SDFI - Notes 11-22

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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.

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	2015	2014
Opening balance financial fixed assets (adjusted share)	101	393
Share of profit for the year in associate company	180	(293)
Closing balance financial fixed assets	280	101

 

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 23.
    
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 reduced by NOK 7.4 billion as a result of changes to future estimated costs from operators and alterations to cessation and decommissioning dates. This change includes NOK 9.3 billion in reduced estimates for plugging and abandoning wells and for shutting down installations as well as completion of current removal projects. Estimates for decommissioning expenses include operating costs for rigs and other vessels required for such complex operations. A somewhat lower discount rate increases the liability by NOK 1.6 billion.

 

NOK 1 355 million for cessation and decommissioning accrued in 2015, 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 related to the final settlement of commercial arrangements concerning the move to company-based gas sales
• debt related to income not yet earned in net profit agreements, recorded at NOK 4.8 billion in 2015.

    
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 1 357 million. Of this, NOK 199 million falls due for payment in 2016, NOK 799 million in the subsequent four years and the residual NOK 359 million after 2021.
    
Other long-term liabilities total NOK 1 202 million, of which NOK 733 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 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 

    
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 sells primarily oil, gas and NGL at current prices. Instruments used to manage price risk for sales at fixed prices or for deferred gas production relate to forwards and futures. At 31 December 2015, the market value of the financial instruments was NOK 3 759 million in assets and NOK 331 million in liabilities. The comparable figures at the end of 2014 were NOK 1 959 million and NOK 404 million respectively. These figures include the market value of listed futures and unlisted instruments. The market value of built-in derivatives related to end-user customers in continental Europe. This amounted to a supplementary NOK 410 million in assets and NOK 507 million in liabilities. The corresponding figures for 2014 were NOK 1 089 million in assets. No net unrealised gains were recognised pursuant to the NGAAP in 2015.

Price risk
The SDFI is exposed to fluctuations in oil and gas prices in the global market. Statoil purchases all oil, NGL and condensate from the SDFI at market-based prices. SDFI revenue from gas sales to end users is the price actually obtained. 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) and primarily to manage price risk for sales at fixed prices or for deferred gas production 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 2015 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
2016	7 201	1 916
2017	6 156	1 929
2018	5 471	1 929
2019	4 731	1 649
2020	4 305	1 565
Beyond	8 703	7 457

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. Licensees are also committed to undertake exploration activities through approved budgets and work programmes. Petoro was committed at 31 December 2015 to participate in 11 wells with an expected cost to the SDFI of NOK 1 290 million. Of this, NOK 1 184 million is expected to be incurred in 2016.
    
The company has also accepted contractual liabilities relating to investment in new and existing fields. Through approved budgets and work programmes, the SDFI was also committed in 2015 to operating and investment expenses for 2016. These amount in all to NOK 29 billion for 2016.
    
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 the book value of tangible fixed assets, reserves, decommissioning of installations, exploration expenses and financial instruments could have the greatest 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’ 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 future market prices.
    
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	2015	2014
Equity at 1 Jan	166 165	157 562
Net income for the year	88 999	119 671
Cash transfers to the government	(93 639)	(111 068)
Equity at 31 Dec	161 524	162 165

The accounts for 2014 did not make a provision of NOK 5 296 million for expected payments under net profit agreements (NPAs) for net cash deficits on fields covered by these regulations. The Ministry of Petroleum and Energy clarified in 2015 that such payments must be made to companies with a net cash deficit in NPA licences. As a result of this clarification, the SDFI has made full provision for the expected repayment of previously paid NPA for fields covered by this system. The provision represents 10 to 17.5 per cent of expected removal costs on fields covered by the relevant licences.
    
Since the provision is regarded as significant for the SDFI and applies to earlier periods, it has been adjusted against equity at 1 January 2014 as an error. The offsetting entry is other long-term liabilities, which has been adjusted by a corresponding amount in the opening balance for 2014. 
    
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.
    
In addition, PwC 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. PwC submits its audit report to the board in accordance with Norwegian auditing standards. PwC’s fee is expensed in the Petoro accounts. 

 

* Oil includes NGL and condensate.
** Reconciliation with official reserves.

At 31 December 2015, the portfolio’s expected remaining oil, condensate, NGL and gas reserves totalled 6 276 million boe. This represented an increase of 130 million boe from the end of 2014.
    
An overall 520 million boe were added to reserves in 2015. This increase primarily related to the decision on development and operation of Johan Sverdrup phase one. In addition comes improved recovery from existing fields in the SDFI portfolio during 2015. At the same time, adjustments were made on some fields.
    
A total of 390 million boe were produced in 2015, giving a reserve replacement rate of 133 per cent for the year. The corresponding rate in 2014 was 24 per cent.


 

Petoro contributes to R&D through the SDFI meeting its share of such costs in the production licences. NOK 581 million was expensed by the SDFI for R&D in 2015 in respect of charges from the operators during the year.