Outlook 2020+

Unprecedented. This is the word first coming to mind when describing the situation that has unfolded in the wake of the current pandemic in all areas of life, including the economy. Unprecedented events send game-changing ripples across the economy, raising immediate questions about their near- and longer-term consequences. ‘We don’t know’ is neither a correct nor a constructive answer, especially in the case of companies in the process of expanding their asset base. As it is, responsible investors seeking to develop a business venture are driven by a vision of the future to which they aspire and which they are shaping. The more uncertain the future, the stronger the expectations that we present a vision of changes underlying our investment directions.

We are a group in the process of transformation. From an oil and gas operator, we are developing into a multi-utility business.

This development direction is aligned with a global mega-trend of energy transformation linked to digitisation, with electric transition at the end of that road. The world is becoming increasingly digital, and all digital is bound to eventually become electric. Electricity is a zero-emission form of usable energy.  Emissions are generated in the process of its production from fossil sources, but their share in the global energy mix is declining in favour of renewables. The power of this mega-trend can be seen clearly in social preferences and the regulatory regimes, relating to both carbon dioxide reduction and investment financing. The transition to a low-carbon economy is a necessity, and technologies to achieve it are being developed at an exponential pace. The share of electricity in total secondary energy is on the rise, as it effectively enters the transport sector, where alongside hybrid vehicle drive trains (on-board power plant, mechanical power supply) and alternative fuels, it is dethroning oil. Hydrogen is an important fuel of the future, becoming part of the current transport ecosystem (fast refuelling points at service stations and long range) and of the energy system – where it is used to store surplus renewable energy. In the world towards which we are progressing, power generation holds a huge growth potential, which cannot be said of the traditional oil sector. This is not yet reflected in the market return on capital, but given the technology advances as well as the social and regulatory pressures, such shift is only a matter of time. It will be sealed by investor sentiment, especially of a long-term nature, turning slowly away from the oil and gas sector.  Changes in business models and development of new technologies will be supported by capital inflows into companies respecting  he Principles for Responsible Investing.  This involves adherence to the ESG  (Environmental, Social, Governance) criteria in the practice of business decision making.

Consequences of the COVID-19 pandemic will not affect the existing developmental challenges, which are underpinned by demographic processes, driving an increase in demand for energy, food and materials. Meeting these needs on a linear (open) basis leads to excessive consumption of natural resources, environmental degradation and a rise in greenhouse gas emissions at a pace posing a threat to further development. The world is trying to tackle these challenges, but so far without much success. The recession, coming as an aftermath of the lockdown of economies, has brought about a steep decline in greenhouse gas emissions, particularly of CO2 emitted by vehicles. In fact, this is the only benefit of measures introduced to contain the pandemic. Unfortunately, the economies cannot be kept frozen forever – we must produce to make a living. There are many signals that production levels will be significantly lower in the coming years relative to pre-pandemic projections, which entails a slower rate of emissions growth. Will this lessen the pressure on reducing emissions? Such scenario cannot be ruled out, but in our opinion intensity gains and efficiency improvements in these areas will be a priority for both the public sector (governments, supranational institutions and public organisations) and its private counterpart (mainly businesses and financial institutions). The pandemic period has witnessed an increase in government intervention and commitment of public funds in financial shields, designed to protect firms and jobs at risk. Does it make sense to channel public funds into projects intended to unlock old outstanding potential? Or would such funds be better allocated to initiatives speeding up the necessary transformation? There is much to indicate that the latter angle of thinking will prevail.

The relationship between primary production factors – labour and capital – will shift, triggering structural adjustments at the international (globalisation shape), national (development drivers) and sectoral (leading technologies) levels. For the first time in more than a century, the impending global economic crisis will have labour rather than capital as its root cause. Given the biological nature of the pandemic, its economic implications for different sectors will depend on whether they are more labour- or more capital-intensive. Therefore, long-term consequences of the COVID-19 crisis should be viewed by sector. The most affected sectors are those providing services that involve direct human contact, such as air travel, public transport, mass events, cinemas, theatres and galleries. In the energy sector, the knock-on effects of transport restrictions have taken their toll on the refining industry and crude oil production.  Restrictions on physical contact between people have not affected the utilities sector. The decline in electricity consumption reflects a decrease in manufacturing output. Social distancing, which mitigates the risk of a new pandemic wave and the emergence of new ones, will prompt an adjustment or change in business models across all sectors of the economy, creating new relations between the capital and labour inputs. Changing consumer behaviours will make demand for transport services recover at a slower pace, with a concurrent shift in its structure (public vs private transport, car and ride sharing vs vehicles for personal use). Changes in consumer behaviours due to the pandemic will have no adverse impact on utilities. An analysis of the potential after-effects of the pandemic should best be carried out at the level of economic and industrial sectors. But before we proceed to such analysis, let us first take a look at the global economic impacts.

Consequences of the pandemic for the global economy – directions of change

According to the spring economic forecasts by the European Commission, released on May 6th 2020, most EU countries are likely to see two-digit GDP declines in the second quarter of 2020. The deepest declines will be felt by France (-18.4%), Italy (-18.2%) and Spain (-17.5%). Germany’s economy was shrink by -11.8%, while Poland’s will recede by -4.5%. The EU-wide GDP will fall by -14.2%, and the US recession will reach -12.9%. Throughout 2020, the global economy is likely to contract by -3.5%, relative to the previously forecast growth of 3.0%. In the EU, a recession of -7.4% will set in instead of the previously predicted 1.4% economic growth. France’s economy will shrink by -8.2% (instead of the 1.3% increase), Italy’s – by -9.5% (vs the expected growth of 0.4%), Spain’s – by -9.4% (instead of the 1.5% growth), and Germany’s – by -6.5% (vs the previously forecast growth of 1.0%). Against this background, Poland’s recession will be relatively mild (-4.3% vs the forecast increase of 3.3%).

'The COVID-19 pandemic’s toll on economic activity in recent months is only the beginning of the story. While the rapid and unprecedented collapse of production, trade, and employment may be reversed as the pandemic eases, historical data suggest that long-term economic consequences could persist for a generation or more.'


  • The fallout of the COVID-19 pandemic is an economic crisis, which for the first time in more than a century began on the labour market. Past crises were capital-related and started on the financial markets.
  • The absence of tools to combat the biological factor led to a situation where the only measure available to contain the pandemic spread was social distancing, whose effects cascaded to the economy, deeply hurting demand.
  • The fall in demand has led to overcapacity within a number of industries.
  • Within the next two to three years, demand should progressively recover in parallel with supply adjustments, as both sides of the market have suffered from the pandemic. However, this will not be a straightforward recovery, involving a change in both the structure and scale of demand. Excess capacity will be weighing on various sectors of the economy, giving rise to strong consolidation pressures, which will eventually transform them: the weak will drop off, whereas the strong will grow stronger. The structure of the economy is set to change, as new technologies emerge.
  • There has been an increase in the engagement of governments and commitment of public funds in financial shields, designed to protect firms and jobs at risk. Sovereign debts have risen in nominal terms. The debt to GDP ratios have deteriorated dramatically, a development that will be difficult to reverse.
  • One long-term consequence of the pandemic will be a shrinking of the global economy. The GWP rate over the next 10 to 15 years will be lower than previously predicted,
    • Not only in the wake of the 2020 recession.
    • Demand for products and services will grow at a slower pace within a number of sectors, and is even likely to dwindle in some areas.
    • The availability of investment capital will be constrained.
    • The ESG criteria will gain in prominence in the financing of investment projects.
  • The probability that another wave of the pandemic strikes or that further pandemics emerge is significantly greater than zero. This awareness will prompt a change in individual and social behaviours.
  • The IMF studies of the long-term effects of 15 pandemics going back to 1300 suggest that a prolonged period of depressed real interest rates is ahead of us ( There are two reasons:
    • Excess capital (capacities) relative to labour (effective demand)
    • Increased desire to save (out of caution or to rebuild depleted wealth).
  • There will be an increase in business costs, attributable to a slowdown in globalisation and setting up of provisions
    • One benefit of globalisation was a reduction in costs, which means that its slowdown will drive costs back up.
    • Transition from ‘just in time’ to ‘just in case’ delivery model.
    • Increased attractiveness of local suppliers.
  • There will be a labour-related increase in business costs. This trend is best seen in the case of services requiring direct contact with customers.
    • Customer service costs will go up (to equip workstations, ensure hygiene measures, and buy disposable materials)
    • Higher real wages (lower number of customers served)
  • The cost of business activities related to the maintenance of office space will go down.
  • Competition in the market of labour that can be provided on a remote basis will intensify.
    • As the efficiency of remote work (Home Office) is tested and proven, it will lower labour mobility barriers, especially in the case of white-collar professions. I can work from anywhere for my company (any location and country).
    • Employers able to exploit this potential will bring down their labour costs, and widespread switch to remote work will equalise such costs across the globe:
    • They will grow in cheaper areas and the other way around.
  • With the passage of time, the balance of long-term costs and benefits of the pandemic-induced transformation will tilt towards positive.
    • Profound economic shocks tend to be followed by periods when technological advances accelerate and innovations emerge giving rise to a step change in efficiency.
    • The digitisation process will gain momentum, delivering significant efficiency gains
    • Enhanced efficiency of the healthcare sector.
  • Changes in business models and development of new technologies will be supported by capital inflows into companies respecting the Principles for Responsible Investing. The ESG criteria will feature more prominently in investment rankings.

Consequences of the pandemic for PKN ORLEN’s business activities


  • Consequences of the pandemic will not slow the pace of the ongoing energy transformation, but may steer it into different paths.
  • The upstream production and refining segments are holding less and less appeal for investors (although they were quite attractive before the pandemic outbreak).
  • Investor appetites are shifting towards utilities, and low-carbon power generation associated with RES.
  • Petrochemicals are still viewed as an attractive investment opportunity – improved competitiveness.
  • Retail – the test bed of digitisation – extensive opportunities.
  • Innovation, Research & Development – long-term competitive advantages are developed in house, by experimenting with new technologies and business models in reliance on one’s own resources and at one’s own risk.

The upstream and refining sector will remain under the pressure of damaged demand for crude oil and liquid fuels, as well as the accelerated peak demand date:

  • The sector was prepared to accommodate an increase in demand following adoption of the new IMO regulations. Many costly investment projects were undertaken, currently being put into service and adding more capacities.
  • A shrunk global economy over the coming decade spells weaker demand for transport services, which will recover with concurrent shifts in fuel demand
    • Improved ICE performance
    • Increasing substitution of crude oil as a transport fuel by its alternative counterparts, electricity, and in the future also by hydrogen
    • Likely drop in demand for (air) travel and (international) journeys
  • The impact of these factors will vary by fuel type (badly impairing especially the demand for aviation fuel, with the demand for diesel relatively least affected; as regards gasoline – it will be absorbed as feedstock by the petrochemical industry).

On the supply side, excess production and refining capacities will persist, putting pressure on both prices and margins.

  • The damaged demand will push down oil prices in the long term (eliminating the need to extract it from more costly sources).
  • Fast depletion of producing fields, coupled with reduced investor interest in upstream projects, will lead to short-lived, widely fluctuating price cycles.

Global excess of refining capacities will prompt the sector to consolidate. The consolidation pressure will be felt strongly in Europe.

  • In the European Union, demand for crude oil and liquid fuels has fallen steadily, save for a short interval, since 2007
  • Oil price fluctuations are reflected in volatile refining margins, posing a threat to independent refineries. For more information, go to:

Investment appetite for oil and gas companies will be drying up:

  • Widespread acceptance of ESG principles, especially in Europe
  • Lower returns due to the capacity overhang and weakening demand (declining sector)

Worldwide growth in demand for petrochemicals set to outpace GDP, giving a strong edge to refineries integrated with petrochemical assets.

  • The world needs materials and fertilizers, which are least harmful to the environment and climate if produced from crude oil and natural gas.
  • The growing role of recycling will add to this advantage, preventing an increase in demand for disposable products from drawing on natural raw materials. For more information, go to:
  • ‘Just in case’ strategies will boost demand for petrochemical products made locally in Europe.
  • The oversupply of crude oil will enhance its competitiveness as a production feedstock versus natural gas.

Power generation will experience a progressive shift towards renewable sources and its wide use (including in transport) will give it a value advantage over the traditional fuel segment.

  • As opposed to crude oil and liquid fuels, demand for electricity (and heat) will be on the rise.
  • The role of energy distribution (utilities), as a stand-alone segment intermediating between energy producers and end users, will become more pronounced. The growing role of end users and their preferences regarding the ‘colour’ of energy consumed is turning utilities from passive distributors into active market players accelerating the energy transformation, which boosts the segment’s market value.
  • Considerable growth opportunities will be found in renewable energy, including offshore wind power generation and selective development of conventional energy sources based on natural gas (especially as an alternative to coal). Gas-based generation will provide a perfect back-up once the related capital costs are amortised.

Retail continues to offer a number of opportunities:

  • Traditional motorist services linked to vehicle refuelling with various types of fuel, electricity and hydrogen.
  • Development of a modern non-fuel offering and digitised customer relations.

Innovation, Research and Development

  • Long-term competitive advantages are developed in house, by experimenting with new technologies and business models in reliance on one’s own resources and at one’s own risk.
  • In this context, we can see significant potential in green hydrogen (obtained by electrolysis), both for the purposes of energy storage and as an alternative fuel for public services (buses), freight (locomotives), in-plant transport (handling trucks) and passenger cars.
  • Major areas of research and innovation experiments include various sources of and applications of bio-components, which can meaningfully reduce emissions from transport and petrochemical production.
  • Along with the development of oil-based petrochemicals, a crucial thing will be to explore business models and technologies that can accelerate the closing of plastic loops.

Adam B. Czyżewski Ph.D.
Chief Economist, PKN ORLEN
June 2020

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