ORLEN Group’s operations in petrochemical segment

DIAGRAM 11. Structure of Benzina’s sales volume on the Czech market in 2012 and 2011.

Lithuanian market

The retail chain in Lithuania comprised, as at 31 December 2012, 35 stations, including 26 own and 9 franchise stations. The stations operated under the ORLEN brand in the Premium segment and under the Ventus brand in the economical segment.

AB Ventus Nafta from the ORLEN Lietuva Group achieved in 2012 a similar level of the sales volume as in the previous year, amounting to 50 thousand tonnes. VERVA diesel oil is more and more popular among customers and its sales volume in 2012 increased by 15% (y/y).

Consistent implementation of the strategy for the non-fuel sales contributed to the increase in the stores turnover by 3% (y/y).

DIAGRAM 12. Structure of AB Ventus Nafta’s sales volume on the Lithuanian market in 2012 and 2011.

3.3.4 Sources of supply

The majority of motor fuels sold on the Polish, Czech and Lithuanian markets are produced in the refining segment. The ORLEN Group also purchases, for reselling purposes, primarily imported ready-made fuels from other domestic sellers and foreign companies. Motor fuels sold by ORLEN Deutschland are purchased from the leading wholesalers operating on this market, including also from the Unipetrol Group.

3.4 ORLEN Group’s operations in petrochemical segment 3.4.1 Market trends, ORLEN Group’s position and competitors

Market trends in the petrochemical industry are global. Until the year 2020, it is expected that the demand for petrochemical products will continue to grow even more, especially in Asia. Also, the trend involving the construction of new petrochemical plants in the Middle East countries is visible, based primarily on the use of natural gas (specifically ethane) as a raw material for production. This is connected with the competitive costs of natural gas being a by-product of the crude oil extraction.

The year 2012 was the period when the growing speculation on raw materials markets and economic slowdown resulted in the increased fluctuation of petrochemical margins. Globalisation of markets including in particular polymers, benzene and PTA causes that the only limitation for trading of above products are the transportation costs.

Consequently, economic conditions for non-innovative manufacturers and whose margins are based primarily on the operations scale, deteriorated. This is also connected with the declining importance of commodity-type products – margins for mass petrochemical products in 2012 were lower in comparison with specialised products.

ORLEN GROUP

MANAGEMENT BOARD REPORT ON THE OPERATIONS FOR THE YEAR 2012

(Translation of a document originally issued in Polish)

The ORLEN Group’s petrochemical segment comprises a selected production installations of PKN ORLEN and Unipetrol Group, as well as Basell ORLEN Polyolefins Sp. z o.o. and ANWIL Group. The ORLEN Group is the only producer of monomers, polymers and the majority of petrochemicals in Poland and Czech Republic.

The key installation of PKN ORLEN’s petrochemical segment is the Olefins installation of the maximum production capacities of approximately 700 thousand tonnes of ethylene and 380 thousand tonnes of propylene. Monomers produced by PKN ORLEN constitute the input for the polymers installations in Basell ORLEN Polyolefins Sp. z o.o. and the polyvinyl chloride installation in the ANWIL Group. Other products are placed on both Polish market and exported (Czech Republic, Denmark, Germany and Lithuania).

Full integration of the refining and petrochemical installations in PKN ORLEN as well as the pipeline infrastructure connecting PKN ORLEN and the ANWIL Group and BOP are the significant element of the competitive advantage in this segment.

In 2011, the PX/PTA Complex (terephthalic acid) was started up, representing one of the most modern plants of such type in Europe.

SCHEME 8. Capacity of biggest PTA plants in Europe.

Unipetrol Group is one of the largest petrochemicals producers in the Czech Republic. The key segment installations are Polyolefin and Olefin installations located in Litvinov, of the annual production capacities of approximately 600 and 540 thousand tonnes, respectively. The share of the Unipetrol Group in the production of high-density polyethylene and polypropylene amounts to 5% and 3% of the production capacities in Europe, respectively. On the Czech market, the Unipetrol Group is the only ethylene producer, while its competitors in respect of propylene production are OMV and PCK Raffinerie GmbH.

The ANWIL Group is both one of the largest chemical companies in Central Europe and the leading polyvinyl chloride (PVC) producer as well as one of the major sodium hydroxide and artificial fertilisers producers in Poland. The production potential of the ANWIL Group amounts to 1,160 thousand tonnes of nitrogen fertilisers, approximately 560 thousand tonnes of PVC and granulates, approximately 360 thousand tonnes of sodium hydroxide and approximately 50 thousand tonnes of caprolactam. The ANWIL Group products are not only placed on the local markets but also exported.

On the nitrogen fertilisers market, the ANWIL Group competes with Azoty Tarnów Group and Zakłady Azotowe Puławy as well as with the fertilisers importers. As regards unprocessed PVC, foreign companies, mainly from Germany and Hungary as well as INEOS Group Limited on the domestic market strongly compete with the ANWIL Group. In respect of sodium hydroxide, the largest competitors of the ANWIL Group include Zakłady Chemiczne Rokita S.A., Zachem Bydgoszcz S.A., Borsodchem from Hungary, Karpatnieftiechim from the Ukraine and Czech Spolchemie and Slovak Novaky. The main competitors in respect of caprolactam production include DSM, BASF and DOMO.

Basell ORLEN Polyolefins Sp. z o.o. specialises in polymers production and owns polyethylene and polypropylene production installations of the annual total production capacities of 820 thousand tonnes. Products of Basell ORLEN Polyolefins Sp. z o.o. are distributed on both domestic and foreign markets, where they are widely used at production of packaging, foils, textile and linen products as well as car spare parts and pipes.

ORLEN GROUP

MANAGEMENT BOARD REPORT ON THE OPERATIONS FOR THE YEAR 2012

(Translation of a document originally issued in Polish)

3.4.2 Technological research and development

The most important studies on research and development activities in PKN ORLEN were connected with the review and standardisation of hydrocarbons emission determination methodology for production units of the Production Plant and PTA in Wloclawek. In 2012, the survey of compliance of exploitation properties of the Petrygo Q car radiator with the requirements for products applying for the ITS certificate was also completed.

Research and development activities of the Unipetrol Group in respect of monomers were carried out in cooperation with VUAnCh and, in respect of polymers, with Polymer Institute Brno s.r.o.

During 2012, VUAnCh handled several research projects relating mainly to optimisation of production processes in Unipetrol RPA. The most important work involved the survey of impact of input quality on the Olefins Installation operation and yields, assessment of technical and economic properties of liquid gas with high olefins content as the input for the Olefins Installation. Additionally, projects concerning the use of benzene installation production capacities for aromatic refinery fractions utilisation were carried out, together with the assessments of current analytical methods specifying the impurities content in propylene used in polymerisation and the choice of optimum manners of propylene purification. As part of continued projects, VUAnCH conducted research on the possibility of regeneration and reuse of catalyst in other technological processes.

Research conducted by Polymer Institute Brno s.r.o. in respect of polymers concerned the development of the new polyethylene type (blow-molding PE) obtained thanks to the new catalyst recipe, which allows to obtain the polymer of the higher melting point. Also, the polyethylene composition for the pipes production was optimised (Liten PL10). Further improvement was possible thanks to modification of technological process with the use of the new catalyst. Moreover, in 2012, the survey of two types of silica gel was carried out, which increases the catalyst activity by 40%. Further, Polymer Institute Brno s.r.o. conducted work concerning the modification of polymerisation process on polypropylene installations in Unipetrol RPA.

In respect of projects relating to the ANWIL Group technological processes development, the industrial scale tests were carried out in respect of implementation of the technology of continuous initiators dosing - CID on PVC installations, which technology is offered by Akzo Nobel and which implementation will result in material savings in electrical energy consumption thanks to liquidation of high-power cooling aggregates. The tests proved successful and confirmed the good quality of the product. In 2012, potential implementation costs were calculated to determine the product effectiveness. Additionally, work was commenced on the project involving the upgrade of Chlorine and Soda Lye Production Plant aimed to significantly reduce the heating energy consumption.

The most important research and development work in the environmental protection area concerned the development of the sewage airtight sealing concept in the Vinyl Chloride Production Plant, which concept will significantly reduce the emission of chlorine derivatives to the atmosphere. As part of the continued project involving the water recovery from sewage from PVC suspension centrifuges, within 6 months in 2012 the filtration tests were carried out once again given the change of type of membranes offered by the supplier. The tests proved successful and the project is at the stage of preparation of detailed data, necessary to make a decision on the investment implementation.

3.4.3 Core products, goods and services

In 2012, the sales volume of petrochemical segment of the ORLEN Group, despite the turnaround of the petrochemical section of the production plant in Plock, which was performed in the III quarter of 2012, increased by 3.3% as compared to 2011. The above result was achieved primarily thanks to higher sale of the terephthalic acid from the PX/PTA Complex and the increased sale of polymers in Unipetrol RPA.

TABLE 24. Assortment structure of sales of ORLEN Group (in PLN thousands/thousands of tonnes).

SALES 2012 2011

4) Canwil, ammonium sulphate, ammonium nitrate, other fertilizers.

5) PVC, PVC granulate.

6) Other include mainly acetone, ammonia, butadiene, phenol, technical gases, glycols, caprolactam, soda lye and sulphur.

ORLEN GROUP

MANAGEMENT BOARD REPORT ON THE OPERATIONS FOR THE YEAR 2012

(Translation of a document originally issued in Polish)

DIAGRAM 13. Structure of sales revenues in ORLEN Group in 2012-2011.

3.4.4 Sale markets Polish market

Petrochemical sales volume of the ORLEN Group companies located on the Polish market increased in 2012 by 2.0% (y/y). Such increase was achieved primarily in the area of the PTA sale, which amounted in 2012 to 484 thousand tonnes and increased by 44.0% (y/y) thanks to the operation of the PTA Complex throughout the entire 2012 and thanks to further intensification of sale on Turkish and Russian markets and entering the Middle East markets.

The lower sales volume of monomers and polymers as compared with 2011 was due to the planned periodical turnaround of petrochemical installations in the III quarter 2012.

Decreased sales of aromas was the net effect of lower sales of toluene due to using this product as input to PTA production and higher sales of benzene.The increased benzene sales volume was achieved thanks to the additional amounts of such product, coming from the new Paraxylene installations, having been placed on the market and to the possibility of stock accumulation and as a result the elimination of effects of the installation turnaround in the III quarter of 2012.

The improved economic situation on the fertilisers market, which was observed primarily in the I half of 2012, impacted higher sale, as compared to the previous year.

The decreased plastics sales is primarily due to the deteriorated economic situation in the I half of 2012 and the turnaround in the III quarter of 2012 described above.

Decreased sales of other products is mainly an effect of lower sales of butadiene due to turnaround of production installation in III quarter of 2012.

TABLE 25. Assortment structure of sales volume on Polish market (in thousands of tonnes).

SALES 2012 2011 CHANGE CHANGE %

1 2 3 4=(2-3) 5=(2-3)/3

Polish market

Monomers 335 358 -23 -6.4%

Polymers 329 346 -17 -4.9%

Aromas 167 191 -24 -12.6%

Fertilizers 1 142 1 115 27 2.4%

Plastics 353 385 -32 -8.3%

PTA 484 336 148 44.0%

Other 677 688 -11 -1.6%

Total 3 487 3 419 68 2.0%

ORLEN GROUP

MANAGEMENT BOARD REPORT ON THE OPERATIONS FOR THE YEAR 2012

(Translation of a document originally issued in Polish)

DIAGRAM 14. Assortment structure of sales volume in petrochemical segment in 2012 and 2011 on the Polish market.

Czech market

The sales volume of the Unipetrol Group increased in 2012 by 5.9%, as compared to 2011. Such result was achieved primarily thanks to the increased polymers sale by Unipetrol RPA by 11.0% (y/y), resulting from the greater product supply due to lack of cyclical installation turnaround in 2011. At the same time the structure of sales improved by 1.4 p.p. (y/y) as a result of the increased polymers share in petrochemical sales of Unipetrol Group up to 30.0%.

No adverse effect of the turnaround in 2011 resulted also in the increase in the sales volume of monomers and other products by 5.7% (y/y) and 5.0% (y/y), respectively.

TABLE 26. Assortment structure of sales volume on Czech market (in thousands of tonnes).

SALES 2012 2011 CHANGE CHANGE%

1 2 3 4=(2-3) 5=(2-3)/3

Czech market

Monomers 149 141 8 5.7%

Polymers 525 473 52 11.0%

Aromas 205 204 1 0.5%

Fertilizers 175 175 0 0.0%

Plastics 16 12 4 33.3%

Other 676 644 32 5.0%

Total 1 746 1 649 97 5.9%

DIAGRAM 15. Assortment structure of sales in petrochemical segment in 2012 and 2011 on the Czech market.

ORLEN GROUP

MANAGEMENT BOARD REPORT ON THE OPERATIONS FOR THE YEAR 2012

(Translation of a document originally issued in Polish)

3.4.5 Sources of supply

Strong integration of the refining and petrochemical segments in PKN ORLEN and the Unipetrol Group provides a competitive advantage in respect of raw materials supply. The gasoline for pyrolysis, transferred from the refining segment, constitutes the main production input for the petrochemical segment for olefins installations. Paraxylene, produced on petrochemical installations in PKN ORLEN constitutes the basic input for terephthalic acid production, while PKN ORLEN is the major supplier of olefins for Basell ORLEN Polyolefins Sp. z o.o. and ANWIL S.A.

3.5 New areas of the ORLEN Group’s operations