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04.11.2009 News release regarding a gas supply understanding

On 3 November 2009 the management board of PGNiG SA adopted a set of agreements concluded as part of the "Joint declaration between OAO Gazprom and PGNiG SA on cooperation with regard to gas". The understanding concluded by PGNiG SA and OAO Gazprom regarding gas supplies ensures the security of supplies to all clients in Poland and provides a basis for growth on the domestic gas market. Also, it does not jeopardise plans to diversify supplies of gas, which remain a priority. The understanding extends the life of the current long-term contract from 2022 to 2037 and sets gas supply levels at 10.27 billion cubic metres. The long-standing pricing formula remains unchanged. The agreements between PGNiG and Gazprom will come into force after appropriate documents are signed by the Republic of Poland and the Russian Federation at government level.

The new contract terms will make it possible to stabilise supplies of gas to Poland, and the conclusion of an agreement directly with the producer of the gas will enable problems to be avoided that in the past were caused by the conclusion of contracts with intermediaries. In accordance with the Diversification Regulation of 2001, companies that were not gas producers were to supply Poland with gas from countries other than Russia, but in practice this has led to problems, such as with RosUkrEnergo. That company, despite having a valid contract, has not supplied gas to Poland since January 2009. It is market practice to conclude long-term contracts directly with gas producers, and other European companies have also concluded similar agreements with Gazprom. These include Italy's ENI until 2035 and Germany's E.ON until 2035 and VNG until 2031. The understanding between PGNiG SA and OAO Gazprom includes compromise solutions regarding the management of the EuRoPolGAZ company and its pricing policies. The parties have agreed that they will strive to return to the shareholding structure originally set in the inter-government agreement, under which PGNiG SA and OAO Gazprom were each to hold 50 per cent of the shares in the company. The initiative to return to the two-shareholder structure was also voiced in 2001 by the Polish side. Despite some market voices to the contrary, this structure does not weaken the position of either party, because EuRoPolGAZ's statute provides that key decisions are made by joint acceptance by the two largest shareholders. The change of the shareholding structure of EuRoPolGAZ and the planned exclusion of GasTrading in that company's shareholding structure will take place in accordance with the provisions of Polish law (the Commercial Companies Code), respecting all rights of all GasTrading shareholders. Currently, GasTrading is owned by: PGNiG SA- 43.41 per cent, PHZ Bartimpex SA - 36.17 per cent, OOO Gazprom Export - 15.88 per cent, Węglokoks SA - 2.27 per cent and Wintershall Erdgas Handelshaus GmbH - 2.27 per cent. In accordance with the understanding, EuRoPolGAZ's prices will be set at a level that will ensure a significant financial liquidity cushion that will make it possible for the company to settle current operating costs and all public law obligations, and to service its debt. The negotiated price levels will aid in the company's growth and guarantee the long-term profitability of its business. The parties believe that EuRoPolGAZ's prices should be set at a level that will guarantee the competitiveness of gas transported through the Polish section of the Yamal Pipeline against alternative gas transportation routes, which will be beneficial for both Polish and European clients. The increase of gas supplies from Russia will not have a negative impact on the progress of diversification projects, which are also aimed at increasing Poland's energy security. Diversification projects remain a priority. According to analyses by both PGNiG SA and external consultants, within several years Polish clients will need several billion cubic metres of gas more than at present. Current per capita gas consumption in Poland is one third of that in West European countries. According to PGNiG SA's growth strategy until 2015, gas sales are expected to grow to approximately 18 billion cubic metres. This is related mainly to planned or commenced electricity generation projects, in which PGNiG SA is also taking part. Gas-fired power units are desirable due to the European Union's guidelines regarding the need to reduce CO2 emissions. In the past these projects have not been realised mainly due to the lack of stable gas supplies in the longer term. Three electricity generation projects in which PGNiG is involved (Stalowa Wola with Tauron, a project with Energa and Lotos and a project in Tarnów) require approximately 1.2 billion cubic metres. Other power companies operating in Poland also have plans to build gas-fired units. They forecast that planned projects will in total require an additional 2 billion cubic metres of gas. In this light, the implementation of the contract concluded by PGNiG SA and QatarGas for the supply of LNG to the terminal in Świnoujście from 2014 onwards is not under threat. The growth strategy until 2015 adopted by PGNiG in 2008 assumed that 30 per cent of the gas used in Poland would come from domestic sources, 40 per cent from Russia, and 30 per cent from other sources. However, when it was being adopted, it was not foreseen that the three-year contract concluded with RosUkrEnergo in 2006 for Central Asian gas (which was possible to extend for another two years) would cease to be implemented from January 2009 for reasons beyond PGNiG's control. Despite the above, this element of the strategy will not be rendered invalid, and its fulfilment will only be delayed for a time. Joanna Zakrzewska Spokesperson of PGNiG SA
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