10.13.1 Provisions
Accounting policies
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and the amount of the obligation can be reliably estimated. If the Group anticipates that the costs for which provisions have been recognised will be recovered, e.g. under an insurance agreement, the recovery of such funds is recognised as a separate asset, but only when such recovery is practically certain to occur. The cost related to a given provision is disclosed in the statement of comprehensive income net of any recoveries. If the effect of the time value of money is significant, the amount of provisions is determined by discounting projected future cash flows to their present value at a pre-tax discount rate reflecting the current market estimates of the time value of money and risks, if any, specific to a given obligation. If the discount method is applied, an increase in the provision as a result of passage of time is recognised as finance costs. Provisions, other than provisions for decommissioning and site restoration costs, are charged against operating expenses, other expenses, or finance costs, depending on what circumstances the future obligation relates to.
Provisions for decommissioning and restoration costs
Provisions for decommissioning and restoration costs are recognised when the Group has an obligation to decommission oil and gas extraction facilities or to demolish, disassemble or remove other property, plant and equipment and restore the site to its original condition, and when a reliable estimate can be made of the amount of the obligation.
If a decommissioning obligation arises with respect to new property, plant and equipment, such as production and transport infrastructure (pipelines) or refinery installations, it is recognised on completion of construction or installation. If a decommissioning obligation arises with respect to a production well, it is recognised on completion of drilling, irrespective of the hydrocarbon flow recorded.
A decommissioning obligation may be further adjusted over the useful life of a well, production or transport infrastructure, etc. to reflect changes in applicable laws or a decision to suspend certain operations. The recognised amount of the obligation is the present value of future expenditures, estimated for the local conditions and requirements.
The amount of the decommissioning provision is adjusted to reflect changes to the present value of estimated decommissioning and restoration costs, other than provision discount reversals. Adjustments are also made for foreign exchange gains or losses arising from translation of a decommissioning obligation denominated in a foreign currency when it is certain that the obligation will be settled in that currency.
Periodic discount unwinding is recognised as finance costs in the statement of comprehensive income. Deferred tax assets and liabilities are recognised in respect of the decommissioning provision and the corresponding decommissioning asset.
A portion of the provision for decommissioning and restoration costs of deposits located in Poland also includes a provision recognised under Polish Geological and Mining Law of February 4th 1994 (Dz.U.05.228.1947, as amended), the Gas Extraction Facility Decommissioning Fund, which may only be used to cover the cost of decommissioning of an oil and gas extraction facility or its designated part.
The amount of contribution to the Fund is calculated separately for each facility and represents an equivalent of 3% or more of the depreciation charge recognised on the facility’s property, plant and equipment, determined in accordance with applicable corporate income tax laws. The Group is required to accumulate the fund in a separate bank account until the commencement of decommissioning of the extraction facility and presents these funds as non- current financial assets.
Estimates
Provision for decommissioning of the Exploration & Production segment’s facillities and site restoration
As at the end of each reporting period, the Group analyses the cost necessary to decommission oil and gas extraction facillities and the expenditure to be incurred on future restoration. As a result of those analyses, the Group adjusts the value of the site restoration provision recognised in previous years to reflect the estimated amount of necessary future costs. Any changes in the estimated time value of money are also reflected in the aount of the provision.
| Provisions for decommissioning and site restoration costs | ||||||||
|---|---|---|---|---|---|---|---|---|
| Note | Provision for oil and gas extraction facilities | Provisions for retired refining and other units | Total | Other provisions | Total | |||
| Poland | Norway | Lithuania | ||||||
| Jan 1 2021 | 353.5 | 985.7 | 23.2 | 16.3 | 1,378.7 | 177.6 | 1,556.3 | |
| Recognised | – | – | 0.1 | 0.1 | 0.2 | 12.1 | 12.3 | |
| Remeasurement of decommissioning costs | (59.8) | (30.5) | 3.1 | 0.1 | (87.1) | (4.2) | (91.3) | |
| Change in provisions attributable to approaching due date of liability (discount unwinding effect) | 9.7 | 4.3 | 40.4 | (3.3) | – | 41.4 | – | 41.4 |
| Reclassification | – | – | – | – | – | 49.1 | 49.1 | |
| Exchange differences on translating foreign operations | – | 46.9 | (0.1) | – | 46.8 | 0.6 | 47.4 | |
| Used | – | (3.9) | – | – | (3.9) | (3.5) | (7.4) | |
| Reversed | – | – | – | (0.6) | (0.6) | (20.9) | (21.5) | |
| Dec 31 2021 | 298.0 | 1,038.6 | 23.0 | 15.9 | 1,375.5 | 210.8 | 1,586.3 | |
| including: | ||||||||
| long-term portion | 298.0 | 1,032.3 | 23.0 | 15.8 | 1,369.1 | 6.2 | 1,375.3 | |
| short-term portion | – | 6.3 | – | 0.1 | 6.4 | 204.6 | 211.0 | |
Provisions for decommissioning and site restoration costs:
Provision for oil and gas extraction facilities in Poland – a provision for future costs of decommissioning of the oil and gas extraction facilities in the B-3 and B-8 licence areas, and the Oil and Gas Extraction Facility Decommissioning Fund, set up to cover future costs of decommissioning of oil and gas extraction facilities in accordance with the Geological and Mining Law of February 4th 1994 and the Minister of Economy’s Regulation of June 24th 2002..
Provision for oil and gas extraction facilities in Norway − a provision for future costs of decommissioning of the oil extraction facilities in the YME field, and the oil and gas extraction facilities in the Heimdal, Sleipner and Utgard fields.
Provision for oil and gas extraction facilities in Lithuania − a provision for future costs of decommissioning of the Lithuanian oil extraction facilities.
Provisions for retired refining and other units − a provision for site restoration and the cost of disassembly and decommissioning of the retired units at LOTOS Terminale S.A., a provision for estimated cost of disassembly of the subsea pipeline operated by the subsidiary Energobaltic Sp. z o.o. (a company of the LOTOS Petrobaltic Group), as well as for site restoration and clean-up
| Provisions for decommissioning and site restoration costs | ||||||||
|---|---|---|---|---|---|---|---|---|
| Note | Provision for oil and gas extraction facilities | Provisions for retired refining and other units | Total | Other provisions | Total | |||
| Poland | Norway | Lithuania | ||||||
| Jan 1 2020 | 267.9 | 938.4 | 17.4 | 16.2 | 1,239.9 | 106.0 | 1,345.9 | |
| Recognised | – | – | – | 0.3 | 0.3 | 81.3 (1) | 81.6 | |
| Remeasurement of decommissioning costs | 73.5 | 1.9 | 0.5 | – | 75.9 | 1.2 | 77.1 | |
| Remeasurement of estimated provision for contingent payments | 9.5 | – | – | – | – | – | (4.5) | (4.5) |
| Change in provisions attributable to approaching due date of liability (discount unwinding effect) | 9.7 | 11.8 | 36.0 | 3.8 | – | 51.6 | 0.1 | 51.7 |
| Interest on Oil and Gas Facility Decommissioning Fund | 0.3 | – | – | – | 0.3 | – | 0.3 | |
| Exchange differences on translating foreign operations | – | 19.1 | 1.6 | – | 20.7 | 1.0 | 21.7 | |
| Used | – | (9.7) | – | – | (9.7) | (5.5) | (15.2) | |
| Reserved | – | – | (0.1) | (0.2) | (0.3) | (2.0) | (2.3) | |
| Dec 31 2020 | 353.5 | 985.7 | 23.2 | 16.3 | 1,378.7 | 177.6 | 1,556.3 | |
| including: | ||||||||
| non-current | 353.5 | 980.0 | 23.2 | 16.2 | 1,372.9 | 4.2 | 1,377.1 | |
| short-term portion | – | 5.7 | – | 0.1 | 5.8 | 173.4 | 179.2 | |
Provisions for decommissioning and site restoration costs:
Provision for oil and gas extraction facilities in Poland – a provision for future costs of decommissioning of the oil and gas extraction facilities in the B-3 and B-8 licence areas, and the Oil and Gas Extraction Facility Decommissioning Fund, set up to cover future costs of decommissioning of oil and gas extraction facilities in accordance with the Geological and Mining Law of February 4th 1994 and the Minister of Economy’s Regulation of June 24th 2002
Provision for oil and gas extraction facilities in Norway − a provision for future costs of decommissioning of the oil extraction facilities in the YME field, and the oil and gas extraction facilities in the Heimdal, Sleipner and Utgard fields.
Provision for oil and gas extraction facilities in Lithuania − a provision for future costs of decommissioning of the Lithuanian oil extraction facilities.
Provisions for retired refining and other units − a provision for site restoration and the cost of disassembly and decommissioning of the retired units at LOTOS Terminale S.A., a provision for estimated cost of disassembly of the subsea pipeline operated by the subsidiary Energobaltic Sp. z o.o. (a company of the LOTOS Petrobaltic Group), as well as for site restoration and clean-up
Provision for oil and gas extraction facilities − Norway
Provision for decommissioning and restoration of oil extraction facility in the YME field
As at December 31st 2021, the provision for decommissioning and restoration of the extraction facility in the YME field, totalling PLN 168.2m, was disclosed under Other liabilities and provisions and reflected the current estimate, made based on the Group’s best knowledge, of future costs of removal of the YME infrastructure and costs of site restoration, assuming that the project is decommissioned in 2032. As at December 31st 2020, the provision was PLN 211.8m.
Provision for decommissioning and restoration of gas extraction facilities in the Heimdal fields
Decommissioning of the fixed assets of the offshore oil and gas extraction facility in the Heimdal fields and site restoration work are scheduled for 2019–2023. As at December 31st 2021, the provision was disclosed in the Group’s statement of financial position under Other liabilities and provisions at PLN 196.2m. As at December 31st 2020, the provision was PLN 194.1m.
Provision for decommissioning and restoration of gas extraction facilities in the Sleipner and Utgard fields
Decommissioning of fixed assets and restoration of the offshore area of the oil and gas extraction facility on the Sleipner fields and the Utgard field, launched in 2019, are scheduled for 2026–2038. As at December 31st 2021, the provision was disclosed in the Group’s statement of financial position under Other liabilities and provisions at PLN 674.2m. As at December 31st 2020, the provision was PLN 579.8m.
Other provisions
The tax risk provision as at December 31st 2021 was PLN 91.4m. As at December 31st 2020, the provision was PLN 87.3m.
As at December 31st 2021, the provision for disputed claims was PLN 51.6m. As at December 31st 2020, the provision was PLN 55.1m.
As at December 31st 2021, the National Reduction Target Provision for potential penalties was PLN 49.1m. As at December 31st 2020, the provision was recognised under current non-financial liabilities in the line item National Reduction Target Provision (see Note 10.13).