In recent years, wide-ranging efforts have been afoot (both globally and locally) to tackle climate change. The European Green Deal is the new economic development strategy for the European Union. The transition of the EU economy towards climate neutrality is a means of achieving the objective of changing the EU’s status from the world’s third largest greenhouse gas emitter into the first climate neutral region. The transition is expected to be completed within three decades.
The Fit for 55 legislative proposal presented in July 2021, which includes more than a dozen legislative acts, is to provide the basis for achieving the EU’s objective of reducing greenhouse gas emissions by 55% by 2030 (compared to 1990). The final regulations that will result from Fit for 55, will have a significant impact on the operations and development of the refining industry. Through changes in the taxation regime, higher prices of CO2 emission allowances, higher costs to finance certain projects and growing requirements regarding the share of renewable energy in transport, these initiatives will affect the LOTOS Group’s operating expenses and results.
Regulatory risk at the national and European level has strong relevance to the LOTOS Group’s operations.
The most important regulatory risks currently faced by the organisation are related to climate change. The Group monitors the legal environment and communicates its position as part of legislative processes, which is always formulated so as to make the best use of opportunities and reduce the potential adverse impact of new regulations.
The LOTOS Group pursues a number of projects which contribute to climate neutrality, including projects in such areas as advanced biofuels, alternative fuels (such as hydrogen) and gas fuels: LNG, i.e., liquefied natural gas and CNG, i.e., compressed natural gas, as well as energy efficiency improvement projects aimed at reducing emissions and increasing the share of energy from renewable sources.
Climate-related risks stem from the Group’s obligation to meet certain targets relating to a minimum share of other renewable fuels and biocomponents contained in fuels used across all modes of transport, relative to the total amount of liquid fuels and biofuels consumed during a calendar year in road and railway transport, calculated according to their calorific value. This National Indicative Target (NIT) obligation is stated in the Act on Biocomponents and Liquid Biofuels of August 25th 2006. To date, the Group has met its National Indicative Target, in keeping with the applicable regulations (adjusted by the reduction coefficient and emission charge). For information on the provision for the NIT substitute fee, see Note 10.13.
A reduction of greenhouse gas emissions over the entire fuel life cycle per energy unit is another metric used. This obligation, referred to as the National Reduction Target (NRT), follows from the Act on Fuel Quality Monitoring and Control System of August 25th 2006. For information on the provision for the NRT fee and for any penalties, see Notes 10.13 and 10.13.1.
Under the Energy Law, which implements the support of production of electricity generated from renewable energy sources in the internal market, the LOTOS Group, as an energy company, is subject to an obligation to acquire and present certificates of origin for redemption or to pay a substitute fee resulting from the obligation to acquire and present for redemption certificates of origin in a given year, for which it recognises a provision (see Note 10.13).
The Group’s production facilities are covered by the EU ETS (European Union Emissions Trading System/Scheme). The projected shortfall of free CO2 emission allowances granted to the Group under the EU ETS in the settlement period of 2021-2025, in relation to the planned emissions in this period, may result in the need to purchase additional allowances. Therefore, the Group is exposed to the risk of higher prices of carbon dioxide emission allowances (CO2), which may have a direct effect on the Group’s operating costs. The year 2021 saw a significant increase in the price of CO2 emission allowances. In addition, the changes proposed in the Fir for 55 strategy may significantly reduce the pool of free allowances available in the ETS, and thus further increase their prices. For information on the management of the CO2 emission allowance price risk and its impact on the Group’s results, see Note 11.2.2 For information on the accounting treatment of CO2 emission allowances and the provision for the costs of covering their shortfall, see Notes 10.1 and 10.13.
Processes carried out by the LOTOS Group, such as exploration for, development and production of hydrocarbons, refining production, product transport and logistics involve a risk of impact on the natural environment. 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. At each reporting date, the Group analyses the costs necessary to decommission oil and gas extraction facilities and the expenditure to be incurred on future site restoration (see Note 10.13.1).
In parallel with the recognition and remeasurement of provisions for decommissioning of oil and gas extraction facilities, the Group recognises corresponding assets for future costs of decommissioning of oil and gas extraction facilities. Assets for future costs of decommissioning of crude oil and gas extraction facilities are depreciated using the units-of-production method, where depreciation per unit of produced crude oil or natural gas is charged to expenses. For information on assets related to future costs of decommissioning of oil and gas extraction facilities, see Note 10.1.2.3.
At the end of the reporting period, the Group assesses the impact of climate issues on the estimates underlying the future cash flows included in the impairment tests of property, plant and equipment and intangible assets. The Group also reviews annually the adopted useful lives and residual values of these assets based on current estimates.
As at the date of authorisation of these financial statements for issue, the Management Board of the Parent did not find any threat to the Group companies continuing as going concerns in the foreseeable future.