SDFI and Petoro annual report 2019
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Compliance report for the SDFI annual accounts

Purpose

Since its establishment in 2001, Petoro has served as the licensee for the state’s participating interests in production licences, fields, pipelines and land-based facilities. Petoro is charged with managing the SDFI portfolio on the basis of sound business principles. As of the end of 2019, the portfolio consisted of 200 production licences, 2 more than at the beginning of the year. In January 2019, Petoro received participating interests for management in 14 production licences under the Awards in Predefined Areas (APA) 2018. One production license was carved out from existing licenses with SDFI participation in 2019, one license was transferred to Petoro and 14 production licences were relinquished.

Confirmation

The annual accounts are presented in accordance with the Provisions on Financial Management in Central Government, circular R-115 from the Ministry of Finance, and requirements in the instructions on financial management of the SDFI in Petoro, with the exceptions granted for the SDFI. The board hereby confirms that the annual accounts, which comprise the appropriation and capital accounts prepared on a cash basis, provide a true and fair picture in accordance with the cash basis. The general ledger accounts report presents accounting figures for the SDFI as reported to the government accounts in accordance with the standard chart of accounts for state-owned enterprises.  

The board confirms that the company accounts have been prepared in accordance with the Accounting Act and Norwegian generally accepted accounting principles (NGAAP) and provide a true and fair picture of the SDFI’s assets, obligations and financial results at 31 December 2019.

Assessment of significant factors

Appropriation and capital accounts

In accordance with the supplemental allocation letter dated 19 December 2019, the SDFI’s appropriation for investments1 totalled NOK 27.0 billion. The appropriation for operating income2 totalled NOK 95.8 billion.  The appropriation for interest on the state’s capital3 totalled NOK 2.8 billion. Operating income in accordance with the cash basis is affected first and foremost by the price of oil and gas and the volume of the SDFI’s production sold. Equinor handles marketing and sale of SDFI’s products through the marketing and sale instruction issued by the Ministry of Petroleum and Energy. 

The general ledger accounts report on the cash basis shows net reported revenues including financial income totalling NOK 153.0 billion in 2019, compared with NOK 175.7 billion in 2018. These revenues are substantially influenced by lower gas prices in 2019 as well as a lower sales volume. Expenses reported in the appropriation accounts comprise payments of NOK 26.3 billion as investments and NOK 30.5 billion as operating expenses. Payments in 2018 amounted to NOK 22.6 billion related to investments and NOK 32.8 billion related to operations. Payments to operations were primarily related to the operation of fields and facilities, processing and transport costs, as well as exploration and field development expenses. This is in addition to payments of financial expenses. Depreciation of fields and facilities amounted to NOK 22.7 billion in 2019, compared with NOK 23.6 billion the previous year. 
1 Ch./item 2440.30
2 Ch./item 5440.24
3 Ch./item 5440.80
The SDFI accounts include a number of significant estimates which are subject to uncertainties and rely on discretionary assessments. These e.g. include capitalised exploration costs, estimates of reserves as the basis for depreciation, decommissioning expenses based on estimates for costs to be incurred far into the future, and assessment of impairment charges on tangible fixed assets.  

Net cash flow transferred to the state amounted to NOK 96 billion, compared with NOK 120 billion the previous year. The total sales volume amounted to 978 million bbls of oil equivalents (boe) per day, just over 11 per cent lower than in 2018. 

Gas production totalled 98 million standard cubic metres (mill. scm) per day in 2019, down 14 per cent from a record-high level of 113 million scm per day last year. The decline in production alongside low gas prices resulted in revenues from self-produced gas of NOK 68 billion, about NOK 21 billion lower than the previous year. The reduction in gas volume was generally associated with use of flexible gas extraction for price optimisation on Troll, as well as operational challenges associated with compression on Ormen Lange.

Liquids production amounted to 349 thousand boe per day, 6 per cent lower than in 2018. This decline was mainly caused by natural production decline, as well as lower production as a result of problems with the riser on Snorre. The decline in liquids production was partially offset by the start-up of Johan Sverdrup in October 2019.

Costs incurred for investment totalled NOK 27 billion, about NOK 4 billion higher than the year before. The increase in investment was primarily caused by increased activity within field development associated with Johan Castberg, Troll phase 3, Snøhvit and Martin Linge, as well as increased production drilling on multiple fields.

The annual profit for 2019 totalled NOK 96 billion, about NOK 19 billion lower than the year before. The decline in net income was mainly caused by reduced revenues, in part offset by lower depreciation due to lower sales volume, as well as a reduction in production expenses. 

Production costs were NOK 4 billion lower than the previous year. Adjusted for a provision associated with a judgement in the trial concerning Troll in 2018 and subsequent settlement in 2019, production costs were on par with the previous year.

The book value of Martin Linge was written down by NOK 1.4 billion as a result of cost overruns and postponed start-up. Compared with the previous year, the change in impairment is not substantial, as Maria was written down by NOK 1.6 billion in 2018.

The book value of assets at 31 December 2019 was NOK 251 billion. The assets mainly consist of fixed assets related to field installations, pipelines and onshore plants, as well as current debtors. Equity at year-end came to NOK 162 billion. Overall debt amounted to NOK 89 billion, of which 70 billion was related to estimated future removal obligations. Removal obligations have increased by NOK 4.7 billion as a result of updated removal estimates, a lower discount rate, as well as the removal date being one year earlier.

The portfolio’s estimated remaining reserves in resource classes 1-3 totalled 5,335 million boe at the end of 2019, down by 210 million boe from the year before. Reserve growth totalled 142 million boe and was mainly caused by increased gas reserves on Gullfaks, as well as an economic life extension for Draugen. With a production of 352 million boe, this yielded a reserve replacement rate of 40 per cent in 2019, compared with 16 per cent in 2018.
 

Additional information

The Office of the Auditor General (OAG) is the external auditor and approves the annual accounts for the SDFI. On completing its annual audit, the OAG issues a final audit letter (report) which summarises the conclusion of its audit work. The result of the audit will be reported by 1 May 2020. 

The Board has appointed PwC to conduct a financial audit of the SDFI accounts as part of Petoro’s internal audit process.  PwC submits its audit report to the Petoro AS board regarding the annual accounts pursuant to the accounting principles on a cash basis and in accordance with international auditing standards.  PwC’s audit work forms the basis for the OAG’s review of the annual accounts.
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