Consolidated financial statements Notes to the financial statements 11. Property, Plant and Equipment and Prepayments for Tangible Assets under Construction

11. Property, Plant and Equipment and Prepayments for Tangible Assets under Construction

 

PLN ‘000 Dec 31 2009 Dec 31 2008
Land 232,423 227,871
Buildings and structures 1,931,190 1,705,246
Plant and equipment 771,728 616,571
Vehicles and other 339,842 235,464
Tangible assets under construction, including: 6,086,780 2,747,460
- capitalised financing costs 187,077 161,033
Total property, land and equipment 9,361,963 5,532,612
Prepayments for tangible assets under construction, including: 153,536 1,200,713
- capitalised financing costs 4,626 37,612
Total 9,515,499 6,733,325

 

Changes to Property, Plant and Equipment and Prepayments for Tangible Assets under Construction

PLN ‘000 Land Buildings and structures Plant and equipment Vehicles and other Tangible assets under construction Prepayments for tangible assets under construction Total
  - exploration and evaluation assets (1)
Gross book value as at Jan 1 2008 221,426 2,096,147 1,232,100 472,181 634,764 69,039 781,780 5,438,398
Increase 17,597 90,561 78,067 51,510 2,229,361 25,671 778,958 3,246,054
- purchase - - 1,412 17,017 2,241,124 28,049 748,294 3,007,847
- transfer from investments 18,255 69,137 76,057 15,930 (187,922) (2,430) - (8,543)
- transfer (443) (1,726) 104 8,689 (3,010) - - 3,614
- reclassified to assets available for sale (1,165) (122) - (4,546) - - - (5,833)
- reclassified from assets available for sale 933 - - 1 - - - 934
- currency translation differences on foreign operations - - 494 14,247 - - - 14,741
- assets related to decommissioning of the Offshore Oil Rigs - 23,094 - - 6,950 52 - 30,044
- borrowing costs - - - - 157,173 - 30,659 187,832
- other 17 178 - 172 15,046 - 5 15,418
Decrease (1,984) (4,802) (4,994) (17,854) (76,076) - (360,025) (465,735)
- sale (1,984) (4,335) (1,252) (15,348) (74,964) - - (97,883)
- liquidation - (292) (3,736) (2,503) (45) - - (6,576)
- currency translation differences on foreign operations - - - (3) - - - (3)
- other - (175) (6) - (1,067) - (360,025) (361,273)
Gross book value as at Dec 31 2008 237,039 2,181,906 1,305,173 505,837 2,788,049 94,710 1,200,713 8,218,717
Gross book value as at Jan 1 2009 237,039 2,181,906 1,305,173 505,837 2,788,049 94,710 1,200,713 8,218,717
Increase 7,326 357,255 257,171 172,987 3,443,813 (3,511) 225,602 4,464,154
- purchase - 34 1,887 51,332 3,915,182 22,543 258,581 4,227,016
- transfer from investments 5,653 258,896 202,916 106,828 (589,781) (26,054) - (15,488)
- change in Group structure 1,605 79,887 48,797 184 105 - - 130,578
- transfer 42 2,340 3,689 7,947 (6,463) - - 7,555
- reclassified to assets available for sale - - (167) (20,729) - - - (20,896)
- reclassified from assets available for sale 26 - - - - - - 26
- currency translation differences on foreign operations - - - 92 70,363 - 7 70,462
- borrowing costs - - - - 38,943 - (32,986) 5,957
- assets related to decommissioning of the Offshore Oil Rigs - 15,853 - - 15,178 - - 31,031
- other - 245 49 27,333 286 - - 27,913
Decrease (1,118) (19,396) (14,208) (16,958) (71,501) (20,360) (1,272,779) (1,395,960)
- sale (675) (5,140) (6,859) (8,556) (48,575) - - (69,805)
- liquidation - (1,717) (4,680) (4,198) (303) - - (10,898)
- change in Group structure (443) (12,539) (2,512) (595) (710) - - (16,799)
- settled prepayments - - - - - - (1,272,779) (1,272,779)
- currency translation differences on foreign operations - - (157) (3,446) (536) - - (4,139)
- other - - - (163) (21,377) (20,360) - (21,540)
Gross book value as at Dec 31 2009 243,247 2,519,765 1,548,136 661,866 6,160,361 70,839 153,536 11,286,911
Accumulated depreciation as at Jan 1 2008 7,242 363,325 551,064 215,498 - - - 1,137,129
Increase 1,568 108,832 135,315 57,677 - - - 303,392
- depreciation 1,529 109,345 135,058 50,591 - - - 296,523
- transfer - (513) (132) (23) - - - (668)
- reclassified from assets available for sale 39 - - 1 - - - 40
- currency translation differences on foreign operations - - 389 7,008 - - - 7,397
- other - - - 100 - - - 100
Decrease (67) (483) (3,181) (10,965) - - - (14,696)
- sale (67) (417) (739) (8,492) - - - (9,715)
- liquidation - (37) (2,439) (2,472) - - - (4,948)
- currency translation differences on foreign operations - - - (1) - - - (1)
- other - (29) (3) - - - - (32)
Accumulated depreciation as at
Dec 31 2008
8,743 471,674 683,198 262,210 - - - 1,425,825
Accumulated depreciation as at Jan 1 2009 8,743 471,674 683,198 262,210 - - - 1,425,825
Increase 1,572 114,456 97,990 71,700       285,718
- depreciation 1,546 112,879 94,489 63,865 - - - 272,779
- transfer - 1,577 3,657 4,326       9,560
- reclassified to assets available for sale - - (158) (9,445) - - - (9,603)
- reclassified from assets available for sale 26 - - - - - - 26
- currency translation differences on foreign operations - - - 15 - - - 15
- other - - 2 12,939 - - - 12,941
Decrease (6) (4,440) (9,760) (12,298) - - - (26,504)
- sale (4) (2,516) (5,090) (6,492) - - - (14,102)
- liquidation - (705) (4,131) (3,448)       (8,284)
- change in Group structure (2) (1,219) (429) (97) - - - (1,747)
- currency translation differences on foreign operations - - (108) (2,215) - - - (2,323)
- other - - (2) (46)       (48)
Accumulated depreciation as at Dec 31 2009 10,309 581,690 771,428 321,612 - - - 1,685,039
Impairment losses as at Jan 1 2008 11 2,920 1,898 815 42,598 15,378 - 48,242
Increase 414 3,135 4,199 8,138 401 66 - 16,287
Decrease - (1,069) (693) (790) (2,410) - - (4,962)
Impairment losses as at Dec 31 2008 425 4,986 5,404 8,163 40,589 15,444 - 59,567
Impairment losses as at Jan 1 2009 425 4,986 5,404 8,163 40,589 15,444 - 59,567
Increase 101 14,454 2,282 7,798 33,655 10 - 58,290
Decrease - (1,557) (710) (15,492) (663)     (18,422)
Change in Group structure (11) (10,998) (1,996) (57) - - - (13,062)
Impairment losses as at Dec 31 2009 515 6,885 4,980 412 73,581 15,454 - 86,373
Net book value
as at Jan 1 2008
214,173 1,729,902 679,138 255,868 592,166 53,661 781,780 4,253,027
Net book value
as at Dec 31 2008
227,871 1,705,246 616,571 235,464 2,747,460 79,266 1,200,713 6,733,325
Net book value
as at Dec 31 2009
232,423 1,931,190 771,728 339,842 6,086,780 55,385 153,536 9,515,499

(1) The value of exploration and evaluation assets comprises the value of expenses capitalised until technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

As at December 31st 2009, the net value of the items of property, plant and equipment serving as collateral for the Group’s liabilities was PLN 2,133,547 thousand (as at December 31st 2008: PLN 1,942,778 thousand).

The cost of servicing the liabilities incurred to finance tangible assets under construction and prepayments for tangible assets under construction in the year ended December 31st 2009 amounted to PLN 116,320 thousand (December 31st 2008: PLN 187,832 thousand).

As at December 31st 2009, the net value of the asset related to the oil rig decommissioning, referred to in Note 10.5, amounted to PLN 106,600 thousand (December 31st 2008: PLN 75,076 thousand).

In the year ended December 31st 2009, the cost of depreciation of property, plant and equipment in respect of which technical feasibility and commercial viability of extracting a mineral resource have been demonstrated amounted to PLN 5,827 thousand (December 31st 2008: PLN 8,006 thousand).

In the year ended December 31st 2009, impairment losses on exploration and evaluation assets amounted to PLN 10 thousand (December 31st 2008: PLN 66 thousand). Furthermore, in 2009 the Group charged depreciation on exploration and evaluation assets in the amount of PLN 20,360 thousand.

As at December 31st 2009 and December 31st 2008, the fair value of perpetual usufruct rights to land obtained by virtue of administrative decisions and disclosed as off-balance-sheet items was PLN 163,446 thousand.

Prospects for Development of B-4 and B-6 Gas Fields

The item “Tangible assets under construction” includes expenditure of PLN 47,790 thousand incurred by Petrobaltic S.A. (currently LOTOS Petrobaltic S.A.) in connection with exploration for gas at the B-4 and B-6 fields. Petrobaltic S.A. commissioned an analysis of the economic viability of development of these fields. According to the findings of the analysis, significant capital expenditure is required to obtain profitable commercial production of hydrocarbons. Despite the envisaged excess of revenue from sale of products to be obtained by exploitation of the reserves over the cost of their development and production, no expenditure on this project is expected in the medium term. The Management Board of Petrobaltic S.A. maintains that, regardless of the necessity to make significant investments, in view of the strategic nature of the reserves and the changing prices and terms of delivery of imported energy materials, their development is possible if the investment plans of Petrobaltic S.A. and Grupa LOTOS S.A. are synchronised. The activities currently under way amongst other things take into account the possibility of finding a partner with whom the company would be able to jointly develop the B–4 and B–6 gas fields. The geological analyses and analyses of reserves carried out to date by Petrobaltic S.A.’s potential partners have confirmed the positive assessment of the fields, opening up a possibility for future collaboration that would lead to the implementation of a joint project. Having obtained relevant bids from interested parties, Petrobaltic S.A. commenced consultations with Polskie Górnictwo Naftowe i Gazownictwo SA (PGNiG SA) which aimed first at determining the optimal conditions of development of the gas fields and subsequently at selecting the best legal form for cooperation between the partners. Petrobaltic S.A. continues to cooperate with PGNiG SA regarding joint development of the gas fields. At the request of PGNiG SA, the “Initial Concept of Development of the Offshore B-4 and B-6 Gas Fields” was prepared in August 2009. Based on the results of the analyses which have been performed, both Petrobaltic S.A. and PGNiG SA upheld their earlier positions and decided to confirm their mutual intentions in a Letter of Intent signed on December 1st 2009. Following another set of analyses, it was found that the B-4 and B-6 gas fields development concept should be extended to include the B-21 prospect located in the Gaz Południe licence area.

Information on Interests in Norwegian Production and Exploration Licences

The item “Tangible assets under construction” includes expenditure of NOK 1,755,293 thousand (the equivalent of PLN 868,168 thousand, translated at the mid-exchange rate for NOK quoted by the National Bank of Poland for December 31st 2009) incurred by LOTOS Exploration and Production Norge AS on the purchase of interests in Norwegian production licences (the YME field). The balance-sheet item “Tangible assets under construction” is additionally adjusted by the tax effect connected with the YME field purchase transaction, of NOK 75,965 thousand (i.e. PLN 37,572 thousand, translated at the mid-exchange rate for NOK quoted by the National Bank of Poland for December 31st 2009). Furthermore, under “Intangible assets” LOTOS Exploration and Production Norge AS recognised expenditure of NOK 72,157 thousand as at December 31st 2009 (the equivalent of PLN 35,689 thousand, translated at the mid-exchange rate for NOK quoted by the National Bank of Poland for December 31st 2009) incurred on the exploration licences (in particular the PL455 licence). The balance sheet item “Intangible assets” is additionally adjusted by the tax effect of NOK 836 thousand (i.e. PLN 413 thousand, translated at the mid-exchange rate for NOK quoted by the National Bank of Poland for December 31st 2009). As at December 31st 2009, the net value of intangible assets related to exploration licences, net of impairment loss, amounts to NOK 61,238 thousand (the equivalent of PLN 30,288 thousand, translated at the mid-exchange rate for NOK quoted by the National Bank of Poland for December 31st 2009).

As at December 31st 2009, LOTOS Exploration and Production Norge AS holds exploration licence PL 316 (20% interest in the YME field) and the following exploration licence interests: 20% interest in licence PL 316CS, 20% interest in licence PL 316DS, 20% interest in licence PL 455, 10% interest in licence PL 497, 25% interest in licence PL 498, 25% interest in licence PL 503, and 20% interest in licence PL 515.

Purchase of Interests in Norwegian Production Licences

On May 20th 2008, LOTOS Exploration and Production Norge AS signed an agreement with Norwegian company REVUS Energy ASA concerning purchase of 10% of interests in the North Sea production licences Nos. PL 316, PL 316B, PL 316CS and PL 316DS. The purchased licences cover the YME field and an additional exploration area. The YME field is located 110km off the coast in the southern part of the Norwegian sector of the North Sea. The recoverable crude oil reserves of the YME field which correspond to the 10% interest held by LOTOS E&P Norge AS were estimated by the operator (Talisman) at ca. 6.8 million bbl (about 900 thousand tonnes). Production from the field is expected to start in the second half of 2010.

The value of the transaction was USD 52.5 million (the equivalent of PLN 114,770 thousand, translated at the USD/PLN mid-exchange rate published by the National Bank of Poland for May 20th 2008). The acquisition of rights to tax exemptions held by the seller in connection with the investments made, accounted for about 20% of the price.

Upon the fulfilment of all the conditions precedent (including the relevant approvals from the General Shareholders Meeting of Petrobaltic S.A. and from the Norwegian Ministry of Energy and Petroleum), on August 29th 2008 LOTOS Exploration and Production Norge AS acquired all rights and obligations connected with the ownership of the 10% interest in the production licences. The value of the agreement was USD 52.5m (the equivalent of PLN 119.1m, translated at USD/PLN mid-exchange rate quoted by the National Bank of Poland for August 29th 2008). That value was increased by the amount of the investment expenditure made by REVUS Energy ASA during the jointly agreed period preceding the assumption of rights and obligations connected with the licences, of approximately USD 12m (the equivalent of PLN 27.2m, translated at USD/PLN mid-exchange rate quoted by the National Bank of Poland for August 29th 2008). The investment expenditure which remained to be made after August 29th 2008 (corresponding to the 10% interest in the YME field) before production could be started was estimated at about USD 65m (the equivalent of PLN 147.5m, translated at USD/PLN mid-exchange rate quoted by the National Bank of Poland for August 29th 2008).

The transaction was financed using a loan and the proceeds from an increase in the company share capital by Petrobaltic S.A.

The total acquisition price of the 10% interest in production licences Nos. PL 316, PL 316B, PL 316CS and PL 316DS in the North Sea, comprising the purchase price (USD 52.5m), the advance payments made and the amount corresponding to the 10% share of LOTOS Exploration and Production Norge AS in the capital expenditure incurred by REVUS Energy ASA in the period from the agreement effective date until the day on which the conditions precedent were fulfilled, amounted to NOK 367,775 thousand.

On October 22nd 2008, LOTOS Exploration and Production Norge AS (a member of the LOTOS Group) signed an agreement with Norwegian company Det Norske Oljeselskap ASA concerning purchase of another 10% interest in the North Sea production licences No. PL 316, PL 316B, PL 316CS and PL 316DS. The transaction was the second transaction of purchase of interests in the YME field by LOTOS Exploration and Production Norge AS in 2008. The agreement provided for its entry into force after its approval by the Norwegian Ministry of Energy and Petroleum and the Norwegian Ministry of Finance.

The value of the transaction was NOK 390m (the equivalent of PLN 161m, translated at the NOK/PLN mid-exchange rate published by the National Bank of Poland for October 22nd 2008). The acquisition of rights to tax exemptions held by the seller in connection with the investments made accounted for about 30% of the price. In addition, the price was increased by the amount of capital expenditure (corresponding to the 10% interest in the YME field) incurred from January 2008 to the transaction closing date, estimated at NOK 180m (the equivalent of PLN 74m, translated at the NOK/PLN mid-exchange rate published by the National Bank of Poland for October 22nd 2008). Other capital expenditure (in the amount corresponding to the 10% interest in the YME field) to be incurred before production from the field could be started was estimated at approx. USD 50m (the equivalent of PLN 144m, translated at the USD/PLN mid-exchange rate published by the National Bank of Poland for October 22nd 2008).

Upon the fulfilment of all the conditions precedent, on December 30th 2008 LOTOS Exploration and Production Norge AS acquired all the rights and obligations connected with the ownership of 10% interests in the North Sea production licences PL 316, PL 316B, PL 316CS and PL 316DS covering the YME field. The licences purchased from Det Norske Oljeselskap ASA cover the YME field development plan and exploration areas. In connection with the transaction, on January 20th 2009, the company paid the amount of NOK 547m (the equivalent of PLN 257.8m, translated at the NOK/PLN mid-exchange rate published by the National Bank of Poland for January 20th 2009), covering: the purchase price, capital expenditure connected with the development of the YME field and costs of exploration work in the licence areas incurred between the economic date of the transaction and the date of its settlement, plus the interest accrued for the period. The transaction was financed using a loan and the proceeds from an increase in the company share capital by Petrobaltic S.A.

As a result of the finalisation of the transactions carried out in 2008, LOTOS Exploration and Production Norge AS has come to hold in total 20% of the interests in the YME field, which corresponds to recoverable crude oil reserves (as estimated by the operator – Talisman) of 13.6 million barrels (approx. 1,800 thousand tonnes).

Purchase of Interests in Exploration Licences by LOTOS Exploration and Production Norge AS

On August 26th 2008, LOTOS Exploration and Production Norge AS entered into an agreement on the purchase of a 20% interest in exploration licence PL455, covering an area of 1,365km2 located in the southern part of the Norwegian sector of the North Sea. LOTOS Exploration and Production Norge AS signed the agreement with Noreco, a Norwegian exploration and production company. LOTOS Exploration and Production Norge AS will acquire a 20% interest in the licence in exchange for covering 40% of the estimated expenditure to be incurred by Noreco on the performance of seismic surveys under the PL455 licence, i.e. approx. NOK 38m (the equivalent of PLN 15.9m, translated using the mid-exchange rate for NOK quoted by the National Bank of Poland for August 26th 2008). The transaction was to take effect once relevant approvals have been obtained from the Norwegian Ministry of Finance and the Ministry of Energy and Petroleum. Licence PL455 was granted to Noreco as part of the qualification round APA 2007. Noreco is also the licence operator and – after the transaction with LOTOS Exploration and Production Norge AS – holds a 50% interest in the licence. The seismic survey was carried out in 2008–2009, and the licence area is planned to be drilled in 2011 to confirm its potential. In accordance with the Norwegian tax law, if the exploration proves unsuccessful, 78% of the incurred expenditure may be reimbursed.

On October 31st 2008, after all conditions precedent had been fulfilled, LOTOS Exploration and Production Norge AS acquired all rights and obligations related to the ownership of a 20% interest in exploration licence PL 455.

Volume of the Crude Oil and Natural Gas Reserves Held by the LOTOS Group

As at December 31st 2009, the LOTOS Group had the following reserves of crude oil and natural gas:

Crude oil (2P*) – 6.4 million tonnes,
Natural gas (2P*) – 4.5 billion cubic metres.

*2P – proved and probable reserves.

The 10+ Programme (Comprehensive Technical Upgrade Programme)

An element of the growth strategy of the LOTOS Group is the implementation of the 10+ Programme, designed to increase the throughput capacity of the Gdańsk Refinery by approximately 75%, that is to 10.5m tonnes of crude oil p.a., at a higher conversion ratio.

Following the completion of the preparatory phase, the Programme’s implementation commenced. The implementation of the 10+ Programme proceeded as scheduled, and reached 94% at the end of 2009. By the end of 2009, the following units reached the Ready For Start Up phase:

  • hydrodesulphurisation unit (HDS)
  • crude distillation unit (CDU/VDU),
  • hydrogen generation unit (HGU),
  • amine sulphur recovery unit (ASR).

In 2010-2011, the following units at the Gdańsk Refinery of Grupa LOTOS S.A. are to be completed:

  • mild hydrocracker (MHC),
  • residue oil supercritical extraction (ROSE),
  • infrastructure expansion (tanks, utilities, inter-facility connections).

At present, Grupa LOTOS S.A. is making preparations to launch in 2012-2015 the second phase of the 10+ Programme, which will focus on the management of heavy residue. As at December 31st 2009, capitalised expenditure on the IGCC project, including reduction of capacity of production lines and a different method of processing of gases, was PLN 20,468 thousand (as at December 31st 2008: PLN 45,853 thousand). The Company’s Management Board expects that the financial benefits to be derived from the project will be no less than the expenditure incurred.

This is a translation of a document originally issued in Polish

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