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The decline of the Group's operating profit was offset by higher profitability of the Exploration and Production segment, which was due mainly to a strong year-on-year increase in margins on crude oil sales and higher revenue on geological/geophysical, drilling and maintenance services.

The level of net profit in Q3 2011 was affected mainly by a PLN 147m drop in the result on financing activities, attributable mostly to higher costs related to foreign exchange losses. On the other hand, the year-on-year drop in net profit was merely 7%, owing to a PLN 128m decrease in tax expense caused by a considerable increase in deferred tax assets at PGNiG Norway AS.

In the three quarters of 2011, net profit amounted to PLN 1.3bn, on a par with the same period of 2010, on sales revenue of PLN 16bn, up by 9% on the three quarters of 2010.

In Q1-Q3 2011, the profitability of high-methane gas sales deteriorated by 4 pp, to -1%, year on year, due primarily to a17% increase in the unit purchase price of imported gas. The protracting tariff procedures and postponed introduction of a new tariff resulted in the Group losing on margin on natural gas sales.

Strong performance of the Exploration and Production segment

The robust performance of the Exploration and Production segment in the first three quarters of 2011 helped offset the decline in the Group's operating profit. The segment's operating profit for Q1-Q3 2011 grew by PLN 212m year on year, as a result of strong improvement in profitability of crude oil sales driven mainly by the soaring crude prices on global markets (which rose on average by 45%). The segment's EBIT advanced also on higher revenue from sales of geophysical/geological, drilling and maintenance services, driven by the intensified exploration for shale gas in Poland.

In Q3 2011, the Exploration and Production segment recorded a PLN 106m rise in operating result thanks also to a 36% increase in revenue on crude sales, driven by a year-on-year rise in crude prices by approximately 50%, combined with a 30% improvement in revenue on geophysical/geological, drilling and maintenance services.

Adverse effect of soaring crude prices and foreign exchange rate on gas prices

The prices of crude oil remain high, having exceeded USD 100 per barrel since February. In Q3 2011, the value of the nine-month average price reached 102.7 USD/boe, having grown by 34% relative to Q3 2010. In Q3 2011, the average USD/PLN exchange rate was 2.94, up by almost 7% relative to Q2 2011, and down by 5% year on year. Taking into account the average USD/PLN exchange rate, the value of the nine-month average price of petroleum products in Q3 2011 was 302 PLN/boe, up by 27% year on year and by 23% relative to Q2 2011. The rise in crude oil prices in 2011 had an adverse effect on the cost of gas purchased by the Company, which translated into the negative gas sales margin. Persistently high crude oil prices will lead to a further growth of the nine-month moving average price of petroleum products in Q4 2011, which may be compounded by depreciation of the Polish złoty. Unless the trends are reflected in the gas tariff, the Trade and Storage segment's sales margins will deteriorate further.

PGNiG Group's results for Q1-Q3 2011 (PLN mln)

PGNiG Group's results for Q3 2011 roku (PLN mln)

Steady rise in gas production and sales

PGNiG has consistently pursued its development strategy with respect to a planned increase of gas production from domestic reserves, thanks to the execution of investment projects of varying scale in the area of gas exploration and production. In 2011, new domestic fields have come onstream, whose production capacities are estimated at approx. 290 million cubic metres of high-methane gas equivalent in the first year of production. As a consequence, gas output grew by 11%, to 1.1 billion cubic metres, in Q3 2011, and by 4%, to 3.2 billion cubic metres, in Q1-Q3 2011.

As for gas sales, they went up by 6%, to 2.55 billion cubic metres, in Q3 2011. The largest growth was recorded in sales to other industrial customers, which purchased 14% more gas year on year. In the period between the quarters under review, total demand from industrial customers rose by 12%. However, in the third quarter of 2011 the Company reported a slump in sales to households (down by 6%).

The first three quarters of 2011 saw an increase in gas sales of PLN 146 million cubic metres year on year. The upturn in sales is most conspicuous in the case of industrial customers, who purchased 6% more gas in Q1-Q3 2011 than in the corresponding period of the previous year. In that customer group, the largest growth was recorded in sales to nitrogen plants (up by 12%). On the other hand, sales of natural gas to households declined by 6%, owing to higher average air temperature year on year.

Also, in Q3 2011, due to a 26% (454 million cubic metres) increase in the volume of gas imports, the Company was able to inject large volumes of gas into its storage facilities. As a result, at the end of September 2011 the amount of high-methane gas stored in the facilities was 1.8 billion cubic metres, up by 27% on the same period last year (1.4 billion cubic meters).

Increase in revenue on sales of crude oil

The production of crude oil and condensate in the first three quarters of both years under analysis was affected by an annual month-long overhaul stoppage at the largest crude production facility in Dębno. In Q2 2011, the stoppage was even longer. The main consequence of the stoppage was a 6% drop in crude oil production in the first three quarters of 2011 relative to the same period of 2010. A slight drop in production (5%) in Q3 2011 alone from the level reported in Q3 2010 was due to the fact that no new fields were brought on line and that there occurred a natural decline in production in the fields from which oil was produced. Despite the fact that crude oil production fell both in the whole three-quarter period and in the third quarter of 2011, bringing down the volume of crude sales, there is no risk that the forecast volume of 460 thousand tonnes of oil to be produced in 2011 will not be achieved.

An over 40% increase in the medium-term price of crude oil on global markets between the first three quarters of 2010 and 2011, and the fact that the złoty strengthened against the US dollar by 6% on average over the period, brought about a 38% growth in the unit price of crude oil sold by the PGNiG Group. As a result, revenue from sales of crude oil in the first three quarters of 2011 rose by 30%, despite the lower sales volume. The situation was similar in the third quarter of 2011.

Joanna Zakrzewska

Spokesperson for PGNiG SA