Impact of coronavirus pandemicon the ORLEN Group operations

The outbreak of the coronavirus SARS-Cov-2 causing the disease COVID-19 had a significant impact on a global economy and situation in the country causing the introduction of significant restrictions on a global scale. Especially, during the period March – June 2020 it caused a blockade of transport on a global scale and an unprecedented drop in global demand for jet fuel, diesel and gasoline, which, as a consequence, led to a drop in demand for crude oil. Excess of crude oil supply over crude oil demand on a scale exceeding available storage capacities caused at the turn of the first and second quarter a sharp and deep decline in crude oil prices, which was in time and scale faster than price adjustments on the markets of fuel and crude oil products. Crude oil prices started to rise in May as a result of the reduction in the production of this commodity by OPEC and Russia and a decline in production due to economic reasons, mainly in the USA, as well as due to the increase in demand resulting from the defrosting of global economies.

Situation connected with coronavirus pandemic affected to a large extent the results achieved by the Group in the financial year 2020 in all operating segments. In particular, during the period March – June 2020 the Group identified both a decrease in crude oil prices and a sharp drop in demand for its products and in consequence decrease in their prices in Refine, Petrochemical, Retail and Upstream segments. The effects of the coronavirus are also visible in the Energy segment, where significant decrease in demand for electricity occurred, especially for end customers from A, B and C tariff groups, as well as decline in the production volume.

In the 2nd and 3rd quarter, due to the defrosting of global economies and social life, as well as adapting them to functioning in pandemic conditions, the Group observed gradual increase in demand. Unfortunately the wave of coronavirus in autumn stopped this trend and brought the economy to a halt again, which adversely affected the Group's results in the fourth quarter of 2020.

During the whole year 2020 as well as presently all ORLEN petrol stations remain open, there are no disruptions in any area of operations within the concern or other production plants of ORLEN Group in the country. There were also no material disruptions in Group’s operations on foreign markets as a result of COVID-19 pandemic. In Group’s opinion currently there are no threats to the supply chain, both with respect to purchase of raw materials and goods, as well as in the field of internal logistic processes (among others supply of liquid fuels from the production plant to fuel terminals and then to petrol stations).

Since the outbreak of the pandemic PKN ORLEN and entities comprising the Group have taken a number of actions in order to adapt to constantly changing business environment, as well as to prevent the spread of COVID-19 infections, both within its own employees and to support the government's fight against coronavirus.

Below the Group presented the impact of the coronavirus pandemic on selected areas of the Group's operations.

Group’s results by operating segments, macroeconomic situation and estimates regarding the impact of COVID-19 on the Group's financial plans, which are basis of the impairment tests were presented in notes 10 and 14.4.

Actions taken by the Group in connection with COVID-19 pandemic 

PKN ORLEN and entities comprising the ORLEN Group have taken a number of actions in connection with COVID-19 pandemic.

At the time when first cases of COVID-19 appeared in the country, the ORLEN Group developed emergency action plans to ensure the continuity of operations of critical infrastructure and the provision of key services provided by ORLEN Group. Crisis management plans are developed depending on the effects that may be caused by the increasing number of cases and coordinated with institutions responsible for the protection of critical infrastructure.

With respect to ongoing purchases, the Group has implemented additional actions in order to limit the risk of potential breach of contractual terms and deliveries terms by suppliers as a result of change in economic situation, especially:

  • in the area of direct purchases actions were taken in order to extend supplier databases for emergency situations, managing supplies from alternative sources as well as cooperation with key suppliers with respect to ongoing reporting of inventory stock and appearing risks in supply chain and ad hoc preparation of alternative action plans in order to assure operational continuity,
  • in the area of investment purchases additional procedures regarding ongoing monitoring of fulfilment of contractual terms and deadlines as well as financial condition of suppliers have been implemented and procedures regarding launching purchasing processes for substitute contractors, if needed,
  • procedures were implemented regarding ongoing analysis of liquidity risk with respect to key suppliers and their current ability to settle liabilities to subcontractors for construction works on the basis of declarations and taking appropriate actions, including shortening payment terms in individual cases, if needed.

    The Group has taken a number of preventive measures in order to limit the spread of the virus at the premises and protection of employees, including:
  • a number of new procedures and guidelines with respect to personnel and material movement were taken, especially aiming at minimizing direct contact and implementing temperature control with respect to personnel staying at the premises; where possible, employees were given the opportunity to work remotely; procedures ensuring availability of key personnel of Group entities were implemented,
  • limitation of business trips and participation in business meetings and instead using media such as phones, Internet messengers and videoconferences were recommended,
  • employees were equipped with protection means (protective masks, gloves) as well as disinfectants; hygiene, sanitation and disinfection procedures were implemented,
  • in order to ensure continuity of ORLEN petrol stations’ operations (own and franchised) regular disinfections, limitation in number of clients who could be at the petrol station at the same time and temperature controls were introduced; plexiglass barriers at the checkouts were installed; restaurant areas were excluded from use, solutions to accelerate refuelling were prepared and new methods of payments directly at distributors through ORLEN Pay application were introduced. Additionally in 4th quarter PKN ORLEN equipped petrol stations with specialized air purifying and filtering devices to further increase safety of its customers and employees.

The Group estimates that the total cost incurred in 2020 due to the above actions amounted to approximately PLN (92) million.

The Group adjusts its operations on an ongoing basis to the changing epidemiological situation.

Prosocial activities taken by the Group in the fight against coronavirus

In 2020 the value of donations recognised by the Group in other operating cost provided as part of prosocial activities in the fight against coronavirus amounted to PLN (139) million.

Most of these funds were transferred by the Group to uniformed and medical services, which were involved to the greatest extent in helping people infected with coronavirus and health protection of others.
Those funds were allocated for the purchase of medical masks, medical equipment, safety uniforms, and gloves. As part of in-kind support the Group donated also disinfectants, to which subsidiary ORLEN Oil switched over its production, and organized actions of free products and goods releases for uniform services and drivers waiting to cross the border. In-kind and cash donations were, among others, given also through the ORLEN Foundation to medical facilities, police units, social welfare homes and Material Reserves Agency. Entities from ORLEN Group have also undertaken additional activities, especially aiming at supporting Polish entrepreneurs in a difficult period related to the ongoing pandemic. At that time PKN ORLEN expanded its cooperation with Polish producers and consistently increases the availability of products manufactured in Poland at its petrol stations. Additionally, in mid-June 2020 PKN ORLEN has started #WspieramyPolskę campaign in cooperation with the Foundation ORLEN, under which, the Company focused on promoting local products and supporting companies in the process of defrosting the national economy. In 4th quarter volunteers from PKN ORLEN got engaged in actions of Solidarity Corps of Senior Support (Solidarnościowy Korpus Wsparcia Seniorów) – a new government program to support and protect the seniors by helping them in everyday activities, such as shopping or visiting the pharmacy.

Additionally, during 4th quarter, in order to secure the number of available hospital beds during for the patients with COVID-19, PKN ORLEN got involved in organizing temporary hospital in Płock and another similar facility in Ostrołęka, which was built with the support of ENERGA. Other companies from the Group were also involved in the construction of hospitals, including ORLEN Projekt which participated in the design of the facility in Plock, as well as ORLEN Budonaft, ORLEN Serwis, ORLEN Administracja and ORLEN Ochrona.

As part of the project, PKN ORLEN performed activities related, among others, to the organization and establishment of temporary hospitals, purchase and provision of temporary containers with the necessary infrastructure, adaptation of facilities and ensuring the availability of equipment as well as maintaining the hospitals’ operation.

The project related to building temporary hospital in Płock was completed at the beginning of December 2020, and the facility was transferred to the Provincial Complex Hospital (Wojewódzki Szpital Zespolony) in Płock.The construction works related to the temporary hospital in Ostrołęka were finalized at the end of 2020, and the hospital in March 2021 was transferred to the Mazowiecki Specialist Hospital in Ostrołęka. Dr. Józef Psarski including the separated part of the facility, which from the second half of January 2021 is used for vaccination action on the basis of the decision of the Mazowieckie Voivode.

The costs incurred in connection with the Group's involvement in the construction, equipment and operation of temporary hospitals were decreased by the value of compensation of project’s costs guaranteed to the Group by the Ministry of State Assets. As a result, the value of donations presented by the Group in other operating expenses related to the temporary hospitals project amounted to PLN 1.55 million.

Analysis of impact of changes in economic situation on valuation of assets and liabilities of the Group

Inventory impairment allowances to net realizable values
Dynamic changes in the economic situation in Poland as well as in the world caused by the coronavirus pandemic resulted in significant fluctuations in oil prices and prices of Group’s products during the whole year 2020. During the period March – May 2020 there were record drops in oil prices as well as rapid fall of demand and decrease in prices of Group’s products. Since June 2020 oil prices started to increase and gradual unfreezing of global economies allowed prices to rise. In the following months, oil prices and sales prices for the Group's products continued to fluctuate depending on the current epidemiological situation and the nature and scope of restrictions introduced by the governments of individual countries.

The cumulative value of net inventory impairment allowances to net realizable values recognised in 2020 amounted to PLN 153 million. Additional information in note 14.5.1.

Estimation of expected credit loss (ECL)
As at 31 December 2020 the Group performed detailed analysis of changes in macroeconomic environment caused by coronavirus pandemic on expected credit loss calculation in terms of the potential need to modify the assumptions made for estimations and including additional risk factor related to current economic situation and forecasts for the future.

Economic situation related to COVID-19 turned into reduction in receivables balance in comparison to previous periods. Nevertheless, in period since the outbreak of the pandemic the Group has not observed any significant deterioration in repayment ratio nor an increase in bankruptcies or restructuring among its clients.

Additionally, receivables from entities, which, in opinion of the Group, are exposed most to insolvency risk, are covered by collaterals. Additional information on the financial and bank guarantees received as at 31 December 2020 and the applied collateral for receivables is presented in note 16.5.4.

As at 31 December 2020, based on performed analysis, the Group did not identify any indicators for modification of assumptions taken for estimation of expected credit loss.

The Group analyse on the current basis the situation on the markets and incoming signals from contractors which could indicate deterioration of financial situation and if there is a need, update adopted estimates for ECL calculation in following reporting periods.

Impairment of property plant and equipment, intangible assets and right-of-use assets
The situation related to the COVID-19 pandemic, in particular the changes in the conditions for conducting business activity and the destabilization on markets of fuel and crude oil products, resulting in high volatility of prices and fluctuations in demand, will, in the Group’s opinion, affect the domestic and global economic situation in the medium and long term. Additional information regarding the impact of the COVID-19 pandemic on the assumptions and approach to the ongoing impairment tests performed at the end of 2020, the status of the impairment tests, as well as the impairment losses recognized as at the time of preparation of these consolidated financial statements were included in note 14.4.

Liquidity situation

As at the date of preparation of this consolidated financial statements the financial situation of the Group is stable.

Working capital decreased by PLN 2,209 million compared to the end of 2019, which was mainly related to decline in crude oil prices and prices of products, which translated into the value of inventories, receivables and liabilities, as well as reduction in demand related to coronavirus pandemic.

In the Group’s opinion, the ongoing coronavirus pandemic did not affect the level of risk in relation to guarantees granted as at 31 December 2020 and the probability of activation of above guarantees remains low.

The Group does not identify currently and within the next 12 months problems with liquidity. The Group also does not identify risk of default on loans or other financing agreements. The Group takes optimization actions and assumes maintaining a safe level of net debt and financial covenants included in the financing agreements.

Additional information on guarantees issued by the Group companies and the liquidity management policy applied by the Group is provided in note 16.5.4.
As at the date of preparation of this consolidated financial statements, the Group estimates, that it has sufficient sources of funding for implementation of all strategic development and investment projects as well as acquisitions as planned.

Other accounting estimates

As at the date of preparation of this consolidated financial statements the Group does not identify any significant risks related to potential breach of the terms of commercial contracts and supply contracts (including crude oil supplies).

ORLEN Group Integrated Report

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