SDFI - Notes 11-22

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As of 1 January 2009, the SDFI’s participation in Statoil Natural Gas LLC (SNG) in the US has been treated 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 at the original acquisition cost of NOK 798 million.

The company’s business office is located in Stamford in the US and it 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 activities in 2007, the profit/loss is allocated in accordance with a disproportionate distribution model which gives 48.4 per cent to the SDFI.

The SDFI participates in SNG under the marketing and sale instruction with regard to activities related to the marketing and sale of the state’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	2017	2016
Opening balance financial fixed assets	362	280
Share of profit for the year	(123)	82
Closing balance financial fixed assets	238	362

 

The liability comprises future abandonment and decommissioning of oil and gas installations. Norwegian authority 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. A number of factors underlying the decommissioning estimate are associated with significant uncertainty, including assumptions for decommissioning and estimating methods, technology and the removal date. The latter is expected largely to occur one or two years after 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 treasury 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.

New liabilities mainly include the Johan Sverdrup, Martin Linge and Maria fields and constitute about NOK 2.5 billion. At the same time, the estimate for decommissioning costs has been reduced by NOK 3.5 billion as a result of changes in future estimated costs from operators and alterations to cessation and decommissioning dates. This change includes reduced estimates for plugging and abandoning wells and for shutting down installations.
 

All figures in NOK million	2017	2016
Liability at 1 Jan	67 546	70 129
New liabilities/disposals	2 565	0
Actual decommissioning	(298)	(584)
Changes to estimates	(3 501)	(2 717)
Changes to discount rates	130	(666)
Changes to participating interests	(195)	(2)
Interest expense	1 400	1 386
Liability at 31 Dec	67 647	67 546

NOK 298 million for cessation and decommissioning accrued in 2017, and is included in the accounts on a cash basis.

 

Other long-term liabilities pursuant to 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 transition to company-based gas sales
• income not yet earned in anticipated repayment of profit shares in licenses with net profit agreements

Three financial leasing contracts were entered into in 2006 on the delivery of three ships to transport LNG from Snøhvit. These contracts run for 20 years, with two options for five-year extensions. Future discounted minimum payment for financial leasing totals NOK 1 145 million as of 31 December 2017. Of this, NOK 119 million falls due for payment in 2018, NOK 475 million in the subsequent four years and the residual NOK 551 million after 2023.

Repayment liabilities for previously paid-up profit shares in licences with net profit agreements linked to decommissioning is included in long-term liabilities and amounts to NOK 1 624 million.

Other long-term liabilities total NOK 860 million, of which NOK 266 million falls due within more than five years from the balance sheet date.

Not relevant to the accounts on a cash basis.

 

Other current liabilities pursuant to  NGAAP falling due in 2017 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 derivative 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 state’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 2017, the market value of the derivatives was NOK 596 million in assets and NOK 2 275 million in liabilities. The comparable figures at the end of 2016 were NOK 277 million in assets and NOK 4 899 million in liabilities. 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. In 2017, this amounted to NOK 498 million in assets. The comparable figures in 2016 were NOK 199 million in assets and NOK 83 million in liabilities. Net unrealised loss on outstanding positions as of 31 December 2017 is carried to expense.

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’s revenue from gas sales is the price actually obtained. Based on the arrangement relating to the marketing and sale instruction along with the SDFI’s participation in the state’s overall risk management, only limited use is made of financial instruments (derivatives). They are primarily employed 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 majority of the company’s revenue from the sale of oil and gas is invoiced in USD, EUR or GBP. Parts of its operating expenses and investments are 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 utilise currency hedging in relation to future sales of the SDFI’s petroleum, and its exposure in the balance sheet at 31 December 2017 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, NGL and condensate 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 risk in current transactions is accordingly regarded as limited.

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
2018	5 219	2 096
2019	4 444	1 562
2020	3 915	1 392
2021	2 994	1 321
2022	2 525	1 297
Beyond	1 391	5 382

Leases represent operations-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 US. 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 commit 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 year-end to participate in 23 wells with an expected cost to the SDFI in 2018 of NOK 1.4 billion.

The SDFI has also accepted contractual liabilities relating to investments in new and existing fields. Overall, this amounts to NOK 9.0 billion for 2018 and NOK 22.5 billion for subsequent periods, totalling NOK 31.5 billion. Through approved budgets and work programmes, the SDFI was also committed to operating and investment expenses for 2018. The mentioned liabilities for 2018 are included in this total.

In connection with the sale of the SDFI’s oil and gas, Statoil has issued guarantees to suppliers and owners of transport infrastructure, as well as in connection with operations in the US, the UK and continental Europe. Guarantees issued in connection with trading activities are provided as security for lack of financial settlement. In total, the guarantees amount to NOK 1.8 billion for the SDFI’s share.

The SDFI and Statoil deliver gas to customers under joint 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, pipelines and onshore facilities, and in the joint sale of the SDFI’s gas together with Statoil. The final scope of the SDFI’s liabilities or assets associated with such disputes and claims cannot be reliably estimated at this time. The SDFI’s financial standing is not expected to be significantly impacted by the outcome of such disputes. 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.

Legal action has been taken by COSL Offshore Management, which is currently being adjudicated as the annual accounts for the SDFI are submitted. The case concerns the termination of a rig contract linked to Troll, where the SDFI has a 56 per cent ownership interest.

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 significant 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 make up the foundation for depreciation expenses are of great significance for the result, and adjustments to the reserve base can cause major changes in 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 prepared, these investments are reviewed for indications of a decline in value. The assessment of whether an asset must be written down is primarily based 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	2017	2016
Equity at 1 Jan.	156 302	161 524
Items recognised directly in equity at 1 Jan. 2016		3 248
Net income	98 919	57 426
Cash transfers to the state	(87 157)	(65 897)
Equity at 31 Dec.	168 063	156 302

Items recognised directly in equity concern the correction of a previous error in the calculation of income not yet earned for a net profit agreement linked to an anticipated decommissioning liability for Valhall.

Not relevant to the accounts on a cash basis.

 

The SDFI is subject to the Appropriations Regulations, as well as the Regulations and Provisions on Financial Management in Central Government. In accordance with the Act relating to the Office of the Auditor General (OAG) of 7 May 2004, the OAG is the external auditor for the SDFI. The audit takes place during the period from 1 May 2017 – 30 April 2018, and the result of the audit will be reported in the form of an auditor’s report by 1 May 2018.

In addition, PricewaterhouseCoopers AS (PwC) has been engaged by Petoro’s board of directors 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 international auditing standards. PwC’s fee is charged to the accounts of Petoro AS.

 

 

	2017		2016		2015
Oil* in mill bbl  Gas in bn scm	oil	gas	oil	gas	oil	gas
Expected remaining reserves at 1 Jan	1489	712	1599	743	1318	767
Corrections for earlier years**			(3)	(1)	(10)
Change in estimates	30	3	18	(1)	17	7
Extensions and discoveries	112	0	1	0	367	2
Improved recovery	129	4	20	1	57	4
Purchase of reserves			2	6
Sale of reserves
Production	(145)	(41)	(150)	(37)	(150)	(38)
Expected remaining reserves at 31 Dec	1615	678	1489	712	1599	743

*    Oil includes NGL and condensate.
**  The correction is due to individual fields reporting negative reserves. Production is measured exactly, whereas remaining reserves are estimates.

The portfolio’s estimated remaining reserves of oil, condensate, NGL and gas totalled 5879 million boe at 31 December, down by 89 million boe from the year before. Reserve growth in 2017 primarily came from Johan Castberg, but also from the mature fields Snorre, Åsgard, Heidrun, and Visund. Nevertheless, the growth was not sufficient to offset the reduction in remaining reserves from production in 2017.

A total of 405 million boe were produced in 2017, giving a reserve replacement rate of 78 per cent for the year. The corresponding rate in 2016 was 22 per cent.

 

Petoro contributes to research and development (R&D) through the SDFI meeting its share of the operator’s costs for general research and development pursuant to the Accounting Agreement. NOK 507 million was expensed by the SDFI for R&D in 2017 as regards charges from the operators during the year.