the volume of traded allowances and is likely to increase the demand and their price. At present, legislative and regulatory efforts are being taken to fully prepare and implement the new phase of the EU ETS system, in which the Group companies covered by the system play an active role.

The Group engaged chiefly in activities designed to improve the system for monitoring the road transport of tax-sensitive goods, i.e. the SENT system, or the transport package including monitoring of railway transport, as well as in work on the ‘heating fuels package’, providing for the use of the SENT system to tighten regulation of the Polish market of heating fuels, which are sensitive considering the rules of excise taxation on such fuels. In 2019, the SENT system was extended to monitor the supplies of LPG for transport purposes in order to improve the efficiency of control over the transport fuel market segment in Poland. The Company engaged in work on the adoption of an amendment to the ‘fuel package’ adopted in mid-2019, which assumes addition of new items to the catalogue of fuels that are subject to VAT quick fixes when they are purchased for the Polish market in intra-Community transactions, as well as extension of licensing and monitoring of imports to Poland of new types of liquid fuels. Additionally, in 2019 PKN ORLEN implemented and applied on a day-to-day basis all new legal requirements dedicated to tightening regulation of the liquid fuels market. PKN ORLEN’s efforts took the form of a public dialogue with the authorities regulating the liquid fuels market in Poland, in particular with the President of the Energy Regulatory Office, President of the Material Reserves Agency, and the National Revenue Administration, as well as close cooperation with the Group’s customers and trading partners.

The Act on Capacity Market of December 8th 2017 defines the organisation of the capacity market and the rules governing provision, against consideration, of standby services to supply electricity to the power system and the supply of that electricity to the system in periods of emergency. Bids for expected service rates will be selected through an auction. As a rule, the winning bids will be those which offer the lowest price while giving maximum effect to the principle of technological neutrality expected by the European Commission. The same rules will apply when selecting bids placed by Polish electricity producers, including operators producing electricity through high-efficiency industrial cogeneration, and a limited number of bids from foreign producers, as well as Demand Side Response service bids, that is proposals to reduce electricity consumption and use of capacity on demand.

In 2019–2025, one main auction will be held every year for delivery periods falling in 2024−2030.  PKN ORLEN’s cogeneration units in Płock and Włocławek will be included in the support system provided for in the Act.

In 2018, the Act on the System for Monitoring the Road Transport of Goods, i.e. the SENT system, was extended to include the monitoring of the rail transport of tax-sensitive goods. In addition, the Act was amended to enable the tracking of shipments by road (with the use of locators installed in vehicles). The above changes, combined with the previous solutions introduced by the fuels package and energy package, are aimed at consolidating the positive effect of curbing the grey market by increasing the effectiveness of supervision.

In 2019, those regulations were amended by including the ‘heating fuels package’, which provides for the use of the SENT system to enhance the effectiveness of monitoring of fuel deliveries to consumers, the range of fuels subject to monitoring was expanded to include LPG. The purpose of the regulations is to counteract excise tax fraud committed while marketing those fuels, for instance by replacing paper excise declarations issued by buyers of fuel oils to confirm the receipt of fuel delivery with electronic delivery confirmations combined with monitoring under the SENT system, and to eliminate illegal use of liquefied gas intended for heating purposes as transport fuel.

PKN ORLEN actively participated in the entire process of drafting the regulations. The Company also worked to develop effective solutions provided for in the Act by designing the system for automatic registration of fuel transport from terminals in the SENT system, and testing the system’s subsequent modifications.

These activities are managed by the Company based on the appropriate integrated management system developed and implemented by ORLEN Upstream. The main legislative act governing business activities of the ORLEN Group’s Upstream segment in Poland is the Geological and Mining Law. In 2018, the Law was amended by introducing the second (in addition to a tender) procedure for granting hydrocarbon licences, i.e. an open door procedure, under which a tender may be organised at the request from an entrepreneur. The amendments also clarified the rules related to the entrepreneur’s right of first refusal. Now, the entrepreneur may apply within a statutorily defined timeframe for the establishment of mining usufruct for its  benefit with priority over other parties. In addition, the structure of  joint operations agreements, which have long been commonly used in other countries, has been modified. The provision requiring that the operator’s share in costs and profits from joint operations  exceeds 50% has been deleted. This provision allows more freedom to conclude such agreements and does not jeopardise their proper performance as the operator will continue to be responsible for discharging its licence and statutory obligations.

It should also be noted that the initiation and conduct of geological and mining activities requires compliance with certain requirements other than those provided for in the geological and mining law. These include such aspects as the environmental impact of such projects, spatial planning and development, waste management, water management and taxation.