14.4.2. The main assumptions used in the impairment tests of assets as at 31 December 2021

Impairment tests for assets and shares were performed based on future, expected net cash flows (value in use), prepared on the basis of (i) macroeconomic assumptions and projections of financial results included in the Financial Plan of PKN ORLEN and the ORLEN Group for 2022, (ii) updated on based on IHS Markit, macroeconomic assumptions for oil prices and major refining and petrochemical products, updated on the basis of forward curves for gas and CO₂ emission allowances and electricity prices as well as (iii) reserves reports for Upstream segment assets. The net cash flows were discounted to their present value using discount rates reflecting current market estimates of the time value of money and the risks typical of the assets, shares and stocks being measured.

Net cash flows planned for the assets of the Energy segment

The ORLEN Group conducted impairment tests for the main energy assets using the income method based on the discounted value of estimated cash flows from operating activities (value in use), taking into account, i.a. the following assumptions:

• Macroeconomic assumptions applied in the ORLEN Group with regard to electricity prices, prices of hard coal and natural gas, capacity market rates for the Polish market, certificates of origin for energy and prices of carbon dioxide emission allowances. As regards prices of biomass the forecasts of the ORLEN Group companies using this raw material were applied.
• The number of free CO₂ emission allowances for the years 2022-2025 in accordance with the Regulation of the Minister of the Environment of the Republic of Poland.
• Replacement capital expenditure at a level ensuring the maintenance of the production capacity of the existing fixed assets, including expenditure on adjusting the levels of industrial emissions to the requirements of Directive 2010/75 / EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions and the executive decision EU Commission 2021/2326 on the conclusions of the best available techniques (BAT) published on 30 November 2021.
• Maintaining support for production from the existing renewable energy sources in the form of income from proprietary rights and taking into account for some installations won auctions for the sale of electricity from renewable energy sources and income from the FIT/FIP mechanism, in accordance with the Act of 20 February 2015 on renewable energy sources with its subsequent amendments.
• Revenues from the capacity market were adopted in accordance with the provisions of the Act of 8 December 2017 on the capacity market, as amended, and the rates were adopted on the basis of auctions held and won in 2018- 2021 and for years beyond the contracted period – on based on price paths.

Net cash flows planned for the assets of the Refining segment and the Petrochemical segment

The ORLEN Group carried out impairment tests for the assets of the Refinery and Petrochemical segments using the discounted future cash flows from operating activities (value in use).

The source of long-term macroeconomic forecasts for refining and petrochemical assets is IHS Markit and other auxiliary sources (forward curves, bank predictions, government agency analyses), taking into account the following assumptions:

• It is assumed that the next 2-3 years will be a period of rebound in global GDP, which will reach 4.5% in 2022. Vaccination successes and a powerful fiscal stimulus will drive global oil demand higher. The pandemic will have an impact on world GDP until 2024-2025, and then it will stabilize with an average annual growth of around 2.6%. An additional strong stimulus to the growth of European demand for petroleum products is their substitutability for natural gas.
• The refineries will achieve throughputs from 2019 in the period 2022-2023. By 2025, the global throughput will increase by 1 Mb/d, and by 2.3 Mb/d by 2033 compared to 2019, then it will start to decline. The COVID19 pandemic has accelerated rationalization efforts at refineries. European refineries will be under pressure of high environmental costs.
• It is assumed that the European Commission regulations concerning the functioning of the border tax, the so-called CBAM (carbon border adjustment mechanism).
• Projected Model Downstream Margin (MMD) based on current macroeconomic assumptions for 2022 at the level of approx. 8.7 USD/bbl. Maintaining low margins, also expected in the next two years, only from 2024 the margin returns to the historical average levels and in 2030 it reaches the level of 14.6 USD/bbl.
• Crude oil will still remain the main source of energy, and its maximum global consumption will take place around 2033. It is assumed that the energy transformation will accelerate, the share of alternative fuels will increase, vehicle propulsion changes, and technological innovations. In this situation, crude oil supplies will remain unchallenged, and potential periodic demand price pressures will be quickly alleviated by the flexibility of shale launch.
• According to the IHS forecast, the current high levels of Brent DTD crude oil prices will remain at 78 USD/bbl in 2022 to reach 75 USD/bbl in 2030. The average Brent DTD price level for 2022-2030 is approx. 70 USD/bbl.
• European gasoline demand is expected to return to 2015-2019 levels in a very short time as the market moves away from diesel. Crack on Gasoline margins (the difference between the petrol quotation and the oil price) are assumed to increase from 151 USD/t in 2022 to 159 USD/t in 2030, with an average level of 147 USD/t in 2022-2030.
• It is assumed that margins for ON will gradually improve as the world recovers from COVID-19. In Europe, the diesel passenger car fleet will continue to switch to alternative solutions due to the pressure to reduce emissions. In the longer term, it is expected that margins for ON will be supported by the use of diesel as bunker fuel after the introduction of IMO regulations in 2020. Crack margins on diesel oil (the difference between the diesel oil price and the oil price) are assumed to increase from 90 USD/t in 2022 to 110 USD/t in 2030, with an average level of 96 USD/t in 2022-2030.
• An increase in the demand for petrochemical products is expected, which results in an increased demand for Kerosene. In the long term, higher margins on petrochemical markets are assumed, and therefore higher demand for Kerosene. Kerosene prices are following rising Asian demand as the European surplus is located in the Far East. Demand in Asia is expected to increase significantly between 2025 and 2030, largely due to a lack of alternative raw materials to meet the high demand for plastics. The price of Kerosene is assumed to be from 645 USD/t in 2022 to 670 USD/t in 2030, with the prices falling in 2023-2024. The average trading level in 2022-2030 is 612 USD/t.
• In 2022, the spread on Ethylene vs Kerosene (the difference between the quotation of Ethylene and the quotation of Kerosene) was assumed at the level of 575 EUR/t, in 2030 at the level of 645 EUR/t. For the period 2022-2030, the average spread is 587 EUR/t.
• Between 2022 and 2025, world Propylene consumption is expected to continue to grow, driven mainly by emerging markets in Asia, notably China and India. Polypropylene will continue to drive global growth in propylene demand. In the long term, the spread on Propylene vs Kerosene is expected to increase (the difference between the quotation of Propylene and the quotation of Kerosene) resulting from the forecasted increase in demand in Europe and worldwide. In 2022, the spread on Propylene vs Kerosene was assumed at the level of 562 EUR/t, in 2030 at the level of 609 EUR/t. For the period 2022-2030, the average spread is 552 EUR/t.
• The financial flows for impairment tests include a gradual plan to reduce CO₂ emissions to the level of -20% in 2030 in accordance with the Orlen Group’s Decarbonisation Strategy.
• Replacement capital expenditures at a level ensuring the maintenance of the production capacity of the existing fixed assets.

The Group conducted impairment tests for major production assets based on a scenario analysis. Three scenarios were defined for CGU Refinery (PKN ORLEN, ORLEN Lietuva, ORLEN Unipetrol) and CGU Petrochemicals (PKN ORLEN, ORLEN Unipetrol): baseline, pessimistic and optimistic. The baseline scenario is based directly on the main macroeconomic assumptions of the Financial Plan 2022 and the updated macroeconomic forecasts for 2023-2030 described above. The pessimistic and optimistic scenarios were built on a single standard deviation of the historic Downstream Margin for 2012-2021 and on the estimated probability of the impact of the prices of CO₂ emission allowances on revenues from the sale of refining and petrochemical products.

For each of the scenarios, probability weights were established based on the normal distribution and expert judgment, in each case assigning a higher probability of the negative scenario materializing than the positive one, in order to maintain a conservative approach.

Net cash flows planned for the Upstream segment assets

The ORLEN Group conducted tests for impairment of the Upstream segment assets using the discounted future cash flow method from operating activities (for the Upstream segment in Poland, the basis was value in use, for the Upstream segment in Canada, the basis was fair value less costs to sell), taking into account the following assumptions :

• Reserves Reports for the Upstream segment assets located in Poland and Canada have been prepared by independent companies.
• Reserve Reports include current oil, gas and condensate price estimates.
• Investment expenditures at a level ensuring optimal efficiency at the assumed prices.
• Production volumes take into account the current assessment of the prospects of the exploited fields and exploration assets.
• Value in use was calculated for the Upstream segment assets located in Poland.
• For the Upstream segment assets located in Canada, the fair value less costs to sell was calculated (measurement level 3 as defined in IFRS 13 – Fair Value Measurement).

Net cash flows planned for Retail segment assets

The ORLEN Group conducted tests for impairment of the Retail segment assets using the discounted future cash flows from operating activities (value in use), taking into account the following assumptions:

• Fuel and non-fuel margin based on the assumptions of the Financial Plan of PKN ORLEN and the ORLEN Group for 2022.
• Replacement capital expenditure at a level that ensures the maintenance of the petrol station network.