The ORLEN Group conducts ongoing monitoring and risk assessment and takes steps to minimize its impact on the financial situation.
GRI Disclosures:
Capitals:
In 2021, the organisation and underlying principles of the Enterprise Risk Management System did not change relative to the previous year.
Based on its Enterprise Risk Management Policy and Procedure, the ORLEN Group monitors and assesses its risk exposures on an ongoing basis and takes steps to minimise their probability and impact.
As required by these regulations, the Financial Control, Risk Management and Compliance Office was established at PKN ORLEN S.A. to coordinate the enterprise risk management (ERM) processes across all levels of the organisation. The Management Boards of all ORLEN Group companies are responsible for risk management at their respective companies.
The Enterprise Risk Management System is a tool used to support effective delivery of the ORLEN Group’s operational and strategic objectives. It provides information on any identified risks and supports effective risk management.
Risk assessment by business areas in PKN ORLEN and the ORLEN Group companies is carried out periodically as part of risk self-assessment processes and testing of control mechanisms. Its key goal is to update the risk assessment, taking into account the verification of the adequacy and effectiveness of control mechanisms. It is the responsibility of process and risk owners based on their position and scope of responsibility.
In the risk assessment, the materiality of each risk is determined under three scenarios:
Once the risk assessment and risk controls testing processes are completed, the Company’s Management Board and Supervisory Board receive a report highlighting risks assessed as key by the business segments.
Risks at PKN ORLEN S.A. and other ORLEN Group companies are defined based on a common model, and further detailed at the level of individual business processes or strategic objectives.
In 2021, as part of an annual risk self-assessment process and risk controls tests at PKN ORLEN S.A., 536 risks were assessed based on tests of 1 002 controls in 164 business processes. The ORLEN Group companies evaluated 191 risks and tested 660 controls across 95 processes.
In 2021, the Enterprise Risk Management system covered the following entities: PKN ORLEN S.A., Anwil S.A., ORLEN Lietuva Group, Unipetrol Group, ORLEN Deutschland GmbH, ORLEN Paliwa Sp. z o.o., and ORLEN Centrum Usług Korporacyjnych Sp. z o.o.
In the Enterprise Risk Model adopted by the ORLEN Group, all identified risks are classified into the following categories:
Ensuring appropriate mechanisms for continuous monitoring of hazard assessments. Implementation of uniform requirements for contractors and subcontractors in line with ORLEN Group Safety Standard No. 9. Using a dedicated IT tool to support project management. Regular review of the market for selected crude grades in terms of their availability and purchase options Checking and confirming on a case by case basis the economic viability of purchase transactions not covered by contracts. Regular checks of the production balance verification process and the level of balance differences. Checking and monitoring the correctness of retail price changes entered into systems and the prices displayed on price totems at PKN ORLEN S.A. service stations. Ensuring uniform data formats for corporate planning and preparing precise work schedules.
Risks/processes
Risk description
Risk mitigation methods
STRATEGIC RISKS
Assumptions
Regular checks of the validity of and monitoring of key strategic objectives against the changing environment (regulations, market, key suppliers, etc.)
Division of responsibilities
High degree of employee specialisation, appropriate delegation of duties and responsibilities by precisely defining their scopes
New regulations
Participation in public consultations on draft legislation to limit the risk of unfavourable regulations coming into force.
Workplace accidents and other hazards
Oversight and management of contractors by implementing work safety monitoring tools.
PROJECT RISKS
Budget overruns
Regular monitoring of contractor’s activities and potential schedule delays Regular monitoring of actual costs vs budget.
Schedule delays
Ongoing supervision of progress of work, assessment of progress against project milestones, and ensuring work completion.
Changes to project scope
Regular analysis of the project environment Possibility to change the project scope if circumstances so require Review of planned and completed work included in the project scope.
Division of responsibilities
Development and implementation of a methodology for division of responsibilities among the project team to avoid conflicts of interest Proper allocation of human resources during project preparation and implementation .
Systems
Identification of alternative IT systems at the project planning stage or testing of other systems to enable project implementation.
PROCESS/OPERATIONAL RISKS
Supplies
Regular monitoring of deliveries made by land and sea Using dedicated statistical and analytical tools, and analysing industry and news sites.
Conducting the supplier selection process in keeping with applicable procedures and documents (market research, lead time analysis, periodic supplier evaluation, etc.) Review of market conditions in terms of availability of required services and feedstocks and their prices.
Putting internal procedures in place enabling effective emergency response (direct purchases of services and feedstocks) Monitoring the frequency and quality of production reports and their delivery to organisational units requiring such reports.
Production
IT system in place supporting overhaul and maintenance planning for the Płock production plant Review of the preparation and approval of maintenance shutdown plans.
The area responsible for production balancing has tools enabling it to implement the balancing process in an optimal way The procedures and processes in place specify the responsibility, scope and time frames for providing production balancing input data.
Regular monitoring and review of initiatives based on relevant expertise to ensure that projects offering the greatest potential (efficiency gains) are implemented Checking compliance of the project’s business rationale with applicable regulations.
Distribution and logistics
Periodical checking of the levels of pollution (contamination) with petroleum products at fuel terminals Oversight of air measurements in accordance with legal requirements.
Regular monitoring of the emergency stock levels Preparation of regular stock volume reports and delivering them to all units concerned.
Periodic inspections of the logistics infrastructure Regular monitoring of product inventory and planning for complementary shipments Checking the correctness of the secondary logistics scheduling process.
Retail
Pricing policy setting the rules of cooperation with trading partners and systemic mechanisms put in place to prevent any irregularities Checking the parameters of contracts with fleet customers for correctness before entering them in the system and checking customers’ purchasing potential Regular verification of the correctness of the negotiated price terms.
Checking the applied ethical standards and knowledge of the Code of Ethics, and investigation of any indications of fraud or breach of ethical standards Regular inspections of service stations and fuel terminals.
Dedicated price management tools ensuring an effective pricing policy
Optimisation of the food and store range offered at service stations.
Regular quality control inspections at service stations.
Wholesale
Regular monitoring of performance against sales and production targets with the assistance of wholesale and supply chain management teams.
Negotiation of commercial terms and execution of contracts as per the powers of attorney in place There is a formal process in place for contract execution and issuing opinions on contracts Keeping up-to-date records of long-term contract negotiations.
Making credit decisions based on a financial analysis model Regular monitoring of past due receivables and collection of debt in accordance with the Trade Credit and Debt Collection Management Policy.
Finance 1
prices of CO2 emission allowances, risk related to commodity prices in cash-and-carry arbitrage transactionsMarket risk management policy and hedging strategies defining the rules for measuring individual risk exposures, parameters and time horizons of hedging against particular risks, and the applied hedging instruments.
Short-term liquidity management policy defining the rules for reporting and consolidation of liquidity at PKN ORLEN S.A. and other ORLEN Group companies The ORLEN Group pursues a policy seeking to diversify its financing sources and uses diverse instruments to effectively manage its liquidity position.
A bank’s short-term credit rating Short-term liquidity management policy, funding sources diversification policy, and tools for effective liquidity management.
Customer solvency and creditworthiness assessment
Management based on the adopted trade credit and debt collection management policy and procedures.
Laws and regulations 2
Monitoring of regulatory changes in countries where the ORLEN Group operates and active participation in legislative processes.
Corporate management
Having a procedure in place for managing logical access to IT systems, including authorisation of requests for the assignment or modification of user privileges, limited access to the operating system, database and hardware layers Checking the effectiveness of cyber security tools Complex password security level for IT resources and corporate applications Checking authority levels on an ongoing basis.
Periodic analysis and updates of operational planning models and regular monitoring of the implementation of the operational plan.
1) For detailed description of the financial risks as well as the methods applied to measure, manage and hedge the risks, see Section 16.5 of the Consolidated Financial Statements for 2021.
2) For a discussion of the most important legislation governing the operation of the oil sector, see Section 4.4.3. of the `Management Board Report on the Operations of ORLEN Group and PKN ORLEN S.A. fort he Year 2021`.
The management of climate change risks and opportunities falls within the remit of the President of the Management Board, who is the direct superior of the Executive Director for Strategy, Innovation and Investor Relations, overseeing the work of the Sustainable Business Development Department. In 2021, the ORLEN Group continued work on scenarios for the transition (regulatory) risks and physical climate change risks, taking into account the dual materiality perspective. The analyses led to the initial identification of transition risks and physical risks in the short and long term. The activities will be continued in the next years.
See the `Climate change risks` section for more information on:
Changes in Polish and EU regulations having an impact on the ORLEN Group’s operations and results:
The Act on Biocomponents and Liquid Biofuels of August 25th 2006 (as amended) sets out the obligations for the placing on the market of biocomponents and biofuels (NIT), imposed on producers and importers of transport fuels. In the first place, the Act includes a requirement to achieve the National Indicative Target (“NIT”), i.e. to ensure the required minimum share of biocomponents in the total volume of liquid fuels and biofuels, both sold on the market and used for the operator’s own needs, in a given calendar year. Failure to achieve the NIT is subject to a penalty calculated on the basis of the formula set out in the Act. The minimum share of biocomponents in a given calendar year is: in the case motor gasolines – 3.2% in 2020–2022, and in the case of diesel oil – 4.95% in 2021; 5% in 2022 and 6.2% in subsequent years. From 2015 onwards, only those biocomponents which meet the criteria of sustainable development set out in the EU and Polish laws may be used to fulfil the NIT obligation. The NIT for 2021–2024 is as follows (base level): 1) 8.7% for 2021; 2) 8.8% for 2022; 3) 8.9% for 2023; 4) 9.1% for 2024. The Act defines conditions under which NIT may be reduced by applying a reduction factor of 0.82 in 2020–2022, and provides for the option to discharge the NIT obligation by paying an emissions charge calculated on the basis of the formula set out in the Act, subject to the achievement of the base level of the NIT in 80% in 2020−2022 and in 85% in subsequent years.
The Act on Fuel Quality Monitoring and Control System of August 25th 2006 (as amended) sets out the quality requirements for fuels transported, stored and placed on the market, including at service stations, and provides for penalties for failure to comply with the quality requirements. The Act also obliges manufacturers and importers of transport fuels to reduce the emission intensity ratio of fuels used in transport relative to the 2010 reference emissions level – the National Reduction Target (NRT). The minimum annual emission reduction is 6%. Failure to achieve the NRT is subject to a penalty calculated on the basis of the formula set out in the Act. The Act provides for the option to achieve the NRT jointly with other entities engaging in the production or imports of low-carbon fuels (LPG, CNG, LNG) to Poland, or by purchasing Upstream Emission Reduction (UER) certificates, and from 2021 onwards by paying an emissions charge calculated on the basis of the formula set out in the Act, subject to the achievement of the minimum NRT level in at least: 1) 4% in 2021; 2) 4.1% in 2022;3) 4.5% in 2023; 4) 5% in 2024.
Emergency stocks – Producers and traders are required to pay a stocks charge for gradual reduction in the amount of physical stocks they are required to hold. Poland: fulfilment of the physical stocks target – from December 31st 2017: 53 days, the stocks charge maintained at its current level (PLN 43/t of oil equivalent and PLN 99/t of LPG). Supply security stocks are held partly by producers/traders (emergency stocks) and partly by the Governmental Strategic Reserves Agency (agency stocks). Czech Republic: emergency stocks are maintained by a state agency at a level of 90 days’ net imports of crude oil and are financed from the state budget. Lithuania: maintaining stocks equivalent to the higher of 90 days’ average daily net imports or 61 days’ average daily domestic consumption. The amount equal to at least 30 days’ average daily domestic consumption is accumulated and maintained by the state agency as earmarked stocks, with the balance held by businesses.
The Act Amending the Value Added Tax Act and Certain Other Acts (the so-called ‘fuel package’) of July 7th 2016 and the Act Amending the Energy Law and Certain Other Acts (the so-called ‘energy package’) of July 22nd 2016, which introduced a number of changes to the regulation of the liquid fuel market in Poland, including new rules regarding VAT settlements on liquid fuel imports to Poland, and linked tax requirements with licence requirements.
The Act on the Monitoring System for the Carriage of Goods by Road and Rail and on Fuel Oil Trade of March 9th 2017. The purpose of the Act is to further curtail the informal fuel trade in Poland, and the legislation supplements solutions introduced as part of the fuel package and the energy package. It imposes an obligation to register road and rail transport of goods considered sensitive and to establish a relevant supervision system. The Act is amended o an ongoing basis to include new mechanisms to further curtail grey economy in fuel trade and goods considered sensitive (e.g. fuel oils and LPG).
Implementation of secondary legislation for the fourth phase of the GHG emissions trading scheme, including the decision approving free allocations for 2021–2025. Issuance of the European Commission’s guidelines amending the system of compensation for indirect emission costs for 2021–2030, which started a process to amend the Act on the Compensation Scheme for Energy-Intensive Sectors and Subsectors. Establishment of a dedicated state fund – the Energy Transformation Fund following an amendment to the Act on the Trading System for Greenhouse Gas Emission Allowances.
Amendments to the Energy Efficiency Act, adding fuel companies placing liquid fuels on the market to the list of entities required to achieve energy savings. Progressive growth of efficiency savings until 2030. Expansion of the catalogue of energy efficiency improvement projects for the transport sector. Greater availability of the option whereby the discharge of the energy efficiency requirement may take the form of a non-refundable funding programme.
Regulation of the Council of Ministers of February 17th 2021 on the manner and procedure for imposing restrictions on gas withdrawal, published on March 26th 2021, imposing restrictions on all gas customers, except for protected customers specified in the Regulation.
The Regulation includes rules governing gas withdrawal restrictions imposed on customers using gas to produce electricity in their generating units.
On May 17th 2021, the draft Regulation of the Minister of Climate and Environment on the technical conditions to be met by gas networks and their locations was published. It contains proposed regulations to be applied in the design, construction and modification of gas networks used to transport gas and of gas pipelines at gas production facilities.
June 18th 2021 saw the publication of the Act Amending the Energy Law and Certain Other Acts of May 20th 2021, which introduces legal basis for the operation of closed distribution systems (CDS) and exempts CDS operators from the obligation to submit tariffs for approval by the President of the Energy Regulatory Office and to prepare development plans.
On October 7th 2021, a draft amendment to the Regulation on detailed operating conditions for the gas system was published, setting out gas fuel quality regulations designed to gradually increase the share of biomethane in the gas network while maintaining the highest possible network security.
December 9th 2021 was the publication date of the Act Amending the Act on Electromobility and Alternative Fuels and Certain Other Acts of December 2nd 2021, introducing new regulations governing the operation of natural gas stations and the use of natural gas in transport.
Tax on production of certain minerals, payable from December 2020, calculated individually for each well at a rate of 1.5%–6% of revenue, depending on the type of deposits and hydrocarbons. Production royalty, depending on the volume and quality – for natural gas: PLN 5.74–PLN 26.54/1,000 Nm3; for crude oil: PLN 40.74–PLN 55.28/tonne. Extraction charge – fixed component (determined on a case-by-case basis) and variable component of 50% of the mineral production royalty for the previous year. Property tax of up to 2% of the initial value of property, plant and equipment, corporate income tax – 19%.
Payable on wells spudded on or after January 1st 2017. Royalty rate from 5% to 40%, depending on the type of hydrocarbons, market prices, and well output. Exemption on account of incurred costs of drilling and completion – relief in the form of reduced tax liabilities with respect to all new qualifying wells. Royalty of up to 5% on a well’s early production until the well’s total revenue from all hydrocarbon products equals the drilling and completion cost allowance, CIT at the rate of 23%.
The proposed amendments envisage, among other things, the introduction of holding law provisions into the commercial companies law to govern relations between parent companies and their subsidiaries, and to strengthen supervision exercised by owners and supervisory boards.
Anti-Crisis Shields and Regulations of the Council of Ministers on the establishment of certain restrictions, orders and prohibitions in connection with the COVID-19 epidemic – they aim primarily at limiting the spread of COVID-19 by introducing restrictions in various spheres of private and public life and in the economic sphere.
Implementation of the rules of operation of the greenhouse gas emission allowance trading system in the Act Amending the Act on the Trading System for Greenhouse Gas Emission Allowances, including the establishment of a Modernisation Fund, amending the rules for harmonised free allocation of emission allowances and their adjustment due to changes in the scale of operation. Initiation of work to amend the Act as a result of publication of the European Commission’s new guidelines on the fourth trading period of the EU ETS.
The Fit for 55 package is to serve as a basis for implementing the EU’s revised target to reduce greenhouse gas emissions by 55% by 2030. The new target is a major challenge, but also an opportunity for a fair economic transformation in Poland and across the European Union. If the proposed solutions are adopted, they will have a significant impact on the Polish and EU economy, which will directly affect PKN ORLEN’s operations in the coming years. Key assumptions: reduction of GHG emissions in the EU by 55% relative to the 1990 levels by 2030, inclusion of the transport and construction sectors into the EU emissions trading scheme (EU ETS), raising the target for the share of renewables in energy generation from the planned 32% to 38–40% by 2030, raising the energy efficiency target from 32.5% to approximately 38%–39% by 2030, introduction of the carbon border adjustment mechanism (CBAM), increase in the transport emission reduction targets.
The purpose of the Regulation to define the conditions under which an economic activity qualifies as making a substantial contribution to climate change mitigation or climate change adaptation, and to determine whether an economic activity does no significant harm to the other environmental objectives. Towards the end of 2021, the European Commission proposed that provisions concerning production of electricity and heat in nuclear and natural gas energy plants should be added.
The Act lays down the rules and conditions for granting support in the form of bilateral contracts for difference for electricity generated in offshore wind farms. The support system has two phases: in the first phase support will be granted by way of an administrative decision issued by the President of the Energy Regulatory Office, while in subsequent years it will take the form of competitive auctions. The Act also governs development and implementation of offshore wind farm projects, defined the rules governing management of an offshore wind farm and power evacuation system, and describes the requirements for construction, operation and decommissioning.
The amendments extend the list of entities required to perform the obligations provided for in the Act to include entities marketing certain types of liquid fuels specified in the Act and used in road or rail transport. The new regulations offer the option for obliged entities to perform their statutory obligations through non-refundable financing programmes whereby financing is provided for connecting end users to the heating network or replacing end users’ heat sources. The Act also clarifies the procedure for issuing energy efficiency certificates and establishes the Central Register of Final Energy Savings.
The amendments introduced by the Act are related to the implementation of the EU Directive on common rules for the internal market for electricity. The key changes introduced by the amendment are those concerning the development of the Central Energy Market Information System (CSIRE). They seek to promote active involvement of consumers in the market, including through the installation of remote reading meters and use of information obtained by them in the development of CSIRE. Other changes introduced by the amendments concern energy storage, licensing of liquid fuels, making entries in the register of importing entities, and granting licences by the President of the Energy Regulatory Office.
In accordance with the amendments, after July 1st 2025 entities that do not meet the CO2 emission limit of 550 g/kWh of generated electricity will not be entitled to benefit from capacity market support. The amendments keep in force the capacity agreements concluded before December 31st 2019. A possibility was also introduced to replace an already signed capacity agreement with one or more capacity agreements providing for standby services that amount to at least 110% of those specified in the original capacity agreement. The regulation came into force on September 1st 2021. The amendments also introduced a new capacity charge model, in which the charge amount depends on the individual consumption curve (reparametrization). A reduced capacity charge for customers with an appropriate energy consumption profile will enable energy intensive customers, including PKN ORLEN, to lower the amounts of the capacity charge they pay. The regulation came into force on October 1st 2021.
The Act makes amends the rules of settlements for energy generated by prosumers. The amendments will take effect on April 1st 2022. In the new settlement system (net billing), prosumers will sell surplus energy fed into the grid for a certain price and will pay for their energy consumption as other customers. Prosumers will also have to pay distribution fees. Under the Act, settlements for customers who become prosumers before the effective date of the Act, i.e. April 1st 2022, will be made in accordance with the existing rules, i.e. discount system (net metering) for the next 15 years.
The Act, among other things, defines the rules for executing electricity sale agreements for publicly available charging stations and rules for access to publicly available charging infrastructure, the obligation for distribution system operators (DSOs) to sell publicly available charging stations, the obligation to obtain EIPA individual identification codes by market participants, and a price list for assigning and maintaining such code (PLN 25 per month per an operator’s station and PLN 50 per charging service provider). The Act also contains more detailed provisions on connection of publicly available charging stations and the rules governing the establishment of clean transport zones.
The Act exempts households from excise duty on electricity and introduces a reduction in excise duty for other customers to PLN 4.60/MWh (from the current PLN 5/MWh) in the period January 1st–May 31st 2022. It also provides for the obligation for sellers to inform households of the reduced tax rates on electricity.
Under the new Regulation, restrictions (if any) on natural gas withdrawal may be imposed on a larger group of buyers. The supply levels and the rules for setting supply levels were redefined and the manner of announcing existing supply levels was specified in detail, in particular by introducing an obligation to make them public.
The Regulation sets the maximum price for electricity generated in offshore wind farms and fed into the grid in PLN per 1 MWh, which is the basis for settlement of the right to pay the negative balance in the first phase of the support system, i.e. the price that may be set by virtue of a decision of the President of the Energy Regulatory Office. The price is PLN 319.6/MWh.
The Regulation specifies the parameters for the main auction for delivery year 2026, which was held in 2021, and the parameters of the additional auction for delivery year 2023, to be held in 2022.
The main amendments introduced by the Regulation is the change of how the minimum and maximum power consumption volumes are determined during the introduction of restriction levels, the change of rules for informing the affected customers, and a detailed catalogue of customers protected against restrictions on the supply and consumption of electricity.
The Regulation lays down detailed criteria to be applied in the assessment of applications in award proceedings for new offshore wind farm licences (Phase 2 offshore), defines the qualification minimum and the manner of determining the most important assessment criterion. It sets out 17 criteria concerning, among other things, the capacity to finance the project with the applicant’s own funds, positive impact of the planned project on energy transition and GHG emission reduction, or experience in the construction or operation of a conventional power plant. Licences are granted based on the points scored for each criterion.
The Regulation reduced the 23% VAT rate on electricity (to 5%), heat and natural gas (to 8%) for the period from January 1st to March 31st 2022.
The draft Act provides for amendments whereby revenue from the sale of emission allowances may be used to support modernisation of the energy sector through the creation of dedicated state fund – Energy Transformation Fund. Under the proposed regulations, 40% of CO2 emission allowances sold each year by Poland in auctions in the period 2021–2030 are to be allocated to the Energy Transformation Fund. In accordance with the draft Act, in 2022–2031 the amount of support from the Energy Transformation Fund would be more than PLN 85bn. The draft identifies a number of energy sector areas in which investment projects may receive support from the Energy Transformation Fund resources. These include nuclear power, renewable energy, gas-fired power generation, energy storage, and innovative technologies.
The proposed amendments introduce provisions supplementing the regulations on the Central Energy Market Information System (CSIRE) enacted on May 20th 2021, including provisions on the technical process of switching electricity suppliers taking no longer than 24 hours as of 2026, conclusion of dynamic electricity price contracts, and on aggregators on the electricity market. As regards PKN ORLEN, the draft introduces changes with respect to producers’ supplying their own premises through a direct line.
The draft Act seeks to liberalise the 10H principle, which bans the construction of wind power plants within a distance of less than 10 times the turbine height (with the blades raised) from residential buildings. The objective is to facilitate the construction of onshore wind farms closer to residential buildings and to re-launch certain projects that were suspended as a result of the entry into force of the 2016 regulations.
The draft Act provides for the abolition of the exchange sale requirement, i.e. the requirement that power utilities involved in electricity generation should sell their electricity output on power exchanges, and for increasing the administrative and criminal liability for manipulation on the electricity market and use of inside information.
The draft Regulation is part of the second stage of the balancing market reform. It provides for the introduction of scarcity pricing on the balancing market, the introduction of new roles on the balancing market, i.e. Balancing Services Providers (BSP) and Balancing Responsible Parties (BRP), the departure from the existing concept of balancing bids and introduction of balancing energy bids and balancing capacity bids (aligned with exchange on the European platforms), and the change of the technical requirements for the equipment, installations and networks connected to the grid.
The ORLEN Group analyses new regulations resulting from the European Green Deal on an ongoing basis and adjusts its business models accordingly. The ambitious agenda of the ORLEN2030 strategy is a strategy designed to capture the opportunities created by Europe’s economic transformation which aims to meet the obligations under of the Paris Agreement and implement the UN Agenda 2030.
Risks related to social and employee issues, respect for human rights, environmental, health and safety at work, anti-corruption and bribery may occur in 3 main risk categories (strategic, project, process / operational) in the ORLEN Group.
The list of risks, methods of their mitigation and trends in the development of risks for the above-mentioned issues is presented in the tables below.
