Integrated Annual Report of LOTOS Capital Group 2015

PLN '000	Dec 31 2015	Dec 31 2014 (restated)
Intangible assets classified as exploration, development and production assets
Exploration and evaluation assets	343,367	196,676
Crude oil and natural gas development and production licences	133,478	208,287
Total	476,845	404,963
Other intangible assets
Licences, patents and trademarks	97,017	101,251
Other	34,047	47,473
Intangible assets under development	9,822	3,771
Total	140,886	152,495
Total	617,731	557,458

15.1 Intangible assets classified as exploration and evaluation assets, and development and production assets

PLN '000	Note	Exploration and evaluation assets				Development and production licences			Total
		Poland	Norway	Lithuania	Total	Poland	Lithuania	Total
Gross carrying amount Jan 1 2015		13,012	314,806	10,213	338,031	15,721	492,231	507,952	845,983
Purchase		15	8,100	-	8,115	-	-	-	8,115
Acquisition of Sleipner assets (1)		-	188,471	-	188,471	-	-	-	188,471
Exchange differences on translating foreign operations		-	(29,291)	(2)	(29,293)	-	(74)	(74)	(29,367)
Expenditure written off due to project discontinuation	9.4	(3,149) (2)	(14,846) (3)	-	(17,995)	-	-	-	(17,995)
Gross carrying amount Dec 31 2015		9,878	467,240	10,211	487,329	15,721	492,157	507,878	995,207
Accumulated amortisation Jan 1 2015		7,277	-	-	7,277	4,948	169,511	174,459	181,736
Amortisation		3,663	-	-	3,663	2,810	18,255	21,065	24,728
Exchange differences on translating foreign operations		-	-	-	-	-	309	309	309
Expenditure written off due to project discontinuation	9.4	(2,894) (2)	-	-	(2,894)	-	-	-	(2,894)
Accumulated amortisation Dec 31 2015		8,046	-	-	8,046	7,758	188,075	195,833	203,879
Impairment losses Jan 1 2015		-	134,078	-	134,078	-	125,206	125,206	259,284
Recognised	9.4	235 (4)	-	10,027 (5)	10,262	-	52,419 (6)	52,419	62,681
Exchange differences on translating foreign operations		-	(8,608)	184	(8,424)	-	942	942	(7,482)
Used/Reversed		-	-	-	-	-	-	-	-
Impairment losses Dec 31 2015		235	125,470	10,211	135,916	-	178,567	178,567	314,483
Net carrying amount Dec 31 2015		1,597	341,770	-	343,367	7,963	125,515	133,478	476,845

PLN '000	Exploration and evaluation assets				Development and production licences			Total
	Poland	Norway	Lithuania	Total	Poland	Lithuania	Total
Gross carrying amount Jan 1 2014	9,608	297,589	11,645	318,842	6,459	477,207	483,666	802,508
Purchase	5,119	27,278	39	32,436	3,183	-	3,183	35,619
Exchange differences on translating foreign operations	-	(14,801)	293	(14,508)	-	13,260	13,260	(1,248)
Reclassification of exploration and evaluation assets to production assets (1)	-	-	(1,764) (2)	(1,764)	-	1,764 (2)	1,764	-
Expenditure written off due to project discontinuation	(1,172) (3)	-	-	(1,172)	-	-	-	(1,172)
Other	(543)	4,740	-	4,197	6,079	-	6,079	10,276
Gross carrying amount Dec 31 2014	13,012	314,806	10,213	338,031	15,721	492,231	507,952	845,983
Accumulated amortisation Jan 1 2014	7,215	-	-	7,215	3,566	124,828	128,394	135,609
Amortisation	1,777	-	-	1,777	164	40,517	40,681	42,458
Exchange differences on translating foreign operations	-	-	-	-	-	4,166	4,166	4,166
Expenditure written off due to project discontinuation	(1,172) (3)	-	-	(1,172)	-	-	-	(1,172)
Other	(543)	-	-	(543)	1,218	-	1,218	675
Accumulated amortisation Dec 31 2014	7,277	-	-	7,277	4,948	169,511	174,459	181,736
Impairment losses Jan 1 2014	-	125,951	-	125,951	-	22,235	22,235	148,186
Recognised	-	14,439	-	14,439	-	100,604	100,604	115,043
Exchange differences on translating foreign operations	-	(6,312)	-	(6,312)	-	2,367	2,367	(3,945)
Used/Reversed	-	-	-	-	-	-	-	-
Impairment losses Dec 31 2014	-	134,078	-	134,078	-	125,206	125,206	259,284
Net carrying amount Dec 31 2014	5,735	180,728	10,213	196,676	10,773	197,514	208,287	404,963

15.1.1 Intangible assets classified as exploration and evaluation assets

Intangible assets classified as exploration and evaluation assets are carried until the technical feasibility and commercial viability of extracting the mineral resources is demonstrated.

Poland

In 2015, the Group incurred expenditure of PLN 15 thousand on extension of licences and licence-related mining usage rights (2014: PLN 5,119 thousand). Cash flows associated with that expenditure amounted to PLN 3,754 thousand (2014: PLN 24 thousand), whereas the amount of outstanding investment commitments was PLN 1,356 thousand as at December 31st 2015 (December 31st 2014: PLN 5,095 thousand).

As at December 31st 2015, the Sambia E licence and mining usage rights had expired. The value of decommissioned assets comprising expenditure on intangible assets related to this licence area was PLN 3,149 thousand.

As at December 31st 2014, the Sambia W licence and mining usage rights had expired. The value of decommissioned assets comprising expenditure on intangible assets related to this licence area was PLN 1,172 thousand.

Norway

In 2015, expenditure on intangible assets classified as exploration and evaluation assets in Norway amounted to PLN 196,571 thousand and was attributable to the acquisition of a portfolio of assets in the Sleipner gas field (PLN 188,471 thousand; see Note 13.1.3) as well as investment in Heimdal assets (PLN 4,308 thousand) and other Norwegian fields (PLN 3,792 thousand). The acquisition of the portfolio of Sleipner assets was made with a pro and contra settlement (see Note 13.1.3), which made it possible to settle the entire transaction price using the tax asset of LOTOS E&P Norge AS, with no cash outflow. The work performed on the Heimdal fields jointly with other interest holders was settled between the operator and consortium members by way of cash calls, which were subsequently settled using the operators’ billings issued after completing successive works, and as a result as at the end of the reporting period the expenditure incurred in 2015 had been paid and no related investment commitments were carried.

As part of the acquisition of natural gas assets in the Sleipner gas field, the Group acquired an interest in the PL046D field and in the Alfa Sentral field, which is currently at a pre-development stage. Production from the field is planned to commence in 2020.

In 2014, the Group’s expenditure on hydrocarbon exploration and evaluation in the Heimdal licence area totalled PLN 21,518 thousand, and related mainly to the Trell licence (PL 102FG).

As at December 31st 2014, the Group recognised an impairment loss on intangible assets related to the Rind field, in an aggregate amount of PLN 13,823 thousand (NOK 27,640 thousand) (see Note 9.4).

Further, in 2014 the Group recognised an impairment loss on capitalised exploration expenses related to surveys performed within the PL 498 and PL 497 licence areas in the North Sea. The impairment loss on the licences was PLN 616 thousand (NOK 1,231 thousand) (see Note 9.4).

Lithuania

Following impairment tests, as at December 31st 2015 the Group recognised an impairment loss on assets comprising expenditure on seismic surveys carried out on UAB Manifoldas’ fields in the amount of PLN 10,027 thousand (see Note 9.4).

15.1.2 Crude oil and natural gas development and production licences 

Lithuania

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. 

The production operations are carried out by companies of the AB LOTOS Geonafta Group, comprising AB LOTOS Geonafta, UAB Genciu Nafta and UAB Manifoldas. The Group also holds interests in UAB Minijos Nafta, a joint venture.

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.

As at December 31st 2015, production licences held by companies of the AB LOTOS Geonafta Group (AB LOTOS Geonafta (Girkaliai, Kretinga and Nausodis fields), UAB Manifoldas (Vėžaičiai, Ližiai and Ablinga fields)) were tested for impairment.

The Group determined the recoverable amount of the tested assets as their value in use measured using the discounted future cash flows method.

Key assumptions underlying computation of the recoverable amount of the tested intangible assets in Lithuania as at December 31st 2015 were as follows:

• 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, at 10.1%, 
• production volumes were assumed to be in line with a competent person report prepared by Miller & Lents based on available current geological information, 
• capital expenditure was assumed to match the projected production volumes. 

The following crude oil price assumptions (USD/bbl) were adopted for the purposes of the estimates: 

• 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. 

As a result of the impairment tests, as at December 31st 2015 an impairment loss totalling PLN 52,419 thousand was recognised on production licences covering the Kretinga, Nausodis, Girkalai, Vezaiciai and Liziai fields; another impairment loss, of a total of PLN 6,314 thousand, was recognised on the property, plant and equipment comprising production infrastructure of the Ablinga and Liziai fields; see Note 13.1.3.

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 AB LOTOS Geonafta Group’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 crude oil price, -15%/+15% change in production volumes, and -15%/+15% change in the USD/EUR exchange rate.

The table below presents the estimated changes in impairment losses on assets of the AB LOTOS Geonafta Group depending on the change in key assumptions:

Factor	Change	Impact on impairment losses (PLN '000)
Crude oil and gas prices	+/- 15%	+ 39,969	- 40,011
Production volume	+/- 15%	+ 48,449	- 48,551
USD/EUR exchange rate	+/- 15%	+ 45,313	- 45,406
Discount rate	+/- 0.5%	- 3,448	+ 3,567

As at December 31st 2014, production licences held by companies of the AB LOTOS Geonafta Group (AB LOTOS Geonafta (Girkaliai, Kretinga and Nausodis fields), UAB Manifoldas (Vėžaičiai, Ližiai and Ablinga fields)) were tested for impairment.

The Group determined the recoverable amount of the tested assets as their value in use measured using the discounted future cash flows method.

Key assumptions underlying computation of the recoverable amount of the tested intangible assets in Lithuania as at December 31st 2014 were as follows:

• 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, at 10%,
• production volumes were assumed to be in line with a competent person report prepared by Miller & Lents based on available current geological information,
• capital expenditure was assumed to match the projected production volumes.

The following crude oil price assumptions (USD/bbl) were adopted for the purposes of the estimates:

• 2015–2018 – prices in line with the price assumptions for the available market scenario,
• 2019 and beyond − prices remaining stable on par with the 2018 level, adjusted for inflation.

As a result of the impairment tests, as at December 31st 2014 an impairment loss totalling PLN 100,604 thousand was recognised on production licences covering the Girkaliai, Kretinga, Vėžaičiai, Ližiai, and Ablinga fields; another impairment loss, of PLN 2,708 thousand, was recognised on the property, plant and equipment comprising production infrastructure of the Ablinga field; see Note 13.1.3 and Note 9.4.

15.2 Other intangible assets

PLN '000	Patents, trademarks and licences	Other	Intangible assets under development	Total
Gross carrying amount Jan 1 2015 (restated)	192,477	73,369	12,804	278,65
Purchase	-	155	12,210	12,365
Settlement of intangible assets under development	5,721	458	(6,179)	-
Exchange differences on translating foreign operations	-	(1,158)	-	(1,158)
Borrowing costs	-	-	52	52
Sale	-	-	(30)	(30)
Liquidation	(154)	(7,790) (1)	-	(7,944)
Other	(137)	(368)	(2)	(507)
Gross carrying amount Dec 31 2015	197,907	64,666	18,855	281,428
Accumulated amortisation Jan 1 2015 (restated)	91,219	25,888	-	117,107
Amortisation	9,816	5,812	-	15,628
Exchange differences on translating foreign operations	-	(485)	-	(485)
Liquidation	(152)	(627)	-	(779)
Other	-	6	-	6
Accumulated amortisation Dec 31 2015	100,883	30,594	-	131,477
Impairment losses Jan 1 2015 (restated)	7	8	9,033	9,048
Recognised	-	17	-	17
Used/Reversed	-	-	-	-
Impairment losses Dec 31 2015	7	25	9,033	9,065
Net carrying amount Dec 31 2015	97,017	34,047	9,822	140,886

PLN '000	Patents, trademarks and licences	Other	Intangible assets under development	Total
Gross carrying amount Jan 1 2014 (restated)	175,733	67,118	19,143	261,994
Purchase	-	2,440	15,341	17,781
Settlement of intangible assets under development	17,048	4,742	(21,790)	-
Exchange differences on translating foreign operations	-	(837)	-	(837)
Reclassification to non-current assets (or disposal groups) held for sale (1)	(114)	-	-	(114)
Borrowing costs	-	-	110	110
Sale	-	4	-	4
Liquidation	(40)	(38)	-	(78)
Other	(150)	(60)	-	(210)
Gross carrying amount Dec 31 2014 (restated)	192,477	73,369	12,804	278,650
Accumulated amortisation Jan 1 2014 (restated)	82,123	20,615	-	102,738
Amortisation	9,222	5,505	-	14,727
Exchange differences on translating foreign operations	-	(267)	-	(267)
Reclassification to non-current assets (or disposal groups) held for sale (1)	(86)	-	-	(86)
Sale	-	4	-	4
Liquidation	(40)	(21)	-	(61)
Other	-	52	-	52
Accumulated amortisation Dec 31 2014 (restated)	91,219	25,888	-	117,107
Impairment losses Jan 1 2014 (restated)	3	26	9,033	9,062
Recognised	4	-	-	4
Used/Reversed	-	(18)	-	(18)
Impairment losses Dec 31 2014 (restated)	7	8	9,033	9,048
Net carrying amount Dec 31 2014 (restated)	101,251	47,473	3,771	152,495

Other intangible assets comprise licences relating to technological processes, including licences for technologies used in the refinery, licences for fuel production, storage and trading, software licences, patents, trademarks and acquired CO₂ emission allowances.

15.3 Other information on intangible assets

The table below presents items under which amortisation of intangible assets was recognised:

PLN '000	Year ended Dec 31 2015	Year ended Dec 31 2014
Cost of sales	21,565	42,570
Distribution costs	572	530
Administrative expenses	18,420	14,447
Change in products and adjustments to cost of sales	(201)	(362)
Total	40,356	57,185

In 2015, borrowing costs capitalised under intangible assets under development were PLN 52 thousand (2014: PLN 110 thousand). As at December 31st 2015, borrowing costs capitalised under intangible assets under development were PLN 114 thousand (December 31st 2014: PLN 64 thousand).

As at December 31st 2015, intangible assets serving as collateral for the Group’s liabilities were PLN 135,528 thousand (December 31st 2014: PLN 155,525 thousand).

As at December 31st 2015, the Group’s future contractual commitments not disclosed in the statement of financial position and related to expenditure on intangible assets (fee for technical support control software) amounted to PLN 5,585 thousand. As at December 31st 2014, the Group’s future contractual commitments related to expenditure on intangible assets (software licences) amounted to PLN 552 thousand.