The Group has legal obligation to clean contaminated land – water environment in the area of production plants, generating installations, fuel stations, fuel terminals, power stations, warehouses and ash landfills and other land owned.

The Group estimated the provision for environmental risk related to the removal of pollution based on analyses provided by independent expert or own analysis taking into account the expected costs of remediation. Depending on the type of facility generating the pollution, the provision is estimated by taking into account the frequency of remediation, the scale of environmental pollution and the achieved ecological effects. The decommissioning of most facilities will take place in the more distant future and the precise requirements that will have to be met when the removal event occurs are uncertain. The level of uncertainty is burdened with a potential change in regulations concerning e.g. environmental protection, factors related to climate change, including an increased risk of extreme weather events or changes in average rainfall, as well as social expectations. Factors related to climate change and the ongoing energy transformation may additionally affect the postponement of the original deadlines for the implementation of remediation works as a result of shortening the useful lives of fixed assets and result in the need for earlier land reclamation or closure of wells or mines.

At the stage of exploration, development and extraction of hydrocarbon deposits, the Group recognises provisions for the cost of removal of drillings and supporting infrastructure. Within this category, the provisions also include costs of dismantling wind farms.

Provision for future well decommissioning costs is recognised when the Company 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. 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 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.

The line environmental provision mainly concerns entities operating in Poland, the Czech Republic, Lithuania, Norway, Germany and Canada. In the Czech Republic, obligations arising from pollution of soil-cum-water environment arising before the date of privatization of individual entities lies with the Czech state. In case of pollutants, arising after this date, this is the obligation of the Group companies.

The increase in the balance of the environmental provision by PLN 5,131 million compared to the previous year resulted mainly from the merger with the PGNiG Group and Grupa LOTOS.

For the calculation of provisions, the Group applied variable discount rates taking into account expected changes in interest rates on 10-year government bonds for individual countries. For the first 5 years, the applied discount rate takes into account the variable risk-free rate estimated on the basis of the 10-year bond yield curve.

From 2028, the risk-free rate was estimated as the sum of the inflation target for a given country and the 2007-2020 average of the spread between the historical 10-year bond yield and historical inflation, respectively for a given country.

As at 31 December 2022 and 31 December 2021, the average discount rate used to calculate the environmental provision amounted to: 4.43% and 3.90% (Poland), 2.83% and 2.27% (Canada), 2.41% and 3.06% (Czech Republic), 2.98% and 1.71% (Lithuania), 2.08% and 0.01% (Germany), 2.64% (Norway as at 31 December 2022). The discount rate was adjusted by the inflation effect.

The Group has analysed the impact of changes in financial discount rates by +/- 0.5 p.p. used to calculate the provision for decommissioning and environmental costs. If the discount rates applied had increased by 0.5 p.p., the value of the provision would have been lower by PLN 296 million, and if the discount rates had decreased by 0.5 p.p., the value of the provision would have been higher by PLN 345 million.