SDFI and Petoro annual report 2019
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SDFI - Notes 11-22

Note 11 - Investments in associated companies

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 former Statoil and Hydro’s petroleum activities in 2007, the profit/loss is allocated in accordance with a skewed 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 2019, the SDFI has recognised an investment associated with Equinor’s acquisition of Danske Commodities (DC) under the marketing and sale instruction. DC is one of Europe’s largest companies within short-term electricity trading. The company’s activities also include short-term gas trading. The company is headquartered in Aarhus, Denmark. The company is formally owned by Equinor, but SDFI participates in the investment through the marketing and sale instruction. The acquisition agreement was entered into in the third quarter of 2018 and was finalised on 1 February 2019. The SDFI’s participation in DC is assessed as an investment in an associated company and is recorded in accordance with the equity method. After the transaction date, the SDFI is entitled to a share of the result from gas activities that fall under the marketing and sale instruction. The investment was recorded with an acquisition cost of NOK 1,190 million. 

The table below includes the shareholdings in Norpipe Oil AS in addition to ENG and DC. Norsea Gas AS was liquidated in 2018.
All figures in NOK million20192018
Opening balance financial fixed assets218238
Share of profit for the year in associate company56(20)
2019 additions 1,1900
Closing balance financial fixed assets1,464218

Note 12 - Shut-down/decommissioning

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 24.  

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 corporate bonds (OMF) as stated in NRS6.

The estimate for decommissioning costs has increased by NOK 4.7 billion as a result of changes in future cost estimates from operators, alterations to cessation and decommissioning dates, as well as a change in the discount rate. 
All figures in NOK million20192018
Liability at 1 Jan65,19067,647
New liabilities232
Actual decommissioning(409)(174)
Changes to estimates 3,393 (3,682)
Interest expense1,6861,397
Liability at 31 Dec69,88365,190
In 2019 NOK 409 million is recognised as actual removal costs and included in the accounts on a cash basis. Estimated cost for 2020 related to actual removal is NOK 405 million SDFI share.
 

Note 13 - Other long-term liabilities

Other long-term liabilities pursuant to NGAAP comprise:
  • debt related to financial lease agreements for three LNG carriers delivered in 2006 
  • income not yet earned in anticipated repayment of profit shares in licenses with net profit agreements
  • debt to Equinor in connection with acquisition of Danske Commodities
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 876 million as of 31 December 2019. Of this, NOK 156 million will be disbursed in 2020 and 623 million will be paid over the subsequent four years. The remaining NOK 97 million will be paid after 2025.  

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 1,467 million. 

Equinor finalised its acquisition of Danske Commodities in 2019. SDFI became a participant in the part of the acquisition associated with gas activities under the marketing and sale instruction. The investment amount for the SDFI share was NOK 1,190 million. 

Other long-term liabilities total NOK 737 million, of which NOK 133 million falls due within five years from the balance sheet date. 

Not relevant to the accounts on a cash basis. 
 

Note 14 - Other current liabilities

Other current liabilities pursuant to NGAAP falling due in 2019 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 receivables from license operators have been reclassified from short term liabilities to current assets in the report.

Not relevant to the accounts on a cash basis.
 

Note 15 - Financial instruments and risk management

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 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 2019, the market value of the derivatives was NOK 2,300 million in assets and NOK 2,252 million in liabilities. The comparable figures at the end of 2018 were NOK 1,008 million in assets and NOK 1,863 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. This amounted to NOK 145 million in assets and NOK 148 million in liabilities in 2019. The comparable figures in 2018 were NOK 133 million and NOK 283 million, respectively. Net unrealised gains on outstanding positions at 31 December 2019 are not recognised as income under the Norwegian Accounting Act and generally accepted accounting principles (NGAAP).

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. The 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 government’s overall risk management, 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. Part 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 2019 was largely related to one month’s outstanding revenue.  

Interest risk
The SDFI is primarily exposed to credit risk through financial leasing contracts. These are recognised in the SDFI accounts in accordance with the Norwegian Accounting Act and generally accepted accounting principles (NGAAP). Together with Equinor, it has a financial liability related to leasing contracts 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. 
 

Note 16 - Leases/contractual liabilities

All figures in NOK millionLeasesTransport capacity and other liabilities
20204,0801,620
20213,3451,542
20222,3401,454
20231,3841,335
20241991,051
Beyond2252,816
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. The SDFI was committed at year-end to participate in 13 wells with an expected cost to the SDFI in 2020 of NOK 1 billion. 

The SDFI has also accepted contractual liabilities relating to investments in new and existing fields. Overall, this amounts to NOK 12.3 billion for 2020 and NOK 13.4 billion for subsequent periods, totalling NOK 25.7 billion. Through approved budgets and work programmes, the SDFI was also committed to operating and investment expenses for 2020. The mentioned liabilities are included in budgets and work programmes for 2020.   

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 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. 
 

Note 17 - Other liabilities

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 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. 

Some long-term gas sales agreements include provisions for price revision which may result in claims from arbitration awards. SDFIs exposure to ongoing arbitration is considered not to have material effect on the SDFI financial result or financial position. Based on SDFI’s consideration no provision has been made in the annual accounts for 2019. Planned date for clarification of outcome is uncertain, but the result is assumed to be settled during 2020. 

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. 2018 included a provision for a liability associated with an intital verdict from court totalling NOK 2.4 billion including interest. The verdict was appealed, but the parties entered into an out of court settlement in early January 2020, before final legal proceedings. The initial provision for the SDFI’s share was reversed and provision was made for the actual settlement in 2019.

Not relevant to the accounts on a cash basis. 
 

Note 18 - Significant estimates

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 to 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 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.
 

Note 19 - Equity

All figures in NOK million20192018
Equity at 1 Jan. 162,607 168,063
Net profit 95,647 114,210
Equity adjustments - -
Cash transfers to the government (96,184) (119,666)
Equity at 31 Jan162,070162,607
Not relevant to the accounts on a cash basis. 
 

Note 20 - Auditors

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 2019 – 30 April 2020, and the result of the audit will be reported in the form of an auditor’s report by 1 May 2020. 

PricewaterhouseCoopers AS (PwC) has also 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.
 

Note 21 - Expected remaining oil and gas reserves – unaudited

Note21-eng2
*   Oil includes NGL and condensate.    

The portfolio’s estimated remaining reserves totalled 5,335 million boe at the end of 2019, down by 210 million boe from the year before. Production in 2019 came to 352 million boe. The reserve growth of 142 million boe was primarily from increased gas reserves on Gullfaks and longer economic life on Draugen. This yields a reserve replacement rate for 2019 of 40 per cent, compared with 16 per cent in 2018. 
 

Note 22 - Research and development

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 512 million was expensed by the SDFI for R&D in 2019 as regards charges from the operators during the year.
 

Note 23 - Events after the balance sheet date

The parties entered into a settlement in early January 2020 in an ongoing court case associated with the Troll Unit. The settlement has been incorporated in the accounts for 2019 and will have a cash effect in 2020.