SDFI - Notes 11-22

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As of 1 January 2009, the SDFI’s participation in Equinor Natural Gas LLC (ENG) 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 Equinor 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 Equinor North America Inc. As a result of the merger between former 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 ENG 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 ENG are settled continuously on a monthly basis in connection with the purchase and sale of LNG.

In addition to ENG, the shareholdings in Norsea Gas AS and Norpipe Oil AS are included in the table below. Norsea Gas AS was wound up in 2018. The winding up dividend from Norsea Gas AS was NOK 373.5 million.
 

All figures in NOK million	2018	2017
Opening balance financial fixed assets	338	362
Share of profit for the year	-20	-123
Closing balance financial fixed assets	218	238

 

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 removal date is largely expected 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 discount rate for enterprise bonds (OMF) as listed in NRS6.

The estimated decommissioning costs have been adjusted downward by NOK 3.7 billion as a result of changes in future estimated costs from operators, changing the decommissioning and removal date, as well as changes in the discount rate.

The changed estimate in 2017 was specified with changed discount rates (130), changed ownership interest (-195) and changed estimate (-3 501). 
 

All figures in NOK million	2018	2017
Liability at 1 January	67 546	67 546
New liabilities	2 565	2 565
Actual decommissioning	-298	-298
Changes to estimates	-3 501	-3 566
Interest expense	1 400	1 400
Liability at 31 December	67 647	67 647

NOK 174 million for cessation and decommissioning incurred in 2018, 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 1 032 million as of 31 December 2018. Of this, NOK 112 million falls due for payment in 2019, and NOK 450 million is to be paid in the subsequent four years. The residual NOK 470 million shall be paid after 2024.

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 1 533 million.

Other long-term liabilities total NOK 783 million, of which NOK 206 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 2018 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

Accounts receivable from licence operators has been moved from short term liabilities to current assets in the report. A comparable change has been made for comparison figures in 2017.

Not relevant to the accounts on a cash basis.

 

Pursuant to the marketing and sale instruction issued to Equinor, 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 Norwegian 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 2018, the market value of the derivatives was NOK 1 008 million in assets and NOK 1 863 million in liabilities. The comparable figures at the end of 2017 were NOK 596 million in assets and NOK 2 275 million in liabilities. These figures include the market value of listed futures and unlisted instruments. The market value of built-in derivatives was related to end-user customers in continental Europe. In 2018, this amounted to NOK 133 million in assets and NOK 283 in liabilities. The comparable figures in 2017 were NOK 498 in assets. Net unrealised loss on outstanding positions as of 31 December 2018 is carried to expense.

Price risk
The SDFI is exposed to fluctuations in oil and gas prices in the global market. Equinor 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 most significant part 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 petroleum, and its exposure in the balance sheet at 31 December 2018 was largely related to one month’s outstanding revenue.
Interest risk
The SDFI is primarily exposed to interest risk through financial leases. Together with Equinor, the company 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 Equinor. 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
2019	5 191	1 575
2020	4 315	1 255
2021	3 449	1 172
2022	2 978	1 129
2023	1 499	1 067
Deretter	505	3 684

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. SDFI was committed at year-end to participate in 19 wells with an expected cost in 2019 of NOK 1.1 billion.

The SDFI has also accepted contractual liabilities relating to investments in new and existing fields. Overall, this amounts to NOK 12.6 billion for 2019 and NOK 20.45 billion for subsequent periods, totalling NOK 33 billion. Through approved budgets and work programmes, the SDFI is also committed to operating and investment expenses for 2019. The mentioned liabilities for 2019 are included in this total.

In connection with the sale of the SDFI’s oil and gas, Equinor 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 billion for the SDFI’s share.

The SDFI and Equinor deliver gas to customers under joint gas sale agreements. SDFI’s 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 Equinor. 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 negatively 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.

According to NGAAP a liability is recognised in the SDFI accounts if the initial verdict from a court has a negative outcome regardless of the the company`s view of a favorable outcome when the initial verdict has been appealed. In the case of Troll Unit a liability for the initial verdict has been recognised in the accounts amounting to NOK 2.4 billion as of 31 December 2018.

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, 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’ 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 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 for exploration wells 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 depreciation if there are indications of a decline in value. The assessment of whether an asset must be written down is largely based on discretionary 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	2018	2017
Equity at 1 Jan.	168 063	156 302
Net income	114 210	98 919
Cash transfers to the state	- 119 666	- 87 157
Equity at 31 Dec.	162 607	168 063

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 2018 – 30 April 2019, and the result of the audit will be reported in the form of an auditor’s report by 1 May 2019.

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.

 

 

	2018		2017		2016
Oil* in million bbl, Gas in billion Sm3	oil	gas	oil	gas	oil	gas
Expected remaining reserves at 1 Jan.	1 615	678	1489	712	1599	743
Corrections for earlier years **	-9	0	0	0	-3	-1
Change in estimates	-33	-6	30	3	18	-1
Extensions and discoveries	127	0	112	0	1	0
Improved recovery	7	1	129	4	20	1
Purchase of reserves	0	0	0	0	2	6
Sale of reserves	0	0	0	0	0	0
Production	-136	-41	-145	-41	-150	-37
Expected remaining reserves at 31 Dec.	1 572	632	1615	678	1489	712

*    Oil includes NGL and condensate
**  The correction is due to individual fields reporting negative reserves. Production is measured exactly, 
      whereas remaining reserves are estimates.
Reserve growth is the total of changes in estimates, extensions and discoveries, as well as improved recovery

At the end of 2018, the portfolio’s estimated total remaining reserves were 5 544 million boe, down by 335 million boe from the end of 2017. Production was 396 million boe in 2018. The reserve growth of 62 million boe primarily came from the decision on Johan Sverdrup Phase 2. This gives a reserve replacement rate for 2018 of 16 per cent, compared with 78 per cent in 2017.

 

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 497 million was expensed by the SDFI for R&D in 2018 as regards charges from the operators during the year.

 

In the third quarter of 2018, Equinor entered into an agreement to purchase 100 per cent of the shares in Danske Commodities (DC). The agreement was approved in January 2019 and entered into force on 1 February 2019. DC is one of Europe’s largest companies within short-term electricity trading. Short-term gas trading is also part of the company’s activities. Petoro is in dialogue with Equinor regarding handling the SDFI’s participation as regards the transaction under the Marketing and Sale Instruction.