AGREEMENT IN THE FORM OF AN EXCHANGE OF LETTERS between the European Community and the Republic of Poland regarding the modernization of the Polish oil sector within the framework of the Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Poland, of the other part

A. Letter from the Community

Brussels, 3 March 1998

Sir,

I have the honour to refer to the consultations which took place on 17 and 18 October 1996 between the European Community and the Republic of Poland on the Polish oil sector.

I confirm the agreement of the European Community to the Agreement negotiated on 17 and 18 October 1996 and approved by the Association Committee on 6 and 7 March 1997. The terms agreed upon are annexed to this letter and form an integral part thereof.

Both Parties declare that they attach great importance to a full implementation of this Agreement, including the six-monthly meetings which will allow the developments to be followed closely.

Furthermore, the European Community welcomes the information received from the Republic of Poland that as of 13 February 1997 the prices for gasoline and gas oil have been fully liberalised by the decrees of the Minister of Finance (Monitor Polski No 7, position 58 and 59).

I should be obliged if you would confirm the agreement of the Republic of Poland to the contents of this letter.

Please accept, Sir, the assurance of my highest consideration.

On behalf of the Council of the European Union

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ANNEX

TERMS AGREED UPON FOR OIL

1. Price liberalisation

The Government of Poland continues the process of price liberalisation for fuels (as provided for in the programme of restructuring and privatisation of the Polish oil sector) with a view to taking a final decision on the price liberalisation before the end of 1996 if the market conditions allow, which means that crude oil prices will stabilise at the level of USD 20/bbl, during a one-month period. Should, however, oil prices remain above USD 20/bbl, price liberalisation will be introduced as from 1 January 1997, in a progressive way, to take account of the effects on inflation and its consequences with a view to reaching full liberalisation as soon as possible.

The programme of restructuring and privatisation of the oil sector provides for the liberalisation of fuel prices as part of the restructuring process applied to this sector. This process began in 1996 with the creation of a joint stock company 'Nafta Polska`. The retail prices of the fuels for the moment remain under the control of the Government which exercises this control by requiring entities to notify their intention to raise prices to the fiscal chambers, which have the authority to freeze such decisions for a period of three months. This regulation applies only to the basic product ranges of fuels produced domestically.

The timetable for the implementation of the programme of restructuring of the oil sector provided for full liberalisation of prices during 1996. The reason why this decision has not yet been taken is the high price of fuels, in particular of gas oil, prevailing on the world market.

However, some liberalisation has already been introduced insofar as importers are at present allowed to fix retail prices taking into account the distribution margin fixed by the Ministry of Finance. Review of these fixed margins will be also included in the price liberalisation decision. During the process of liberalisation, the fiscal advantages for domestic producers will be reviewed and eliminated for the main ones.

2. Programme for the early privatisation and modernisation of refineries

The Polish Government will continue to implement a programme for the early privatisation and modernisation of refineries.

According to the 'programme of restructuring and privatisation of the oil sector` adopted in 1995 by the Polish Government, the joint stock company Nafta Polska started operations in May 1996. The company has received 75 % of shares of five refineries, including Petrochemia Plock and Rafineria Gdanska. By the end of 1996, the company should also receive CPN's shares. A programme of privatisation and sale of shares in refineries to foreign investors has been prepared. A memorandum for foreign investors will be presented at the end of 1996.

Up to 30 % of shares of refineries will be offered to potential investors. 66 % of CPN shares will be owned by refineries.

3. Increase of security stocks

The Polish Government will continue the policy of increasing stocks.

Raising the present level of security stocks of liquid fuels in the appropriate quantities is necessary both for energy security reasons and in order to comply with the requirements of the European Union.

The present level of security stocks does not exceed 30 days.

The Law on state reserves and mandatory stocks of fuels, as adopted in 1996 by the Sejm, has created the legal grounds for the process of augmentation of stocks.

The draft decree of the Minister of Trade and Industry on mandatory stocks of liquid fuels which is an implementing regulation for this law, now under consultation between Ministries, imposes the obligation to create stocks on entities operating on the market, in compliance with Article 15.1 of the Law.

4. Equal treatment of all buyers by Polish refineries

The Polish side is not aware of any cases of unequal treatment of entities. The sale of products by refineries is done under market conditions. The Polish legislation guarantees an equal treatment for all buyers.

5. Automatic licensing system

Poland will lift all quantitative restrictions on imports of oil products as from 1 January 1997 and will apply an automatic licensing system with no quantitative restrictions in 1997.

6. Six-monthly meeting

Meetings will take place to monitor the implementation of these measures on a six-monthly basis at dates and locations to be mutually agreed. The first meeting will take place before the end of March 1997.

7. Level of tariff protection

Polish customs duties on imports of petroleum products originating in the EU.

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B. Letter from the Republic of Poland

Warsaw, 24 March 1998

Sir,

I have the honour to acknowledge receipt of your letter of today's date which reads as follows:

'I have the honour to refer to the consultations which took place on 17 and 18 October 1996 between the European Community and the Republic of Poland on the Polish oil sector.

I confirm the agreement of the European Community to the Agreement negotiated on 17 and 18 October 1996 and approved by the Association Committee on 6 and 7 March 1997. The terms agreed upon are annexed to this letter and form an integral part thereof.

Both Parties declare that they attach great importance to a full implementation of this Agreement, including the six-monthly meetings which will allow the developments to be followed closely.

Furthermore, the European Community welcomes the information received from the Republic of Poland that as of 13 February 1997 the prices for gasoline and gas oil have been fully liberalised by the decrees of the Minister of Finance (Monitor Polski No 7, position 58 and 59).

I should be obliged if you would confirm the agreement of the Republic of Poland to the contents of this letter.`

I have the honour to confirm that the Republic of Poland is in agreement with the contents of your letter.

On behalf of the Government of the Republic of Poland

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