The outbreak of the war in Ukraine significantly deepened the shortages of natural gas, hard coal, crude oil and liquid fuels that appeared on the global markets of these commodities already at the beginning of the 4th quarter of 2021. Subsequent sanctions imposed on the import of hydrocarbons from Russia resulted in the initial period an intensive increase in the prices of crude oil and petroleum products. The prices of gas and electricity also rose. At the same time, in the 12-month period of 2022, there was a very high volatility in the quotations of CO2 emission allowances.
Since the beginning of the war the Group observed also an increase in refining margins caused mainly by the insufficient supply of fuels in relation to the demand, resulting from the structural shortage of refining capacities in the world, strongly reduced after the outbreak of the pandemic.
Dynamic changes in the macroeconomic environment and regulatory changes led to the weakening of the PLN currency in the 12-month period of 2022 and thus affected on the valuation and settlement of derivative instruments owned by the Group throughout the presented period.
In the Group's opinion, the ongoing conflict in Ukraine will continue to affect the macroeconomic situation in Poland and in the world and will cause volatility in the prices of refining and petrochemical products and raw materials, including oil and gas, energy and CO2 emission allowances and currency quotations, with the direction of impact on margins currently difficult to define. As a consequence, this may lead to a further increase in inflation and interest rates, which will translate into the economic situation in the countries in which the Group operates, including slowdown in economic growth or even a recession. On the other hand, the scale and impact of the war in Ukraine on the macroeconomic situation and, consequently, the future financial situation of the Group, its operating activities, as well as its future financial results are currently very difficult to estimate. This impact will depend both on the implementation of possible scenarios for the further course of the war in Ukraine, as well as on the actions that will be taken by the governments of other countries, including the maintenance or imposition of new sanctions on Russia, as well as the continuation of restrictions in trade relations with Russia and possibly countries supporting its military operations in Ukraine.
The description of the Group's achievements and factors having a significant impact on the financial data presented by the Group as at 31 December of 2022 is presented in note 9.
So far, there have been no significant disruptions in the operational processes carried out within the Group, and there were no significant restrictions on the availability of raw materials, including crude oil, in any of the Group's operating areas.Terminals, storage depots and refineries in ORLEN Group operate in the same scope, and fuel deliveries to all filling stations are carried out all the time. The Group believes that it has adequate stocks of raw materials, including crude oil and fuels to ensure the continuity of production processes. In addition, the Group secured additional supplies of crude oil from alternative sources. Since the outbreak of the war in Ukraine, ORLEN has given up importing crude oil by sea and finished fuels from Russia. From the beginning of February 2023, after the contract with Rosneft expired, Russian oil supplies covered only about 10 percent. the Company's demand for this raw material.These were only pipeline deliveries for which international sanctions had not been introduced. At the end of February 2023, the Russian side suspended supplies via the Przyjaźń pipeline to Poland, and therefore ORLEN currently does not receive crude oil from Russia. Recently, the Company has been taking intensive steps to diversify its portfolio and deliveries to the refinery can only be made by sea. Currently, crude oil is supplied from the North Sea, West Africa, the Mediterranean basin, as well as the Persian and Mexican Gulfs. An important partner in the import portfolio of this raw material is Saudi Aramco, with whom ORLEN concluded a strategic contract for the supply of crude oil in 2022. Thus, the suspension of REBCO oil deliveries from Russia will not affect the supply of the Company's Polish customers with the Company's products, including gasoline and diesel oil. The Company monitors and forecasts crude oil operating inventories on an ongoing basis and verifies the assumptions for the operating plan. Purchasing decisions are made on the basis of the contracted volumes of deliveries and the planned levels of processing, in order to secure the continuity of production processes with the assumed structure of the raw material in subsequent periods and to maintain the security of product supply.
The Company is also subject to numerous obligations resulting from the Act of 16 February 2007 on stocks of crude oil, petroleum products and natural gas and the rules of conduct in situations of threat to the fuel security of the state and disturbances on the oil market and fully meets the requirements regarding mandatory stocks of crude oil and fuels. The volumes of mandatory stocks are controlled by national regulatory authorities and may be placed on the market (or processed into products in the case of crude oil) only in response to supply shortages/disruptions or market crises, pursuant to a government decision/authorisation or as a result of a stock release decision by the International Energy Agency (IEA).
Additionally, the Group is taking intensive steps to increase oil imports to Czech refineries from directions other than Russia. In particular, the Company is in talks with the Czech government on the modernization of TAL, IHL and Adria oil pipelines and thus reducing dependence on oil imports from Russia. Currently, pipelines that deliver oil to the Czech Republic are still excluded from the sanctions due to the limited possibilities of alternative supplies.
Considering the above, in the period of 12 months after the balance sheet date, the Group does not identify the risk of shortages of crude oil operating inventories.
Nevertheless, the Group believes that restrictions on oil supplies from the Russian direction has affect the Group's operating activities and financial results. Therefore, the estimates of cash flows being the basis for impairment tests in the Refining and Petrochemical segment take into account the effect of limited availability of REBCO crude oil and its substitution with more expensive available crude oil, which translates into higher production costs. More details in note 14.4.
In connection with the merger of ORLEN and PGNiG on 2 November 2022, ORLEN as PGNiG's legal successor, monitors the situation regarding the implementation of natural gas supplies to the Polish transmission system on an ongoing basis. The Company started the heating season with natural gas storage in Poland in full nominal capacity of available installations. Thanks to the reserved transmission capacity, ORLEN can supply natural gas from various directions, including the LNG Terminal in Świnoujście (shipments mainly from the United States), Lithuania, as well as via the Baltic Pipe gas pipeline from the Norwegian Continental Shelf. An important source of natural gas is also extraction from domestic deposits. Depending on the balancing needs, the ORLEN Group makes reservations for additional transmission capacities on interconnectors and supplementary gas purchases. The Group is also investing in its own LNG tankers, which will provide the Group with effective transport of liquefied gas to Poland and will strengthen the company's position on the global LNG market.
The suspension of supplies of Russian gas to Poland in April 2022 accelerated the diversification of imports and thanks to the quick and effective reorganization, the Company ensured the safety of Polish recipients of this raw material from various directions. The Company expects 2023 to be the first full year without gas imports from Russia.
As at the date of preparation of these consolidated financial statements, gas transmission both to the Company's customers and to the ORLEN Group complies with the reported demand. In addition, from the end of 2021, ORLEN additionally implemented technological measures to reduce the dependence of the main plant in Płock on the availability of natural gas. In addition, through membership and active participation on the Polish Power Exchange and the possession of a portfolio of OTC contracts, the Company has a wide range of purchasing alternatives.
In connection with the ongoing war in Ukraine, the Group has developed appropriate contingency plans in the event of cyber attacks, the need to introduce immediate changes in the supply chain, and in the event of a threat to the lives of employees of the Group's companies in the event of expansion of military operations to the territories of other countries. Additionally, procedures in the event of emergency situations have been developed to ensure the continuity of the critical infrastructure. The Group has sufficient financial resources to enable it to settle its current liabilities and to continue planned investment and acquisition projects.
Moreover, the Group constantly adjusting its derivative transactions portfolio to the changing market conditions in order to reduce their negative impact on the liquidity situation and the Group's results.
In the opinion of the Group, the ongoing conflict in Ukraine does not change the risk with regard to the guarantees issued as at 31 December 2022. The Group has made a detailed analysis of sales on the Ukrainian and Russian markets.
The Group has no subsidiaries, jointly controlled entities or associates in Russia and Belarus. As at 31 December 2022, the Group did not have any significant assets located in Russia, Belarus or Ukraine, and the sales volume in these countries is immaterial (less than 2% share in the Group's sales revenues).
Despite the ongoing conflict in Ukraine and the related volatility in the markets and macroeconomic situation, in 2022 the Group did not observe a significant deterioration in repayment capacity or an increase in the number of bankruptcies or restructuring among its clients. Due to the effective management of trade credit and debt collection, the Group believes that the risk of non-payment of receivables by contractors has not changed significantly, and the repayment of receivables shown in the balance sheet as at 31 December 2022, which are due in the coming months, will remain at a materially unchanged level. In connection with the above, as at 31 December 2022, the Group did not identify any reasons to modify the assumptions adopted to assess the expected credit loss in terms of the potential need to take into account an additional element of risk related to the current economic situation and forecasts for the future.
The Group analyses the situation on the markets on an ongoing basis and the incoming signals from contractors that may indicate a deterioration of the financial situation and, if necessary, will update the adopted estimates for the ECL calculation in subsequent reporting periods.
The Group monitors the developments in Ukraine on an ongoing basis and adjusts its activities to the changing market conditions. Nevertheless, in the event of a protracted armed conflict in Ukraine and the implementation of negative scenarios of the war impact on the global economic situation, it may also have a negative impact on the Group's operations, both in terms of organization and liquidity.
The ORLEN Group assumes that Russia's invasion of Ukraine may affect significant estimates and assumptions made by the Management Board in subsequent periods, in particular such as:
- prices and supply of raw materials: crude oil, gas, electricity;
- changes in prices of CO2 emission allowances;
- raw material optimization due to the high price and volatility of supply;
- prices and margins of refinery and petrochemical products;
- exchange rates, mainly EUR and USD;
- ratios of the expected rate of return on WACC investments;
- inflation rates and the level of interest rates.
These assumptions will mainly affect the models in relation to future expected cash flows, as well as the method of calculating the discount rates used to estimate the value in use in impairment tests of fixed assets. These assumptions will also affect future expected cash flows in the scenarios developed by the Group.
Changes in the assumptions regarding inflation rates and the level of interest rates will also affect the estimates of the provisions created in the long-term part, as well as the calculation of the marginal interest rate for the valuation of lease liabilities.
Assumptions regarding oil prices as well as prices of refinery and petrochemical products will affect the Group's estimates of the net realizable value of inventories.
In addition, changes in the prices of raw materials, CO2 emission allowances, margins on products and fluctuations in exchange rates will have a direct impact on the operating profit generated by the Issuer, including the valuation and settlement of derivatives held by the Group.
In addition, the assumptions made with regard to macroeconomic data, such as the dynamics of Gross Domestic Product, inflation rate, or unemployment rates, may make it necessary to change the estimates of the expected credit loss for the Group's trade receivables and to include an additional element in the calculation of the expected credit loss risks related to the economic situation and forecasts for the future.
Details of the assumptions regarding the above parameters adopted by the Group as part of the cash flow forecasts used in the impairment tests of non-current assets carried out as at 31 December 2022 and the sensitivity analysis in relation to selected assumptions are presented in note 14.4.
When making assumptions and estimates, the Group relied on rational and factually supported assumptions reflecting the most appropriate assessment of the Management Board regarding all economic conditions that may occur in the foreseeable future. Nevertheless, due to the fact that the estimates adopted by the Group are subject to high uncertainty, there is a significant risk that the balance sheet values of the assets and liabilities described above, which are most affected by the adopted assumptions, may change significantly in subsequent reporting periods. Since the outbreak of the war in Ukraine, high uncertainty and unpredictability of price changes have persisted in commodity markets. This is due both to the unpredictability of the further course of the war, subsequent sanctions imposed on Russia and their effects, and retaliation from Russia. Under these conditions, many international institutions withheld their forecasts. They were replaced by conditional scenarios, limited to the leading commodity markets, such as oil, and differing in the scale and effectiveness of sanctions on Russian exports of fossil fuels, which, however, due to high uncertainty, cannot be assigned a reasonable level of probability of implementation.
