© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
[Audio Gap]
year-on-year to the level of USD 9.8 per barrel, and the higher fuel consumption as a result of loosening COVID restrictions translated into increase in sales volumes by 9% year-on-year and 10% quarter-on-quarter.
In Q2, we processed 6.8 million tonnes of crude oil, so 10% more than in the previous year, which is a 78% utilization ratio. Crude oil throughput was adjusted to the fuel demand, as usual, and also to the maintenance shutdowns that we had in our petrochemical segments.
Our financial situation is still very strong. In Q2, we generated PLN 5.1 billion cash flow from operations that I've mentioned in the beginning. We realized CapEx at the level of PLN 2.4 billion. And as a result, we reduced our net debt by PLN 2 billion compared to Q1 to the level of PLN 11.5 billion. Covenant net debt to EBITDA remains at the safe level of 0.87.
In May, PKN ORLEN, as the first company in Poland, issued [ 7-year bonds ] worth EUR 500 million with 1.125% coupon. The issue of green bonds met with really great interest from investors, yes. So the subscriptions were made for a total amount of nearly EUR 3 billion, which means that demand was 6x higher than the volume of assumed issue.
Funds from the issue, of course, will be a source of financing investments in renewable energy sources, including offshore and onshore wind farms as well as charging infrastructure for electric and hydrogen cars and to waste recycling installations.
In May as well, Annual General Meeting of PKN ORLEN approved the dividend payment for 2020 recommended by the Management Board at the level of PLN 3.5 per share. The dividend will be paid on the 5th of August. Additionally, in the second quarter, State Treasury with PKN ORLEN, PGNiG and LOTOS Group confirmed noncash structure of the merger, and it was positively assessed by Fitch Rating agency. European Commission extended deadline to select the partner for remedies within acquisition of LOTOS Group until 14th November this year. PKN ORLEN applies to antimonopoly body for consent to acquire PGNiG. We opened a brand new R&D center in Plock. We commenced the expansion of Olefin complex in Plock, so the largest petrochemical investment in Europe. Just to remind you, total value of the investment is estimated at the level of PLN 13.5 billion.
ORLEN became the most valuable Polish brand worth PLN 10 billion. ORLEN Lietuva took control over the only railway terminal at the Polish-Lithuanian border, which is used for reloading petroleum products manufactured in Mažeikiai to be delivered to Polish and Ukrainian markets. We opened the first store with a wide gastronomic offer format under brand name ORLEN w ruchu, which means ORLEN in motion, in Warsaw. By the end of the year, another 40 points will be opened in the largest Polish cities, and there will be a total of [ 900 ] of them.
We also actively support the development of innovation in Poland. We launched ORLEN Skylight Accelerator, the first corporate accelerator program in Poland for technology start-ups with an international range, addressed to young innovative companies from around the world with ready-made products and services, with the purpose of which is to support the further dynamic growth of PKN ORLEN business yes, like petrochemical production, energy and retail sales.
As a part of sustainable development, so ESG, we launched HYDROGEN EAGLE program, assuming the construction of international network of hydrogen hubs powered by renewable energy sources and the construction of over 100 hydrogen refueling stations for [indiscernible] clients, public and also cargo transport.
ORLEN Poludnie is finalizing investment in ecological glycols, and together with PGNiG is developing career of biomethane production. As the largest sponsor of Polish sports and culture, we published the first sponsorship report.
It's worth to underline also that 7 times in a row we received the CSR Golden Leaf by Polityka, which confirms that we consistently implement the ideas of social responsibility and sustainable development. And in June, the fourth edition of My Place on Earth program was launched under which ORLEN Foundation will donate another PLN 2 million to support local communities and during last 3 editions, aid in the amount of EUR 7 million was granted to nearly 900 organizations all over the Poland.
Now I will go into the details of second quarter. So let's move to Slide #5. Macro environment. In second quarter, model downstream margin increased by USD 2.5 per barrel compared to the last year the level of USD 9.8 per barrel. And this was mainly the effect of increase of petrochemical margin by 74% year-on-year to the record high level of almost EUR 1,500 per tonne and also higher B/U differential by USD 1.9 per barrel.
Refining margin was still under the pressure as a result of lower cracks on diesel by minus 40%, heavy fuel oil by minus 145%, and higher cost of own consumption due to increase in crude oil prices by more than 130% with a simultaneous increase in gasoline crack by 148%.
Operating results were supported by weaker Polish zloty versus euro and negative impact of stronger zloty versus dollar.
Next slide, Slide #6, shows GDP and fuel consumption. So we may say that we expect higher fuel consumption year-on-year on all domestic markets as a result of loosening restrictions in movement related to COVID, which, of course, translates into higher GDP. In Q3, we expect fuel consumption dynamics to flatten compared to the last year, which is already shown in July data on fuel sales.
Now I will present financial and operating results. So let's start from Slide #8. But one comment from my side before I go into the details, for better comparability, operating results for the second quarter and also 6 months 2020 were [ excluding ] one-off gain on the bargain purchase of ENERGA shares recognized in the second quarter at the level of over PLN 4 billion. And also, for your convenience, we added a few slides in the supporting section. So Slide #30 split of EBITDA LIFO by segment, including impact of net realizable value hedge in total, including CO2 hedge. And also Slide #31 and 32, fully dedicated to the issue of valuation and settlement of CO2 contracts. So it's worth to dig in and have a look on this because this is a summary of what we presented in the whole presentation.
In the second quarter, we recorded revenues increase by 73% year-on-year due to higher quotations of refining and petrochemical products, resulting from crude oil price increase by USD 39 per barrel and also higher sales volumes by 9%. We achieved PLN 3.2 billion EBITDA LIFO, which is higher by PLN 1.2 billion compared to the previous year, mainly due to, first of all, positive macro impact, higher sales volumes, higher trade margins in wholesale and nonfuel margins in retail, usage of historical layers of inventories as a result of maintenance shutdowns and also higher ENERGA Group results. Those effects were partly offset by negative impact of inventories revaluation as well as lower fuel margins in retail and higher costs.
Positive impact of changes in crude oil prices on valuation of inventories in the second quarter. So LIFO effect amounted to PLN 1 billion, what caused an increase in the reported EBITDA to the level of PLN 4.2 billion.
Net financials amounted to PLN 0.1 billion. So as a result of the surplus of positive FX differences at negative interest cost and net impact of settlement and valuation of derivative financial instruments. And taking all into account, in the second quarter, we achieved PLN 2.3 billion net profit, which is a record high one in the quarterly results.
Next slide, Slide #9 presents split of EBITDA LIFO by segment. So starting from the refining. It generated almost PLN 300 million. EBITDA LIFO, so result lower by PLN 316 million year-on-year due to negative macro impact and revaluation of inventories, net realizable value at positive impact of higher sales volumes, higher trade margins and usage of historical layers of inventories.
Petchem generated over PLN 1 billion, so higher by PLN 770 million year-on-year due to positive macro impact and usage of historical layers of inventories at negative impact of lower sales volumes.
Energy generated over PLN 1.2 billion, so higher by PLN 475 million year-on-year due to positive macro impact and higher ENERGA Group result at negative impact of lower sales volumes.
Retail generated PLN 828 million, which is higher by PLN 102 million year-on-year. And here, we have a positive impact of higher sales volumes, higher nonfuel margins at negative impact of lower fuel margins and higher cost of running the business.
Upstream generated PLN 60 million, so higher result by PLN 50 million year-on-year due to positive macro impact at negative impact of lower sales volumes and cash flow hedging transactions.
And corporate functions, here, we've got lower cost by PLN 112 million, and this includes mainly donations and expenses on COVID, which we spent last year.
So now let's go into the details, Slide #10. In the second quarter, refining, as I said, recorded almost PLN 300 million. As you see on the bottom chart that challenging macro remains the main factor standing behind the weaker performance of the Refining segment year-on-year. This is due to a decrease in cracks on diesel and heavy fractions, strengthening of Polish zloty versus U.S. dollar, negative impact of cash flow hedging transactions and higher cost of internal usage resulting from higher crude oil price. And these negative effects were partially compensated by positive impact of higher B/U differential, higher gasoline and JET cracks and valuation and settlement of CO2 contract as a part of transaction portfolio in the amount of PLN 260 million year-on-year. So this is shown in the supporting slides, as I said, number 30, 31 and 32.
Positive volume effect fully compensated the negative macro effect so sales volumes in the second quarter increased by 11% year-on-year to the level of 5.8 million tonnes. We recorded higher gasoline sales by 15%, diesel by 12%, JET by almost 120% at lower sales of LPG by 6%, HSFO by 5%. Others include mainly minus PLN 1.2 billion, so lack of a positive impact of inventories revaluation net realizable value from the second quarter last year. So this quarter, net realizable value is not material and is equal to just PLN 14 million. And also PLN 0.5 billion usage of historical layers of inventories, higher trade margins at higher cost of CO2 emission.
So now Slide #11 shows operating data of refining segment, starting from crude oil throughput. Crude oil throughput was adjusted to the fuel demand and the maintenance shutdowns in Petrochemicals segment. So in the second quarter, we processed 6.8 million tonnes of crude oil, so 10% more than in the previous year, mainly due to a significant increase in Unipetrol utilization ratio. So throughput Unipetrol increased by 0.8 million tonnes year-on-year due to low base from Q2 2020. We had a cyclical shutdown of refining and petchem in Litvinov. And we also had a delayed start of refinery in Kralupy after the shutdown from March last year. And currently, also, this is the impact of higher demand for fuel.
In petchem shutdown of Steam Cracker, PE2 and PE3 installations due to lack of the feedstock and also planned maintenance shutdown.
PKN ORLEN recorded decreased by 0.2 million tonnes year-on-year due to a maintenance shutdown of CDU units, hydrogen plant and metathesis. And utilization ratio in the second quarter was adjusted to olefin shutdown. And last year ago, of course, the limited demand for fuel as a COVID impact.
And in ORLEN Lietuva, throughput was at comparable level at lower utilization by minus 1 percentage point year-on-year.
As for sales volumes, sales amounted to 5.8 million tonnes, so increase by 11%, of which Poland by 11%; Czech Republic, 34%; Lithuania by 1%. So higher sales in all the markets was the result of loosening COVID restrictions.
Now let's move to Slide #12. In the second quarter, Petchem delivered over PLN 1 billion of EBITDA LIFO, so 4x higher than a year ago. This is the effect of a record high petrochemical margin, valuation and settlement of CO2 contract as a part of transactional portfolio in the amount of PLN 287 million year-on-year and weakening of Polish zloty versus euro. Margins increased on all the petrochemical products. But despite record high margins, of course, we were not able to take the full advantage of the market situation due to realization of plant maintenance shutdown of olefin unit in Plock, and we recorded a decrease in sales volumes in Poland by minus 27% and year-on-year at higher sales in Czech Republic by 58% and Lithuania by 367%.
Total petchem sales in the second quarter amounted to 1 million tonnes and was lower by 4% year-on-year, of which lower sales of olefins by minus 69%; PVC, minus 22% at higher sales of polyolefins by 23%; fertilizer by 12% and PTA by 3%. The result on PTA sales was over 30% higher year-on-year at comparable on the results to the second quarter 2020.
Slide #13 shows operational data of Petrochemical segment, And we may say that the utilization of petrochemical installations in the second quarter was lower in Poland and Lithuania due to realization of plant maintenance shutdowns in Plock and Wloclawek due to shutdown of olefin units and in ORLEN Lietuva as a result of wider scope of work during the spring maintenance shutdown comparing to the last year.
In the Czech Republic, utilization ratio increased by 69 percentage points year-on-year as a result of low base in Q2 2020.
To remind you, last year, Unipetrol had a cyclical shutdown of Litvinov refinery.
Now let's move to Slide #14, energy. Energy generated over PLN 1.2 billion EBITDA LIFO in the second quarter, so more than 60% comparing to the previous year, mainly due to ENERGA Group results being higher by PLN 537 million year-on-year and the valuation of CO2 contract settlement within transactional portfolio in the amount of PLN 217 million.
Positive effects. The positive effects were limited by negative impact of margin on electricity due to higher gas prices and also CO2 prices year-on-year by minus PLN 142 million and also lower sales volumes by minus PLN 114 million. Sales of electricity decreased by 6% year-on-year, mainly due to 1.5 months shutdown of CCGT in Plock.
So now let's move to operational data of Energy segment, so Slide #15. And this slide definitely confirms that we focus on developing low and zero-emission energy sources. So in the second quarter, ORLEN Group produced less electricity by 7% mainly due to CCGT Plock shutdown at production increase in conventional energy of Ostroleka, following, of course, the higher demand from state-owned grid operator. Total production amounted to 2.6 terawatt hours, of which 70% was from renewable sources and gas-fired power plants.
Current installed capacity of ORLEN Group is 3.4 gigawatts of electricity, of which 2 gigawatts in ORLEN Group and over 1.4 gigawatts in energy group -- ENERGA Group, sorry. Compared to the previous quarter, new renewable sources capacity was added at the level of 0.1 gigawatts of electricity, so new plants, Kanin and Nowotna.
Electricity sales decreased by 6% year-on-year to the level of 6.6 terawatt hours, and this is mainly due to lower sales in wholesale aimed at portfolio optimization and also drop of electricity usage by business clients at higher usage by households during COVID period.
Electricity distribution, which is fully realized via ENERGA operator, increased by 16% due to the level of 5.8 terawatt hours. And this is mainly due to low base from previous year economic recovery and also higher number of energy connection points.
CO2 emission in Energy segment in the second quarter amounted to 1.9 million tonnes, which is over 50% of ORLEN Group emission that is amounted to 3.7 million tonnes in the second quarter.
Now Slide #16, retail. Retail generated in the second quarter EBITDA LIFO in the amount of PLN 828 million, which is higher by 14% year-on-year. In the second quarter, we recorded decrease in fuel margins mainly in Polish, Czech and German markets at comparable level of margins in Lithuania year-on-year.
Retail sales volumes increased by 13%, of which gasoline by 19%, diesel by 11% and LPG by 13%. Nonfuel margin in the second quarter was higher year-on-year in all markets, especially sales of hot snacks and hot beverages.
We expand also availability of alternative fuels. So currently, we have 278 points of alternative fueling, which is more by 104 comparing to the last year.
Slide #17 shows operating data of Retail segment. And at the end of the second quarter, we were running 2,854 fuel stations, of which circa 80% was equipped with nonfuel concept Stop Cafe and Star Connect. Number of fuel stations increased by 22 year-on-year. We also opened new stations on all of the markets we operate except Germany. And due to loosening COVID restrictions, retail recorded sales volumes [ increase ] 13% year-on-year. And the higher sales, we may say it was observed in all of the markets.
Market share increased in the Czech Republic and Slovakia, a drop on other markets. We consequently [ developed ] fuel sales in second quarter and other 2 locations were opened. And at the end of the quarter, we were running 2,239 coffee corners, which is more by 77 locations year-on-year. In Warsaw, as I've mentioned at the beginning, we have launched the first Orlen w ruchu concept.
We are expanding portfolio of alternative fuel stations. At the end of second quarter, we had 278, which means increase by 104 locations, of which 89 in Poland, 15 in Czech Republic at comparable number in Germany. And our clients can use the 232 EV chargers, 191 in Poland, 34 in Czech Republic, 7 in Germany. We have also the hydrogen stations located in Germany and 44 CNG stations in the Czech Republic.
Slide #18. So upstream in the second quarter delivered PLN 60 million EBITDA LIFO, which is higher by PLN 50 million year-on-year. This is the effect of rising prices of all hydrocarbons, so margins impact was higher by roughly speaking PLN 100 million comparing to the previous year at negative impact of hedging transactions at the level of minus PLN 40 million.
Moreover, what I see, we recorded sales volumes decrease by 9% year-on-year as a result of drop in average production by minus 900 BOE per day year-on-year, of which in Canada by minus 1,000 BOE per day at higher production in Poland by 100 BOE per day.
And Slide #19, operational data of Upstream segment. We may say that we have 174 million BOE of 2P reserves of crude oil and gas, so this data at the end of last year. Average production in the second quarter reached 17,900 BOE per day CapEx in the second quarter amounted to circa PLN 52 million, of which 35% in Poland and 65% in Canada.
In Poland, within development of existing assets, we conducted works on Miocen, Edge and also projects realized with PGNiG. Drilling works included construction of drilling sites for Pruchnik well on the Miocen project as well as design and preparatory works for drilling future wells on Plotki project. Within seismic activity works, we completed processing of seismic data of Koczala Miastko 3D and starting interpretation. This is the Edge. And we completed seismic interpretation of data, 2D data on the Karpaty project.
In Canada, investment works regarding development of Ferrier and Kakwa assets were continued. 2 wells were fracked and added to the production in Kakwa. Drilling of 1 well was started in Ferrier so currently works to prepare locations for further wells are in progress. The process of acquiring new concession rights in the highly perspective part of Lochend assets was completed.
So that's all from my side. Now I hand over to Michal. Thank you.
Thank you, Konrad. Good morning, everyone. Let's start with Slide #21. Cash flow looks very strong in this quarter. We have recorded historical high net income from operations in second quarter of PLN 5.1 billion. Of course, EBITDA, including LIFO effect was contributing the most with PLN 4.2 billion, but also categories were contributing positively to operating cash flow. We have improved our working capital by PLN 0.4 billion, mainly driven by the strict control of payables and receivables. Also, we have recorded a positive cash flow from settlement of deposits, mainly related to CO2 hedging activity.
Net outflow from investment reached PLN 2.9 billion in second quarter, out of which, PLN 2.4 billion was CapEx.
Altogether, over the last 6 months, we have recorded PLN 7.7 billion of EBITDA. Working capital actually stays at a very similar level to end of 2020. We have PLN 4.2 billion on CapEx and additional PLN 1.4 billion on purchase of CO2 emission rights in March this year. This purchase was partially offset by cash inflow from settlement of deposits of PLN 1 billion altogether over the last 6 months. I would just like to recall that we have -- currently, we have over PLN 40 million contracts for CO2 in our portfolio. Others position covers mainly cash spendings on acquisitions, advance payments to our contractors, income tax paid, leasing payments, interest paid and dividends received.
In total, we have decreased our net debt by PLN 1.6 billion versus end of 2020.
The improvement of debt over the last quarter is even stronger. You can see it on Slide #22. So we decreased debt by PLN 2 billion versus end of March 2021, even though we have recorded PLN 244 million of project finance nonrecourse related to acquisition of onshore wind farms in [indiscernible]. Due to a very strong [ EBITDA ] and decrease of debt, we recorded lower net-debt-to-EBITDA ratio of 0.87. It was worth to mention that this quarter, we are not taking the calculation profit on the bargain purchase of ENERGA, which was recognized in second quarter of 2020 for calculation of this ratio, so which is purely calculated now based on the EBITDA result, this one-off and on the net debt level of cost, excluding hybrid and project finance nonrecourse project finance.
As Konrad mentioned, we have issued in second quarter our inaugural green -- euro green bond of EUR 500 million. And the profits coming from this issuance will be used mainly for development of renewables, hydrogen, fueling and EV charging infrastructure, and recycling installations. Currently, over 30% of our outstanding debt is sustainable or green debt. In May, Fitch placed our rating on a positive watchlist announcement, new announcements and more details on the merger with PGNiG and LOTOS on the noncash base.
That is all from my side. Thank you very much. I hand over to [ Marek ], who will give you more on CapEx.
Thank you, Michal. So let's move to the Slide #23, which is CapEx. And as a reminder, planned CapEx for 2021 amounts to PLN 9.5 billion, which PLN 7.7 billion is accountable to ORLEN Group and PLN 1.8 billion for ENERGA Group. We plan to spend over 50% of expenditures on growth. And after 6 months, we realized CapEx -- the realized CapEx amounts to PLN 4.2 billion, of which PLN 0.9 billion was spent in ENERGA Group. The biggest share attributed to Petchem segment, it's PLN 1.4 billion; and to Energy segment, that's PLN 1.2 billion.
In the Refining segment, the capital expenditures amounted to PLN 0.9 billion. In retail, it was PLN 0.5 billion. And in Upstream, it was roughly PLN 100 million.
CapEx is in line with the schedule. And at the moment, we are confident that it will reach the annual target that we set at the beginning of the year.
Main growth projects realized in the second quarter are as follows. So in refining, the construction of Visbreaking unit in Plock and construction of propylene glycol installation in [ Poludnie ].
In petchem as a part of petchem development program, the expansion of olefin unit capacity in Plock. And in Anwil, the extension of fertilizers production in energy segment and the project for construction of offshore wind farm on the Baltic Sea, modernization of current assets and connection of new clients in ENERGA Group and development of EV chargers network.
In retail, we opened 6 stations, 6 were closed, and we've opened 10 nonfuel, Stop Cafe or Star Connect points altogether.
The last section on Slide #25, describes current macro environment. So this data is as for 23rd of July. And in the first quarter '21 'til the date, we observe a fall so the downstream margin decreased by USD 1.2 per barrel, quarter-to-quarter to the level of USD 8.6 per barrel due to lower petchem margin and lower refining margin at higher B/U differential.
Crude oil price increased by USD 6 per barrel quarter-on-quarter to the level of average -- to the average level of USD 75 per barrel due to positive growth prospects for global oil demand such as increased demand for JET fuel, economic recovery in the U.S. and European countries, and another week of reducing U.S. crude oil inventories by 7.9 million barrels to the level of 437 million barrels.
The information about the increase in crude oil production in OPEC+ by 400,000 barrels a day from August had a negative effect on oil prices as well.
In terms of diesel cracks, those decreased by minus 16% quarter-on-quarter with an average of USD 31 per tonne. But in the last weeks, we observed a rebound in diesel cracks to the level of USD 39 per tonne, and those are due to increasing demand related to the easing of restrictions and increasing mobility, disruptions in the fuel supply chain in Europe. Those were caused by heavy rains and [ plus ] labor shortages in the U.K. transport industry. And the decline in inventories in the U.S. and ARA region. And as for gasoline cracks, those increased by 11% quarter-on-quarter with an average at the level of USD 160 per tonne, currently reaching even almost USD 180 metric ton. And those are mainly the same reasons for diesel cracks rebound. And more than that, the possibility of introducing a ban in gasoline exports in Russia following a record increase in Russian gasoline prices.
As for HSFO products, those decreased by minus 15% quarter-on-quarter with an average of minus USD 175 per tonne. Those were mainly due to higher crude oil price and limited demand for bunker fuel and as for Brent/Ural differential that one increased by USD 0.5 per barrel quarter-on-quarter with an average of USD 2.5 per barrel, mainly due to the drop in demand for Ural crude oil in Baltic ports.
About petchem margin based on [indiscernible]. Sorry guys for the interruption. I'll just make sure it won't happen again. Okay. So as for the petchem margin, this one decreased by minus EUR 110 per ton quarter-on-quarter, with an average of EUR 1,353 per tonne, currently observing the levels of EUR 1,300 per ton and those caused mainly due to the decreases in polymers importations last week and rising crude oil prices. Although Petchem is very strong due to low supply related to the accumulation of postponed shutdowns from 2020, low imports to Europe, production problems in Europe, which is in Germany and lower feedstock costs such as naphtha and LS VGO.
Okay. So now let's move to the next slide, Slide #26. It's a slide where we described the market environment. And let's start with the Brent crude oil prices, which increased due to the OPEC+ pricing policy, mainly because of Saudi Arabia resistance to increase production so that it would not keep up with the dynamic growth in demand that we currently observe.
In mid-July, OPEC+ overcame internal divisions and agreed to increase production, which caused fears of an all surplus as COVID-19 infections continue to rise in many countries. In the coming weeks, we expect oil prices to fall and stay at the average price below USD 70 per barrel until the end of 2021.
The fall in oil prices will not be smooth as currently. Over 60% of crude oil production is able to flexibly react to changes in the market situation. For example, in case of OPEC+, it's actually possible immediately and in U.S. after 1 or 2 quarters. So the shortening of the price cycles in this crude oil market from several years to several quarters will be accompanied by increased price volatility.
As for refining margins, the strong increase in demand for crude oil and liquid fuels, which we have been [ used ] with -- since the beginning of the second quarter of 2021, combined with the seasonal effects have improved refining margins, relieving the pressure to reduce refining capacity. So the improvement in margins was limited by the dynamic increase in oil prices to nearly $80 per barrel. Current perspective of a decline in crude prices may temporarily improve refining margins. But in the long term, the global excess of refining capacity will continue to keep the margins under pressure.
The latest projections indicate that in 2050 -- well, we'll need 7 million barrels per day of crude oil and liquid fuels less than it was expected before the pandemic [indiscernible]. So the reason behind the reduction in demand forecast is the dynamic development of EVs and alternative fuels.
And so overall, in the short term, we expect margins to improve temporary as crude oil prices decline. However, in the longer term, margins will be under pressure as the excess capacity in the global refining industry has increased, as we mentioned before.
As for the petchem margin, because this one might be crucial for the first quarter in our case, the increasing demand at supply constraints pushed margins to the record high levels in the second quarter '21, actually largest -- we've never seen before at these high levels. And in the following quarters, we expect margins to deteriorate. However, they will remain at high levels, much higher than in previous years.
Petchem is strictly correlated with GDP, which is currently growing strongly following a deep decline last year.
On the gas, current natural gas spot prices in Europe at the highest since actually 2008. And the reasons for such high feed prices -- prices are, in our opinion, as follows. This is due to limited gas supply, which is a low level of stock in Europe and limited availability of LNG loads going to Asia, increased demand for natural gas in the world overall. So splitted by regions in Europe. It is built by high prices of coal and CO2 emission allowances, which makes the production of electricity from gas power -- gas-fired plants more effective and the need to replenish gas for the winter period. Those are the -- in fact, we see in Europe.
In Asia, it is a consequence of the high demand for gas for energy purposes. It's an effect of high temperatures that are being [indiscernible] in Asia. And in Brazil, drought limits the possibility of energy production from hydro resources and forces the replacement with gas power plants. And also, if level of stocks will not increase before the winter season to the level observed in previous years, that may support gas prices as well as in the coming winter quarters.
As for the electricity, the fundamental components for electricity prices have recently been at [ pro-growth ] nature. From the beginning of the year, the base-wide '22 contract prices increased from around PLN 250 to a maximum of of over PLN 360, which translates to an increase of approximately 30%.
Due to the structure of the Polish energy market, a strong correlation with CO2 allowances is of great importance as it is now an unquestionable support factor for energy prices with the prospect of further growth.
The prices of coal on the global market have recently reached new heights despite the active European policy which is, in the long run, should limit the profitability of using fossil fuels and to strive to move away from coal. However, the changes may be delayed in the near future by the perspective of the cold winter and weather extremes.
Currently strong demand throughout Asia and limited supply from Indonesia and South Africa are also of [ pro-growth ] nature, which also directly affects coal prices in Europe and indirectly also in our domestic market.
The [ stop ups ] on high gas prices and the general high demand for electricity are also important. And this, in turn, results from a relatively warm summer, low in generation and high temperatures.
In the coming months, energy prices should also be supported by, among others, the situation in the gas market, relatively low levels of stocks in Europe and an uncertain price perspective for the coming months with limited supply and high LNG prices will be a weaker constraint on rising coal prices and another factor supporting energy prices. The perspective of the cold winter, high demand may be another factor causing an increase in electricity prices.
So as a result of easing the restrictions, we observe an economic recovery and an increase in fuel demand, which should be sustained in our opinion. And in terms of regulation, nothing has changed since the last quarter.
And that will be all on my part. So thank you for your attention. And now we will move to the Q&A session. So we are open for your questions.
[Operator Instructions] We have the first question. It's from Ekaterina Smyk of Bank of America.
I have 3 questions. The first one is on the ongoing LOTOS-PGNiG merger -- sorry, the preliminary works. Appreciate the State Treasury approved the noncash structure of the transaction. So what is the current status of it? And when do you expect to announce to get the final [ certification and ] proposal for the share of parity.
The second question is on your volumes outlook for the third quarter or the second half of the year, how your maintenance looks like and whether you expect to recover volumes significantly compared to the first half, which was affected by maintenance?
And the third question is on the offshore wind project. So this is basically the first call since news on the contract for different award for the project. What are the next sort of steps you need to achieve to get this project to the construction phase? And sort of what are the utilization rates you expect to achieve at the project? And what is the IRR you currently look for given the known level of the subsidy at this stage.
Okay. So as for the questions regarding the merger with LOTOS and PGNiG. I'll just start with the PGNiG one. And in this transaction, we are currently -- we filed the petition to the Polish Antimonopoly Trust. So we are working. We are waiting for the decision. And after that, we'll be able to start the whole procedure.
So as for the State Treasury confirmed that they accept the noncash solution for this transaction, it stays viable. So nothing has changed. And as for the shares to our parity, we have not commented yet on that. We'll be more than ready when we receive information from [indiscernible] we'll be ready to go with this process altogether. Still, we would think that this transaction could be finished in this year. So we are currently waiting for the decision of [indiscernible].
As for the LOTOS, as you know, and as we informed before, we postponed or prolonged the date to present our buyers or contractors to the EU Commission. And the date that is set up for now is 14th of November. So that's the new date for the participants in this -- participants that will take the remedies from us, but also it doesn't mean that it will prolong the whole transaction for another 4 months.
We are clearly ready with all the formal steps afterwards. So I just say that the best thing to do for now is to wait for the 14th of November, maybe, next summer when we present who and on what terms will take the remedies and realize the remedies in that transaction. And of course, as for parity swap, this is too early to discuss on that topic.
Okay. So Konrad Wlodarczyk speaking. I take the second question about the volumes perspective on the second half of this year. So definitely, we may say that the second half of this year will be definitely less packed with maintenance shutdowns comparing to H1 this year.
In the third quarter, we are planning to process 8.4 million tonnes of crude oil which is, roughly speaking, 95% utilization ratio, and this is also higher comparing to Q3 '20.
In Plock, we're going to have maximum utilization rate despite the fact that in September, we have some planned maintenance shutdowns. On the refining part, we have reforming and H oil maintenance, roughly speaking, 30 days. On the petrochemical side, we have maintenance shutdowns of PX/PTA unit up to 30 days.
In ORLEN Lietuva and Unipetrol utilization, we will be at the level of, roughly speaking, 85%, of course, adjusted to the market situation. In ORLEN Lietuva, and in September, we are planning to conduct maintenance shutdowns of vacuum flasher [indiscernible] 2 weeks. And in Unipetrol, we have planned maintenance shutdowns of PE3 unit almost the whole month and also polypropylene unit slightly above 10 days.
In terms of volumes, volumes, we may say that the demand, first of all, is very sound, yes. However, in the first quarter, we are expecting to mitigate the dynamics in the consumption of fuels in Poland comparing year-on-year due to the fact that we do not have any restrictions in movement, But this is the similar situation that we had last year, so Q3 '20. Last year was also free from any restrictions. So those significant double-digit dynamics as we observed in the second quarter definitely is not applicable to Q3.
Total sales in Poland in July, what we see right now is on the comparable level to the July last year. On the wholesale level, sales of fuels is, roughly speaking, higher by 1% year-on-year. So this is the effect of higher sales of gasoline by, roughly speaking, 10%; JET by more than 130% at lower sales of diesel by, roughly speaking, minus 3%.
On the retail side, we observed currently lower sales by 3% year-on-year due to the fact that we observe lower demand for the gasoline and also diesel year-on-year.
In terms of petrochemicals, we may say that petrochemical sales is currently on the comparable level year-on-year. So all the, let's say, planned maintenance shutdowns of petrochemical units realized in the second quarter has already finished in June, and it was, of course, according to the plan.
In terms of maybe the market, the margins, trading margins, yes, because, let's say, macro from quotations you follow. However, in terms of trading margins, so IP spot on the wholesale level. In Poland, we may say that it's on the record high in terms of the gasoline. So we observe increase by roughly [ 75% ] year-on-year. So this is the effect of high demand at lower supply. So we have a -- summer season, we have maintenance shutdowns of [indiscernible] refinery and some logistic constraints on the Germany at lower IP on the diesel at the level of minus 15% comparing to the last year.
In terms of retail margins, they are quite sound. In Czech Republic, so 10% increase. We have comparable margins currently in Germany, at lower margins on the Polish market by 6%. And of course, the pressure definitely is from crude oil price, which is higher by, roughly speaking, 75% year-on-year. So higher crude oil prices, I always underline, means higher prices of final products. So it's hard to, let's say, spread the margins in such, let's say, challenging environment of crude oil price.
So now question #3, if I may ask Justyna to answer this question, please. The floor is yours.
Yes. Thank you. So again, with regard to the [indiscernible] power project, we expect to start the construction in 2023. So we still got 2 years of hard work of us [indiscernible] we will be ready to start the construction. So there's still a lot of things to be done. And you asked what needs to be done for the start to construction. So right now, we are running [indiscernible] service. And thus, we will be able to decide the design for the whole wind farm. [ You asked about ] receiving that environmental decision. And we expect to receive the -- [ based on ] the environmental decision for the offshore wind farm, but it will not [ include the cable ]. So we need to rectify the decision also for the cable and this is a [indiscernible] process.
Then we need to organize the financing. We are underway and in the process of doing so. You mentioned that we received the decision of the regulator regarding the CSC, and this is correct. The Polish regulator issued the decision for [indiscernible] power, but this isn't the final decision. We still need to apply to the European Commission to confirm support for our projects. And after the European Commission decisions, we will need to come back to the Polish regulator to, again, reconfirm the level of support.
And so as you can see, there's still a lot of work. Our schedule is quite ambitious. We expect that it will be ready in the middle of 2023 to make the final investment decisions and then start the construction. This is about the schedule.
We commenced the deal our expectation regarding the IRR in terms -- there a lot of analysis and study undergoing. And we'll be [ sharing ] with you with the numbers in a year or 1.5 years, but I don't think I got the last part of the question, if you could just repeat.
Yes, basically, I think that pretty answers my entire question. That's very detailed.
Our next question is by Michal Kozak.
I have a question about PGNiG exploration licensing in Upstream in [ Poland ] after merger with ORLEN. Will these licenses automatically move to merged PKN or you will need to buy it in a separate public tender, pay additional cash for it? Will PGNiG sell these licenses first before merger or just give it back without getting cash? So [indiscernible] like to general succession and current [indiscernible].
[ Thanks so much for your trust ] of PKN ORLEN. We are aware of the challenges that you have described, and we are now working about the best solution for both PKN ORLEN and PGNiG to solve this problem. And we'll have an internal answer for this question in roughly 1.5 months from now.
So the second question from my side, a lot of [indiscernible] refineries in our case to a general meeting for the votes. Will you present for both shares [ swap ratio ] and [indiscernible] company for LOTOS refinery before the voting?
So regarding the share swap ratio, it will be too early to show the swap ratio at this general meeting regarding the put up of the LOTOS refinery. So there won't be -- it won't be disclosed yet.
So the third question, do you need to get additional approval to LOTOS transactions from European Commission due to changing structure of this transaction for merger with LOTOS?
Yes. So the decision of EU Commission does not include the transaction structure itself. So it could be as well be made with the cash or noncash on the same decision. It's only for the acquisition itself, not the structure.
So you don't need additional [indiscernible], yes?
Correct.
Okay. So my last question, my last question. There is some media speculation that you are interested in acquisition of [indiscernible] stabilizer company in Lithuania. Could you give us any comment on this? And could you also refer to potential acquisitions with anything in media sector like [indiscernible]? Are you interested in such [ smokes ]?
Okay. We have [ Jarek ] from M&A department on the line. So [ Jarek ], if you could answer the question, and I have to have the comments to the previous one as well. So go ahead.
Maybe I will start from a previous question. Regarding the decision of the European Commission. European Commission has to approve our final solutions regarding the [indiscernible], so we will deliver our proposal to [ provide ] remedies and then the right to fulfill that -- fulfilling the [ points ]. But the first question answer regarding [indiscernible]. I think there's nothing new today to answer to the situation that is now and there are -- nothing has changed so far.
So you are interested in the targets or not?
Yes. I guess, [ Jarek ] -- yes if you could. [ Jarek ]?
In general, [indiscernible] it can be interesting for us and looking at the fertilizers market as a whole, but there's no transaction at the moment.
Are you interested in acquisition of fertilizer companies in Poland per se?
[indiscernible] possible [indiscernible] today, but there's no such projects.
Yes. So Michal, I think that the best answer to your question will be that we know that you like to send us some ideas what could be great for us as for M&As throughout history. But basically, we did not disclose any information regarding any activities or M&A activities regarding fertilizers acquisitions in Poland or Lithuania.
Of course, M&A, our M&A is very active in Poland and abroad. And if there will be any transaction to be realized, you will be all first to know about the situation because we're basically publicly.
So as for now, I would just assume that our M&A guys make a lot of ideas and valuations, but there are no projects ongoing regarding those assets you've mentioned.
Our next question is by Mr. Patricot of UBS.
I'm Patricot from UBS. I have 2 questions on that topic. And then just one on petchem. So just on CO2, I was wondering whether you could give us some guidance for the third quarter around CO2 again? What we should expect in terms of both the P&L and cash flow impact?
And secondly, in the longer term, given the EU Commission proposals around the EU ETS and accelerated decline of free allowances in the next years, [indiscernible] that can change your hedging policy, would you be looking to hedge further out and more aggressively?
And finally, just on petchem in the third quarter because we're seeing very high, still pretty high margins. You mentioned that you should have petchem volumes back to normal. I was wondering whether you can fully capture this high level of margins or was it actually kind of a bit difficult to pass on these very high prices to customers or if there is maybe some delay and we see the benefit more in the later part of the year?
Okay. So taking the questions of petchem margin. So as [ Marek ] said during the conference call, the margins are still very high. Of course, they are quite lower comparing to the historical levels that we observed in the second quarter. But despite the fact that the margins deteriorated, they still remain at high level, much higher than in the previous year.
In terms of the volume, volumes definitely should be also better comparing, of course, to the second quarter because we finalized all the petchem maintenance shutdowns that we have planned. So you may expect that if macro will not deteriorate severely, and we do not expect such a situation, we are assuming that it may go down to EUR 1,200 per tonne. So third quarter should be really a good one for petchem division.
And in terms of your question on CO2, Michal Perlik speaking, well, the impact of CO2 on the results in the next quarters will depend mainly on the price of CO2, assuming that the price will stay at the comparable level we have at the moment so EUR 50, EUR 55. Then we will not recognize any substantial result on the settlement and valuation of CO2 futures. So they should be around 0.
And on the other hand, we will recognize pretty the same results on the creation and revaluation of the provision for CO2 as settlement of subsidies for CO2 are received, so the net effect would be around PLN 0.5 billion quarterly. Of course, if the prices are going up, then we are recognizing profit on our contracts, on our CO2 contracts. But also the provisions are going up proportionally. And I understand your second question was about free allowances that will be granted to us over the next few years, correct? Yes?
Yes, yes, that's right.
So we already -- yes. So we already know that under the -- and it is for the next 4 years, we will get approximately the same number of free allowances we got previously. So nothing is changing here. Of course, we are gradually opening new position, new contracts to secure our position in 2023 and 2024.
Next question is by Oleg Galbur of Raiffeisen.
Congratulations on the strong quarterly results. I have 3 questions. And if you don't mind, I'll ask them one by one.
The first question refers to the Slide #30, from which I have calculated that the refining segment saw a negative impact of hedges, excluding CO2, of some PLN 370 million. And I'm a bit puzzled by this high level of hedging losses, especially with the recent level of product cracks, including gasoline and diesel remaining at, let's say, levels below the pre-COVID. So if you could comment on this.
Excuse me, I understand your question was about the hedging on the crude oil deliveries we have, yes?
Well, my question, first of all, refers to Slide #30, where you provided a split by segment of EBITDA, right, EBITDA. And when looking at the refining segment, I see that hedges, yes, had a net impact of minus PLN 170 million, including the CO2 of plus [ PLN 260 million ], which means that the product hedges had a negative impact of PLN 370 million. And I was wondering whether you can explain this high level of losses.
Yes. This is mainly related to our hedging strategy on the timing mismatch of deliveries of crude oil, which is coming to us via vessels. So we are basically hedging all the vessels that we are importing to Poland or Lithuania. And this is the result, which is strictly related to sharp increase of oil prices over the last quarter and also over the last half of the year because the same effect you can see starting first quarter this year.
Okay. I see. And the impact is mainly on the P&L, not so much on the cash flow. Is that correct?
Actually, when -- considering this position, you should also remember that on the other side, we have crude oil which is offsetting -- physical crude oil which is offsetting our hedging position. So the hedging strategy on the time mismatch deliveries always bring us 0 cash effect because we have either more expensive crude oil by buying cheaper, but get -- when it comes to us, it's more expensive. So we turn on the -- we have a profit on the pure crude, physical, but we have a lot on the hedging instruments. Or the opposite situation that we are buying crude oil on the, -- with a higher price. When it comes to us, the price is lower, but it is offset by profit on the hedging. And the strategy is set in a way that it's always 0. So we hedge the time between we buy the crude oil and between it is delivered to us.
The other -- the rest of the effect is visible in the margin. And the same story is with CO2 hedging. When the prices are going up, then we have a profit on the hedging instruments, but we have a higher provisions, higher [ resource ]. And when the prices are going down, we have lower provisions, but we have also lower profits or losses on the hedging. So this is not trading, this is hedging, and it's always offset by the physical position.
Yes. And actually, that was my second, my next question regarding the impact of these settlements, CO2 contract settlements, on the cash flow which, in the second quarter, as you presented on Slide 32, was almost PLN 700 million.
And once again, if you can explain in more detail because I can understand the impact on the P&L, but actually what is causing such a strong impact on the cash flow?
Yes, we have over -- we had over 12 million -- almost 13 million contracts open on the ICE Exchange. And there is a deposit behind. When the prices are going up, we are getting cash for the difference between the initial price when the contract was open and the current price on the market. You can see on the right-hand chart that over the last -- sorry, I can see that we have not updated this slide. But over the last 3 months, the price went up from EUR 42 million to EUR 55 million. So they went up by around EUR 13 million times the number of contracts we have open. And this is a pure cash income to us. The prices will start going down, then we have to bring the cash to the deposit.
Understood. Okay. Okay. And lastly, if you could share your view on the petchem market and more specifically from what you see, which were the sectors driving the demand and the margins of the petchem products? And why would you expect the petchem margin to contract in the second half of this year? Is it mainly because of the increasing supply? Or is the movement on the consumption side? So having your thoughts will be very helpful.
Adam Czyzewski. While we expect contracting margins, the reason is that we expect a high demand for petchem products. This is related to high GDP growth. In general, petchem products are correlated with GDP because they are used in many applications.
But last quarter, we had extraordinary margins because there was a lot of supply chain breaks and supply chain restrictions, which elevated margins. Now like, for example, a lot of maintenance shutdowns, et cetera. And also, this was the strong winter in Texas, which closed down the petrochemical production.
Now we expect that this extraordinary or one-off events will not happen. This is -- and therefore, we'll have higher supply.
And second thing is that we observe increase in feedstock prices, especially with petchem based on oil, which is caused by the increase in oil prices, but got prices also go up.
[Operator Instructions] Our next question is by Mr. [indiscernible] of [indiscernible].
2 questions. So the first, the energy segment because the EBITDA -- in the breakdown, I see some 112 impact from subsidiaries accounting -- equity method. Could you please explain what is the subsidiary accounting in this segment with such profit or what's the source of this impact?
Where do you see this information? Is it from the presentation or from the...
Excel spreadsheet, you delivered segment by segment. So in the detailed energy segment breakdown, you have this line showing profit from investments accounted for -- under equity method market. So far, it was on the neutral. And now I see 112.
This is Baltic power.
[indiscernible]
Let us please check, and I will return to you with the answer shortly. Okay?
Okay, okay. And my second question refers to the PTA results this quarter because when I look at the model benchmark margins on this product, they are not very impressive. And this quarter, you managed to improve your results quarter-on-quarter. Could you comment on these products a little bit?
If you look on PTA, what I see, the margins were slightly higher on PTA comparing to the first quarter, yes, because you realize second quarter, so the first quarter, yes, of this year. So what I see the margins were slightly better than it was in the previous quarter and also volumes were higher.
There are no further questions, and so I hand back.
Okay. Thank you, operator. If there are no more questions, I would like to thank you for the participation in the conference call. And of course, this concludes our presentation. So thank you, and have a nice day. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.