13. Property, plant and equipment
|PLN '000||Dec 31 2013||Dec 31 2012|
|Plant and equipment||4,728,815||4,244,449|
|Property, plant and equipment under construction||822,818||888,829|
|Exploration and evaluation property, plant and equipment||182,691||134,677|
Change in property, plant and equipment
|PLN '000||Land||Buildings, structures||Plant and equipment||Vehicles, other||Property, plant and equipment under construction||Exploration and evaluation property,
plant and equipment Total
|Gross carrying amount
Jan 1 2013
|Acquisition of Heimdal assets||-||-||339,772||-||-||-||339,772|
|Transfer from property, plant and equipment under construction||29,692||125,822||196,741||59,885||(427,614)||-||(15,474)|
|Contribution of assets for development of B-4 and B-6 fields to Baltic Gas Sp. z o.o. i wspólnicy sp.k. (1)||-||-||-||-||(2,363)||(48,287)||(50,650)|
|Reclassification to assets held for sale (2)||(923)||(23,556)||(21,676)||(1,717)||(29,273)||-||(77,145)|
|Exchange differences on translating foreign operations||-||27||(44,968)||(4,054)||(190,671)||(10)||(239,676)|
|Assets related to decommissioning of oil extraction facilities||-||(1,404)||265,345 (3)||-||11,995||-||275,936|
|Deconsolidation (LOTOS Tank Sp. z o.o.) (1)||-||(3,987)||(1,944)||(8,026)||(5)||-||(13,962)|
|Gross carrying amount
Dec 31 2013
(1) For more information on the transaction, see Note 2.
(2) Including assets of LOTOS Asfalt Sp. z o.o. associated with the Waterproofing Materials Production Plant and assets related to the YME field, see Note 17.
(3) Including an asset of PLN 265,709 thousand (NOK 496,004 thousand) related to decommissioning of oil and gas production facility following acquisition of the Heimdal portfolio, described in more detail in information on acquisition of interest in Norwegian production and exploration licences - Heimdal.
(4) Including PLN 180,429 thousand under liquidation of spent catalysts at Grupa LOTOS S.A.
|PLN ’000||Land||Buildings, structures||Plant and equipment||Vehicles, other||Property, plant and equipment under construction||Exploration and evaluation property,
plant and equipment
Jan 1 2013
|Exchange differences on translating foreign operations||-||1||(20)||(2,999)||-||-||(3,018)|
|Reclassification to assets held for sale (1)||(70)||(3,734)||(4,806)||(960)||-||-||(9,570)|
|Deconsolidation (LOTOS Tank Sp. z o.o.) (3)||-||(831)||(694)||(241)||-||-||(1,766)|
Dec 31 2013
Jan 1 2013
|Reclassification to assets held for sale (1)||(669)||(15,221)||(13,611)||(201)||(19,855)||-||(49,557)|
|Exchange differences on translating foreign operations||-||-||-||-||(125,779)||-||(125,779)|
|Used / Reversed||(179)||(6,849)||(5,040)||(91)||(732)||(48,672)||(61,563)|
Dec 31 2013
Dec 31 2013
(1) Including assets of LOTOS Asfalt Sp. z o.o. associated with the Waterproofing Materials Production Plant and assets related to the YME field, see Note 17.
(2) Including PLN 180,429 under liquidation of spent catalysts at Grupa LOTOS S.A.
(3) For more information on the transaction, see Note 2.
|PLN ’000||Land||Buildings, structures||Plant and equipment||Vehicles, other||Property, plant and equipment under construction||Exploration and evaluation property, plant and equipment||Total|
Jan 1 2012
|Transfer from property, plant and equipment under construction||29,782||115,937||84,385||32,758||(280,799)||-||(17,937)|
|Acquisition of control (AB LOTOS Geonafta Group) (1)||4||16||33,138||433||2,073||-||35,664|
|Exchange differences on translating foreign operations||-||(146)||(8,868)||(11,392)||(36,265)||(147)||(56,818)|
|Reclassification of exploration and evaluation property, plant and equipment (2)||-||-||4,396||-||-||(4,396)||-|
|Assets related to decommissioning of oil extraction facilities||-||11,823||(930)||-||56,506||-||67,399|
|Deconsolidation (AB LOTOS Geonafta Group) (1)||(2)||(8)||(25,287)||(308)||(1,037)||-||(26,642)|
Dec 31 2012
Jan 1 2012
|Exchange differences on translating foreign operations||-||(7)||(1,938)||(7,697)||-||-||(9,642)|
|Deconsolidation (AB LOTOS Geonafta Group) (1)||-||-||(6,541)||(92)||-||-||(6,633)|
Dec 31 2012
Jan 1 2012
|Reclassification to assets held for sale||-||-||-||(390)||-||-||(390)|
|Exchange differences on translating foreign operations||-||-||-||-||(12,764)||(119)||(12,883)|
|Reclassification of exploration
and evaluation assets (2)
|Deconsolidation (AB LOTOS Geonafta Group) (1)||-||-||(2,033)||-||-||-||(2,033)|
|Used / Reversed||(407)||(1,317)||(534)||(13)||(2,109)||-||(4,380)|
Dec 31 2012
Dec 31 2012
(1) Effect of the acquisition of control over UAB Manifoldas by AB LOTOS Geonafta. For more information on the transaction, see Note 2 to the consolidated financial statements for 2012.
(2) Exploration and evaluation property, plant and equipment relating to mineral resources with demonstrable technical feasibility and commercial viability of their extraction.
Property, plant and equipment used under finance lease
|PLN ’000||Dec 31 2013||Dec 31 2012|
|Gross carrying amount||Accumulated depreciation||Net carrying amount||Gross carrying amount||Accumulated depreciation||Net carrying amount|
|Plant and equipment, vehicles||198,737||47,379||151,358||199,202||31,316||167,886|
The Group uses finance leases to finance primarily rolling stock assets.
The table below presents items under which depreciation of property, plant and equipment was recognised:
|PLN ’000||Year ended
Dec 31 2013
Dec 31 2012
|Cost of sales||496,122||503,547|
|Change in products and adjustments to cost of sales||11,303||16,341|
As at December 31st 2013, borrowing costs capitalised as cost of property, plant and equipment under construction were PLN 43,009 thousand (December 31st 2012: PLN 43,211 thousand).
In 2013, borrowing costs capitalised as cost of property, plant and equipment under construction were PLN 1,842 thousand (2012: PLN 11,299 thousand).
As at December 31st 2013, the Group’s future contractual liabilities related to expenditure on property, plant and equipment undisclosed in the statement of financial position were PLN 582,966 thousand, and were mostly related to acquisition of a rig, as described in Note 37 (December 31st 2012: PLN 74,594 thousand).
As at December 31st 2013, property, plant and equipment serving as collateral for the Group's liabilities was PLN 7,877,463 thousand (December 31st 2012: PLN 7,150,215 thousand).
Exploration and evaluation assets
The Group incurs expenditures on exploration for and evaluation of mineral resources. In 2013, the Group incurred expenditure of PLN 76,745 thousand, chiefly on assets related to the B-8 and B-28 fields in the Baltic Sea ( 2012: PLN 65,264 thousand). In 2013, the value of cash flows related to expenditure on exploration and evaluation property, plant and equipment was PLN 74,360 thousand (2012: PLN 64,296 thousand), and the value of investment commitments related to exploration and evaluation assets was PLN 2,115 thousand as at December 31st 2013 (December 31st 2012: PLN 968 thousand).
Exploration and evaluation property, plant and equipment is carried until the technical feasibility and commercial viability of extracting the mineral resources are demonstrated. As at December 31st 2013, property, plant and equipment related to mineral resources with demonstrable technical feasibility and commercial viability of extraction was PLN 102,678 thousand (December 31st 2012: PLN 109,030 thousand), and depreciation of these assets in 2013 was PLN 6,786 thousand (2012: PLN 7,300 thousand). As at the end of the reporting period, this property, plant and equipment was not longer presented as exploration and evaluation property, plant and equipment, but as property, plant and equipment comprising production infrastructure, depreciated with the units-of-production method.
Assets from decommissioning and reclamation
The property, plant and equipment comprising production infrastructure and depreciated with the units-of-production depreciation method includes assets related to future costs of decommissioning of oil and gas facilities. As at December 31st 2013, the net value of assets from decommissioning of oil facilities was PLN 421,667 thousand (December 31st 2012: PLN 188,523 thousand), attributable chiefly to assets from the YME and Heimdal projects in Norway (see below).
Furthermore, under property, plant and equipment the Group recognises an asset for decommissioning of the underground pipeline used by Energobaltic Sp. z o.o. As at December 31st 2013, the value of the asset was PLN 3,653 thousand (December 31st 2012: PLN 4,045 thousand).
Impairment losses on property, plant and equipment
In 2013, the Group made a revaluation of its property, plant and equipment. The impairment losses totalled PLN 46,135 thousand (2012: PLN 969,823 thousand), while impairment loss reversals amounted to PLN 58.728 thousand (2012: PLN 1,527).
Given that no commercial hydrocarbon flows were recorded on the B-28 field, in 2013 LOTOS Petrobaltic S.A. decided to recognise a PLN 26,842 thousand impairment loss on the expenditure incurred in relation to the formation and well. Moreover, in 2013 LOTOS Petrobaltic S.A. reversed an impairment loss on assets associated with the B-4 and B-6 gas fields, which were contributed to Baltic Gas (see Note 2). Impairment losses were recognised for the full amount of expenditure on gas exploration operations conducted on the B-4 and B-6 fields, incurred in previous years by LOTOS Petrobaltic S.A.
In 2012, the Group tested the YME project for impairment, as a result of which it recognised an impairment loss of PLN 935.247 thousand . For detailed information on the YME project see below.
In 2013, LOTOS Paliwa Sp. z o.o. recognised an impairment loss on assets related to service stations in the amount of PLN 11,912 thousand. LOTOS Paliwa Sp. z o.o. determines the recoverable amount of property, plant and equipment related to the LOTOS service station network based on the value in use, using the discounted cash flow method. Future cash flows were calculated based on five-year cash-flow projections, prepared using budget projections for 2014 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 1.84% (2012: 1.94%) 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 2009–2020. LOTOS Paliwa Sp. z o.o.’s net weighted average cost of capital (WACC) was assumed at 7.16% (2012: 7.53%), 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 (an 8% 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 by REUTERS in November 2003 was adopted),
- volumes based on fuel consumption growth rate (a 5% 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 2013-2020, prepared using GUS, NBP and JBC reports (for gasolines), and based on GDP market consensus
As regards the calculation of the value in use of service stations, 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 exceeding its recoverable value to a significant extent.
In view of the slow pace of reaching the initially assumed sales volumes of finished products and the loss incurred on the Waterproofing Materials Production Plant operations, in 2012 LOTOS Asfalt Sp. z o.o. tested the assets for impairment by analysing the discounted future cash flows expected to be generated by the Plant in 2013 - 2017. Following the test, an impairment loss for the full amount of the assets, i.e. PLN 22,840 thousand, was recognised. The test was carried out based on the following assumptions: consistent growth of sales volumes by 35% in 2013 (relative to 2012) and 10% in 2014-2017 (on a year-on-year basis), taking into account an adjustment for expected inflation rate at 2.44% - 2.74% (in 2014-2017), and weighted average cost of capital of 11.17%. In 2013, following the sale of the assets LOTOS Asfalt Sp. z o.o. made a reversal of the impairment loss of PLN 8,000 thousand.
Interests in Norwegian production and exploration licences − YME
Property, plant and equipment under construction include expenditure incurred by LOTOS Exploration and Production Norge AS (“LOTOS E&P Norge AS”) on the acquisition of interests in Norwegian production licences and on the development associated with the interests in the YME field, in an amount of PLN 1,588m (NOK 3,207m).
The Group tested the YME project for impairment as at December 31st 2013. No impairment indicators were found.
The Group tested the YME field assets for impairment as at December 31st 2013 using the same methodology as the one used to test the assets for impairment as at December 31st 2012.
The test, carried out with the discounted cash flow method, was based on estimated values in use for LOTOS E&P Norge AS's interest in hydrocarbon reserves in the YME licences. The YME field impairment test was carried out assuming a +/-15%/bbl in crude oil prices relative to Brent crude prices as at December 31st 2013, a +/-15% change in the USD/NOK exchange rate, a +/-15% change in the YME field reserves, a weighted average cost of capital of 7.5%, and the 78% marginal tax rate (applicable in Norway). For the purposes of the test as at December 31st 2013 it was assumed that production from the field would be launched in 2018.
Based on such assumptions, as at December 31st 2013 the carrying amount of the assets related to the YME field was below the upper limit of the recoverable amount ranges determined, and hence no impairment loss was recognised on the tested asset as at the end of December 2013.
Further, as LOTOS E&P Norge AS's exit from the YME field project was being considered, the Group calculated the recoverable amount of the assets on the basis of their estimated fair value less cost to sell. For the purposes of determining the price that could be obtained for the interest in the YME field (realisable value), the value of the assets was calculated on the basis of the proved reserves of crude oil (2P category − proved and probable) and the price per unit of reserves in similar market transactions involving fields with comparable development status, taking into account the value of tax position. The realisable value thus determined confirmed the realisability of the YME field assets as presented in the consolidated financial statements as at December 31st 2013, which means that there was no need to recognise any further impairment.
As described in Note 35.1, on March 12th 2013, the operator of the YME field, Talisman Energy Norge AS (“Talisman,” "Operator”) and the supplier of the Mobile Operating and Production Unit (MOPU) to be operated on the YME field, Single Buoy Moorings Inc. (“SBM”), 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 existing contracts and agreements between the parties in connection with the YME project.
As at December 31st 2013, the then-aggregate impairment losses adjusting the value of expenditure on the YME project were PLN 1,051m (NOK 2,123m). As at December 31st 2013, the amount of expenditure on property, plant and equipment under construction related to the YME field, net of impairment, was PLN 537m (NOK 1,084m).
Taking into account the impairment losses on the YME project expenditure recognised in previous years, and the incurred tax losses that may be carried forward, in the consolidated statement of financial position as at December 31st 2013 the Group recognised a deferred tax asset of PLN 932m (NOK 1,882m). Given the fact that under the Norwegian tax legislation tax losses can be carried forward indefinitely, and that on December 30th 2013 the Group acquired interests in the Heimdal assets (including interests in producing fields), the Group believes that the deferred tax asset recognised as at December 31st 2013 is fully realisable at the amount disclosed in these consolidated financial statements.
Due to significant market volatility, in particular with respect to crude oil prices, the adopted assumptions might be subject to justifiable changes, and such changes may in the future cause a reduction of carrying amounts of assets associated with the YME field as the carrying amounts may exceed the assets' recoverable amount. Therefore, the Group points to a number of uncertainties as to the recoverable amount of the assets recognised in connection with the YME field, such uncertainties being related to:
- volatility of market prices of crude oil,
- the new PDO (plans for development and operation) for the YME field that is ultimately opted for,
- the estimated amount and market value of hydrocarbons recoverable from the YME field, dependent on the new PDO,
- the estimated fair value of tax assets taken into account in the impairment test of the YME project,
- the amount of reclamation commitments, including those assumed together with elements of the SBM subsea infrastructure, under the agreement of March 12th 2013 concluded between the YME Project Operator and SBM (see Note 35.1),
- date of production launch, if any, from the YME field,
- date and cost of MOPU removal from the YME field,
- volatility of the NOK/USD exchange rate,
- discount rates.
Acquisition of interests in Norwegian production and exploration licences − Heimdal
On October 18th 2013, LOTOS Exploration and Production Norge AS of the LOTOS Petrobaltic Group ("LOTOS E&P Norge AS") entered into an agreement with Centrica Resources (Norge) AS/Centrica Norway Limited ("Centrica", "Seller"), subsidiaries of Centrica Plc. of the UK, to purchase Heimdal assets on the Norwegian Continental Shelf. On December 18th 2013, LOTOS E&P Norge AS obtained the consent of the Norwegian authorities to finalise the transaction and on December 30th 2013 it delivered to the Seller a certificate confirming payment and creation of security in the form of a stand-by letter of credit for international transactions, for future liabilities related to decommissioning of the production infrastructure.
On December 30th 2013 ("acquisition date") all conditions precedent to the agreement were fulfilled and all material risks and benefits related to the ownership of the acquired Heimdal assets were transferred to LOTOS E&P Norge AS. The transaction is recognised in these consolidated financial statements as asset acquisition, in accordance with IAS 31 Interests in Joint Ventures.
The Heimdal assets comprise interests in 14 licences on the following fields in the central part of the North Sea:
|Heimdal||transmission infrastructure (HUB), exploration||PL036BS||5%|
|Trell Carve-out Area||exploration||PL102F, PL102G||10%|
|Frigg Gamma Delta||discovered||PL442||10%|
Under the licence, production activities are no longer being carried out on the Heimdal gas field (located 212 km north west of Stavanger), but the platform continues to operate as the centre for processing and distribution of gas coming from the Norwegian Continental Shelf. At present, given the central location of the field, its infrastructure is used to process gas from other neighbouring fields: Atla, Skirne, Vale and Huldra. It also serves as a distribution point for the transport of gas from the Oseberg Gas Transport. The Heimdal hub can process and transport gas representing approximately 15%-20% of Norway's gas exports, which makes Heimdal one of the key strategic points for gas exports from Norway to Central Europe and the UK. The Heimdal licence operator is Statoil Petroleum AS. The other interest holders are Total E&P Norge AS, Petoro AS and Centrica Norge. Production from the Atla, Skirne and Vale fields attributable to LOTOS E&P Norge AS's interest is approximately 5,000 boe daily and approximately 250,000 toe annually.
Gas and condensate are produced from the Skirne/Byggve, Atla and Vale fields. Frigg Gamma Delta, Fulla and Rind are new discoveries, which can be developed by 2020 or later. The Group also obtained access to six exploration licences. On the Fulla field, LOTOS E&P Norge AS is the operator in licences PL362 and PL035B, and a partner in the other licences.
Proven and probable (2P) recoverable volumes of gas (70%) and condensate (30%) from the interests acquired by the Group in the producing fields amount to 9m boe. 2C contingent resources in the discoveries attributable to LOTOS E&P Norge AS’s interest amount to 31m boe.
The contractual price for the interests in the 14 licences acquired in the Heimdal transaction was set by the parties at USD 175.8m as at January 1st 2013, 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 joint ventures on the Norwegian Continental Shelf require approval by the Norwegian Ministry of Finance. This requirement is imposed by the legislation governing crude oil taxation. The legislation also 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 partners of the joint venture. 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 purchase 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 Heimdal assets was partly financed with a bank loan, and the balance of the contractual price of USD 175.8m was 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 2013) to the actual date of finalising the transaction (the acquisition date, i.e. December 30th 2013), in the amount of USD 72.16m.
Given the high amount of the deferred tax asset recognised in LOTOS E&P Norge AS accounts, no income tax for 2013 will be paid on those cash flows and the Seller will recover income tax overpayment of NOK 278.9m, after assignment to LOTOS E&P Norge AS of cash flows of USD 72.16m, counted towards the contract price of USD 175.8m. Such settlement follows from the Norwegian tax regime and has no effect on the Group's financial result.
The total value of the acquired Heimdal assets as disclosed in the consolidated financial statements is PLN 710.2m (NOK 1,433.8m). The table below presents the effect of accounting for the acquisition of Heimdal assets in these consolidated financial statements:
|I. Property, plant and equipment||634.2||314.1|
|II. Intangible assets||303.6||150.4|
|Value of acquired Heimdal assets after pro and contra settlement, taking into account capitalised transaction costs and estimated future conditional payments (I + II)||937.8||464.5|
|III. Decommissioning asset||496.0||245.7|
|Total (I + II + III)||1,433.8||710.2|
|Settlement of acquisition price (A + B):||910.5||450.9|
|A. Price paid after pro and contra settlement (USD 175.8m - USD 72.16m)||631.6||312.8|
B. Tax resulting from pro and contra settlement, on cash flows generated in the transitional period (amount paid by Centrica to the Norwegian tax authorities, settled against deferred tax asset of LOTOS E&P Norge AS)
|Capitalised transaction costs (C + D):||27.3||13.6|
|C. Amount of conditional future payments as agreed||10.2||5.1|
|D. Capitalised transaction costs||17.1||8.5|
|E. Decommissioning provision||496.0||245.7|
The purchased property, plant and equipment comprise production equipment (plant and equipment). The remaining assets were classified as intangible exploration and evaluation assets.
Under property, plant and equipment the Group recognises an asset related to future costs of decommissioning of offshore oil facility of PLN 245,671 thousand (NOK 496,004 thousand). The value of the asset is dependent on the updated estimated value of the relevant provision.
The decommissioning 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 2014 to 2035, therefore the amount of future costs was determined by the Group at a 4.5% discount rate and a 2% inflation rate. For information on provisions for offshore oil and gas facilities on the North Sea, see Note 30.1.
To finance the acquisition of Heimdal assets, on December 11th 2013 LOTOS E&P Norge AS signed a USD 110m investment loan agreement. The total amount drawn under the loan is USD 105m and includes payments of interest on the deferred settlement with Centrica. The final loan repayment date is December 31st 2016.
The bank guarantee provided to the Seller, in the form of a stand-by letter of credit, secures LOTOS E&P Norge AS's liabilities related to decommissioning of depleted off-shore oil and gas facilities. The amount under the bank guarantee agreement, signed with PKO BP S.A. on December 11th 2013, is USD 25m.
Prospects for development of the B-4 and B-6 gas fields
As at December 31st 2012, the items “Property, plant and equipment under construction” and “Exploration and appraisal assets” included expenditure of PLN 593 thousand and PLN 48,672 thousand, respectively, incurred by the Group on gas exploration on the B-4 and B-6 fields in the Baltic Sea. As at December 31st 2012, impairment losses were recognised for the full amount of those assets. In 2013, pursuing further development of the B-4 and B-6 fields under an investment agreement between LOTOS Petrobaltic S.A. and CalEnergy Resources Poland Sp. z o.o., the Group reversed impairment losses on these expenditures in the amount of PLN 48,273 thousand and contributed the amount to Baltic Gas spółka z ograniczoną odpowiedzialnością i wspólnicy sp. k, a special purpose vehicle, in exchange for Baltic Gas shares acquired by the Group (see Note 2). Under the preparatory work schedule, seismics acquisition and selection of a preliminary field development concept are scheduled for 2013–2014. Upon completion of that stage, the partners will be able to make a final decision whether to pursue development of the B-4 and B-6 fields.