6.3.2 Provision for well decommissioning, restoration and environmental remediation costs

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.

The Group recognises provisions for future liabilities for:

• costs of identification, reclamation 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, reclamation and remediation 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, reclamation and remediation costs are remeasured to the value of the asset to which the provision relates. 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.

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.

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).

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.

With respect to the costs of decommissioning of wells and site infrastructure in Poland, in 2021 the discount rate applied to calculate the provision for well decommissioning was 0.94%, and resulted from a 3.46% rate of return on assets and an inflation rate assumed to equal the NBP’s continuous inflation target of 2.50% (as at the end of 2020, the discount rate was -1.22% as the product of 1.25% and 2.50%, respectively).