Assessment of the situation of PKN ORLEN, as presented by the PKN ORLEN Supervisory Board

Polski Koncern Naftowy ORLEN S.A. (“PKN ORLEN”, “Company”), Central Europe’s largest downstream oil company, in accordance with the rule no 18 of the code of “Good Practices in Public Companies 2005”, adopted by the Warsaw Stock Exchange, announces an assessment of the situation of PKN ORLEN, as presented by the PKN ORLEN Supervisory Board:
“Acting in accordance with Rule 18 of Good Practices in Public Companies 2005, the Supervisory Board of PKN ORLEN S.A. presents its assessment of the situation of the Company.

The year 2005 was extremely successful, but also particularly demanding for PKN ORLEN S.A. A number of different processes, which occurred simultaneously, absorbed the attention of the management of the Company, including the Supervisory Board, to the maximum extent. In the first place, the successful takeover and integration of the Unipetrol Group and certain related complications must be mentioned. It is, however, impossible to ignore the extensive restructuring operations, which culminated in the implementation of segment management in the Polish companies of the Capital Group as of 2006.

In this context, the still favourable macroeconomic conditions helped the Company to generate extraordinary profits from its refinery operations. The consolidated operating profit and consolidated net profit of the parent company shareholders rose by 84% and 85%, respectively, compared to the previous year (IFRS basis).

The factors that contributed to the overall financial result were described in detail in the report of the Management Board on the activities of the Capital Group in 2005. The Supervisory Board, however, reminds Shareholders about a number of one-off factors, mainly of a non-cash nature. The takeover of shares and receivables of some companies of the Unipetrol Group resulted, on the one hand, in the recognition of revenue in respect of the “negative goodwill” in the amount of PLN 1,894 million, and the fulfillment of the discount at the price of the acquired receivables in the amount of PLN 246 million. On the other hand, the Company established a large reserve for the coverage of potential negative financial results connected with the performance of contracts concerning the disposal of part of the assets and receivables relating to companies from the Unipetrol Group.

Other one-off factors include primarily the profit from the increase of inventory value caused by the rise in oil prices. PKN ORLEN is obliged to establish mandatory stocks that are included in the calculation of the product manufacturing cost according to the effective weighted average method. If International Accounting Standards provided for the LIFO method for the disbursement of stocks, then the operating profit of the Company would have been lower by approx. PLN 1 billion! It is a non-cash factor, because it corresponds to a rise in the balance-sheet inventory value.

Intensive operations aimed at integration and internal restructuring did not prevent the Company from making brave investment decisions with a view to increasing both the organic and non-organic value of the company. In particular, over the next 3 years the Company will spend approx. PLN 2.3 billion for the construction of paraxylene and Purified Terephthalic Acid (PTA) installations. Apart from the profitability of these investments exceeding the cost of the Company’s capital, these petrochemical project will enable a further increase in the deep processing of oil, which is the main source of profits for the Company, in spite of the limited absorption capacity of the Polish fuel market.

However, the future structure of the Capital Group will depend most on the takeover by PKN ORLEN, for USD 2.8 billion, of the only refinery in the Baltic states - Mažeikių Nafta, which is now subject only to the consent of regulators. The Supervisory Board expects that the experience gained during the integration of the Unipetrol Group will result in the successful implementation of this project and, in particular, the achievement of the required return rate, even assuming less favourable macroeconomic conditions than now. The Supervisory Board is also convinced about the reliability of oil suppliers, with whom PKN ORLEN is bound by long-term relationships of mutual economic dependence; nevertheless, the Company is prepared for any other scenario. Because of this, the main risk involved in this takeover of record value will be the temporarily high indebtedness of the Company. It justifies the motion of the Management Board for the approval of a conditional dividend payment.

Finally, the Supervisory Board recognises with satisfaction the significant improvement in the image of the Company, which conducts its business with full respect for the law, and the accepted rules of corporate governance, business ethics and social responsibility. In the light of these circumstances, the prospects for the Company look optimistic.”