SDFI - Notes 11-21

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The SDFI’s participation in Statoil Natural Gas LLC (SNG) in the USA has been treated with effect from 1 January 2009 as an investment in an associate, which is recognised in accordance with the equity method. At the time it was established in 2003, the investment was recorded as an investment in intangible fixed assets at an original acquisition cost of NOK 798 million.
    
SNG has its business office at Stamford in the USA and is formally owned 56.5 per cent by Statoil Norsk LNG AS, which reflects the SDFI’s ownership interest under the marketing and sale instruction. The remaining 43.5 per cent is owned by Statoil North America Inc. As a result of the merger between Statoil and Hydro’s petroleum business in 2007, the profit/loss is allocated in accordance with a skewed distribution model which gives 48.4 per cent to the SDFI.

Statoil consolidates its holding in SNG with other US operations, and uses SNG as a marketing company for gas sales in the American market. Pursuant to the marketing and sale instruction, the SDFI participates in SNG with regard to activities related to the sale of the government’s LNG from Snøhvit. Cash flows from SNG are settled continuously on a monthly basis in connection with the purchase and sale of LNG from 2013.

In addition to SNG, the shareholdings in Norsea Gas AS and Norpipe Oil AS are included in the table below.

 

All figures in NOK million	2014	2013
Opening balance financial fixed assets (adjusted share)	393	1102
Net profit credited before impairment	(293)	(709)
Impairment
Closing balance financial fixed assets	101	393

 

The liability comprises future abandonment and decommissioning of oil and gas installations. Norwegian government legal requirements and the Oslo-Paris (Ospar) convention for the protection of the marine environment of the north-east Atlantic provide the basis for determining the extent of the decommissioning liability.
    
The liability is calculated on the basis of estimates from the respective operators. Great uncertainty relates to a number of factors underlying the decommissioning estimate, including assumptions for decommissioning and estimating methods, technology and the decommissioning date. The last of these is expected largely to fall one-two years after the cessation of production. See note 22.

Interest expense on the liability is classified as a financial expense in the income statement. The discount rate is based on the interest rate for Norwegian government bonds with the same maturity as the decommissioning liability. An extrapolated interest rate derived from foreign rates is applied for liabilities which extend beyond the longest maturity for such bonds.

The estimate for decommissioning costs has been increased by NOK 4.9 billion as a result of changes to future estimated costs from operators and alterations to cessation and decommissioning dates. This change includes higher estimates for plugging and abandoning wells and for shutting down installations. Estimates for decommissioning expenses include operating costs for rigs and other vessels required for such complex operations. A lower discount rate increases the liability by NOK 19.2 billion.
 
 

All figures NOK million	2014	2013
Liability at 1 Jan	52 580	58 207
New liabilities/disposals	130	1 359
Actual decommissioning	(1 243)	(655)
Changes to estimates	4 853	3 482
Changes to discount rates	19 247	(11 380)
Interest expense	1 910	1 566
Liability at 31 Dec	77 520	52 580

NOK 1 243 million for cessation and decommissioning accrued in 2014, and is included in the accounts on a cash basis.

 

Other long-term liabilities pursuant to the NGAAP comprise:

• debt related to financial leasing of three LNG carriers delivered in 2006
• debt relating to the final settlement of commercial arrangements concerning the move to company-based gas sales.

    
Three financial leasing contracts were entered into in 2006 on the delivery of three ships for transporting LNG from Snøhvit. These contracts run for 20 years, with two options for five-year extensions. The future discounted minimum payment for financial leasing totals NOK 1 438 million. Of this, NOK 168 million falls due for payment in 2015, NOK 674 million in the subsequent four years and the residual NOK 428 million after 2019.

Other long-term liabilities total NOK 1 044 million, of which NOK 792 million falls due longer than five years from the balance sheet date.

Not relevant to the accounts on a cash basis.

 

Other current liabilities pursuant to the NGAAP falling due in 2015 consist mainly of: 

• provisions for unpaid costs accrued by licence operators in the accounts at November
• provisions for accrued unpaid costs at December, adjusted for cash calls in December
• other provisions for accrued unpaid costs not included in the accounts received from operators 
• current share of long-term liabilities.

Not relevant to the accounts on a cash basis.

 

Only limited use is made of financial instruments (derivatives) to manage risk in the SDFI portfolio. This is primarily because the SDFI is owned by the state and is accordingly included in the government’s overall risk management. The SDFI does not have significant interest-bearing debt, and all crude oil and NGL is sold to Statoil. Instruments used to hedge gas sales relate to forwards and futures. At 31 December 2014, the market value of the financial instruments was NOK 1 959 million in assets and NOK 404 million in liabilities. The comparable figures at the end of 2013 were NOK 289 million and NOK 301 million respectively. These figures include the market value of unlisted instruments. The market value of built-in derivatives related to end-user customers in continental Europe. This amounted to a supplementary NOK 1 089 million in assets. The corresponding figures for 2013 were NOK 1 137 million and NOK 31 million in liabilities. No net unrealised gains were recognised pursuant to the NGAAP in 2014. The net unrealised loss for the trading portfolio at 31 December 2013 was recorded as NOK 11.6 million.
 
Price risk
The SDFI is exposed to fluctuations in oil and gas prices in the world market. Statoil purchases all oil, NGL and condensate from the SDFI at market-based prices. SDFI revenue from gas sales to end users reflects market value. Based on the arrangement relating to the marketing and sale instruction together with the SDFI’s participation in the government’s overall risk management, only limited use is made of financial instruments (derivatives) to counteract fluctuations in profit and loss owing to variations in commodity prices.

Currency risk
The most significant part of the SDFI’s revenue from the sale of oil and gas is billed in USD, EUR or GBP. Part of its operating expenses and investments is also billed in equivalent currencies. When converting to NOK, currency fluctuations will affect the SDFI’s income statement and balance sheet. The SDFI does not make use of currency hedging in relation to future sales of the SDFI’s petroleum, and its exposure in the balance sheet at 31 December 2014 was largely related to one month’s outstanding revenue. 

Interest risk
The SDFI is primarily exposed to credit risk through financial leases. Together with Statoil, it has a financial liability related to charters for LNG ships pursuant to the marketing and sale instruction. The SDFI has no other interest-bearing debt exposed to interest rate fluctuations. 

Credit risk
The SDFI’s sales are made to a limited number of parties, with all oil and NGL sold to Statoil. In accordance with the marketing and sale instruction, financial instruments for the SDFI’s operations are purchased from other parties with sound credit ratings. Financial instruments are only established with large banks or financial institutions at levels of exposure approved in advance. The SDFI’s credit-related risk during consecutive transactions is accordingly regarded as insignificant. 

Liquidity risk
The SDFI generates a significant positive cash flow from its operations. Internal guidelines on managing the flow of liquidity have been established.

 

All figures in NOK million	Leases	Transport capacity and other liabilities
2015	6 553	1 967
2016	6 286	1 829
2017	4 708	1 949
2018	4 115	1 828
2019	3 777	1 563
Beyond	9 660	12 303

Leases represent operation-related contractual liabilities for the chartering/leasing of rigs, supply ships, production ships, helicopters, standby vessels, bases and so forth as specified by the individual operator. The figures represent cancellation costs.
    
Transport capacity and other liabilities relate to the sale of gas, and consist mainly of transport and storage liabilities in the UK and continental Europe as well as terminal capacity liabilities relating to the Cove Point terminal in the USA. The SDFI’s share of installations and pipelines on the NCS is generally higher than or equal to the transport share. Hence, no liabilities are calculated for these systems.

Other liabilities 
In connection with the award of licences to explore for and produce petroleum, licensees may be required to undertake to drill a certain number of wells. Petoro was committed at 31 December 2014 to participate in eight wells with an expected cost to the SDFI of NOK 948 million. Of this, NOK 763 million is expected to be incurred in 2015.
    
The company has also accepted contractual liabilities relating to investment in new and existing fields. These obligations total NOK 11.8 billion for 2014 and NOK 15.5 billion for subsequent periods, a total of NOK 27.3 billion. The SDFI is also committed in 2014 through approved licence budgets to operating and investment expenses for subsequent years. The above-mentioned liabilities for 2014 are included in this total.

In connection with the sale of the SDFI’s oil and gas, Statoil has issued a limited number of warranties to vendors and owners of transport infrastructure relating to operations in the USA, the UK and continental Europe. Warranties issued in connection with trading operations are provided as security for the financial settlement. 

The SDFI and Statoil deliver gas to customers under common gas sale agreements. SDFI gas reserves will be utilised in accordance with the SDFI’s share of production from the fields selected to deliver the gas at any given time. 

Not relevant to the accounts on a cash basis.

 

The SDFI could be affected by possible legal actions and disputes as a participant in production licences, fields, pipelines and land-based facilities, and in the joint sale of the SDFI’s gas together with Statoil. The SDFI is involved in current disputes relating to issues in joint ventures in which Petoro is a licensee. Provisions have been made in the accounts for issues where a negative outcome for the SDFI portfolio is thought to be more likely than not.
    
Not relevant to the accounts on a cash basis.

 

The SDFI accounts are presented in accordance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles (NGAAP), which means that the management makes assessments and exercises judgement in a number of areas. Changes in the underlying assumptions could have a substantial effect on the accounts. Where the SDFI portfolio is concerned, it is presumed that assessments of reserves, decommissioning of installations, exploration expenses and financial instruments could have the largest significance.
    
Recoverable reserves include volumes of crude oil, NGL (including condensate) and dry gas as reported in resource classes 1-3 in the   classification system used by the Norwegian Petroleum Directorate (NPD). Only reserves for which the licensees’ plan for development and operation (PDO) has been sanctioned in the management committee and submitted to the authorities are included in the portfolio’s expected reserves. A share of the field’s remaining reserves in production (resource class 1) provides the basis for depreciation. A share of oil and gas respectively is calculated annually for the portfolio to represent the relationship between low and basis reserves. This common share is used to calculate the depreciation basis for each field. The downwardly adjusted basis reserves which form the basis for depreciation expenses have great significance for the result, and adjustments to the reserve base can cause major changes to the SDFI’s profit.

Drilling expenses are capitalised temporarily until an assessment has been made of whether oil or gas reserves have been found. Assessments of the extent to which these expenses should remain capitalised or be written down in the period will affect results for the period.

Substantial investments in tangible fixed assets have been made in the SDFI portfolio. Each time the accounts are made up, these are reviewed for indications of a fall in value. The assessment of whether an asset must be written down builds to a great extent on judgements and assumptions about the future.

Reference is otherwise made to the description of the company’s accounting principles and to notes 12 and 15, which describe the company’s treatment of exploration expenses, uncertainties related to decommissioning and financial instruments.
    
Not relevant to the accounts on a cash basis.

 

All figures in NOK million	2014	2013
Equity at 1 Jan	162 858	155 085
Net income for the year	119 671	132 817
Cash transfers to the government	(111 068)	(124 825)
Items recorded directly against equity		(219)
Equity at 31 Dec	171 461	162 858

Items recorded directly against equity in 2013 related to an equity adjustment in connection with a change to the method for translating foreign currencies to Norwegian kroner when valuing the stock margin for the gas stock. Equity at 1 January included a capital contribution of NOK 9.1 billion paid to Statoil on 1 January 1985 for the participatory interests acquired by the SDFI from Statoil. It otherwise includes accumulated income reduced by net cash transfers to the government. 
    
Not relevant to the accounts on a cash basis.

 

Petoro is subject to the regulations on appropriations and the government’s financial regulations. In accordance with the Act on the Auditing of Governmental Accounts of 7 May 2004, the Office of the Auditor General is the external auditor for the SDFI. The Auditor General issues a final audit letter (report) concerning the SDFI accounts and budget, which is first published after the government accounts have been submitted and when the Auditor General’s annual report, Document no 1, is submitted to the Storting (parliament).
    
In addition, Deloitte AS has been engaged by the board of directors of Petoro AS to perform a financial audit of the SDFI as part of the internal audit function. Deloitte submits its audit report to the board in accordance with Norwegian auditing standards. Deloitte’s fee is expensed in the Petoro accounts. 

 

 

	2014		2013		2012		2011
Oil* in mill bbl   Gas in bn scm	oil	gas	oil	gas	oil	gas	oil	gas
Expected reserves at 1 Jan	1395	799	1458	821	1429	847	1397	817
Corrections for earlier years**								(1)
Change in estimates	68	1	41	6	62	8	43	(3)
Extensions and discoveries	4	1	12	3	34	6	74	7
Improved recovery	0	0	35	5	89	1	86	61
Purchase of reserves
Sale of reserves							(10)	(1)
Production	(148)	(34)	(151)	(36)	(157)	(41)	(161)	(33)
Expected reserves at 31 Dec	1318	767	1395	799	1458	821	1429	847

*   Oil includes NGL and condensate.
** Correction in 2011 as a result of reconciliation with official production figures from the NPD.

At 31 December 2014, the portfolio’s expected remaining oil, condensate, NGL and gas reserves totalled 6 145 million boe. This represented a decline of 277 million boe from the end of 2013.
    
Net reserves rose by 88 million boe in 2014. This low figure reflected few decisions on investing in new developments and improved recovery measures on existing SDFI fields during the year. Most of the increase arose from more uniform reporting of reserves for new wells on fields operated by Statoil. At the same time, reserves were downgraded on some fields.

A total of 365 million boe were produced in 2014, giving a net reserve replacement rate of 24 per cent for the year. The corresponding rate in 2013 was 47 per cent.