INTEGRATED ESG
REPORT 2020

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PL

6.3.2 Provision for well decommissioning, restoration and environmental remediation costs

Accounting policies

Provision for future well decommissioning costs and contributions to the Extraction Facilities Decommissioning Fund.

The Group recognises a provision for future well decommissioning costs when the Group has the obligation to decommission wells after production is discontinued. When the provision for well decommissioning costs is recognised with respect to wells classified as tangible exploration and evaluation assets, the discounted amount of the provision is added to the amount of those assets, and after the production phase starts, it is depreciated over the expected useful life of the wells (accounting policies in Note 6.1.1). Any subsequent adjustments to the provision due to changes in estimates are also recognised as an adjustment to the value of the relevant item of property, plant and equipment. Adjustments to provisions resulting from changes of discount rates are taken to profit or loss. The amount of the provision for future costs of decommissioning of production and storage wells is adjusted for the amount of the Extraction Facilities Decommissioning Fund.

The Extraction Facilities Decommissioning Fund is created on the basis of the Mining and Geological Law, which requires the Group to decommission extraction facilities once their operation is discontinued. Contributions to the Extraction Facilities Decommissioning Fund are recognised in correspondence with other expenses. The assets accumulated in the Extraction Facilities Decommissioning Fund are kept in a separate bank account and may be used only to cover the costs of decommissioning of an extraction facility or its specific part, in particular the costs of:

  • Abandonment of and securing production, storage, discharge, observation and monitoring wells;
  • Liquidation of redundant facilities and disassembly of machinery and equipment;
  • Restoration of land and development of areas after completion of extraction activities;
  • Maintenance of facilities intended for decommissioning in an order ensuring safety of extraction facility operations.

The fund’s resources comprise restricted cash in accordance with IAS 7, presented – due to its long-term nature – under long-term assets.

Provisions for environmental liabilities

The Group recognises provisions for future liabilities for:

  • costs of identification and remediation of contamination of soil and aquatic environment in connection with the existence of a legal or customary obligation to perform these activities. The provision recognised for such liabilities reflects potential costs projected to be incurred, which are estimated at current prices and reviewed periodically.
  • compulsory costs of restoration of leased land/land plots prior to the transfer of the land back to the lessor after the end of the contract.

Changes in the amount of provisions resulting from changes in the discount rate (due to the passage of time) are recognised in profit or loss, while changes in the estimated restoration costs are remeasured to the value of the right-of-use asset. Changes in the amount of provisions resulting from changes in estimates due, for example, to early site restoration are treated as an adjustment to the value of the right-of-use asset and an increase in the amount of the provision up to the amount of costs actually incurred on site restoration.

Significant estimates

Provision for well decommissioning costs

The amount of the provision for well decommissioning costs is based on the estimates of future asset decommissioning and land restoration costs, which largely depend on the applied discount rate and the estimate of time when the outflow of cash is expected to take place.

The provision for well decommissioning costs is calculated based on the average cost of well decommissioning at the individual extraction facilities over the last three full years preceding the reporting period, adjusted for the projected consumer price index (CPI) and changes in the time value of money. The adoption of a three-year time horizon was due to the varied number of decommissioned wells and their decommissioning costs in the individual years.

Extraction Facilities Decommissioning Fund

Contributions to the Extraction Facilities Decommissioning Fund are made in the amount of 3% of the value of the annual tax depreciation of extraction property, plant and equipment (determined in accordance with the laws on corporate income tax).

Provisions for costs of landfill reclamation and environmental protection

The amount of the provisions is based on the estimates of future restoration costs, which largely depend on the applied discount rate and the estimate of time when the cash flows are expected to occur.

XLS

Note Provision for well decommissioning costs Provisions for environmental liabilities Provision for landfill reclamation Total
As at Jan 1 2019 2,008 115 67 2,190
Effect of amended IFRS 9 – (19) – (19)
Recognised provision capitalised in cost of property, plant and equipment Note 6.1.1. 441 – – 441
Recognised write-downs taken to profit or loss Note 3.3. 60 49 7 116
Other increases – Extraction Facilities Decommissioning Fund 2 – – 2
Used (35) – – (35)
Write-down reversal taken to profit or loss Note 3.3. (86) (28) (14) (128)
Exchange differences on translating foreign operations (1) – – (1)
Other changes – 5 – 5
As at Dec 31 2019 2,389 122 60 2,571
non-current 2,355 105 50 2,510
current 34 17 10 61
As at Jan 1 2020 2,389 122 60 2,571
Recognised provision capitalised in cost of property, plant and equipment Note 6.1.1. 706 – – 706
Recognised write-downs taken to profit or loss Note 3.3. 83 10 6 99
Other increases – Extraction Facilities Decommissioning Fund 1 – – 1
Used (28) – – (28)
Write-down reversal taken to profit or loss Note 3.3. (45) (16) – (61)
Exchange differences on translating foreign operations 23 – – 23
As at Dec 31 2020 3,129 116 66 3,311
non-current 3,094 92 55 3,241
current 35 24 11 70

With respect to the costs of decommissioning of wells and site infrastructure in Poland, in 2020 the discount rate applied to calculate the provision for well decommissioning was -1.22%, and resulted from a 1.25% rate of return on assets and an inflation rate assumed at the NBP’s continuous inflation target of 2.50% (as at the end of 2019, the discount rate was -0.45%, and resulted from the rates of 2.04% and 2.50%, respectively).

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6.3.1 Employee benefit obligations
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6.3.3 Other provisions

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