SDFI and Petoro annual report 2021
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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 of 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. 

The SDFI recognised an investment associated with Equinor’s acquisition of Danske Commodities (DC) under the marketing and sale instruction in 2019. 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 the SDFI participates in the investment through the marketing and sale instruction for the part of the enterprise related to gas activities. The acquisition agreement 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. At the time of acquisition in 2019, the investment was recorded at the original acquisition cost of NOK 1,190 million. 

The table below includes the shareholdings in Norpipe Oil AS in addition to ENG and DC.
 
All figures in NOK million20212020
Financial assets 1 Jan.1,2891,464
Share of profit for the year in associate company(979)(202)
2019 additions 1,51827
Financial assets 31 Dec1,8271,289

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, as well as 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 been reduced by NOK 5.3 billion as a result of changes in future estimated costs from operators, alterations to cessation and decommissioning dates, as well as a change in the discount rate. 
 
All figures in NOK million20212020
Liability at 1 Jan.84,02969,883
New liabilities0146
Actual decommissioning(364)(310)
Change estimate and discount rate(6,357)12,696
Interest expense1,4261,605
Liability at 31 Dec78,73484,029
NOK 364 million for cessation and decommissioning accrued in 2021, and is included in the accounts on a cash basis. The SDFI’s share of estimated expenses for 2022 associated with shutdown and removal amounts to NOK 700 million.
 

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 licences 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 754 million as of 31 December 2021. Of this, NOK 219 million will be disbursed in 2022 and 535 million will be paid over the subsequent three years.

Repayment liabilities for previously paid-up profit shares in licences with net profit agreements linked to decommissioning are included in long-term liabilities and amount to NOK 1,782 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. Outstanding debt associated with the investment for the SDFI share came to NOK 2,772 million at year-end.

Other long-term liabilities amount to NOK 668 million. 

Not relevant to the accounts on a cash basis.
 

Note 14 - Other current liabilities

Other current liabilities pursuant to NGAAP falling due in 2021 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
  • open account vis-à-vis Equinor related to financial instruments under the marketing and sale instruction

Licence operator credits have been moved from current liabilities to current assets in the report.

Not relevant to the accounts on a cash basis.
 

Note 15 - Financial instruments and risk management

The marketing and sale instruction issued to Equinor utilises derived financial instruments (derivatives) to manage risk in the SDFI portfolio. 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 2021, the market value of the derivatives was NOK 19,814 million in assets and NOK 10,280 million in liabilities. The comparable figures at the end of 2020 were NOK 2,557 million in assets and NOK 1,785 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. This amounted to NOK 188 million in assets and NOK 0 million in liabilities in 2021. The comparable figures in 2020 were NOK 187 million in assets and NOK 0 million in liabilities, respectively. Net unrealised gains on outstanding positions at 31 December 2021 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 2021 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
SDFI’s sales take place vis-à-vis a limited number of counter-parties which are considered to have high creditworthiness, of which all oil, NGL and condensate is 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
20223,3141,272
20231,860 1,071
2024550785
2025170624
2026150296
Beyond211328
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.

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 15 wells with an expected cost to the SDFI in 2022 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 9 billion for 2022 and NOK 17 billion for subsequent periods, totalling NOK 26 billion. Through approved budgets and work programmes, the SDFI was also committed to operating and investment expenses for 2022. The mentioned liabilities are included in budgets and work programmes for 2022. 

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 870 million 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 ongoing legal actions or unresolved disputes and claims 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, or when a judgement has been pronounced and SDFI is on the losing side, regardless of whether the judgement is appealed and the dispute will advance through the legal system. A loss provision was reversed in 2021 associated with a future transport capacity agreement from 2020 totalling NOK 1.3 billion.

Some long-term gas sales agreements contain price revision clauses that may lead to claims that become the subject of arbitration. The SDFI’s exposure associated with ongoing price revision is not considered to have a significant effect on the SDFI’s net income or financial position. Based on the SDFI’s assessments, no substantial provisions have been made for price revision in the annual accounts for 2021.

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 impact 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 expected reserves. This common share is used to calculate the depreciation basis for each field. The reduced expected 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 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 million20212020
Equity at 1 Jan. 151,113 162,070
Net profit 222,135 47,754
Cash transfers to the government (186,058) (58,711)
Equity at 31 Jan187,190 151,113
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 2021 – 30 April 2022, and the result of the audit will be reported in the form of an auditor’s report by 1 May 2022. 

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-eng
*   Oil includes NGL and condensate   

The portfolio’s estimated remaining reserves totalled 4,972 million boe at the end of the year, down by 73 million boe from the year before. Reserve growth amounted to 301 million boe and mainly comes from project decisions such as Ormen Lange phase 3, Oseberg increased gas capacity and Åsgard B low-pressure production phase 3, in addition to extending drilling activities on Heidrun. With a production of 375 million boe, this yielded a reserve replacement rate of 80 per cent, compared with 20 per cent in 2020.
 

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 562 million was expensed by the SDFI for R&D in 2021 as regards charges from the operators during the accounting year.
 

Note 23 - Events after the balance sheet date

There were no significant events after the balance sheet date.