The ORLEN Group's performance in 2Q 2005

The high price of oil was an important macroeconomic factor influencing the economic situation in the second quarter of this year. The difference in the price of oil in 2Q 2005 compared to 2Q 2004 amounted to almost 46%. At the same time, the Ural/Brent differential reached USD 3.6/bbl, higher than in 1Q 2004 by 16.1%. The refinery margin amounted to an average USD5.5/bbl, equivalent to a fall of 7% compared to the corresponding quarter of the previous year.

The Company achieved a net profit of PLN698 million, 9% higher than in 2Q 2004. The results were better for each segment. The operating profit in the refinery segment rose by 38.2% compared to 2Q 2004. This was as a result of the implementation of effective solutions and the high demand for fuel and chemical products. Despite stagnation in olefins installation there was a dynamic rise in profits in the petrochemical segment (higher by 43.4% compared to 2Q 2004) as a result of high profit margins for ethylene and propylene. The operating profit of ORLEN Deutschland amounted to PLN10 million, and this positively influenced the results of the retail segment, which reached PLN62 million.

The Company’s revenue in 2Q of this year amounted to PLN 8,400 million, 12% higher than in 2Q 2004. The most dynamic rise in revenues compared to 2Q 2004, of 26%, was registered in the refinery segment. In the period described the rate at which costs rose was slower than the rate at which incomes increased.

In the years 2003-2004 the previous PKN Orlen Management Board signed a series of agreements with Agrofert and ConocoPhilips. These agreements oblige PKN Orlen (among other things) to make all possible efforts to sell a part of Unipetrol’s assets to Agrofert Holding a.s. The agreements signed with Agrofert stipulate selling some assets of Unipetrol within the Unipetrol group which were not considered by the previous Management Board to be relevant to the activities of PKN Orlen. These assets were connected with agricultural production, plant protection measures and chemical products. The present Management Board emphasizes that there was no agreement signed between Unipetrol and Agrofert or ConocoPhilips which dealt with selling these assets. The agreement with ConocoPhillips also stipulates the selling by Unipetrol of up to 1/3 of all Unipetrol- owned fuel stations with the sales price having been previously fixed in the agreements. These transactions would have to be made by PKN Orlen after achieving corporate control over Unipetrol. The fact of not fulfilling the commitments defined in these agreements exposes PKN Orlen to compensatory sanctions. Additionally, much of the information concerning these agreements is covered by confidentiality clauses, which stipulate significant compensatory sanctions for violation.

The present Management Board has ordered independent experts to analyze all the possible results of realizing the agreements signed by the previous Management Board. This has only become possible after taking corporate control over Unipetrol. The transactions relating to the purchase of Unipetrol Holding is controlled by the Monitoring and Safety Office of PKN ORLEN. The results of this work will be directed to the Public Prosecutor’s Office, the Agency of Public Safety and the Central Investigation Office. In July 2005 the present Management Board presented to the Supervisory Board its strategy for minimizing the negative results of the realization of these agreements for PKN Orlen and its shareholders. All possible, formal and juridical preparations have taken place in order to secure, in the most effective way, the interests of PKN ORLEN and its shareholders.

- All the remedial actions of the present Management Board are in line with best practice, and transparency and ethics rules. They concentrate on the maximum protection of PKN ORLEN shareholder’s interests and of our investment in the Czech Republic – stated Igor Chalupec, the President of the Management Board.

Despite of the necessity of creating a reserve to cover the economic risk, the present Management Board is positive regarding PKN’s presence in the Czech market and the chance of gaining above-average returns from the investment made in Unipetrol. There is no reference between the agreement signed with National Treasure Fund of Czech Republic and the agreements signed with ConocoPhilips and Agrofert.

The Company has implemented a restructuring program which aims is to improve the effectiveness of the firm’s backup services, decentralize sales management and centralize the operational base of the Company. In July 2005 new regional structures began to function in the retail segment, investment and fuel station rebuilding segment, and in finance. At the end of July, this year, an agreement with the trade unions was signed closing the period of collective protest.

From 1 of October 2005 the Basell Orlen Polyolefins (BOP) partnership will be responsible for the realization of sales of petrochemical products in Poland, while the second investor in BOP – the Basell partnership will take responsibility for selling the surplus. In October the new installations for Polyethylene HDPE and Polypropylene will begin operation.

Numerous initiatives to improve the effectiveness of the ORLEN Group have been introduced during the last few months. In 2005, 8 partnerships were disinvested, other 9 were taken over or merged, and the disinvestment process of a further 9 firms has begun. In addition, an investigation concerning managers in the Group’s Partnerships was finalized by independent experts as well as during the assessment center. Based on their recommendations, changes in management were made in 14 partnerships, and in 17 others the changes will be made soon. Moreover, the segment responsibility for particular subjects was attributed to competent departments within PKN ORLEN.

In 2Q 2005 a new program for cost reduction, OPTIMA, was presented. Its aim is to gain by 2009 a minimum of PLN600 million in savings in operational costs, and investment will be reduced by a further PLN600 million. The previous program KPRO is still being implemented and, by the end of this year, it should result in PLN800 million savings in operational costs per year. After the end of 2Q 2005 the savings achieved of PLN426 million was equivalent to 53% of the program’s target for this year. Also, a new system of internet auctions sales was introduced, enabling negotiations on the basis of an internet platform.

A new motivating program – “management by objectives” - for management personnel was also implemented in 2Q 2005. This program introduces a transparent and objective model for manager rewards.

The aim of PKN ORLEN is to become a regional leader. This is why PKN ORLEN implements projects on an international scale. The Management Board of PKN ORLEN has placed a tender offer for a 51% stake in Tupras (which owns 4 refineries in Turkey with a total processing capacity of ca. 27,6 million tonnes/year). The privatization was announced by the Turkish government in the first half of 2005. A due diligence study of the Turkish group has been finished. The deadline for the placement of final offers is 2 September 2005.