← Statement Notes index
13. Property, plant and equipment
PLN '000 | Dec 31 2015 |
Dec 31 2014 (restated) |
---|---|---|
Property, plant and equipment classified as exploration, development and production assets | ||
Property, plant and equipment classified as exploration and evaluation assets | 118,759 | 44,769 |
Property, plant and equipment classified as development assets | - | 522,350 |
Property, plant and equipment classified as production assets | 2,182,903 | 600,390 |
Total | 2,301,662 | 1,167,509 |
Refinery and other property, plant and equipment | ||
Land | 501,778 | 475,666 |
Buildings, structures | 3,055,277 | 3,151,731 |
Plant and equipment | 3,662,822 | 3,851,578 |
Vehicles, other | 649,623 | 569,425 |
Property, plant and equipment under construction | 397,260 | 265,974 |
Total | 8,266,760 | 8,314,374 |
Total | 10,568,422 | 9,481,883 |
13.1 Property, plant and equipment classified as exploration and evaluation, and development and production assets
PLN '000 | Note | Property, plant and equipment classified as exploration and evaluation assets | Property, plant and equipment classified as development assets | Property, plant and equipment classified as production assets |
Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Poland | Lithuania | Total | Poland | Norway | Total | Poland | Norway | Lithuania | Total | |||
Gross carrying amount Jan 1 2015 |
91,930 | - | 91,930 | 578,046 | 1,535,085 | 2,113,131 | 497,119 | 582,851 | 136,105 | 1,216,075 | 3,421,136 | |
Purchase | 27,372 | - | 27,372 | 304,332 | - | 304,332 | 2,194 | 3,903 | 8,290 | 14,387 | 346,091 | |
Acquisition of Sleipner assets (1) | - | - | - | - | - | - | - | 394,956 | - | 394,956 | 394,956 | |
Exchange differences on translating foreign operations | - | - | - | - | (84,158) | (84,158) | - | (87,469) | 122 | (87,347) | (171,505) | |
Recognition of assets related to future costs of decommissioning of oil and gas extraction facilities | 13.1.4 | - | - | - | - | - | - | - | 605,423 (1) | - | 605,423 | 605,423 |
Estimated costs of decommissioning of oil and gas extraction facilities | 13.1.4 | - | - | - | 10,054 | 1,485 | 11,539 | (304) | 5,480 | (250) | 4,926 | 16,465 |
Reclassification of property, plant and equipment under construction to development assets | - | - | - | 30,857 | - | 30,857 | - | - | - | - | 30,857 | |
Reclassification of property, plant and equipment under construction to exploration and evaluation assets | 60,577 | - | 60,577 | - | - | - | - | - | - | - | 60,577 | |
Reclassification of development assets to production assets | - | - | - | (865,348) | - | (865,348) | 865,348 | - | - | 865,348 | - | |
Reclassification to non-current assets (or disposal groups) held for sale (2) | - | - | - | (45,011) | - | (45,011) | - | - | - | - | (45,011) | |
Reversal of asset related to decommissioning of oil and gas extraction facilities | 30.1 | - | - | - | (2,750) | - | (2,750) | - | - | - | - | (2,750) |
Expenditure written off due to project discontinuation | 9.4 | (12,123) (3) | - | (12,123) | - | - | - | - | - | - | - | (12,123) |
Other | - | - | - | (10,180) | - | (10,180) | 4,599 | (7,941) | (286) | (3,628) | (13,808) | |
Gross carrying amount Dec 31 2015 |
167,756 | - | 167,756 | - | 1,452,412 | 1,452,412 | 1,368,956 | 1,497,203 | 143,981 | 3,010,140 | 4,630,308 | |
Accumulated depreciation Jan 1 2015 |
- | - | - | 55,696 | - | 55,696 | 312,353 | 199,741 | 50,873 | 562,967 | 618,663 | |
Depreciation | - | - | - | 2,427 | - | 2,427 | 20,294 | 129,831 | 19,065 | 169,190 | 171,617 | |
Exchange differences on translating foreign operations | - | - | - | - | - | - | - | (19,307) | 336 | (18,971) | (18,971) | |
Reclassification of development assets to production assets | - | - | - | (58,123) | - | (58,123) | 58,123 | - | - | 58,123 | - | |
Other | - | - | - | - | - | - | (144) | - | (286) | (430) | (430) | |
Accumulated depreciation Dec 31 2015 |
- | - | - | - | - | - | 390,626 | 310,265 | 69,988 | 770,879 | 770,879 | |
Impairment losses Jan 1 2015 |
47,161 | - | 47,161 | - | 1,535,085 | 1,535,085 | - | 43,415 | 9,303 | 52,718 | 1,634,964 | |
Recognised | 9.4 | 1,836 (4) | - | 1,836 | - | 1,485 | 1,485 | - | - | 6,314 (5) | 6,314 | 9,635 |
Exchange differences on translating foreign operations | - | - | - | - | (84,158) | (84,158) | - | (2,786) | 114 | (2,672) | (86,830) | |
Used/Reversed | - | - | - | - | - | - | - | (2) | - | (2) | (2) | |
Impairment losses Dec 31 2015 |
48,997 | - | 48,997 | - | 1,452,412 | 1,452,412 | - | 40,627 | 15,731 | 56,358 | 1,557,767 | |
Net carrying amount Dec 31 2015 |
118,759 | - | 118,759 | - | - | - | 978,33 | 1,146,311 | 58,262 | 2,182,903 | 2,301,662 |
(1) Acquisition of Sleipner assets in Norway (property, plant and equipment − NOK 846,818 thousand, decommissioning assets − NOK 1,298,076 thousand; for more information on the transaction, see Note 13.1.3).
(2) As a result of the change of the technical concept for the project to convert the Petrobaltic rig into a production centre on the B-8 field, the Group reclassified the field development assets related to the project to assets held for sale (see Note 17). The assets represented expenditure incurred by LOTOS Petrobaltic S.A. on elements of the tubular legs of the rig, for which an impairment loss of PLN 36,634 thousand was recognised (see Note 9.4) and which were classified as non-current assets (or disposal groups) held for sale in the amount of PLN 8,377 thousand, the value being − in the Management Board’s opinion − the net realisable value of the tubular legs (based on an analysis of current steel prices in Poland and on foreign markets, made by LOTOS Petrobaltic S.A.).
(3) Decommissioning of exploration and evaluation assets related to the Sambia E field.
(4) Słupsk area assets.
(5) Liziai and Ablinga fields.
PLN '000 | Note | Property, plant and equipment classified as exploration and evaluation assets | Property, plant and equipment classified as development assets | Property, plant and equipment classified as production assets |
Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Poland | Lithuania | Total | Poland | Norway | Total | Poland | Norway | Lithuania | Total | |||
Gross carrying amount Jan 1 2014 |
224,532 | 617 | 225,149 | 196,741 | 1,572,207 | 1,768,948 | 527,959 | 563,107 | 112,881 | 1,203,947 | 3,198,044 | |
Purchase | 70,756 | 10,061 | 80,817 | 209,388 | 349 | 209,737 | 5,751 | 6,385 | 14,902 | 27,038 | 317,592 | |
Exchange differences on translating foreign operations | - | 7 | 7 | - | (71,001) | (71,001) | - | (27,286) | 3,473 | (23,813) | (94,807) | |
Recognition of assets related to future costs of decommissioning of oil and gas extraction facilities | 13.1.4 | - | - | - | 642 | - | 642 | - | - | 1,074 | 1,074 | 1,716 |
Estimated costs of decommissioning of oil and gas extraction facilities | 13.1.4 | - | - | - | - | 27,743 | 27,743 | (36,396) | 33,455 | (844) | (3,785) | 23,958 |
Reclassification of exploration and evaluation assets to production assets (1) | (176,425) (2) | (10,685) (3) | (187,110) | 176,425 (2) | - | 176,425 | - | - | 10,685 (3) | 10,685 | - | |
Expenditure written off due to project discontinuation | (33,097) (4) | - | (33,097) | - | - | - | - | - | (5,772) (5) | (5,772) | (38,869) | |
Sale | - | - | - | - | (2,504) | (2,504) | - | - | (75) | (75) | (2,579) | |
Other | 6,164 | - | 6,164 | (5,150) | 8,291 | 3,141 | (195) | 7,190 | (219) | 6,776 | 16,081 | |
Gross carrying amount Dec 31 2014 |
91,930 | - | 91,930 | 578,046 | 1,535,085 | 2,113,131 | 497,119 | 582,851 | 136,105 | 1,216,075 | 3,421,136 | |
Accumulated depreciation Jan 1 2014 |
- | - | - | 52,007 | - | 52,007 | 284,532 | - | 33,532 | 318,064 | 370,071 | |
Depreciation | - | - | - | 3,579 | - | 3,579 | 28,505 | 210,962 | 16,208 | 255,675 | 259,254 | |
Exchange differences on translating foreign operations | - | - | - | - | - | - | - | (11,221) | 1,21 | (10,011) | (10,011) | |
Sale | - | - | - | - | - | - | - | - | (75) | (75) | (75) | |
Other | - | - | - | 110 | - | 110 | (684) | - | (2) | (686) | (576) | |
Accumulated depreciation Dec 31 2014 |
- | - | - | 55,696 | - | 55,696 | 312,353 | 199,741 | 50,873 | 562,967 | 618,663 | |
Impairment losses Jan 1 2014 |
42,468 | - | 42,468 | - | 1,035,345 | 1,035,345 | - | - | 6,383 | 6,383 | 1,084,196 | |
Recognised | 31,853 | - | 31,853 | - | 578,447 | 578,447 | - | 45,854 | 2,708 | 48,562 | 658,862 | |
Exchange differences on translating foreign operations | - | - | - | - | (76,203) | (76,203) | - | (2,439) | 224 | (2,215) | (78,418) | |
Used/Reversed | (27,160) | - | (27,160) | - | (2,504) | (2,504) | - | - | (12) | (12) | (29,676) | |
Impairment losses Dec 31 2014 |
47,161 | - | 47,161 | - | 1,535,085 | 1,535,085 | - | 43,415 | 9,303 | 52,718 | 1,634,964 | |
Net carrying amount Dec 31 2014 |
44,769 | - | 44,769 | 522,350 | - | 522,350 | 184,766 | 339,695 | 75,929 | 600,390 | 1,167,509 |
(1) Exploration and evaluation assets relating to mineral resources with demonstrable technical feasibility and commercial viability of extraction.
(2) B-8 field.
(3) Ablinga field and Zvaginai well.
(4) Decommissioning of the B-28 well and exploration and evaluation assets related to the Sambia W field.
(5) Decommissioning of the Zvaginai well.
13.1.1 Property, plant and equipment classified as exploration and evaluation assets
Property, plant and equipment are classified as exploration and evaluation assets until the technical feasibility and commercial viability of extracting the discovered resources are demonstrated.
Poland
As at December 31st 2015, property, plant and equipment classified as exploration and evaluation assets included mostly expenditure incurred on the B-21, B-23, B-27 and B-101 fields in the Baltic Sea.
Moreover, the Group holds an equity interest in special purpose vehicle Baltic Gas spółka z ograniczoną odpowiedzialnością i wspólnicy sp.k. (“Baltic Gas”, see Note 2 and Note 16), a joint venture operated by the Group jointly with CalEnergy Resources Poland Sp. z o.o. as part of further activities related to the B-4 and B-6 gas condensate formations in the Baltic Sea.
In 2015, the expenditure incurred by the Group on the B-21, B-27 and B-101 fields reached PLN 27,372 thousand. The expenditure made in 2014, of PLN 70,756 thousand, related to the B-21, B-27 and B-28 fields. Cash flows associated with that expenditure amounted to PLN 32,943 thousand (2014: PLN 64,761 thousand), whereas the amount of outstanding investment commitments was PLN 2,693 thousand as at December 31st 2015 (December 31st 2014: PLN 8,110 thousand).
As the Group decided to discontinue investments in the Sambia E block and its mining usage rights to the block expired, as at December 31st 2015 the Group wrote off the expenditure of PLN 12,123 thousand on hydrocarbon exploration and evaluation in that area, see Note 9.4 (as at December 31st 2014: PLN 5,937 thousand, expenditure written off on the Sambia W field).
Given a very low volume of potential recoverable reserves, in 2014 the Group decided to recognise an impairment loss of PLN 29,914 thousand on the expenditure incurred in 2014 on the B-27 well (see Note 9.4 to the consolidated financial statements for 2014) and an impairment loss of PLN 1,939 thousand on the expenditure incurred on the B-28 well and formation (see Note 9.4). The total amount of impairment losses was PLN 31,853 thousand (see Note 9.4 to the consolidated financial statements for 2014).
The Group also decided to plug and abandon the well in the B-28 field. It used previously recognised impairment losses of PLN 27,160 thousand to write off the discontinued projects in 2014, and thus the write-off did not affect the Group’s consolidated net profit or loss for 2014.
Moreover, as the Group decided to discontinue further investments in the Sambia W field and its mining usage rights to the block expired, as at December 31st 2014 the Group wrote off its expenditure on hydrocarbon exploration and evaluation in the area of PLN 5,937 thousand (see Note 9.4).
13.1.2 Property, plant and equipment related to development of crude oil and natural gas resources
Poland
B-8 field
The Group’s expenditure on the development of oil and gas resources included expenditure incurred on the B-8 field, which is located in the Baltic Sea, about 70 km north of Jastarnia (in the vicinity of the B-3 field).
In 2015, the Group’s expenditure on the development of the B-8 field amounted to PLN 304,332 thousand (2014: PLN 209,388 thousand), and related mainly to the drilling of production wells and water injectors, conversion of the Petrobaltic platform, and transmission pipelines.
As the B-8 field was brought on stream in September 2015, the Group reclassified the related capital expenditure to Property, plant and equipment classified as production assets. As at December 31st 2015, the B-8 field production assets amounted to PLN 807,225 thousand.
Norway
YME field
The Group holds a 20% interest in two licences covering the YME field, which is situated 120 km to the south-west off the Norwegian coast (Egersund), in the southern part of the North Sea. The Group has not yet commenced production from the YME field due to technical defects in the Mobile Offshore Production Unit (MOPU).
As at December 31st 2015, property, plant and equipment related to the development of the YME field included expenditure of PLN 1,452m (NOK 3,278m) incurred by LOTOS Exploration and Production Norge AS (“LOTOS E&P Norge AS”) on acquisition of interests in production licences and on development of the field.
In the previous years, due to significant delays in the implementation of the YME project, cost overruns and defects of the MOPU that had been intended to be used to produce hydrocarbons from the YME field, the Group tested the YME assets for impairment, which resulted in impairment losses being recognised on those assets. More details on the impairment tests performed in the previous years and the resulting impairment losses recognised on the YME assets are included in the Group’s financial statements for the previous years (2012, 2013, 2014, see Note 13).
As discussed in Note 35.1 to the consolidated financial statements for 2014, in March 2013 Talisman Energy Norge AS, the then YME field operator (“Talisman”, “Operator”) and Single Buoy Moorings Inc. (“SBM”), supplier of the MOPU which was to be used to conduct production from the YME field, announced that an agreement had been reached to remove the defective MOPU (evacuated in mid-July 2012) from the YME field and to terminate all contracts and agreements existing between the parties in connection with the project.
As the decision-making process concerning the choice of the YME field development concept protracted and no development scenario has been selected by the YME consortium partners, in 2014 the Group re-analysed the development prospects for its YME assets and, consequently, recognised further impairment loss reducing the carrying amount of its YME assets to zero. The analysis accounted for the following facts:
- continued uncertainty and risks resulting from the protracted process of selecting Plans for Development and Operation of the YME field (“PDO”) originally expected to be completed by the end of Q1 2014,
- lack of decision as to the YME field development scenario,
- absence of an approved version of the budget for further YME field development,
- delay of the estimated production launch at the field.
Considering the above circumstances, on June 30th 2014 an impairment loss was recognised in relation to all capital expenditure on the YME project. This means that impairment losses presented in the consolidated financial statements for 2014, taking into account the effect of currency exchange differences, was PLN 1,551m (NOK 3,275m). Impairment losses on the capital expenditure associated with the YME project included impairment recognised in respect of the decommissioning asset increase after the Operator provided an updated estimate of the cost of decommissioning of the YME field production infrastructure, which resulted in a concurrent increase in decommissioning asset charged to other expenses in the consolidated statement of comprehensive income of PLN 28m (NOK 55m). Accordingly, operating loss on the impairment of the YME field assets, including the remeasurement of the estimated provision for future decommissioning costs, recognised in the statement of comprehensive income for 2014 was PLN 578m (NOK 1,157m), whereas the effect on net profit (after accounting for the deferred tax effect) was PLN 196m (NOK 392m).
Given the nature of the Joint Operating Agreement between the YME project partners and the guarantees issued by LOTOS Petrobaltic S.A. for the benefit of the Norwegian government with respect to LOTOS E&P Norge AS’s exploration and production activities on the Norwegian Continental Shelf, further capital expenditure on the YME field and the necessity to revalue the expected decommissioning costs are possible, in particular once the YME field decommissioning concept is selected and the Norwegian government approves the adopted abandonment plan.
As at December 31st 2015, based on a decision of a majority of the consortium members, approved by the Norwegian Petroleum and Energy Ministry by the letter dated June 30th 2015, a plan of complete decommissioning of the YME field infrastructure is currently being developed and is to be approved by the Norwegian government by June 30th 2016. The operator intends to extend the aforementioned time frame to the end of 2016 so as to check the feasibility of an alternative decommissioning scenario. It has been preliminarily assumed that the YME decommissioning process will be completed by 2019.
In the opinion of LOTOS E&P Norge AS, the amount of the provision for decommissioning of the infrastructure associated with the YME field (see Note 30.1) reflects the necessary commitment by LOTOS E&P Norge AS if the scenario of complete decommissioning materialises by 2019. This is a consequence of the phase (currently under way) of preparation of the YME field infrastructure decommissioning plan, adopted by the consortium with the votes of the majority of its members and reflected in the project budget to be approved, taking into account a reduction in the decommissioning cost estimate for 2016-2019 in connection with a drop in the market cost of such services in Norway following the decline in market prices of hydrocarbons.
Furthermore, work related to removal of the defective MOPU from the YME field, for which the partners obtained financing under an agreement with SBM, is still under way. The scheduled removal date of the MOPU has been changed (June 2016), and the amount of expected costs of the operation (most of which have been already contracted) has been properly reflected in these financial statements by updating relevant provisions in accordance with the best current knowledge of the Company’s Management Board as at the date of these statements (see Note 30.1).
Taking into account the recognised impairment losses on the YME expenditure and the incurred tax losses that may be carried forward, in the consolidated statement of financial position as at December 31st 2015 the Group recognised a deferred tax assets. The total amount of the tax assets related to the Group’s operations in Norway was PLN 677m (NOK 1,528m) as at December 31st 2015. Given that under the Norwegian tax legislation tax losses can be carried forward indefinitely, and taking into account the Group’s acquisition of interests in the Heimdal assets on December 30th 2013 and interests in Sleipner assets on December 30th 2015, including interests in producing fields from which the Group derives revenue, the Management Board believes that the deferred tax assets recognised as at December 31st 2015 are fully realisable at the amount disclosed in these consolidated financial statements.
13.1.3 Property, plant and equipment classified as production assets
Poland
Offshore oil and gas extraction facility in the B-3 field
Property, plant and equipment classified as production assets and situated in Poland comprise the assets of the offshore extraction facility in the B-3 field, located in the Baltic Sea area, approximately 70 km north off Cape Rozewie. LOTOS Petrobaltic S.A.’s production infrastructure in the B-3 field includes the Baltic Beta production platform, the PG-1 unmanned riser platform, as well as subsea installations of the B3-6 and B3-9 nodes. This infrastructure supports the operation of more than ten production and injection wells.
Crude oil produced from the field (Rozewie crude) is transported via pipelines to a tanker moored to a loading buoy, and sold exclusively to the Company. Natural gas extracted together with crude oil (casinghead gas) is transported via a subsea pipeline to an onshore CHP plant in Władysławowo operated by Energobaltic Sp. z o.o. (a company of the LOTOS Petrobaltic Group). In 2015, capital expenditure on the offshore oil extraction facility in the B-3 field amounted to PLN 2,194 thousand (2014: PLN 5,751 thousand) and was incurred mainly on periodic construction inspections of the PG-1 and Baltic Beta platforms.
In the Management Board’s opinion, as at December 31st 2015, there were no indications that the assets of the offshore oil extraction facility at the B-3 field should be tested for impairment. Considering the projected output from the B3 field until 2026 (ca. 1m tonnes), it can assumed that the revenue from the sale of the extracted oil will create a price surplus sufficient to enable depreciation of the remaining field assets’ value (PLN 171,105 thousand). The Management Board believes that with stable production levels and the plans to drill an additional production well, the B-3 assets should be fully realisable.
B-8 field
Given that the Group made a decision that development of the B-8 field would be conducted on a project finance basis, in December 2013 a separate special purpose vehicle named B8 Spółka z ograniczoną odpowiedzialnością BALTIC spółka komandytowo-akcyjna (“SPV B-8”) was established within the Group. In 2014, LOTOS Petrobaltic S.A. contributed to SPV B-8 mining usage rights, the right to use geological data, and the property, plant and equipment related to the project, including the Petrobaltic drilling platform. B-8 SPV will carry out further work related to the development of the field, including preparation of subsea installations and other tasks necessary to make the site ready for production. In August 2014, SPV B-8, Polskie Inwestycje Rozwojowe S.A., Bank Gospodarstwa Krajowego and Bank Pekao S.A. entered into agreements on the B-8 project financing through a note issue programme. In connection with the significant drop in oil prices, the concept for project execution and design documentation related to platform conversion changed, and the conditions precedent to the issue were not met. As at December 31st 2015, the financing had not yet been made available. The Company is currently holding negotiations with financial institutions concerning adjustment of the terms of financing of the B8 project to the new macroeconomic environment and the concept for project execution.
In 2015, the Group’s expenditure on the development of the B-8 field amounted to PLN 304,332 thousand, and related mainly to the conversion of the Petrobaltic platform, transmission pipelines and water injection wells. As at December 31st 2015, the B-8 field development assets amounted to PLN 807,225 thousand.
As at December 31st 2015, the Group tested the assets for impairment and determined their recoverable amount as their value in use measured using the discounted future cash flows method.
Key assumptions underlying computation of the recoverable amount of the tested property, plant and equipment:
- the cash flow projection period was assumed to equal the asset’s planned life,
- the discount rate was assumed to equal the weighted average cost of capital, and was calculated at 9.70% after taxation with the 19% marginal tax rate,
- production volumes were assumed to be in line with a competent person report prepared by Miller & Lents based on available current geological information,
- sales volumes, capital expenditure, operating expenses and field decommissioning costs were assumed in line with current projections for the B-8 field.
The following price assumptions were adopted for the purposes of the estimates:
- for crude oil in USD/bbl (per barrel of oil equivalent):
- 2016–2019 – prices in line with the price assumptions for the available market scenarios,
- 2020 and beyond − prices remaining stable in the long term on par with the 2019 level, adjusted for inflation.
Impairment testing of the B-8 field’s development assets carried out in 2015 did not indicate the need to recognise any impairment losses on the assets.
Due to significant market volatility, in particular with respect to crude oil prices, the adopted assumptions may be subject to justifiable changes, and such changes may necessitate a revision of the carrying amounts of the field’s assets in the future.
To determine the effect of key factors on the test results, the Group carried out an analysis of sensitivity to a -15%/+15% change of oil and gas price, -15%/+15% change in production volumes, and -15%/+15% change in the USD/PLN exchange rate.
The table below presents the estimated changes in impairment losses on the B-8 field’s assets depending on the change in key assumptions:
Factor | Change | Impact on impairment losses (PLN '000) |
|
---|---|---|---|
Crude oil and gas prices | +/- 15%. | - | - 107,154 |
Production volume | +/- 15%. | - | - 100,299 |
USD/PLN exchange rate | +/- 15%. | - | - |
Discount rate | +/- 0.5%. | - | - |
Norway
The upstream operations in Norway are carried out by LOTOS Production and Exploration Norge (LOTOS E&P Norge AS, a company of the LOTOS Petrobaltic Group) on the Norwegian Continental Shelf.
Acquisition of interests in Sleipner gas field licences in Norway
On October 30th 2015, LOTOS Exploration and Production Norge AS (“LOTOS E&P Norge AS”), a LOTOS Petrobaltic Group company, entered into an agreement with ExxonMobil Exploration and Production Norway AS (“Exxon”, the “Seller”), to acquire a portfolio of assets in the Sleipner gas field located on the Norwegian Continental Shelf. In December 2015, LOTOS E&P Norge AS obtained all the necessary consents of the Norwegian authorities to finalise the transaction.
On December 30th 2015 (“acquisition date”), all conditions precedent to the agreement were fulfilled and all risks and rewards related to the ownership of the acquired Sleipner assets were transferred to LOTOS E&P Norge AS.
The Sleipner assets comprise interests in licences on the following fields in the central part of the North Sea:
Fields | Status | Licences | Shares |
---|---|---|---|
Slepiner Ost | production | PL 046 Inside | 15% |
Sleipner Vest | production | PL 046 Outside, PL 029 | 15% |
Gungne | production | PL 046 Outside | 15% |
Loke | production | PL 046 Outside | 15% |
Alfa Sentral | pre-development | PL 046 E, F | 28% |
PL046 D | exploration | PL 046D | 28% |
Sleipner is a major gas hub (distribution centre) on the Norwegian Continental Shelf, linked to numerous countries, including Germany and the United Kingdom, by a gas pipeline network.
The operator on each of the production fields is Statoil. Apart from LOTOS E&P Norge AS, Total E&P Norge AS and ExxonMobil E&P Norway AS hold interests in these fields. The output from the fields is 70% natural gas and 30% condensate, that is light crude oil used in the production of gasoline and LPG. Proven and probable reserves (2P) attributable to the interests acquired by LOTOS E&P Norge AS in the production fields total 20.8m boe.
The Alfa Sentral field, in which LOTOS E&P Norge AS acquired an interest, is currently at a pre-development stage. The operator of the Alfa Sentral licence is Statoil and, apart from LOTOS E&P Norge AS, also Total E&P Norge AS holds interests there. Recoverable (contingent) resources (2C) attributable to the interests acquired by LOTOS E&P Norge AS in the Alfa Sentral field amount to 10.3m boe. The plans provide for the production of 4,000 boe/d from the interests allocated to LOTOS E&P Norge AS. Production from the field is planned to commence in late 2019.
The contractual price for the interests in the licences acquired in the Sleipner transaction was set by the parties at USD 160m as at January 1st 2015, which under the Norwegian tax law is referred to as the effective economic date of the transaction. Tax consequences of acquisition and sale of interests in licences located on the Norwegian Continental Shelf and shared by many investors require approval by the Norwegian Petroleum and Energy Ministry and Ministry of Finance. This requirement is imposed by the legislation governing crude oil taxation. The legislation requires that January 1st be assumed as the effective transaction date for tax purposes, and that payment for acquired interests include the agreed purchase price, an appropriate share in working capital, and the amount of settlements between the existing licence partners. The period from January 1st (the effective economic transaction date) to the date of actual transaction settlement is referred to as the transitional period.
Once the transaction is finalised, the buyer pays the agreed acquisition price and a pro and contra settlement takes place, as part of which the parties make mutual settlements relating to working capital, accounts to be settled with the joint venture partners as at January 1st, and respective shares in net cash flows from the licence in the transitional period.
The purchase of the Sleipner assets for the contractual price of USD 160m was financed under and settled through the pro and contra mechanism, that is using the cash flows acquired by LOTOS E&P Norge AS, generated in the period from the effective transaction date (January 1st 2015) to the actual date of finalising the transaction (the acquisition date, i.e. December 30th 2015). Under this mechanism, LOTOS E&P Norge AS was reimbursed USD 26.3m as the surplus of the settlement amount over the acquisition price.
Given the high amount of the deferred tax asset recognised in LOTOS E&P Norge AS accounts, no income tax for 2015 will be paid on those cash flows and the transaction will have no effect on the Group’s financial result under the Norwegian tax regime.
The total value of the acquired Sleipner assets as disclosed in the consolidated financial statements is PLN 1,129.4m (NOK 2,548.9m) and accounts for the decommissioning asset’s value of PLN 575.2m (NOK 1,298m). The table below presents the effect of accounting for the acquisition of Sleipner assets in these consolidated financial statements:
Reporting item | NOKm | PLNm |
---|---|---|
I. Production assets | 846.8 | 375.2 |
II. Exploration and evaluation assets | 404.1 | 179.0 |
Value of acquired Sleipner assets after pro and contra settlement, taking into account capitalised transaction costs and estimated future conditional payments (I + II) | 1,250.9 | 554.2 |
III. Decommissioning assets | 1,298.0 | 575.2 |
IV. Other assets and liabilities, net | 82.6 | 36.6 |
Total (I+II+III+IV) | 2,631.5 | 1,166.0 |
Settlement of acquisition price (A+B): | 1,030.9 | 456.7 |
A. Price paid after pro and contra settlement (USD 160m - USD 186.3m) | (228.6) | (101.3) |
B. Tax resulting from pro and contra settlement, on cash flows generated in transitional period (amount paid by Exxon, settled against deferred tax asset of LOTOS E&P Norge AS) | 1,259.5 | 558.0 |
Capitalised transaction costs (C+D): | 302.6 | 134.1 |
C. Amount of conditional future payments as per agreement | 285.5 | 126.5 |
D. Capitalised transaction costs | 17.1 | 7.6 |
E. Reclamation provision | 1,298.0 | 575.2 |
Total (A+B+C+D+E) | 2,631.5 | 1,166.0 |
The purchased property, plant and equipment comprise production infrastructure (plant and equipment). The remaining assets were included in intangible assets classified as exploration and evaluation assets. Under property, plant and equipment the Group recognises an asset related to future costs of decommissioning of an offshore oil extraction facility of PLN 575,177 thousand (NOK 1,298,076 thousand). The value of the asset is dependent on the revision of the estimated value of the relevant provision.
The reclamation provision recognised by the Group, representing the best estimate of future costs related to land reclamation, is recognised in the financial statements in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and in fulfilment of the obligation resulting from international land reclamation requirements. The estimated reclamation period for the deposits covered by the transaction will span from 2016 to 2033, therefore the amount of future costs was determined by the Group at a 4% discount rate and a 2% inflation rate. For information on provisions for offshore oil and gas extraction facilities on the North Sea, see Note 30.1.
On December 31st 2015, the Group analysed the sensitivity of the Sleipner assets to changes in key macroeconomic factors, as presented in the table below:
Factor | Change | Impact on impairment losses (PLN '000) |
|
---|---|---|---|
Crude oil and gas prices | +/- 15%. | - | - 109,231 |
Production volume | +/- 15%. | - | - 120,934 |
USD/PLN exchange rate | +/- 15%. | - | - |
Discount rate | +/- 0.5%. |
Heimdal offshore gas and condensate extraction facility Skirne/Byggve, Atla and Vale fields
The Group’s production assets located in the Heimdal area include interests in gas-condensate fields: Skirne/Byggve (30%), Alta (20%) and Vale (25.75%), acquired together with an interest (5%) in the Heimdal gas and condensate processing and export hub in December 2013.
The entire volume of gas and condensate produced by the Group from these fields is sold to external customers via a pipeline network delivering the products to various offtake points in the UK and continental Europe.
The production infrastructure of the Heimdal offshore facility comprises the Heimdal production platform with ancillary infrastructure (the Heimdal gas and condensate processing and export hub) and subsea production wells.
As at December 31st 2015, the Group tested the assets for impairment and determined their recoverable amount as their value in use measured using the discounted future cash flows method.
Key assumptions underlying computation of the recoverable amount of the tested property, plant and equipment:
- the cash flow projection period was assumed to equal the asset’s planned life,
- the discount rate was assumed to equal the weighted average cost of capital, and was calculated at 7.33% after taxation with the 78% marginal tax rate (applicable in Norway),
- production and sales volumes, capital expenditure, operating expenses and field decommissioning costs were assumed as projected by the field operators.
The Management Board’s estimates used in impairment testing as at December 31st 2015 take into account the additional benefits which were realised in 2015 or are very likely to be realised but were not taken into account in the impairment tests carried out as at December 31st 2014:
- Heimdal hub – from December 2015 to February 2016, the Heimdal platform’s operator (Statoil Petroleum AS) drilled a new production well, which should be placed in service in Q1 2016 according to the operator’s projections. The reserves attributable to the Group due to its interest in the Heimdal platform are close to 0.3m boe.
- Atla field – the field’s physical production period increased significantly. According to previous forecasts, physical production should have stopped in 2015, but the field is still producing and its physical production is set to end no earlier than in Q2 2016.
- Skirne field – in accordance with the assumptions presented by the field’s operator (Total E&P Norge AS), an increase in hydrocarbon output is expected.
- Vale field – the production profile covers low pressure production (LPP) – both the licence budget for 2016 and the long-term forecast for the field prepared by the operator (Centrica Resources (Norge) AS) provide for capital expenditure to be incurred in 2016 to enable low pressure production and, in consequence, achieve additional hydrocarbon output. The Group’s share in the additional production made possible by LPP is ca. 1.1m boe.
The additional benefits listed above had a positive effect on the Management Board’s estimates, reducing the negative impact of changes in the price of oil and gas.
The following price assumptions were adopted for the purposes of the estimates:
- for crude oil in USD/bbl (per barrel):
- 2016–2019 – prices in line with the price assumptions for the available market scenarios,
- 2020 and beyond − prices remaining stable in the long term on par with the 2019 level, adjusted for inflation.
- for natural gas in USD/bbl (per barrel):
- 2016–2019 − prices in line with the price assumptions for the available market scenarios, and in 2020 and beyond − prices remaining stable in the long term on par with the 2019 level, adjusted for inflation,
The USD/NOK exchange rate used for the purposes of the impairment test is a cross rate calculated based on forward curves for the EUR/USD and EUR/NOK currency pairs. The visible weakening of NOK compared to USD and EUR was also instrumental in mitigating negative price shifts.
Impairment tests of the Heimdal assets carried out in 2015 did not indicate the need to recognise any impairment losses on property, plant and equipment classified as production assets.
Due to significant market volatility, in particular with respect to oil and gas prices, the adopted assumptions may be subject to justifiable changes, and such changes may necessitate a revision of the carrying amounts of the LOTOS E&P Norge’s assets in the future.
To determine the effect of key factors on the test results, the Group carried out an analysis of sensitivity to a -15%/+15% change of oil and gas price, -15%/+15% change in production volumes, and -15%/+15% change in the USD/NOK exchange rate.
The table below presents the estimated changes in impairment losses on the Heimdal assets of LOTOS E&P Norge depending on the change in key assumptions:
Factor | Change | Impact on impairment losses (PLN '000) |
|
---|---|---|---|
Crude oil and gas prices | +/- 15% | - | - 25,317 |
Production volume | +/- 15% | - | - 25,393 |
USD/NOK exchange rate | +/- 15% | - | - 25,393 |
Discount rate | +/- 0.5% | - 6,309 |
As at December 31st 2014, the Group tested the assets for impairment and determined their recoverable amount as their value in use measured using the discounted future cash flows method.
Key assumptions underlying computation of the recoverable amount of the tested property, plant and equipment:
- the cash flow projection period was assumed to equal the asset’s planned life,
- the discount rate was assumed to equal the weighted average cost of capital, and was calculated at 7.5% after taxation with the 78% marginal tax rate (applicable in Norway),
- production and sales volumes, capital expenditure, operating expenses and field decommissioning costs were assumed as projected by the field operators.
The following price assumptions were adopted for the purposes of the estimates:
- for crude oil in USD/bbl (per barrel):
- 2015–2018 – prices in line with the price assumptions for the available market scenarios,
- 2019 and beyond − prices remaining stable in the long term on par with the 2018 level, adjusted for inflation.
- for natural gas in p/th (pence/thermal units):
- 2015–2020 − prices in line with the price assumptions for the available market scenarios, and in 2021 and beyond − prices remaining stable in the long term on par with the 2020 level, adjusted for inflation.
Following the impairment tests, an impairment loss was recognised on property, plant and equipment classified as production assets (Heimdal, Vale, Skirne, Atla) in a total amount of PLN 45,854 thousand (NOK 91,690 thousand); see Note 9.4 to the consolidated financial statements for 2014.
Following the impairment tests, an impairment loss of PLN 13,823 thousand (NOK 27,640 thousand) was also recognised on the Heimdal portfolio’s intangible assets related to exploration for and evaluation of hydrocarbon resources in the Rind field; see Note 15.1.1 and Note 9.4 to the consolidated financial statements for 2014.
Lithuania
Onshore oil extraction facilities
The upstream operations in Lithuania are carried out by the AB LOTOS Geonafta Group, which comprises AB LOTOS Geonafta, UAB Genciu Nafta and UAB Manifoldas. The Group also holds interests in UAB Minijos Nafta, a joint venture.
The Group holds interests in 17 onshore oil fields in Lithuania, which are located within seven onshore licence areas (Plunge, Klaipėda, Girkalai, Kretinga, Nausodis, Genciu and Gargzdai). 13 of these fields are on production.
Key assets held by those companies include the following fields: Genciai (UAB Genciu Nafta), Girkalai, Kretinga, Nausodis (AB LOTOS Geonafta), Ablinga, Liziai, Siaures Vezaiciai, Auksoras (UAB Manifoldas), Agluonenai, Degliai, Pietu Siupariai, Pociai, Sakuciai, Siupariai, Uoksai, and Vilkyciai (UAB Minijos Nafta). In the Siaures Vezaiciai, Auksoras and Uoksai fields, production has been suspended.
Property, plant and equipment related to Lithuanian production operations include onshore extraction facilities of the AB LOTOS Geonafta Group companies, which comprise surface and underground infrastructure such as production wells, pumps, pipelines, crude oil and formation water tanks and a gas separation system. The production wells are fitted with surface and downhole pumps. Oil from the extraction facility is fed to a pipeline system connected to a storage centre, from where it is shipped by land to a marine terminal in Liepāja (Latvia). The oil is then transported to Gdańsk on a tanker ship and sold to the Company.
In 2015, the Group’s capital expenditure on property, plant and equipment related to Lithuanian production infrastructure was PLN 8,290 thousand, compared with PLN 14,902 thousand in 2014.
Based on the results of an impairment test of the Lithuanian onshore extraction facilities performed as at December 31st 2015, the Group recognised an impairment loss of a total of PLN 6,314 thousand on production infrastructure associated with the Ablinga and Ližiai fields (2014: PLN 2,708 thousand on production infrastructure associated with the Ablinga field) (see Note 9.4.) The method and assumptions used to determine the recoverable amounts of the assets were consistent with those applied to determine the recoverable amounts of the Lithuanian production licences, tested as at December 31st 2015 (see Note 15.1.2.).
In addition, in 2014 the Group wrote off expenditure on property, plant and equipment related to the Zvaginai well of PLN 5,772 thousand (see Note 9.4.).
13.1.4 Assets related to future costs of decommissioning of oil and gas extraction facilities
PLN '000 | Dec 31 2015 | Dec 31 2014 |
---|---|---|
Development assets | - | 24,573 |
Production assets | 706,029 | 178,162 |
Total | 706,029 | 202,735 |
As part of its development and production assets, the Group discloses decommissioning assets for future costs of decommissioning of oil and gas extraction facilities depreciated with the units-of-production method. These assets are recognised along with the recognition and remeasurement of provisions for decommissioning of oil and gas extraction facilities.
PLN '000 | Note | Development assets | Production assets | Total | |||||
---|---|---|---|---|---|---|---|---|---|
Poland | Norway | Total | Poland | Norway | Lithuania | Total | |||
Gross carrying amount Jan 1 2015 |
28,571 | 129,699 | 158,27 | 72,558 | 266,534 | 2,298 | 341,39 | 499,66 | |
Recognised | 13.1; 30.1 | - | - | - | - | 605,423 (1) | - | 605,423 | 605,423 |
Estimated costs related to decommissioning of oil and gas extraction facilities | 13.1; 30.1 | 10,054 | 1,485 | 11,539 | (304) | 5,48 | (250) | 4,926 | 16,465 |
Exchange differences on translating foreign operations | - | (8,401) | (8,401) | - | (47,631) | (6) | (47,637) | (56,038) | |
Reversal of asset related to decommissioning of oil and gas extraction facilities | 13.1; 30.1 | (2,750) | - | (2,750) | - | - | - | - | (2,750) |
Reclassification of development assets to production assets | (35,875) | - | (35,875) | 35,875 | - | - | 35,875 | - | |
Gross carrying amount Dec 31 2015 |
- | 122,783 | 122,783 | 108,129 | 829,806 | 2,042 | 939,975 | 1,062,760 | |
Accumulated depreciation/ amortisation Jan 1 2015 |
3,998 | - | 3,998 | 72,217 | 90,069 | 942 | 163,228 | 167,226 | |
Depreciation/amortisation | 316 | - | 316 | 37 | 41,81 | 393 | 42,24 | 42,556 | |
Exchange differences on translating foreign operations | - | - | - | - | (7,869) | 6 | (7,863) | (7,863) | |
Reclassification of development assets to production assets | (4,314) | - | (4,314) | 4,314 | - | - | 4,314 | - | |
Accumulated depreciation/amortisation Dec 31 2015 |
- | - | - | 76,568 | 124,01 | 1,341 | 201,919 | 201,919 | |
Impairment losses Jan 1 2015 |
- | 129,699 | 129,699 | - | - | - | - | 129,699 | |
Recognised | 9.4 | - | 1,485 | 1,485 | - | - | - | - | 1,485 |
Exchange differences on translating foreign operations | - | (8,401) | (8,401) | - | (1,684) | - | (1,684) | (10,085) | |
Used/Reversed | - | - | - | - | 33,713 | - | 33,713 | 33,713 | |
Impairment losses Dec 31 2015 |
- | 122,783 | 122,783 | - | 32,029 | - | 32,029 | 154,812 | |
Net carrying amount Dec 31 2015 |
- | - | - | 31,561 | 673,767 | 701 | 706,029 | 706,029 |
(1) Acquisition of Sleipner assets in Norway (for more information on the transaction, see Note 13.1.3.).
PLN '000 | Note | Development assets | Production assets | Total | |||||
---|---|---|---|---|---|---|---|---|---|
Poland | Norway | Total | Poland | Norway | Lithuania | Total | |||
Gross carrying amount Jan 1 2014 |
27,929 | 108,194 | 136,123 | 108,954 | 245,671 | 2,224 | 356,849 | 492,972 | |
Recognised | 13.1; 30.1 | 642 | - | 642 | - | - | 1,074 | 1,074 | 1,716 |
Estimated costs of decommissioning of oil and gas extraction facilities | 13.1; 30.1 | - | 27,743 | 27,743 | (36,396) | 33,455 | (844) | (3,785) | 23,958 |
Exchange differences on translating foreign operations | - | (6,238) | (6,238) | - | (12,592) | 62 | (12,530) | (18,768) | |
Other | - | - | - | - | - | (218) | (218) | (218) | |
Gross carrying amount Dec 31 2014 |
28,571 | 129,699 | 158,270 | 72,558 | 266,534 | 2,298 | 341,390 | 499,660 | |
Accumulated depreciation/amortisation Jan 1 2014 |
3,998 | - | 3,998 | 67,378 | - | 725 | 68,103 | 72,101 | |
Depreciation/amortisation | - | - | - | 4,839 | 95,129 | 194 | 100,162 | 100,162 | |
Exchange differences on translating foreign operations | - | - | - | - | (5,060) | 23 | (5,037) | (5,037) | |
Accumulated depreciation/amortisation Dec 31 2014 |
3,998 | - | 3,998 | 72,217 | 90,069 | 942 | 163,228 | 167,226 | |
Impairment losses Jan 1 2014 |
- | - | - | - | - | - | - | - | |
Recognised | - | 136,985 | 136,985 | - | - | - | - | 136,985 | |
Exchange differences on translating foreign operations | - | (7,286) | (7,286) | - | - | - | - | (7,286) | |
Used/Reversed | - | - | - | - | - | - | - | - | |
Impairment losses Dec 31 2014 |
- | 129,699 | 129,699 | - | - | - | - | 129,699 | |
Net carrying amount Dec 31 2014 |
24,573 | - | 24,573 | 341 | 176,465 | 1,356 | 178,162 | 202,735 |
13.2 Refinery and other property, plant and equipment
PLN '000 | Note | Land | Buildings, structures | Plant and equipment | Vehicles, other | Property, plant and equipment under construction | Total |
---|---|---|---|---|---|---|---|
Gross carrying amount Jan 1 2015 (restated) |
493,495 | 4,488,657 | 5,607,338 | 1,020,064 | 279,575 | 11,889,129 | |
Purchase | - | - | 1,287 | 5,004 | 462,888 | 469,179 | |
Transfer from property, plant and equipment under construction | 29,645 | 91,742 | 53,844 | 63,165 | (238,396) | - | |
Borrowing costs | 13.3 | - | - | - | - | 1,331 | 1,331 |
Exchange differences on translating foreign operations | - | 2 | 987 | 17,178 | 93 | 18,260 | |
Estimated costs of decommissioning, land reclamation and clean-up (1) | - | (2,095) | (142) | - | - | (2,237) | |
Sale | (1,892) | (7,217) | (11,447) | (2,484) | (262) | (23,302) | |
Liquidation | (18) | (1,974) | (9,902) | (34,854) (2) | (41) | (46,789) | |
Expenditure written off due to project discontinuation | 9.4 | - | - | - | - | (171) | (171) |
Finance lease | - | - | 24 | 97,344 | - | 97,368 | |
Reclassification of property, plant and equipment under construction to exploration and evaluation assets (3) | - | - | - | - | (60,577) | (60,577) | |
Reclassification of property, plant and equipment under construction to development assets (4) | - | - | - | - | (30,857) | (30,857) | |
Other | 365 | 1,862 | (1,017) | -6,087 | (2,628) | (7,505) | |
Gross carrying amount Dec 31 2015 |
521,595 | 4,570,977 | 5,640,972 | 1,159,330 | 410,955 | 12,303,829 | |
Accumulated depreciation Jan 1 2015 (restated) |
16,762 | 1,299,460 | 1,750,284 | 447,678 | - | 3,514,184 | |
Depreciation | 1,897 | 177,529 | 240,036 | 83,133 | - | 502,595 | |
Exchange differences on translating foreign operations | - | 2 | 707 | 14,080 | - | 14,789 | |
Sale | - | (5,570) | (10,185) | (2,435) | - | (18,190) | |
Liquidation | - | (1,139) | (9,520) | (34,359) (2) | - | (45,018) | |
Finance lease | - | - | - | (7,344) | - | (7,344) | |
Other | - | 1,007 | 535 | 1,035 | - | 2,577 | |
Accumulated depreciation Dec 31 2015 |
18,659 | 1,471,289 | 1,971,857 | 501,788 | - | 3,963,593 | |
Impairment losses Jan 1 2015 (restated) |
1,067 | 37,466 | 5,476 | 2,961 | 13,601 | 60,571 | |
Recognised | 9.4 | - | 9,991 | 976 | 4,881 (5) | 132 | 15,980 |
Exchange differences on translating foreign operations | - | - | 7 | 118 | 3 | 128 | |
Used/Reversed | - | (3,951) | (166) | (41) | (41) | (4,199) | |
Other | 91 | 905 | - | - | - | 996 | |
Impairment losses Dec 31 2015 |
1,158 | 44,411 | 6,293 | 7,919 | 13,695 | 73,476 | |
Net carrying amount Dec 31 2015 |
501,778 | 3,055,277 | 3,662,822 | 649,623 | 397,260 | 8,266,760 |
(1) Estimated cost of land reclamation and clean-up and dismantling of a subsea pipeline operated by subsidiary Energobaltic Sp. z o.o. (LOTOS Petrobaltic Group).
(2) Including retirement of worn-out spare parts in the amount of PLN 19,513 thousand
(3) Related to operations on Gaz Południe, Gotlandia, Łeba and Rozewie licence areas, which in line with the upstream segment management’s decision will be continued in 2016. Applications were filed to convert the Łeba and Rozewie licences into combined oil and gas exploration, appraisal and production licences.
(4) Related to prepayments for capital expenditure on the development of the B-8 field.
(5) Including PLN 4,499 thousand related to impairment losses on vessels used in the LOTOS Petrobaltic Group.
PLN '000 | Land | Buildings, structures | Plant and equipment | Vehicles, other | Property, plant and equipment under construction | Total |
---|---|---|---|---|---|---|
Gross carrying amount Jan 1 2014 (restated) |
472,934 | 4,392,014 | 5,532,666 | 699,067 | 260,389 | 11,357,070 |
Purchase | - | 47 | 1,202 | 20,029 | 585,101 | 606,379 |
Transfer from property, plant and equipment under construction | 23,039 | 107,813 | 101,346 | 323,335 | (555,533) | - |
Borrowing costs | - | - | - | - | 2,693 | 2,693 |
Exchange differences on translating foreign operations | - | 50 | 1,131 | 21,010 | (255) | 21,936 |
Estimated costs of decommissioning, land reclamation and clean-up (1) | - | (762) | - | - | - | (762) |
Reclassification to non-current assets (or disposal group) held for sale (2) | (764) | (6,771) | (6,010) | (27,639) | - | (41,184) |
Sale | (1,881) | (1,362) | (12,890) | (2,279) | (4,050) | (22,462) |
Decommissioning | - | (1,782) | (11,985) | (6,964) | - | (20,731) |
Expenditure written off due to project discontinuation | - | - | - | - | (226) | (226) |
Other | 167 | (590) | 1,878 | (6,495) | (8,544) | (13,584) |
Gross carrying amount Dec 31 2014 (restated) |
493,495 | 4,488,657 | 5,607,338 | 1,020,064 | 279,575 | 11,889,129 |
Accumulated depreciation Jan 1 2014 (restated) |
15,499 | 1,134,001 | 1,531,793 | 387,626 | - | 3,068,919 |
Depreciation | 1,53 | 171,185 | 243,783 | 76,004 | - | 492,502 |
Exchange differences on translating foreign operations | - | 8 | 810 | 16,515 | - | 17,333 |
Reclassification to non-current assets (or disposal group) held for sale (2) | (24) | (2,601) | (4,278) | (23,614) | - | (30,517) |
Sale | (121) | (583) | (12,541) | (2,077) | - | (15,322) |
Decommissioning | - | (1,630) | (10,529) | (6,471) | - | (18,630) |
Other | (122) | (920) | 1,246 | (305) | - | (101) |
Accumulated depreciation Dec 31 2014 (restated) |
16,762 | 1,299,460 | 1,750,284 | 447,678 | - | 3,514,184 |
Impairment losses Jan 1 2014 (restated) |
1,045 | 16,021 | 480 | 1,795 | 13,624 | 32,965 |
Recognised | 150 | 24,918 | 6,014 | 1,565 | 5 | 32,652 |
Used/Reversed | (13) | (1,968) | (1,015) | (36) | (28) | (3,060) |
Reclassification to non-current assets (or disposal group) held for sale (2) | (115) | (1,505) | (3) | (363) | - | (1,986) |
Impairment losses Dec 31 2014 (restated) |
1,067 | 37,466 | 5,476 | 2,961 | 13,601 | 60,571 |
Net carrying amount Dec 31 2014 (restated) |
475,666 | 3,151,731 | 3,851,578 | 569,425 | 265,974 | 8,314,374 |
(1) Estimated cost of land reclamation and clean-up and dismantling of a subsea pipeline operated by subsidiary Energobaltic Sp. z o.o. (LOTOS Petrobaltic Group).
(2) Jasło and Czechowice-Dziedzice Branches operating as separate, organised parts of business in Jasło and Czechowice-Dziedzice; see Note 17.
Refinery and other property, plant and equipment include chiefly Group’s assets related to downstream and support activities, such as the service station network, rolling stock, storage depots, refinery infrastructure and property on which the production plants, production units, pipelines and office buildings are located. The item also comprises other upstream segment assets, including ships and a multi-purpose mobile drilling rig.
In 2015, capital expenditure incurred by the Group on refinery and other property, plant and equipment was PLN 469,179 thousand, and included primarily outlays on the extension of the service station chain, enlargement of the tanker fleet, construction of the Hydrogen Recovery Unit (HRU), Delayed Coking Unit (DCU) with auxiliary infrastructure (the EFRA Project), and classification surveys of vessels. In 2014, capital expenditure incurred by the Group on refinery and other property, plant and equipment was PLN 606,379 thousand, and related mainly to the extension of the fuel depot in Poznań, construction of the Hydrogen Recovery Unit, extension of the service station network, and acquisition of the multi-purpose drilling platform ‘LOTOS Petrobaltic’.
Impairment losses on refinery and other property, plant and equipment
In 2015, the Group made a revaluation of its refinery and other property, plant and equipment. Impairment losses totalled PLN 15,980 thousand (2014: PLN 32,652 thousand) (see Note 9.4).
In 2015, LOTOS Paliwa Sp. z o.o. recognised an impairment loss on service station assets in the total amount of PLN 7,812 thousand; (2014: PLN 15,765 thousand; see Note 9.4). The recoverable amount of property, plant and equipment related to the service station network was determined based on the value in use of each station, calculated with the discounted cash flow method. Future cash flows were calculated based on five-year cash-flow projections, prepared using budget projections for 2016 (in 2014: for 2015) and the cash inflow and outflow plan for subsequent years, based on the development strategy until 2018. The residual value for the discounted cash flows was calculated using the growing perpetuity formula. A fixed growth rate of 2.79% (2014: 1%) was used to extrapolate cash-flow projections beyond the five-year period. The extrapolation was based on a quantitative forecast of the fuel consumption growth rate in Poland in 2014–2020. LOTOS Paliwa Sp. z o.o.’s net weighted average cost of capital (WACC) was assumed at 7.3% (2014: 6.13%), based on the company’s capital structure. Discounted cash flows calculated separately for each cash-generating unit were grossed up.
Calculation of the value in use of cash-generating units is most sensitive to the following variables:
- gross margin, which depends on average values of unit margins in the period preceding the budget period (a 6% average year-on-year decline of the margin was assumed),
- discount rates, reflecting risks typical to the cash-generating unit (the median price for five-year PLN-denominated notes quoted in November 2015 was adopted),
- volumes based on fuel consumption growth rate (a 4% increase was assumed),
- market share in the budget period (a stable market share was assumed),
- growth rate used to extrapolate cash-flow projections beyond the budget period, based on a quantitative forecast of the fuel consumption growth rate in Poland in 2014−2020, prepared using POPiHN, GUS, NBP and JBC reports (for gasolines), and based on GDP market consensus. In the case of diesel oil, the data included also the market consensus on GDP and its constituent elements sourced from IBNGR, BZWBK, MILLENIUM, NBP, MG, EBOIR, WFM, OECD, KE, and ERSTE GROUP.
As regards the calculation of the service stations’ value in use, the Management Board is of the opinion that no reasonably probable change to any of the key assumptions listed above will result in the carrying amount of the service station assets exceeding their recoverable amount to a significant extent.
As at December 31st 2014, LOTOS Asfalt Sp. z o.o. tested for impairment its Jasło and Czechowice plant assets. As a result of the test, LOTOS Asfalt Sp. z o.o. recognised an impairment loss of PLN 15,893 thousand on its Jasło plant assets (see Note 9.4). The impairment loss was recognised based on the assumption that the bitumen business would be restructured after the launch of the EFRA Project, and such restructuring would involve suspending the operation of the Jasło and Czechowice plants’ infrastructure, while maintaining production in Gdańsk. The impairment test was performed using the discounted cash flow method. The analysis covered the planned cash flows in 2015–2017. The test assumed a sales volume growth in 2016–2017 (by about 27% in 2016 compared with 2015 and a further 9% in 2017 compared with 2016), expected in connection with Poland’s absorption of funds available from the new EU budget until 2020 on development of its road infrastructure. The sales growth assumed for 2016 was based on the new EU financial framework and the schedule of investment projects planned as part of the National Road Construction Programme 2014–2020, which envisages considerable expenditure on road infrastructure. The company has taken into account the negative impact of the cement technology on its sales growth, however given that the road construction process involving this technology is quite advanced, the cementing work should not peak before the end of 2018. In 2016–2017 margins were assumed to remain roughly unchanged from their budgeted 2015 level, the net weighted average cost of capital (WACC) was put at 9%, and fixed costs were assumed to remain stable as were distribution costs per unit (comprising mainly costs of transport); the computations were performed using fixed prices (inflation was eliminated both from revenue/costs and the discount rate).
13.3 Other information concerning property, plant and equipment
PLN '000 | Property, plant and equipment used under finance lease | |
---|---|---|
Dec 31 2015 | Dec 31 2014 | |
Gross carrying amount | 334,209 | 198,575 |
Accumulated depreciation | 93,403 | 47,328 |
Net carrying amount | 240,806 | 151,229 |
The Group uses finance leases to finance primarily rolling stock assets (downstream segment); see also Note 27.4.
The table below presents items under which depreciation of property, plant and equipment is recognised:
PLN '000 | Year ended Dec 31 2015 |
Year ended Dec 31 2014 |
---|---|---|
Cost of sales | 590,267 | 654,683 |
Distribution costs | 68,197 | 63,030 |
Administrative expenses | 20,302 | 17,128 |
Change in products and adjustments to cost of sales | (4,554) | 16,915 |
Total | 674,212 | 751,756 |
In 2015, the Group capitalised finance costs of PLN 1,331 thousand as property, plant and equipment under construction (2014: PLN 2,693 thousand) (see note 13.2). As at December 31st 2015, financing costs capitalised as property, plant and equipment under construction totalled PLN 5,050 thousand (December 31st 2014: PLN 5,655 thousand).
As at December 31st 2015, the Group’s future contractual commitments, not disclosed in the statement of financial position, concerning expenditure on property, plant and equipment amounted to PLN 1,768,229 thousand and mainly related to the EFRA Project, development of the B-8 field (B8 Project), construction of a Hydrogen Recovery Unit (HRU) at the Refinery, and extension of the service station chain.
As at December 31st 2014, the Group’s contractual commitments, not disclosed in the statement of financial position, concerning future expenditure on property, plant and equipment amounted to PLN 808,860 thousand and related mostly to the conversion of a drilling platform into a production platform at LOTOS Petrobaltic S.A., a delayed coking unit (the EFRA Project), construction of a Hydrogen Recovery Unit (HRU) at the Refinery, and extension of the service station network.
The Group’s future contractual commitments follow from the 2013−2015 Efficiency and Growth Programme.
As at December 31st 2015, property, plant and equipment serving as collateral for the Group’s liabilities was PLN 6,402,952 thousand (December 31st 2014: PLN 7,038,347 thousand).
The Notes to the consolidated financial statements are an integral part of the statements.
(This is a translation of a document originally issued in Polish)