Attainment of the strategic objectives will rely in particular on activities concentrating in three areas, including:

• 1- hydrocarbon exploration and production domestically and abroad, to ensure access to new oil and gas reserves;
• 2- the power sector, focusing on the development of gas-fired power generation in Poland;
• 3- management of the Company's natural gas portfolio and activities on the European gas trading market.

By 2015, the PGNiG Group is planning to spend about PLN 27bn on implementing its strategic objectives. More than half of the planned expenditure will be allocated to oil and gas exploration and production, both in Poland and abroad.

In 2008-2010 the amount spent by the Group on strategy implementation was approximately PLN 10bn.

Nearly PLN 15bn to be spent on exploration and production

PGNiG has maintained its strategic goals relating to increasing the Group's own production of natural gas to about 6.2 billion cubic meters and of crude oil to about 1.8 million tonnes a year.

The Company wants to concentrate on hydrocarbon exploration and production in Poland, as this represents the most attractive and profitable line of business. New initiatives relating to exploration for unconventional gas (especially shale gas) and conventional gas from deep structures will be of particular importance.

The Company has confirmed its plans to increase domestic gas production from the current annual level of about 4.1 billion cubic meters to 4.5 billion cubic meters, and production of crude oil from the current 0.5 million tonnes to 1 million tonne a year starting from 2015. This is to be attained through the development of the Lubiatów-Międzychód-Grotów field, which is to come on stream in 2012, allowing PGNiG to double its oil production as soon as in 2013. Proved recoverable reserves in the area of Lubiatów, Międzychód and Grotów amount to approximately 7.2 million tonnes of crude oil and about 7.3 billion cubic meters of natural gas.

To further increase domestic production of hydrocarbons, the Group has to intensify its exploration activities. The PGNiG Management Board believes that strong opportunities are offered by shale gas. PGNiG currently holds 15 exploration licences covering areas where shale gas is typically present - more than any other company which has been granted such licences in Poland. Shale gas may potentially be present also in areas where PGNiG is licensed to explore for conventional gas. In other words, PGNiG will retain its leading position in gas exploration. Initial results of analyses look promising. In March 2011 PGNiG completed drilling of the first well in exploration for shale gas, in the Lubocino-1 licence area near Wejherowo, where significant gas flow was recorded. Another two wells are planned to be drilled in 2011 to explore for shale gas in PGNiG's licence areas. In subsequent years, the Group's exploration for shale gas should intensify, and PGNiG intends to spend on such projects as much as will be necessary. The cost of drilling one well ranges from several million to tens of millions of złotys.

PGNiG will also intensify its conventional gas exploration in deep geological formations. The licence located near Kutno, where PGNiG holds a 50% interest and where estimated reserves are at 100 billion cubic metres, is a good example. The first 6.5 km deep exploration well is scheduled to be drilled in H2 2011.

The PGNiG Group continues to be interested in hydrocarbon exploration and production abroad, primarily in Norway, where production from the Skarv field will be launched in Q2 2011. The estimated annual production from the field will be approximately 0.5 million tonnes of crude oil and 0.4 billion cubic metres of natural gas. In 2011, approximately 90 thousand tonnes of crude oil and 100 million cubic metres of natural gas will be produced from the field. At current market prices, the planned production volume will allow the PGNiG Group to derive USD 500m in 2012 revenues from the production operations in Norway.

PGNiG intends to spend around PLN 14.7bn on exploration and production of hydrocarbons in Poland, which highlight the importance which the PGNiG Management Board attaches to the segment's role in Company's development.

PLN 2.9bn to be spent on gas-fired power generation

Gas-fired power generation is the second pillar of the PGNiG Group's strategy. In the Management Board's opinion, the natural gas market in Poland has sound growth prospects, with gas-fired power generation as the key driver of the growth. It is then a natural direction for the Company to engage in gas-fired power generation, both as a gas supplier, and as a equity or trade investor. By 2015, PGNiG intends to invest around PLN 2.9bn in power generation projects.

The Company has already launched activities in the power sector. In May 2010, PGNiG engaged in construction and future operation of a gas-fired CHP plant in Stalowa Wola. This will be the largest gas-fired project in Poland's power sector. The power generating capacity of the new unit will be 400 MWe, and heat generating capacity - 240 MWt. The unit will use approximately 540 million cubic metres of gas a year, to be supplied by PGNiG. The CHP plant will be launched by the end of 2014.

Work on other power generation projects has also begun.

International expansion

Another pillar of the Company's strategy is trade in natural gas in Europe through the subsidiary POGC Trading. PGNiG intends to gain experience in gas trading on a developed international market characterised by a large number of hubs and interconnectors where exchange trading plays an important role. Experience gathered on fully liberalised markets will give the Company a competitive advantage over its peers, which are expected to intensify their operations in Poland in a short-term perspective. The new expertise will enable PGNiG to provide its clients with an offering better aligned to their needs, such as the "gas plus electricity" package.

The tasks of POGC Trading will be to find a market for a part of PGNiG's production outside Poland, particularly in the context of the production launch in Norway - PGNiG will have to place on markets approximately 0.5 billion cubic metres of natural gas a year more. As currently it is not technically possible to transport gas to Poland, the establishment of POGC Trading will allow PGNiG to sell the gas in Germany or the Benelux countries. Also, PGNiG's involvement in other international production projects will soon necessitate selling natural gas and crude oil on markets outside Poland.

Consolidating the leading position on the domestic gas market

The PGNiG Group intends to maintain its leading position on the Polish gas market through development of new products to meet client's growing requirements. One of the strategic objectives involves enhancing the operating efficiency to achieve profitability of gas trading operations. In the environment of high crude prices and the strong dollar against the złoty, margins on gas sales equal zero or may even be negative.

The Company plans to improve the profitability of gas distribution by optimising the development of the distribution network. Another strategic goal is to further rationalise costs in selected areas of PGNiG's operations e.g. accounting, payroll, IT or procurement. The Company plans to allocate approximately PLN 5.8bn to these objectives until 2015.

Underground gas storage facilities to ensure energy security of Poland.

In order to improve the energy security of Poland, PGNiG will continue its programme of extending the underground gas storage facilities. The updated Strategy provides for extension of the underground storage capacities from the current 1.6 billion cubic metres to over 3 billion cubic metres in 2015. A considerable capacity improvement of approximately 2.4 billion cubic metres will be achieved already in 2011. The extension of the Strachocina Underground Gas Storage Facility is scheduled for completion by the end of July 2011 and the Wierzchowice Underground Gas Storage Facility is to be completed in Q3 2011.

The increased capacity of the gas storage facilities will support PGNiG's flexibility in responding to any disruptions in natural gas supplies. The Company plans to spend approximately PLN 1.4bn on this purpose in 2011-2015.

Joanna Zakrzewska

Spokesperson