Grupa LOTOS S A : LOTOS Group Management’s Discussion and Analysis Q1 2020

Grupa LOTOS Management's

Discussion and Analysis

of the consolidated financial results for the first quarter of 2020

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

ISIN	Stock Exchange	Thomson Reuters	Bloomberg
PLLOTOS00025	LTS	LTSP.WA	LTS PW

MARKET ENVIRONMENT.....................................................................................................................................	3
EXPLORATION & PRODUCTION SEGMENT ..................................................................................................	6
REFINING & MARKETING SEGMENT..............................................................................................................	12
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME.............................................................	17
CONSOLIDATED STATEMENT OF FINANCIAL POSITION .......................................................................	20
CONSOLIDATED STATEMENT OF CASH FLOWS .......................................................................................	23
SUPPLEMENTARY INFORMATION.................................................................................................................	24

An excel file with the operating and financial data for Q1 2020 and the previous reporting periods is published in the Investor Relations section of our website at→ inwestor.lotos.plas → databook

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

MARKET ENVIRONMENT

• Crude oil prices down approximately 20% both year on year and quarter on quarter, i.e. USD-12.36/bbl1and USD - 12.73/bbl, respectively; significant price depression since March 9th 2020
• Natural gas prices plummeting by ca. 50% year on year, i.e. USD-17.28/boe,2and 22.5% quarter on quarter, i.e. USD - 5.13/boe
• Crack spreads3for diesel oil and aviation fuel deteriorated year on year, respectively by -10% or USD --1.78/bbl and -21% or USD -3.52/bbl
• Expansion of quarterly average diesel oil vs heavy fuel oil crack spread by 33%, or USD 7.22/bbl year on year, and sharpyear-on-year decrease in negative crack spread for heavy fuel oil (-268%, or USD 9/bbl)

• Year-on-yearwidening of quarterly average Brent/Urals spread, from USD 0.24/bbl to USD 2.31/bbl
• Year-on-yearappreciation of the USD/PLN average quarterly exchange rate by PLN 13 (to PLN 3.92)
  Figure 1. Brent prices (USD/bbl), natural gas prices (USD/boe) and the Brent/Urals spread (USD/bbl)

	71	71
64	66	64	64			67
63	63	64
59				59	60

41
	34
		29	26							27	23
			23	20	20	19	17	18				20
									2,78
0,03	0,25	0,46	0,21		1,80	1,28	0,36	1,90	1,61	0,22	2,10
	-0,17

56

32

17163,28

1,49

Jan-19

Feb-19

Mar-19

Apr-19

May-19Jun-19

Jul-19

Aug-19Sep-19

Oct-19

Nov-19Dec-19

Jan-20

Feb-20

Mar-20

Brent/Urals spread

Brent crude

Natural gas

Source: Refinitiv

Table 1. Brent crude prices, Brent/Urals spread and gas prices (USD/bbl)

	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
DATED Brent FOB prices	50.54	63.27	62.90	-20.1%	-19.7%
Brent/Urals spread	2.31	1.54	0.24	50.0%	862.5%
UK NBP natural gas prices4	17.72	22.85	35.00	-22.5%	-49.4%
Source: Refinitiv

1bbl - barrel of crude oil.

2boe - barrel of oil equivalent

3Product crack spread is calculated as the difference between the price per barrel of a given product (price per tonne computed using the appropriate density factor) and the price of Urals crude (the Brent crude price adjusted for the Brent/Urals spread).

4To ensure comparability, the UK NBP natural gas prices were converted from USD/MWh to USD/boe using the conversion factor of 1.6282 MWh/boe.

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Table 2. Product crack spreads (USD/bbl)
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Motor gasoline	7.63	10.56	2.93	-27.7%	160.4%
Naphtha	-2.14	-3.58	-6.89	40.2%	68.9%
Diesel oil (10 ppm)	16.10	18.31	17.88	-12.1%	-10.0%
Light fuel oil	14.05	16.20	16.08	-13.3%	-12.6%
Aviation fuel	13.24	17.89	16.76	-26.0%	-21.0%
Heavy fuel oil	-12.36	-25.57	-3.36	51.7%	-267.9%
Source: Refinitiv
Table 3. USD/PLN exchange rates
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
PLN/USD exchange rate at end of period	4.15	3.80	3.84	9.2%	8.1%
Average PLN/USD exchange rate	3.92	3.87	3.79	1.3%	3.4%
Source: National Bank of Poland.

Key external factors affecting to the LOTOS Group's performance in Q1 2020:

• Feedstock and products

Refining & Marketing segment:

Depressed year-on-year crack spreads for middle distillates, i.e. diesel oil and aviation fuel, had an adverse impact on the Refining & Marketing segment's performance. A significant decline in crude oil and petroleum product prices affected the Refining & Marketing segment's EBIT, which was reduced by an inventory write-down of PLN 827.8m. The continuing downward price trend caused a marked deterioration of EBIT, reported based on the weighted average cost method. On the other hand, refining costs were down on a steep year-on-year decline in the price of natural gas used to fuel the Company's refinery. The price of crude oil processed into products and used in the processing operations (consumed internally) was also significantly lower.

An increase in the differential between the diesel oil and heavy fuel oil crack spreads in Q1 2020, of USD 28.46/bbl, supported the profitability of the Grupa LOTOS refinery's product mix, which changed after new EFRA units had been integrated into the existing refinery set-up (a shift towards a higher share of diesel oil (up 13% year on year) and less heavy fuel oil (down 57.4%) in the refinery's total yields). These factors translated into the Refining & Marketing segment's Q1 2020 adjusted LIFO-based EBITDA of PLN 490.5m (up +13.2% year on year).

Exploration & Production segment:

1. markedyear-on-year drop in the UK National Balancing Point prices of natural gas (down 49.4%) and a 19.7% year-on- year decline in crude oil prices had an adverse effect on the Exploration & Production segment's performance. As a result, the Exploration & Production segment's adjusted EBITDA came in at PLN 184.2m (down 10.4% year on year).

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

• Exchange rates

An increase in the average USD/PLN exchange rate in the quarter (up 3.4% year on year) had a positive effect on crack spreads and thus on the operating performance of both reporting segments.

• Covid-19pandemic

In March 2020, the Company's market environment became extremely volatile and unpredictable. The Company has been operating in an environment prone to rapid changes triggered by the pandemic and by measures taken to contain its impact, both in Poland and globally.

They have upset the balance and disrupted the flows of international trade, including trade in goods and services, and passenger traffic has fallen markedly. Restrictions have been imposed on both air and road transport. Many countries have forbidden non-essential travel, restricted the use of services, retail outlets, institutions of culture and schools, and closed their borders for tourist traffic and migrant workforce. On March 14th 2020, the state of epidemic emergency was introduced in Poland, resulting in the imposition of restrictions described above. Their negative impact on the Polish fuel market, including that of aviation fuel, is expected to persist at least throughout Q2 2020, with a substantialdecline in volumes sold through the retail channel (service station chain), especially in the case of gasoline and LPG. In April 2020, the restrictions were further extended and remained in force throughout the month, which was reflected in reduced fuel consumption volumes on the Polish market, prompting the Company to export some products.

5

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

EXPLORATION & PRODUCTION SEGMENT

• Hydrocarbon production rate at 23.5 thousand boe/d (up 14.8% year on year and 8.4% quarter on quarter)
• Segment's performance and growth projects impacted by challenging market conditions associated with the commodity market crisis andCovid-19 pandemic
• Exploration & Production segment's adjusted EBITDA of PLN 184.2m (up +5.3% quarter on quarter and down 10.4% year on year)

Crude oil and natural gas reserves, production and total sales
Table 4. Crude oil and natural gas reserves as at (mboe)5
				Mar 31 2020	Dec 31 2019	Mar 31 2019
Norway				29.1	30.7	36.0
Poland				47.5	47.9	49.1
Lithuania				2.6	2.7	2.9
Total				79.2	81.3	88.0
Source: Company
Table 5. Daily production (boe/d)
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Norway	18,043		20,045	14,830	-10.0%	21.7%
Poland	4,871		5,000	4,980	-2.6%	-2.2%
Lithuania	626		657	702	-4.8%	-10.8%
Total	23,539		25,702	20,512	-8.4%	14.8%
Source: Company
Table 6. Quarterly production (boe)
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Norway	1,641,873		1,844,095	1,334,729	-11.0%	23.0%
Poland	443,229		460,019	448,204	-3.6%	-1.1%
Lithuania	56,940		60,479	63,149	-5.9%	-9.8%
Total	2,142,042		2,364,593	1,846,082	-9.4%	16.0%
Source: Company

52P - proved and probable reserves (SPE-PRMS classification).

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Table 6. Oil and gas sales (boe)
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Norway	1,627,950	1,420,853	1,195,811	14.6%	36.1%
Poland	316,796	466,910	276,630	-32.2%	14.5%
Lithuania	92,790	92,318	98,772	0.5%	-6.1%
Total	2,037,536	1,980,081	1,571,213	2.9%	29.7%
Source: Company

Exploration and production activities in Poland

Map 1. Licences held by the LOTOS Group companies in Poland as at March 31st 2020

Source: Company

In Q1 2020, LOTOS Petrobaltic S.A. ("LPB") continued to produce crude oil and associated natural gas from the B3 field in the Baltic Sea at an average rate of 1,088 boe/d. During that time, well workover operations were under way in the B3 field to maximise recovery rates and enhance production. Notably, Q1 2020 saw the workover and bringing online of the B3-9 well, while another workover treatment was commenced on the B3-15 well. For the time being, the workover programme has been hindered by the state of epidemic emergency announced in Poland (the issue of availability of foreign services). The schedule of further work will depend on how the Covid-19 situation unfolds.

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

B8 project

Development of a crude oil field in the Baltic Sea

In Q1 2020, crude oil and associated natural gas were being produced from the B8 field at an average rate of 3,783 boe/d. During that period, offshore work was carried on to functionally test all systems and equipment and to continue the comprehensive startup of the process modules. As a result of the work, the Production Centre is to achieve its full operational capacity in 2020. On April 3rd 2020, a crude oil separation and export unit was launched, as the Production Centre's primary functionality. First oil has already been obtained from the Petrobaltic Production Centre, and tests are being run to check the efficiency of the oil separation system using hydrocarbon streams. The timely launch of further process units will be affected by constraints brought about by the Covid-19 pandemic.

Key parameters of the B8 project (for the LOTOS Group interest):

○	LOTOS Group interest	100%
○	2P reserves	34.4 mboe as at March 31st 2019 (91% crude oil, 9% natural gas)
○	current output	3.8 thousand boe/d (Q1 2020)
○	full-scale production	not earlier than in Q2 2021
○	expected average output	5.0 thousand boe/d (for 5-year period from full-scale production launch).

B4/B6 development project

Development of natural gas fields in the Baltic Sea

The B4/B6 project consists in the development of natural gas deposits in the Baltic Sea, in partnership with CalEnergy Resources Poland Sp. z o.o. A final investment decision (FID) for the project is under way. However, the market conditions in Q1 2020 affected by the Covid-19 crisis coupled with the sharp declines in commodity prices were far from conducive to the investment decision. A viable date of the FID, ushering in the project implementation phase, will probably be towards the end of 2020 - depending on market developments.

Key parameters of the B4/B6 project (for the LOTOS Group interest):

○	LOTOS Group interest	51%
○	2C resources6	17.9 mboe as at March 31st 2020 (74% natural gas, 26% NGL)
○	Final investment decision	Q4 2020 (depending on market developments).

Exploration projects

As part of exploration activities in:

• the Gotland, Łeba and Rozewie offshore licence areas (LPB interest: 100%) - work was under way to develop a regional structure and tectonic model,
• Młynary onshore licence area (LPB interest: 100%) - an attachment to the plan of geological operations for 3D seismic surveys was being developed,
• Górowo Iławeckie onshore licence area (PGNiG operator interest: 51%, LPB interest: 49%) - work was under way to proceed to the exploration drilling stage.

6contingent resources prior to PDO approval.

8

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Exploration and production activities in Norway

Map 2. Licences held by LOTOS Exploration & Production Norge AS at March 31st 2020

Source: Company

At the end of Q1 2020, LOTOS Norge held interests in 29 licences for exploration, appraisal and production of hydrocarbon reserves in the Norwegian Continental Shelf. In January 2020, two new licences awarded following the APA 2019 licensing round were added to the LOTOS portfolio in Norway:79.74% interest in the 442C licence covering an extension of the Liatårnet discovery and 16% interest in the 036F licence in the Trell/Trine area. The new licences are operated by AkerBP. Both licences are an important addition to the existing asset base in the Greater Heimdal and Trell/Trine areas.

In Q1 2020, LOTOS Norge, operating as part of a consortium, produced natural gas and condensate from fields located in the Heimdal and Sleipner areas (including the Utgard field brought on stream in Q3 2019). The average output of the Norwegian assets in Q1 2020 was 18.0 thousand boe/d (+21.7% year on year).

In Q1 2020, projects to develop new fields in Norway were impacted by market challenges related to the Covid-19 pandemic and commodity market crisis. The market crisis was affecting most sectors of the economy, including the oil industry. Many exploration and production projects were put on hold or re-scheduled. This also applied to projects carried out by LOTOS Norge. Their status as at the end of Q1 2020 is presented below:

Yme project

Development of an oil field in Norway

The Yme project is at an advanced development stage . However, circumstances that have emerged from the Covid-19 pandemic crisis will affect the first oil production date relative to that previously communicated, i.e. Q4 2020. As disclosed in Current Report No. 7/2020, the project to upgrade the Maersk Inspirer platform for hydrocarbon production from YME in line with the Plan for Development and Operation may be significantly delayed following the introduction by Norwegian authorities of new regulatory measures in response to the pandemic outbreak. The resulting restrictions are affecting businesses, including by preventing them

7Awards in Predefined Areas

9

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

from continuing to hire employees from outside Norway. This situation has been notified to the Company by Maersk Drilling, i.e. the Platform owner, and Aker Solutions, i.e. the contractor engaged to perform the upgrade, both of which in these circumstances will have a reduced capacity to operate as well as to fulfil their mutual obligations. The Company believes that first oil production from the YME field is highly likely to be postponed until Q4 2021. The Company keeps monitoring the situation and will communicate any key arrangements changing the project status, especially any mitigating measures taken by subcontractors with respect to the availability of staff from other projects that have now been suspended. The prevailing situation may affect the amount of expenditure incurred depending on further developments in the Covid-19 pandemic.

Key parameters of the Yme project (for the LOTOS interest):

○	LOTOS interest	20%
○	2P reserves	12.7 mboe as at March 31st 2020 (100% crude oil)
○production to be launched in	Q4 2021
○	expected average output	5.0 thousand boe/d (for 5-year period from production launch).

New growth projects

LOTOS Norge is engaged in efforts to develop new fields in Norway. These efforts focus on the development of fields lying north of the Heimdal hub as part of the NOAKA project (Frigg Gamma Delta, Langfjellet, Rind, Fulla and Froy discoveries, with LOTOS Norge's average interest of approximately 10% and AkerBP as the operator), as well as development of the Trel and Trine discoveries located within the Heimdal area (where LOTOS Norge's respective interests are 10% and 16%, and AkerBP is the operator). In Q1 2020, both projects were at a stage of selecting optimum development concepts, but due to the Covid-19-related crisis and turbulence on the crude oil market, the project work was temporarily suspended. Further work on the projects will depend on market conditions and developments in the Covid-19 pandemic.

Exploration and production activities in Lithuania

Map 3. Licences held by the AB LOTOS Geonafta Group as at March 31st 2020

Source: Company

10

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

In Q1 2020, companies of Lithuania's AB LOTOS Geonafta Group focused on optimising production from their existing onshore oilfields located in the following licence blocks: Girkaliai, Genciai, Kretinga, Nausodis, Klaipėda, and Gargždai. The output of the Lithuanian assets in Q1 2020 was 626 boe/d ( down 10.8% year on year).

Table 7. Exploration & Production segment's key financial data (PLNm)

	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Revenue	329.3	333.5	310.7	-1.3%	6.0%
EBIT	-197.9	190.8	153.1	-203.7%	-229.3%
Depreciation and amortisation	86.1	78.1	52.5	10.2%	64.0%
EBITDA	-111.8	268.9	205.6	-141.6%	-154.4%
Adjusted EBIT8	98.1	96.9	153.1	1.2%	-35.9%
Adjusted EBITDA8	184.2	175.0	205.6	5.3%	-10.4%
Source: Company

The year-on-year growth in the Exploration & Production segment's revenue in Q1 2020 (up 6%) was mainly attributable to higher hydrocarbon sales volumes in Norway (up 36.1%) and in Poland (up 14.5%), combined with an increase in the average USD/PLN exchange rate in the quarter (up 2.4%), offset by a decline in the prices of natural gas (down 49.4%) and Brent Dtd crude (down 19.7%).

The moderate quarter-on-quarter revenue decline was mainly attributable to lower prices of natural gas (down 22.5%) and Brent crude (down 20.1%), offset by a 2.9% increase in the segment's hydrocarbon sales volumes (Norway: up 14.6%), and a slight increase (up 0.3%) in the average quarterly USD/PLN exchange rate.

The higher year-on-year depreciation and amortisation of the segment reflects an increase in the production volumes in Norway (from the Utgard field).

As a combined effect of these factors, the Exploration & Production segment's adjusted EBITDA for Q1 2020 rose 5.3% on Q4 2019 and fell 10.4% on Q1 2019.

8Adjusted EBIT and EBITDA:

in Q1 2020 (PLN -296m): impairment loss on the YME, Utgard and Lithuanian field assets of PLN -223.6m, PLN -53.4m and PLN -19.0m, respectively.

in Q4 2019 (PLN 93.9m): reversal of impairment loss on the YME field of PLN +105.4m, reversal and re-estimation of provision for liabilities on account of contingent payments related to the acquisition of Sleipner assets of approximately PLN +44.5m, loss on discontinued projects in Norway of PLN -41.2m, impairment loss on a ship at the Miliana Group of PLN -5.9m, and impairment loss on Lithuanian fields of PLN -8.9m.

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

REFINING & MARKETING SEGMENT

• Successful completion of all tests and operational stabilisation of EFRA Project units9
• Improved sales structure (year on year): diesel oil volume up 11.3%, with heavy product volume down 57.4%
• Refining & Marketing segment's adjustedLIFO-based EBITDA of PLN 490.5m (up 13.2% year on year)

Table 8. Crude oil throughput ('000 tonnes)10
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Crude oil throughput	2,597.9	2,586.3	2,610.5	0.5%	-0.5%
Source: Company

In Q1, the Company was optimising capacity utilisation at its refinery in Gdańsk. Its crude oil throughput amounted to 2,597.9 thousand tonnes, i.e. remained stable year on year and quarter on quarter. As successive EFRA units were coming online, the refinery's product mix varied over Q1 2020. In the reporting period, the Company announced that the structure of its refining output in February 2020 was less favourable than the target mix (see Current Report No. 5/2020). The reason was unscheduled downtime of the Delayed Coking Unit (DCU). The DCU experienced disruptions to smooth operation that are characteristic of newly commissioned refinery units. These disruptions were resolved.

In Q1 2020, preparations were being made for a 30-day test of the Delayed Coking Unit and the new hydrogen production unit required by the facility agreement (Lenders Reliability Test - LRT). The test was carried out between February 24th and March 24th 2020. All the stated test objectives were satisfied, pertaining to operational availability, quantity of feedstock processed, product quality, product yields, and confirmation of other significant parameters related to interoperation between the newly constructed facilities and the Company's refinery units.

Given the extremely strong volatility of the macro environment triggered by the Covid-19 pandemic and destabilisation on the crude oil market, further aggravated by the 'price war' between the major oil producers Saudi Arabia and Russia, intensive optimisation efforts were being undertaken to align the Company's product yields with market conditions.

In Q1 2020, Grupa LOTOS was carrying on several business development projects on a smaller scale. The most advanced one, i.e. the Hydrogen Recovery Unit (HRU), completed in 99%, whose purpose is to increase the production of hydrogen, LPG and naphtha in the refinery's total yields pool is scheduled to be placed in service in H1 2020. Seeking to expand its capacity to dispatch fuels from the refinery, the Company was moving forward with the project to construct a railway loading facility, scheduled to be placed in service at the end of 2020.

9EFRA, i.e. Effective Refining

10The difference between the volume of crude oil processed and the refinery's output of products stems from the fact that, apart from crude oil, the processing units and finished product blenders receive biocomponent streams, enhancing additives and middle distillates purchased from third-party suppliers.

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	Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results
Table 9. Refining output structure ('000 tonnes)11
		Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Gasolines		392.0	436.9	407.2	-10.3%	-3.7%
Naphtha		135.8	131.8	106.1	3.0%	28.0%
Diesel oils		1,407.4	1,391.3	1,245.4	1.2%	13.0%
Light fuel oils		74.4	68.3	67.5	9.0%	10.2%
Jet fuel		150.0	110.0	102.8	36.4%	45.9%
Heavy products12		229.4	259.1	538.6	-11.5%	-57.4%
Petcoke		79.3	64.0	0.0	23.9%	-
Other 13		368.4	317.9	326.1	15.9%	13.0%
Total		2,836.6	2,779.3	2,793.7	2.1%	1.5%
Source: Company

Table 10. Sales structure in the Refining & Marketing segment ('000 tonnes)

	Q1 2020		Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Gasolines	409.7		416.5	396.8	-1.6%	3.3%
Naphtha	135.8	131.8	106.1	3.0%	28.0%
Diesel oils	1,437.7		1,522.4	1,291.7	-5.6%	11.3%
Light fuel oils	72.4		69.5	71.3	4.2%	1.5%
Jet fuel	154.9	91.6	116.6	69.1%	32.8%
Heavy products11	198.6		280.6	508.4	-29.2%	-60.9%
Other	328.1		264.1	229.2	24.2%	43.2%
Total	2,737.2	2,776.5	2,720.1	-1.4%	0.6%
Source: Company

Polish fuel market14

11The difference between the volume of crude oil processed and the refinery's output of products stems from the fact that, apart from crude oil, the processing units and finished product blenders receive biocomponent streams, enhancing additives and middle distillates purchased from third-party suppliers.

12Heavy fuel oil and bitumen components

13products include fuel and industrial gases, sulfur, base oils, xylene fraction, LPG, bunker fuel, extracts, refinates, and slack wax

14Source of fuel consumption data in Poland - POPiHN.

13

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

In Q1 2020, consumption of liquid fuels (diesel oil, gasoline and light fuel oil) in Poland fell 0.1% year on year. The reason behind the decline were restrictions imposed in response to the Covid-19 pandemic. Motor gasoline consumption fell 0.2% year on year, diesel oil consumption remained flat, while consumption of light fuel oil was on a downward trend (-1.2%).

Motor gasoline

The LOTOS Group's total sales of gasoline rose 3.2% year on year in Q1 2020, while the average global crack spread for gasoline rose by USD 4.7/bbl year on year.

Figure 2. Motor gasoline - average monthly crack spread, USD/bbl January 2019 - March 2020

15.8915.78

		14.50
12.55		13.44
11.67	12.31

9.61 8.398.709.40

6.42

1.03 1.15

5.58

Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19Jan-20Feb-20Mar-20

Source: Refinitiv

Diesel oil

Despite reduced fuel consumption in March 2020, the LOTOS Group's sales for the entire Q1 2020 grew 11.3%. In Q1 2020, the average global crack spread for diesel oil went down by USD 1.78/bbl year on year.

Figure 3. Diesel oil - average monthly crack spread, USD/bbl January 2019 - March 2020

						18.86	21.15			19.42
17.71	18.46	17.33		16.26	17.19		16.26	17.35
				15.64
		13.88	14.00	14.15
							13.66

Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19Jan-20Feb-20Mar-20

Source: Refinitiv

Heavy fuel oil

In the reporting quarter, the LOTOS Group's sales of heavy products (bitumen components and heavy fuel oil) fell 60.9% year on year, as the refinery's yields were optimised following integration of the new EFRA units. In Q1 2020, the average negative crack spread for heavy fuel oil on global markets was USD -12.35/bbl, having deteriorated by USD 8.99/bbl year on year.

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Figure 4. Heavy fuel oil - average monthly crack spread, USD/bbl January 2019 - March 2020

Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19Aug-19Sep-19Oct-19Nov-19Dec-19Jan-20Feb-20Mar-20

-4.69	-2.55	-2.92	-6.72	-5.74	-3.68								-4.55
			-9.68				-9.60
											-12.58
								-12.97
										-19.74		-19.34
										-29.75	-27.74
Source: Refinitiv
Table 11. Refining & Marketing segment's key financial data (PLNm)
					Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Revenue						5,882.9		7,035.8		6,533.8		-16.4%		-10.0%
EBIT						-1,156.8		252.8		216.1		-557.6%		-635.3%
Depreciation and amortisation				189.3		178.6		160.6		6.0%		17.9%
EBITDA						-967.5		431.4		376.7		-324.3%		-356.8%
LIFO-based EBIT					245.3		274.9		257.5		-10.8%		-4.7%
LIFO-based EBITDA					434.6		453.5		418.1		-4.2%		3.9%
Adjusted LIFO-based EBITDA15				490.5		406.3		433.3		20.7%		13.2%
Source: Company

The 10.0% year-on-year decline in the Refining & Marketing segment's revenue was driven primarily by a 10.5% drop in the segment's average net selling price. In Q1 2020, the segment's average net selling price was PLN 2,149/tonne, having fallen PLN 253/tonne, chiefly on lower prices of petroleum products.

The 16.4% quarter-on-quarter decline in the Refining & Marketing segment's revenue reported in Q1 2020 was largely attributable to a 15.2% decrease in the average net selling price (down PLN 385/tonne) driven by lower prices of petroleum products.

In Q1 2020, adjusted LIFO-based EBITDA of the Refining & Marketing segment came in at PLN 490.5m, up 20.7% quarter on quarter and up 13.2% year on year.

EBIT posted by the Refining & Marketing segment in Q1 2020 was negative at PLN -1,156.8m mainly on account of inventory write- downs of PLN 827.8m on a consolidated basis. In addition, the falling trend in crude oil prices translated into a significant LIFO effect on inventory measurement of PLN 574.3m, which negatively affected the segment's EBIT.

Both factors are of a non-cash nature, not affecting the Company's ability to generate actual refining margin.

15EBITDA including the LIFO effect on inventory measurement and reversal of inventory write-downs, net of foreign exchange differences on operating activities in each quarter and impairment losses on service stations in Q1 2020 and Q4 2019.

15

	Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results
Table 12. Number of service stations within the LOTOS network as at March 31st 2020
		Mar 31 2020	Dec 31 2019	Mar 31 2019	Q1 2020/ Q4	Q1 2020/ Q1 2019
		2019
CODO		312	312	307	0	5
DOFO		194	194	186	0	8
Total		506	506	493	0	13

Source: Company

As at the end of March 2020, the LOTOS Group operated a chain of 506 service stations, an increase of 13 sites relative to the end of March 2019.

Figure 5. Service stations in Poland as at March 31st 2020

							PKN Orlen
							BP
				1 796			LOTOS
						Shell
3 136							CircleK (formerly Statoil)
						AMIC (formerly Lukoil)
				578			TOTAL
							AS24
				506			IDS
						Supermarket service stations
				415
		354			Moya
248							Independent service station
196	14	35	39	116

Source: POPiHN (Polish Organisation of Oil Industry and Trade).

Table 13. Retail's key financial data (PLNm)

	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Sales volume ('000 tonnes)	284.6	325.1	284.3	-12.5%	0.1%
Revenue	1,511.7	1,779.8	1,546.6	-15.1%	-2.3%
EBIT	9.7	-23.2	35.7	-141.8%	-72.8%
Depreciation and amortisation	28.1	29.3	27.8	-4.1%	1.1%
EBITDA	37.8	6.1	63.5	519.7%	-40.5%
Adjusted EBIT	18.3	-1.9	35.7	-1,063.2%	-48.7%
Adjusted EBITDA	46.4	27.4	63.5	69.3%	-26.9%

16

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Source: Company

EBIT posted in Retail for Q1 2020 reached PLN 9.7m. The Retail operating result reflects a PLN 8.6m impairment loss on service stations.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Table 14. Key financial results of the LOTOS Group (PLNm)
	Q1 2020	Q4 2019	Q1 2019	Q1 2020/ Q4 2019	Q1 2020/ Q1 2019
Revenue	6,095.8	7,212.5	6,741.0	-15.5%	-9.6%
EBIT	-1,358.9	452.4	362.3	-400.4%	-475.1%
Depreciation and amortisation	275.4	256.7	213.1	7.3%	29.2%
EBITDA	-1,083.5	709.1	575.4	-252.8%	-288.3%
LIFO effect16	1,402.1	22.1	41.4	-	-
LIFO-based EBIT	43.2	474.5	403.7	-90.9%	-89.3%
Adjusted LIFO-based EBIT	395.1	333.4	418.9	18.5%	-5.7%
Adjusted LIFO-based EBITDA17	670.5	590.1	632.0	13.6%	6.1%
Source: Company.

In line with its inventory measurement policies, the LOTOS Group uses the weighted average cost method to measure changes in inventories. This method defers the impact of changes in crude oil prices on the prices of finished goods. Thus, an increase in crude oil prices has a positive effect on financial performance, while a decrease adversely affects the performance.

Operating results computed using this inventory measurement method are presented in the EBITDA and EBIT lines of the table. The table also presents estimated inventory decreases measured using the LIFO method, as well as the LIFO effect, LIFO-based EBIT, adjusted LIFO-based EBIT, and adjusted LIFO-based EBITDA.

In Q1 2020, the LOTOS Group posted an operating loss (EBIT) of PLN -1,358.9m, being the combined result of the Refining & Marketing segment's EBIT of PLN -1,156.8m, the Exploration & Production segment's EBIT of PLN -197.9m, and PLN -4.2m in consolidation adjustments. LIFO-based EBITDA, net of exchange differences on operating activities and other non-recurring items (adjusted LIFO-based EBITDA), was PLN 670.5m.

The operating performance was adversely affected by a significant decline in the prices of crude oil, natural gas and petroleum products.

1. LIFO effect =LIFO-based EBIT (estimated with the LIFO, or Last In First Out, method) - EBIT.
2. EBITDA, includingone-off items described in the segment discussion.

17

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Figure 5. Structure of the LOTOS Group's consolidated results in Q1 2020 (PLNm)

EBIT -					Share in net
Exploration &	EBIT - Refining	Consolidation		Net finance	profit/(loss) of	Profit/(loss)		Net
Production	& Marketing	adjustments	EBIT	income/(costs)	joint ventures	before tax	Income tax	profit/(loss)

-197.9
-1,156.8	-4.2			-1,311.6
	1,358.9
	-370.2	-0.8	-1,729.9	418.3

Source: Company

In Q1 2020, the LOTOS Group reported a net finance loss of PLN -370.2m, mainly comprising foreign exchange losses of PLN - 104.0m, a PLN -216.2m loss on measurement and settlement of hedging transactions, and a negative net balance of interest on debt, interest income and commissions of PLN -48.9m.

In Q1 2020, the effect of measurement and settlement of market risk hedging transactions at the LOTOS Group included mainly a PLN -132.7m net loss on settlement and measurement of transactions hedging currency risk and a PLN -75.0m net loss on measurement of transactions hedging the risk related to product prices.

Market risk management

Presented below is the market risk management process, including the measures undertaken in Q1 2020. In its core business activities, the LOTOS Group is exposed to market risk manifest in:

• risk related to commodity and petroleum product prices,
• risk related to prices of carbon dioxide emission allowances,
• currency risk,
• interest rate risk.

As part of the risk related to commodity and petroleum product prices, certain key risk factors have been identified at the LOTOS Group, including volatility of the refining margin, volatility of prices of stocks held in excess of the mandatory emergency stock volumes, volatility of differentials used in trade contracts (e.g. Urals vs Brent), and the use of non-standard pricing formulas in trade contracts.

In Q1 2020, commodity swaps were entered into as part of the adopted policy of managing the commodity and petroleum product price risk. The contracts were concluded in order to preserve the original price risk profile in connection with the fact that bitumen components are offered for sale at fixed prices.

The risk related to prices of carbon dioxide emission allowances is managed at Grupa LOTOS on an ongoing basis, in line with the assumptions set forth in the strategy for managing the risk. The Group balances its future CO2emission allowance shortages and surpluses depending on the market situation and within defined limits.

In Q1 2020, the Company managed its position in CO2emission allowances based on a strategy to adapt to the situation prevailing at a given time on the EUA Futures market, taking into account the projected deficit after 2020 and the requirement for EUA units

18

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

reported by the Group companies. At present, Grupa LOTOS S.A. has reduced the surplus of CO2emission allowances relative to Q4 2019.

In its business activities, the LOTOS Group is exposed to exchange rate movements in connection with its commodity and petroleum product trading activities, investing cash flows, financing cash flows (including deposits and credit facilities), and measurement of derivative instruments. The parent actively manages its currency exposure based on an adopted policy and within defined limits, using Cash-Flow-at-Risk (CFaR) as the principal risk measure. In Q1 2020, as part of the currency risk management process, in order to optimise the value of expected cash flows, the Group entered into spot, FX forward and FX swap contracts taking into account prevailing market conditions.

Under the EFRA project, in Q1 2020 the LOTOS Group concluded EUR/USD currency contracts designed to hedge EUR- denominated capital expenditure against USD as the main financing currency.

The Group is exposed to the risk of changes in cash flows caused by interest rate movements as interest income and interest expense related to certain assets and liabilities accrue based on floating interest rates, including in particular under the investment credit facility for the EFRA Project and the inventory financing and refinancing credit facilities where the amount of interest is computed by reference to the floating LIBOR USD rate. To hedge its interest rate risk, the LOTOS Group enters into interest rate swap contracts.

Table 15. EBIT, profit before tax and net profit/(loss) of the LOTOS Group (PLNm)
	Q1 2020	Q4 2019	Q1 2019
EBIT	-1,358.9	452.4	362.3
Profit/(loss) before tax	-1,729.9	570.8	292.2
Net profit/(loss)	-1,311.6	`354.0	172.5
Source: Company

In Q1 2020, the LOTOS Group posted a consolidated net loss of PLN -1,311.6m.

19

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Table 16. Consolidated statement of financial position - assets (PLNm)
		Mar 31 2020	Dec 31 2019		Nominal change	Change in %
Total		21,356.2		23,672.1		-2,315.9		-9.8%
Non-current assets		13,995.8		14,236.2		-240.4		-1.7%
Property, plant and equipment of the Refining & Marketing segment		9,634.1		9,638.4		-4.3		0.0%
Intangible assets of the Refining & Marketing segment		158.1		160.0		-1.9		-1.2%
Property, plant and equipment of the Exploration & Production		3,277.8		3,632.4		-354.6		-9.8%
segment
Intangible assets of the Exploration & Production segment		294.5		330.5		-36.0		-10.9%
Equity-accounted joint ventures		141.6		142.2		-0.6		-0.4%
Deferred tax assets		269.5		174.5		95.0		54.4%
Derivative financial instruments		5.8		0.1		5.7		5700.0%
Other non-current assets		214.4		158.1		56.3		35.6%
Current assets		7,360.4		9,435.9		-2,075.5		-22.0%
Inventories		3,099.5		4,854.3		-1,754.8		-36.1%
Trade receivables		2,283.8		2,609.1		-325.3		-12.5%
Current tax assets		158.3		96.7		61.6		63.7%
Derivative financial instruments		18.4		25.1		-6.7		-26.7%
Other current assets		312.4		334.1		-21.7		-6.5%
Cash and cash equivalents		1,488.0		1,516.6		-28.6		-1.9%

Source: Company

As at March 31st 2020, the LOTOS Group carried total assets of PLN 21,356.2m (down PLN -2,315.9m on December 31st 2019). Key changes in assets:

• PLN 1,754.8m decrease in inventories due to a significant decline in prices and inventorywrite-downs
• PLN 354.6m decrease in the Exploration & Production segment's property, plant and equipment, attributable mainly to impairment losses on the YME and Utgard field assets in Norway and Lithuania
• PLN 325.3m decrease in trade receivables driven by lower selling prices

20

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

Table 17. Consolidated statement of financial position - sources of funding (PLNm)
		Mar 31 2020	Dec 31 2019		Nominal	Change in %
			change
Total		21,356.2	23,672.1		-2,315.9	-9.8%
Equity		11,297.0	12,715.4		-1,418.4	-11.2%
Share capital		184.9	184.9		0.0	0.0%
Share premium		2,228.3	2,228.3		0.0	0.0%
Cash flow hedging reserve		-257.0	-203.6		-53.4	-26.2%
Retained earnings		9,103.9	10,415.5		-1,311.6	-12.6%
Translation reserve		36.8	90.2		-53.4	-59.2%
Non-controlling interests		0.1	0.1		0.0	0.0%
Non-current liabilities		4,738.6	5,097.9		-359.3	-7.0%
Borrowings, other debt instruments and finance lease liabilities		3,238.6	3,142.6		96.0	3.1%
Derivative financial instruments		42.8	6.6		36.2	548.5%
Deferred tax liabilities		56.6	475.2		-418.6	-88.1%
Employee benefit obligations		211.0	207.5		3.5	1.7%
Other liabilities and provisions		1,189.6	1,266.0		-76.4	-6.0%
Current liabilities		5,320.6	5,858.8		-538.2	-9.2%
Borrowings, other debt instruments and finance lease liabilities		1,538.4	1,273.8		264.6	20.8%
Derivative financial instruments		173.1	15.3		157.8	1031.4%
Trade payables		1,066.5	1,940.8		-874.3	-45.0%
Current tax liabilities		208.8	217.1		-8.3	-3.8%
Employee benefit obligations		170.9	174.3		-3.4	-2.0%
Other liabilities and provisions		2,162.9	2,237.5		-74.6	-3.3%
Source: Company

The reduction in the LOTOS Group's equity as at March 31st 2020 to PLN 11,297.0m (down by PLN 1,418.4m on 2019) was driven primarily by lower retained earnings (down by PLN 1,311.6m), foreign exchange losses on valuation of cash flow hedges recognised in capital reserves adjusted by the tax effect of PLN -53.4m, and a PLN 53.4m decrease in translation reserve.

The share of equity in total equity and liabilities fell by 0.8pp year on year, to 52.9%. Key changes in liabilities (down PLN -897.5m)

• PLN 874.3m decrease in trade payables due to lower volumes of crude oil purchased outside the LOTOS Group in March 2020 compared with December 2019, and a considerable reduction in purchase prices
• PLN 151m decrease in other liabilities and provisions (mainly provisions for remediation work in the Exploration & Production segment)
• PLN 418.6m decrease in deferred tax liabilities, due mainly to their absence at the parent

21

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

• PLN 360.6m increase in borrowings, other debt instruments and finance lease liabilities, reflecting mainly their remeasurement following an increase in the USD/PLN exchange rate by PLN 0.35 at the end of March 2020
• PLN 194.0m increase in a loss on measurement of financial instruments.

As at March 31st 2020, the LOTOS Group's debt totalled PLN 4,777.0m, up by PLN 360.6m on the end of December 2019, mainly as a result of the increase in the USD/PLN exchange rate by PLN 35 at the end of March 2020. Net debt was PLN 3,289.0m. The ratio of net debt to adjusted LIFO-based EBITDA was 1.1 as at March 31st 2020.

22

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

CONSOLIDATED STATEMENT OF CASH FLOWS

Table 19. Cash flows (PLNm)
	Q1 2020	Q4 2019	Q1 2019
Cash flows from operating activities	340.4	132.9	494.5
Cash flows from investing activities	-362.1	-153.5	-230.6
Cash flows from financing activities	-254.6	-786.8	-120.1
Effect of exchange rate fluctuations on cash held	47.2	-18.7	1.9
Change in net cash	-229.1	-826.1	145.7
Cash at beginning of period	1,516.6	2,342.7	1,938.3
Cash at end of period	1,287.5	1,516.6	2,084.0
Source: Company

As at March 31st 2020, the LOTOS Group's cash balance (including current account overdrafts) was PLN 1,287.5m. In Q1 2020, net cash flows reduced cash and cash equivalents by PLN 229.1m.

In Q1 2020, net cash flows from operating activities were positive at PLN 340.4m, driven mainly by a marked decrease in inventories, net loss incurred and a decline in trade payables.

Negative net cash flows from investing activities (PLN -362.1m) were mainly attributable to acquisition of property, plant and equipment and other intangible assets, chiefly for the Exploration & Production segment and the EFRA Project.

Negative cash flows from financing activities in Q1 2020, of PLN -254.6m, chiefly comprised a negative net balance of proceeds from borrowings and repayments of borrowings (principal and interest), and payments of liabilities under finance leases.

23

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

SUPPLEMENTARY INFORMATION

1. Grupa LOTOS S.A. shares

There were no changes in major holdings of Company shares in the period from the date of issue of the FY 2019 report (March 12th 2020) to the date of issue of the Q1 2020 report (May 14th 2020).

Table 19. Shareholders of Grupa LOTOS S.A. as at May 14th 2020, i.e. the date of issue of the Q1 2020 report

	Number of
	shares/voting rights	Share of total voting rights
	equivalent to par value	equivalent to percentage of
Shareholder	of shares	share capital held
State Treasury	98,329,515	53.19%
Other	86,543,847	46.81%
Total	184,873,362	100%

Source: Company

1. Changes in the number of Company shares or rights to Company shares held by the management and supervisory staff, in accordance with the information available to the Company

To the best of the Company's knowledge and based on the representations of May 11 2020 made for the purpose of the Q1 2020 report, as at this report issue date no Management Board or Supervisory Board members held any Company shares or rights to Company shares. Their holdings in the Company did not change from March 12th 2020, i.e. the issue date of the FY 2019 report.

1. Material court, arbitration or administrative proceedings concerning liabilities or claims of the Company or its subsidiaries, and material settlements under court proceedings

In the period between the end of the previous financial year, i.e. December 31st 2019, and the date of issue of the Q1 2020 report, there were no significant changes with respect to pending material court, arbitration, and administrative proceedings or with respect to other risks to the Company or its subsidiaries. For information on pending material proceedings, see Note 29.1 to the consolidated financial statements for 2019.

Material court proceedings to which the Parent is a party Tax settlements

The Company's tax settlements are subject to customs and tax inspections carried out by competent authorities. As at March 31st 2020, the Company disclosed a provision for tax risk, recognised in connection with such proceedings, of PLN 84.1m.

In connection with a judgment by the Court of Justice of the European Union of October 16th 2019 in Case C-189/18 Glencore, on January 15th 2020 the Company filed a petition for resumption of proceedings in which the following decisions had been issued:

• decision by the Director of the Tax Chamber in Gdańsk, dated December 29th 2015, upholding the decision by the
  Director of the Tax Audit Office in Bydgoszcz, dated September 28th 2015, assessing the Company's VAT liabilities for individual months of 2010 at a total amount of PLN 48.4m,
• decision by the Director of the Tax Chamber in Gdańsk, dated February 29th 2016, upholding the decision by the Director of the Tax Audit Office in Bydgoszcz, dated September 28th 2015, assessing the Company's VAT liabilities for individual months of 2011 at a total amount of PLN 112.5m,
• decision by the Director of the Tax Administration Chamber in Gdańsk, dated October 25th 2018, upholding the decision by the Head of the Gdańsk Province Customs and Tax Office in Gdynia, dated January 19th 2018, assessing the Company's VAT liabilities for January 2012 at a total amount of PLN 7.3m, and after resumption of the proceedings, for:

1. reversal of the decisions issued by the tax authorities of both instances and discontinuation of the tax proceedings
   - with respect to the proceedings for 2010-2011,

24

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

1. suspension of the proceedings until final conclusion of the court proceedings - with respect to the proceedings for 2012, in connection with proceedings pending before the Supreme Administrative Court, initiated by the Company's cassation complaint.

Court proceedings instigated by or against companies of the LOTOS Group Agreement to which LOTOS Exploration and Production Norge AS is a party

LOTOS Exploration and Production Norge AS ("LOTOS E&P Norge AS") was a party to proceedings held before an arbitration court in Norway in connection with claims filed by Single Buoy Moorings Inc. ("SBM"), the supplier of the MOPU (Mobile Offshore Production Unit) for operation of the YME field, against Talisman Energy Norge AS, the operator of the YME field ("Talisman", "Operator") and the other YME licence holders. The share of SBM's claims attributable to LOTOS E&P Norge AS was 20%.

In 2013, Talisman Energy Norge AS ("Talisman", the then operator of the YME field) and Single Buoy Moorings Inc. ("SBM", owner of the MOPU) announced that an agreement was reached to terminate all existing contracts and agreements executed by the parties in connection with the YME project and remove the defective MOPU from the YME field.

SBM paid USD 470m to the consortium members, and Talisman Energy, on behalf of the licence holders, agreed to make the necessary preparations and remove the platform from the field. Under the agreement, SBM was responsible for towing the MOPU to the port and its scrapping, whereas following completion of certain works, the ownership of elements of the YME field in situ subsea infrastructure delivered by SBM should be transferred to the consortium members, who would be required to perform site restoration (and disassembly) activities related to the subsea infrastructure. Each of the parties will cover the costs of its scope of decommissioning work as set out in the agreement.

In accordance with the agreement made with SBM, the balance of the Group's share in the amount due to the consortium members under the agreement (USD 81.8m) was transferred to the YME project escrow account, to be gradually released to finance the removal of the MOPU and related infrastructure from the field, in accordance with the agreement.

On August 22nd 2016, the YME project partners completed evacuation of the defective MOPU from the field. In Q1 2017, the caisson (element of the subsea infrastructure) was inspected. As a result of the inspection it was found that the caisson can stand without additional support until 2019 (provided that it is inspected on a semi-annual basis and its condition remains unimpaired).

On August 11th 2017, SBM Offshore confirmed the conclusion of an agreement with a majority of MOPU insurers to settle insurance claims relating to the faulty execution of the MOPU. On September 10th 2018, SBM announced that the insurance claim concerning the YME project was fully and finally settled. The gross amount received by SBM as insurance compensation was USD 390m. The share of LOTOS E&P Norge AS (net of the cost of legal services and other expenses) was expected at USD 30.7m. In 2018, the

Group recognised its share in the compensation under Other income, in the amount of PLN 118.3m.

On March 5th 2019, LOTOS E&P Norge AS received cash of USD 31.1m as the final settlement of insurance claims.

In the three months ended March 31st 2020, there were no material settlements under court or other proceedings, save for those presented above.

IV.Loan sureties or guarantees, or other guarantees issued by Grupa LOTOS S.A. or its subsidiaries jointly to one entity or its subsidiary, where the aggregate value of such sureties or guarantees is significant

An unconditional and irrevocable guarantee issued by LOTOS Upstream Sp. z o.o. for the benefit of the government of Norway, covering the exploration and production activities of LOTOS E&P Norge AS on the Norwegian Continental Shelf, was effective as at March 31st 2020. In the guarantee, LOTOS Upstream Sp. z o.o. undertook to assume any financial liabilities which may arise in connection with the operations of LOTOS E&P Norge AS on the Norwegian Continental Shelf, consisting in exploration for and extraction of the natural resources from the sea bottom, including their storage and transport using means of transport other than ships.

As at March 31st 2020, an excise bond in the form of two promissory notes for a total lump sum of PLN 240m, valid from August 20th 2019 to August 19th 2020, which were submitted by Grupa LOTOS S.A. to the Head of the First Tax Office in Gdańsk, continued in effect.

1. Information material to the assessment of the personnel, assets, financial condition and financial results of the LOTOS Group and their changes, and to the assessment of Grupa LOTOS S.A.'s ability to fulfil its obligations

Changes in Grupa LOTOS Management Board

On January 30th 2020, the Supervisory Board of Grupa LOTOS S.A. appointed the following persons to the Company's Management Board of the 10th joint term of office (with effect from February 3rd 2020): Mr Paweł Jan Majewski as President of the Management Board of Grupa LOTOS S.A. (Current Report No. 3/2020of January 30th 2020).

25

Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

UOKiK's decision concerning Polimery Police project

On January 22nd 2020, the Company was notified of a decision issued by the President of the Polish Office of Competition and Consumer Protection (UOKiK) clearing the proposed concentration whereby Grupa Azoty S.A., Hyundai Engineering Co., Ltd., Korea Overseas Infrastructure & Urban Development Corporation and the Company are to establish a joint venture operating under the name of Grupa Azoty Polyolefins S.A. (Current Report No. 2/2020of January 22nd 2020)

The clearance satisfies one of the conditions precedent under the MoU forming the initial term-sheet with respect to Grupa LOTOS S.A.'s equity investment in and provision of debt financing for the 'Polimery Police' project (see Current Report No. 41/2019of December 13th 2019).

Impact of the outbreak of the Covid-19 pandemic on the YME field production schedule

On March 28th 2020, the Company announced (Current Report No. 7/2020of March 28th 2020) that, as a consequence of the Covid-19 pandemic, the date of first oil production from the YME field ("YME"), previously scheduled for Q4 2020, was likely to change.

The project to upgrade the Maersk Inspirer platform (the "Platform") for hydrocarbon production from YME in line with the Plan for Development and Operation may be significantly delayed following the introduction by the Norwegian authorities of new regulatory measures in response to the outbreak of Covid-19. The resulting restrictions are affecting businesses, including by preventing them from continuing to hire employees from outside Norway. This situation has been notified to the Company by Maersk Drilling, i.e. the Platform owner, and Aker Solutions, i.e. the contractor engaged to perform the upgrade, both of which in these circumstances will have a reduced capacity to operate as well as to fulfil their mutual obligations.

Accordingly, the Company believes that first oil production from the YME field is highly likely to be postponed until Q4 2021. The Company is monitoring the YME project on an ongoing basis and will report on any key decisions affecting its progress.

VI.Management Board's position regarding the feasibility of meeting forecasts published earlier for a given year in the light of the results presented in this quarterly report in relation to the forecast results

The Management Board of Grupa LOTOS S.A. did not publish any financial guidance for 2020.

VII.Factors with a bearing on the Group's results in the next quarter or in a longer term, according to Grupa LOTOS S.A.

Market situation

The spread of the Covid-19 pandemic since March 2020 has had major socioeconomic implications and heightened the risk of an economic recession both in Poland18and globally in 2020. According to Rystad Energy, in April 2020 demand for road and aviation fuels worldwide may have fallen in the wake of the Covid-19 pandemic by 16.3m b/d (i.e. by -32.6%), and 4.5m b/d (-64.3%), respectively19.

IEA20and OPEC21estimated the decline in crude oil consumption at, respectively, 5.6m b/d and 5.8m b/d in Q1 2020, and at 23.2m b/d and 11.9m b/d in Q2 2020. According to OPEC's forecasts, an overall decline in demand in 2020 may reach 6.9% (6.85m b/d) year on year. Both organisations predict a global decline in the consumption of refining products in 2020.

Table 20. Oil demand forecast for 2020 by quarter (m boe/d)

	Q1	Q2	Q3	Q4	year	y/y difference	y/y change (%)
2019	98.75	98.56	100.53	100.79	99.67	0.83	0.84
2020	92.92	86.70	94.28	97.30	92.82	-6.85	-6.87

Source: OPEC.

1. https://www.imf.org/~/media/Files/Publications/WEO/2020/April/English/text.ashx?la=en
2. https://www.rystadenergy.com/globalassets/pdfs/rystad-energy_covid-19-report_22-april_2020_openaccess.pdf
3. https://webstore.iea.org/oil-2020
4. https://momr.opec.org/pdf-download/res/pdf_delivery_momr.php?secToken2=1784144949379b369db10877b1db560d44f676f1

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

In Poland, demand for fuels weakened, especially demand for motor gasolines sold through the retail channel, i.e. service stations, in March. A less pronounced decline in demand was seen in the case of diesel oil used in transport. In March 2020, overall fuel consumption fell 4.9% (-16% in the case of gasoline, -3.6% in the case of diesel oil, and +57.7% in the case of light fuel oil). Over that period, gasoline production in Poland fell 4.6%, whereas diesel oil output went up 4.6%. Grupa LOTOS recorded a 7.9% decline in gasoline output and an 8.5% increase in diesel oil output year on year, with almost twofold growth in the output of light fuel oil.

The Company's position

The key factors which, in the Company's opinion, may affect its performance in the following quarters of 2020 include:

• macroeconomic climate marked by strong volatility and uncertainty in the face of theCovid-19 pandemic, which may cause risks within key areas of the LOTOS Group's operations to materialise, including:
  orisk of a temporary decline in demand for and sales of Grupa LOTOS fuels in Poland coupled with temporary export limits,
  orisk of delayed delivery of ongoing capital projects and maintenance work, in particular the project to fully develop the B8 field, the well workover campaign on the B3 field in the Baltic Sea, commissioning of the hydrogen recovery unit (HRU) project, and delays on the Yme field project due to force majeure provisions invoked by subcontractors,
  orisk of delaying certain pre-FID projects, including the B4B6 field development project and HBO project, opotential scaling down or stoppage of hydrocarbon production, refining operations, feedstock and product logistics due to potential workforce availability pressures and supply chain disruptions caused by transport constraints, in the event that incidence of Covid-19 in Poland becomes as widespread as in
  other countries (i.e. Italy).
  oAs a consequence of the pandemic, additional issues could materialise, affecting procurement, human resources management, IT, cyber security, and timely plant maintenance,
  opotential risk of deteriorating liquidity of certain trading partners (payment backlogs),
• disturbance and violent changes in the trend of gas and crude oil prices,
• quoted prices of petroleum products and the diesel oil vs heavy fuel oil price spread on global markets, whose narrowing could suppress marginal refining margin on the EFRA project below the level assumed by the Company (between USD 2 and USD 4.5 per barrel of crude oil processed,
• development of the Brent/Urals differential, reflected in the Company's refining margin,
• USD/PLN exchange rate, which has bearing on the LOTOS Group's financial performance as the prices of crude oil and of some products are quoted in the US dollar and Grupa LOTOS S.A. has USdollar-denominated debt;
• temporary shift in energy consumption patterns caused by theCovid-19 pandemic, which is upsetting the balance of supply and demand for petroleum products in Poland and globally,
• flexibility of the refinery's production and optimisation measures planning in response to changing market conditions in order to maximise Grupa LOTOS S.A.'s refining margin,
• possible recognition of impairment losses on assets (or their reversal) under conditions marked by strong volatility of crude oil and natural gas prices,
• delivery of exploration and production projects, i.e. the project to fully develop the B8 field, the well workover campaign on the B3 field in the Baltic Sea, and delays on the Yme field project, as communicated by the Company, due to force majeure provisions invoked by subcontractors.

Summary

As at the date of issue of the Q1 2020 report, it is difficult to fully assess the consequences of the Covid-19 crisis, in particular the implications of an economic recession likely to follow in its wake both in Poland and globally, and the time needed by the economy, commodity and refining product markets to regain an equilibrium.

The Company's Management Board is keeping track of the developments, doing its utmost to ensure undisrupted operation of the LOTOS Group. So far, there have been no disruptions in the refinery's operations, hydrocarbon production, or in logistics and distribution of products. A number of procedures have been put in place to effectively coordinate work and to ensure that both the Group's staff and contractors remain safe in the face of the pandemic. Regulations designed to maintain the continuity of key processes have been implemented, including systematic work by the Crisis Management Team, who are responsible for ongoing coordination of the response efforts, as well as a number of organisational and procedural solutions guaranteeing the effective

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Grupa LOTOS Management's Discussion and Analysis of Q1 2020 consolidated results

and safe conduct of business processes, with due regard given to the existing restrictions, including switching as many staff members as possible to remote work.

VIII.Material developments after the reporting date

No material events occurred at the Company or the Group between the reporting date and the issue date of the Q1 2020 report.

IX.Overview of changes in the LOTOS Group's organisation and consolidated entities as at March 30th 2020

In the reporting period, there were no material changes in the organisation of the Group or in the list of consolidated entities. For the list of companies making up the LOTOS Group, see the Q1 2020 consolidated financial statements, Note I.2, pages 8-10.

1. Significant achievements of Grupa LOTOS S.A. and the LOTOS Group in Q1 2020

Completion of a banking test of the Delayed Coking Unit (DCU)

In Q1 2020, preparations were being made for a 30-day test of the Delayed Coking Unit and the new hydrogen production unit required by the facility agreement (Lenders Reliability Test - LRT). The LRT test was carried out between February 24th and March 24th 2020. All the stated test objectives were satisfied, pertaining to operational availability, quantity of feedstock processed, product quality, product yields, and confirmation of other significant parameters related to interoperation between the new LOTOS Asfalt facilities and the Company's refinery units.

XI.Factors and events, including of a non-recurring nature, having material bearing on these condensed financial statements

The LOTOS Group's consolidated EBIT for Q1 2020 was charged with impairment losses on non-current assets:

• in the Exploration & Production segment

• 1. of PLN 223.6m in respect of the Norwegian YME fieldsoof PLN 53.4m in respect of the Norwegian Utgard fields oof PLN 19.0m in respect of Lithuanian fields
• in the Refining & Marketing segment of PLN 8.6m in respect of service stations.

In addition, due to a steep decline in the prices of crude oil and petroleum products, inventory write-downs of PLN 866.4m were recognised at the LOTOS Group.

For a discussion of changes to material reporting items and factors with bearing on the Group's financial performance in the reporting period, as well as a short summary of results achieved by each business segment, see this Management's Discussion and Analysis ('Exploration & Production segment' on page 6 and 'Refining & Marketing segment' on page 12).

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