6.1.1.1. Provisions related to property, plant and equipment (including the provision for well decommissioning 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 and makes contributions to the Extraction Facilities Decommissioning Fund.
The provision for well decommissioning costs is recognised when the Group has the obligation to properly decommission and abandon 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 any unused contributions to 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;
- Reclamation 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 assets are presented under non-current assets in the statement of financial position, as other assets.
Material 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 reclamation 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% to 10% of the value of the annual tax depreciation of extraction property, plant and equipment (determined in accordance with income tax laws).
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| Provision for well decommissioning costs | 2016 | 2015 | |
|---|---|---|---|
| At beginning of reporting period | 1,573 | 1,608 | |
| Recognised provision capitalised in the cost of property, plant and equipment | 62 | 143 | Note 6.1.1. |
| Recognised provision taken to profit or loss | 37 | 39 | Note 3.3. |
| Other increases – Extraction Facilities Decommissioning Fund | 2 | 3 | |
| Used | (20) | (29) | |
| Provision reversal taken to profit or loss | (23) | (173) | Note 3.3. |
| Exchange differences on translating foreign operations | 30 | (18) | |
| At end of reporting period | 1,661 | 1,573 | |
| – non-current | 1,641 | 1,540 | |
| – current | 20 | 33 |
With respect to the costs of decommissioning of wells and site infrastructure in Poland, in 2016 the discount rate applied to calculate the provision for well decommissioning was 1.04%, and resulted from a 3.57% rate of return on assets and an inflation rate assumed at the NBP’s continuous inflation target of 2.5% (as at the end of 2015, the discount rate was 0.48%, and resulted from the rates of 2.99% and 2.5%, respectively).
