18.2. The impact of the military conflict in Ukraine on Group’s operating and financing activities
As at the date of this consolidated financial statement, the Group has not completed its analysis and quantification of possible impact of the military conflict in Ukraine on the Group’s future financial position, its operating activity, as well as its future financial results. This impact will depend both on the realization of possible scenarios for the war progress in Ukraine, as well as on actions that will be taken by governments of other countries, including maintaining or imposing new sanctions against Russia, and also limiting or terminating trade relations with Russia and optionally with countries supporting its military actions in Ukraine.
The outbreak of the war in Ukraine resulted in an intensive increase in the prices of crude oil and petroleum products. The prices of gas and electricity also rose in response to the risk of a possible shortage of supplies of these raw materials. Simultaneously, there was a sharp change in the quotations of CO2 emission allowances. At that time, the Group observed an increase in margins, with a simultaneous negative impact of an increase in the prices of raw materials, high volatility in the prices of CO2 allowances, as well as a weakening of the PLN currency on the valuation and settlement of derivatives owned by the Group.
In recent days, the macroeconomic situation has temporarily stabilised. There was a fall in oil prices in the world markets and in the prices of other raw materials. Moreover, the Polish zloty strengthened, which lost its value significantly as a result of the armed conflict in Ukraine and the increase in energy raw materials prices. In the Group’s opinion, the ongoing conflict in Ukraine will continue to affect the macroeconomic situation in the country and in the world and will cause volatility in the prices of refining and petrochemical products and raw materials, including oil, energy and CO2 emission allowances, with the direction of impact currently difficult to define on margins. 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 a possible 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 are currently very difficult to estimate.
As at the date of this consolidated financial statement, the Management Board has assessed that the ongoing military conflict in Ukraine has no impact on the assessment of the Group’s ability to continue its activity.
The Group considers that changes in the macroeconomic situation in Europe and around the world caused by the military conflict in Ukraine and the sanctions imposed on Russia, may affect certain assumptions and estimates made by the Group. Consequently, this may lead to significant adjustments in balance sheet value of certain assets and liabilities in subsequent reporting periods. However, at this stage, considering the situation in Ukraine has changed day by day, the Management Board is unable to reliably estimate the impact of these events on the Group’s future financial results.
As of now, no disruptions have occured in the operational processes applied in the Group, and any significant constraints have not taken place in the availability of raw materials, including crude oil, in any area of the Group’s operations.
The ORLEN Group’s terminals, storage warehouses and refineries are operating unchanged and fuel deliveries to all petrol stations are continuous all the time. The Group assesses that it disposes of the adequate raw materials stocks, including crude oil and fuels. In addition, The Group contracted extra deliveries of crude oil from other sources, ensuring the continuation of processing and sales without significant restrictions. With respect to purchases of gas, the Group is in the process of preparation the contingency plans relating to reorganise supply chains in the event of a shortage of supply from the East.
With regard to the ongoing war in Ukraine, the Group has established adequate contingency plans both in the event of cyber-attacks, the need to introduce immediate changes in the supply chain, as well as in the event of the lifethreatening of the Group companies’ employees when the military actions expand into other countries’ territories. Additionally, in the event of emergency situations, contingency procedures have been established to ensure continuity of critical infrastructure operations.
The Group has sufficient financial resources to enable executing its current liabilities as well as to continue its planned investment and acquisition projects. In the Group opinion, the ongoing conflict in Ukraine does not affect the risk changing in respect of the guarantees granted as at 31 December 2021. The observed dynamic changes in CO2 emission allowance prices and the depreciation of PLN currency have an impact on the current portfolio of derivative transactions held by the Group. The Group monitors the progress of the events on an ongoing basis and adjusts activities on the current transactions portfolio to changing market conditions to reduce their negative impact on the Group’s liquidity situation and its results. As a result of the increased demand for working capital and in order to supplement security deposits, the Group used additional funds under a syndicated loan agreement.
The Group also performed a detailed analysis of sales which is executed on the Ukrainian and Russian markets. Based on the performed analysis, due to the low volume of sales in these countries (a share of less than 2% of the Group’s sales revenue) and an immaterial balance of receivables on the balance sheet date from entities established in these countries, the Group has not identified a significant increase in the risk of insolvency of receivables reported as at 31 December 2021.
Moreover, due to ongoing war in Ukraine, the subsidiaries from ORLEN Group have actively engaged in pro-social activities in assisting both refugees arriving in Poland from across the eastern border and those fighting in Ukraine.
The Group continuously monitors the progress of the events in Ukraine and adjusts its operations to changing market conditions. Nevertheless, in the event of continuing military conflict in Ukraine and the realisation of negative scenarios of the war’s impact on the global economic situation, this could have a negative impact also on the Group’s operations, both on the organisational and liquidity side.