14.4.1. THE MAIN ASSUMPTIONS USED IN THE IMPAIRMENT TESTS OF ASSETS AS AT 31 DECEMBER 2020

Impairment tests for assets were performed based on future expected net cash flows, 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 2021, (ii) the macroeconomic assumptions included in the 2030 Strategy, and (iii) reserves reports for the 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 for the assets 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 BASE and PEAK electricity prices, prices of hard coal and natural gas, and prices of carbon dioxide emission allowances. The forecasts were prepared until 2030 inclusive, therefore, for the following years, data from the last projection year was extrapolated. As regards prices of certificates of origin for energy, biomass prices and capacity market rates for the Polish market, forecasts were adopted based on a report prepared for the Group by an independent entity. The forecast was prepared in the perspective until 2065.
• The number of free CO2 emission allowances for 2021 in accordance with the Regulation of the Council of Ministers of 31 March 2014 (item 439) on the list of installations other than electricity generating, covered by the greenhouse gases emission allowance trading system in the settlement period starting from the 1 January 2013 and of 8 April 2014 (item 472) on the list of electricity generating installations covered by greenhouse gases emission allowance trading scheme in the settlement period starting from the 1 January 2013, along with the assigned number emission allowances.
• 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 2017/1442 on the conclusions of the best available techniques (BAT) published on 17 August 2017.
• 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 in accordance with the Act of 20 February 2015 on renewable energy sources with its subsequent amendments (Journal of Laws 2017 No. 0, item 1148).
• 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 2019 and 2020 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 Refining and Petrochemical segments using the discounted future cash flows from operating activities (value in use).

The source of long-term macroeconomic forecasts for refining assets is IHS Markit, for petrochemical assets Nexant taking into account the following assumptions:

• The COVID-19 pandemic will have a long-term impact on the global economy.
• The COVID-19 vaccine will be available in mid-2021 but will be widely available worldwide in early 2022.
• The years 2021-2022 will be a period of rebound in global GDP (+ 3.7% / year). From 2023, there will be a return to stable growth at the level of approx. 2.8% / year.
• Projected Model Downstream Margin (MMD) based on the macroeconomic assumptions adopted in the 2030 Strategy for 2021 at the level of approx. $ 9 / bbl, well below historical levels. Maintaining low margins, also expected in the next three years, only from 2024 the margin returns to its historical average levels. After 2024, a more dynamic rebound of MMD is forecasted due to the forecasted higher margins of petrochemical and refining products
• Crude oil will still remain the main source of energy and its maximum global consumption will take place around 2035. For Brent DTD crude oil, an average annual price growth dynamics of 8% was adopted for the entire forecast period. It is assumed that the situation on the global market will stabilize and the price will gradually increase - in nominal terms, from $ 48 / bbl in 2021 to $ 86 / bbl in 2030.
• Crack Gasoline margins (difference between Gasoline and crude oil prices) are projected to increase from $ 101 / t in 2021 to $ 179 / t in 2030 following sharp declines in 2020 due to the COVID-19 pandemic. The forecasted demand for gasoline in the world will grow as a result of the increase in transport frequency and the slower rotation of the car fleet towards electric cars. Also, the prediction of gasoline demand in Europe assumes an increase of approx. 2% annually in the period 2021-2030. In the coming years, it is assumed that the low margins in 2020, caused by the reduced demand for refining products caused by the pandemic, will recover. IHS forecasts show that gasoline margins will continue to grow until 2030.
• According to the predictions of IHS, the demand for diesel oil in the world will grow as a result of the increase in transport frequency and slower rotation of the car fleet towards electric cars. IHS forecasts indicate that the margins on diesel fuel will continue to grow until 2039.
• In the next two years (2021-2022), the market of petrochemical products is expected to maintain the pressure on lower spread levels vs. kerosene (difference between product quotations and kerosene), which results from the global situation related to COVID-19. In the long term, higher margins are assumed on the markets of products for which an increase in demand is expected.
• Replacement capital expenditure at a level that ensures the maintenance of the production capacity of the existing fixed assets.
  
  

Due to the current economic situation related to the COVID-19 pandemic, the Group decided to introduce impairment tests for major production assets based on a scenario analysis. Three scenarios were defined for CGU Refining (PKN ORLEN, ORLEN Lietuva, UNIPETROL) and CGU Petrochemicals (PKN ORLEN, UNIPETROL): base, pessimistic and optimistic. The base scenario is based directly on the main macroeconomic assumptions of the Financial Plan 2021 and Strategy 2030 described above. The pessimistic and optimistic scenarios were built on a single standard deviation of the historic Downstream Margin for 2012-2020. 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 2021.
• Replacement capital expenditure at a level that ensures the maintenance of the production capacity of the existing fixed assets.