Directors’ report 2021

Petoro manages the State’s Direct Financial Interest (SDFI), which represents about one-third of Norway’s overall oil and gas reserves. The company’s objective is to create the greatest possible value and achieve the greatest possible revenue for the State from SDFI. 

The SDFI scheme was established in 1985. Under this arrangement, the state participates as a direct investor in petroleum activities on the Norwegian continental shelf (NCS), so that the state receives revenues and incurs expenses associated with SDFI’s ownership interests. Petoro acts as licensee, on equal footing with other partners, for the state’s ownership interests in production licences, fields, pipelines and onshore facilities. 

As SDFI manager, Petoro contributed a cash flow of NOK 186 billion in 2021, which represents an estimated 50 per cent of the state’s total revenues from the petroleum activities in 2021.
 

External trends 

The previous year was yet another year for the world and Norway characterised by major challenges associated with the Covid-19 pandemic. Other global challenges are also on the rise, such as the climate crisis, protectionism and geopolitical conflicts, to name a few. The unrest in Ukraine through 2021 ended with Russia’s invasion and full war in February 2022. This is a major humanitarian crisis, while shaking geopolitical stability. As a consequence of this, the world is experiencing increasing supply issues and higher inflation. Among other things, higher energy prices, particularly for gas and electricity, are having a substantial impact.

The oil and gas industry on the Norwegian shelf has maintained a high activity level and delivered good results in a year defined by the global challenges in the energy markets. Gas prices in particular have been extraordinarily high in 2021, and prices at this level have led to concern as regards predictable and reasonable access to energy. At the same time, this has strengthened Norway’s role as a reliable supplier, particularly of gas, to Europe.

Prices for both gas, coal and electricity are now at levels most market players did not believe were possible a short time ago. The consequences for consumers are massive and the situation has been called an energy crisis. An increasing number of stakeholders are questioning how the markets are organised and demanding that politicians take additional steps. Despite the significant income increases high gas prices entail for players on the Norwegian shelf, a long-term high price level could weaken the attractiveness of gas over time. The oil price has also been relatively high in 2021, but this increase has not been as sharp as for gas and electricity. During the winter, high regularity and increased gas exports have been important for Europe in a situation where Russia has failed to deliver the vast volumes expected by the market.

2021 saw a high level of activity in the oil and gas industry in Norway. The stimulus package adopted in 2020 to counteract a reduction in investments as a result of the Covid pandemic has contributed to a record-high number of plans for development and operation (PDOs) scheduled for submission by the end of 2022. It is decisive and Petoro emphasizes to ensure the highest possible quality and value in these projects. The high activity level puts pressure on capacity in the supplier industry, and it is crucial that the plans for implementing the projects take this into account. It is also important that the work to identify and mature new projects continues once the stimulus package expires in order to secure further development on the Norwegian shelf.

The trend is that companies on the Norwegian shelf prioritise exploration close to fields, at the expense of exploration in more frontier areas. In spite of the Norwegian Petroleum Directorate’s expectation that the greatest remaining resources on the shelf are located in the Barents Sea, the companies do not appear to prioritise exploration for gas in the area. This is the result of a lack of export capacity and several disappointing exploration wells.

Companies on the Norwegian shelf continued to consolidate in 2021. This has led several of the medium-sized companies to strengthen their positions. AkerBP’s agreement to take over Lundin’s activities on the Norwegian shelf is a good example of this development. The emergence of the medium-sized companies is a positive contribution to the further development of the Norwegian shelf. The selldown in recent years from the major international companies with significant operator experience means that there is constrained access to valuable experience and expertise on the Norwegian shelf.

Safety results were improved somewhat in 2021, but the number of serious incidents is still too high. Falling objects still dominate the range of incidents in raw numbers. The maintenance backlog from 2020 has largely been overcome, and the Petroleum Safety Authority Norway’s annual mapping of the risk level on the Norwegian shelf shows a positive development. It is important that the industry continues its improvement efforts in order to further reduce the number of serious incidents.

The new report from the Intergovernmental Panel on Climate Change was published in August, and its conclusion was clear; the climate challenges we are facing must be treated as an acute threat. At the same time, UN Secretary General António Guterres stated that the report is “code red” for humanity. The UN believes that greenhouse gas emissions from fossil fuels constitute an immediate threat to millions of humans.

The subsequent climate summit in Glasgow (COP 26) also emphasised that the goal is still to avoid global warming beyond 1.5 degrees. 196 countries signed an agreement for an emission trading system, scaling back coal power, as well as cutting subsidies for the fossil fuel industry. These ambitions will require a substantial energy system transition in an effort to cut emissions. Over time, this will contribute toward phasing out fossil energy sources such as coal, oil and gas.

The EU aims to be climate neutral by 2050. In April 2021, the EU agreed to raise its climate target from 40 to 55 per cent emission cuts by 2030. Last summer, the European Commission presented the first part of an extensive policy package to reach the objectives; the Fit-for-55 package. Parallel efforts are under way on the EU’s taxonomy for sustainable finance. Developments in the EU are important for the SDFI, as Norway follows the EU’s ambitions and goals and will adapt Norwegian climate policy correspondingly.

A unified Norwegian oil and gas industry is following up on the climate roadmap and climate targets for the Norwegian shelf that were established in 2020. The oil and gas industry is expected to reduce emissions by 50% by 2030, compared with 2005, which will require significant efforts over the next few years.

Electrification of existing fields is the most important measure to reduce CO₂ emissions from production. Efforts have been under way in recent years to mature more projects to replace gas turbines with power from shore or offshore wind. Investment decisions were made in 2021 for a few of the fields with long remaining lifetimes, such as Troll and Oseberg. These projects are extensive and require major investments, but will lead to considerable reductions in CO₂ emissions.

In line with additional parts of society requesting access to electricity for new green investments and measures to reduce greenhouse gas emissions, more and more people are asking where the future power will come from and to what extent shelf electrification should be prioritised. The Government stated in its Hurdal Platform that, to the extent possible, electrification of the shelf shall take place using offshore wind or other renewable electricity generated on the shelf. This is challenging in the short term.

The oil and gas companies are changing their strategy to develop their activities in the face of a low-carbon future. Renewable energy and decarbonisation of particularly natural gas will be key in this regard. In addition to offshore wind, efforts are under way to explore whether natural gas can be converted to hydrogen and ammonia with carbon capture and storage. New licenses for CO₂ storage on the Norwegian shelf were announced in 2021. In the Barents Sea, this has materialised as an interesting business opportunity in the short term, as ammonia production not only reduces the climate risk for natural gas, but also increases the export capacity for gas from this area.

The Norwegian shelf has further strengthened its competitiveness in 2021. Three factors are important to emphasise here:

Even with a high activity level and an ongoing pandemic, the players have been able to keep operating expenses at a stable level. There has been a significant increase in costs for CO₂ emissions and electricity. Overall, the Norwegian shelf is still competitive internationally measured in cost per produced unit. Over the last year, the petroleum industry has lived up to its reputation as a driving force for development and implementing new technology with a solid domestic market as a foundation. This is important to ensure not only the continued competitiveness of the Norwegian shelf, but also significant export of goods and expertise.

Secondly, multiple electrification measures were adopted over the last year, and additional measures are in planning stages. This will strengthen the competitive position of the Norwegian shelf as world-leading, with the lowest greenhouse gas emissions from upstream production of hydrocarbons. Low emissions are expected to be an important competitive parameter which will only grow in significance in the years to come. This particularly applies in the European core markets for the Norwegian shelf.

In conclusion, the winter of 2021/2022 has clearly shown the importance of stable and predictable gas supplies from Norway to Europe. The war in Ukraine has emphasized this even more clearly, with more countries now turning away from Russia and towards more reliable energy suppliers. This emphasises the fact that security of supply and reliability have again become an important competitive parameter, where particularly Norwegian gas has been given an important role for geopolitical stability in Europe. This scenario could strengthen the significance of the SDFI’s highly gas-weighted portfolio.  

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Net cash flow to the state from the SDFI at year-end amounted to NOK 186 billion, 127 billion higher than last year. The increase was mainly caused by significantly higher income as a result of increased oil and gas prices. The positive effect has been offset by increased working capital and third-party gas purchases.

Total production amounted to 1,026 thousand barrels of oil equivalent per day (kboed), an increase of 38 kboed compared with the same period last year. 

Gas production amounted to 101 million standard cubic metres (mill. scm) per day, an increase of 3 per cent compared with the same period last year. This increase was mainly caused by increased gas extraction on Troll and Oseberg, partially offset by the production shutdown on Snøhvit following the fire on Melkøya. The average realised gas price was NOK 4.78 per scm, compared with NOK 1.25 in the same period last year. The strong increase in gas prices was mainly caused by low gas storage levels, strong LNG demand from Asia, as well as lower LNG imports and renewables production in Europe compared with last year.

Liquids production amounted to 388 kboed, 14 kboed higher than the same period last year. The increase was caused by higher production capacity and accelerated production from Johan Sverdrup, as well as production from the Snorre Expansion Project. This increase was partially offset by natural production decline on several mature fields. The average realised oil price was USD 70, compared with USD 40 per barrel in 2020. However, the price increase in USD was somewhat offset by a strengthened NOK, meaning that the achieved oil price measured in NOK was 603, compared with NOK 376 per barrel last year. The increase in oil price compared with last year was caused by strong growth in demand as a result of societies reopening in large parts of the world, while at the same time, the increase in supply has not been able to keep pace with this development.

Cash investments amounted to NOK 25 billion, just under 3 billion less than the last year. The reduction was mainly caused by lower investments on the development projects Johan Sverdrup, Johan Castberg and Troll, as well as lower drilling activity compared with last year. This was partially offset by increased development investments on Breidablikk and Ormen Lange, as well as increased operational investments on Snøhvit and Troll.

Production costs ended at NOK 18 billion, NOK 4 billion higher than in 2020. The increase was mainly caused by higher electricity prices and environmental taxes, as well as increased maintenance activities on certain fields. The reduction in transport costs was mainly caused by reversal of previous provisions for an onerous contract for transport capacity.

Total exploration costs in 2021 came to NOK 1.5 billion, of which a net of NOK 0.1 billion has been recognised as capitalised exploration expenses.

The financial result for 2021 was a net income of NOK 222 billion, NOK 174 billion higher than last year. The increase was mainly caused by significantly higher income as a result of increased prices on oil and gas, as well as reversal of previous impairments of fixed assets in the 1st and 4th quarters, as well as somewhat lower transport costs. The increase was partially offset by higher gas purchases, depreciation, as well as increased operating expenses.

The book value of assets at 31 December 2021 was NOK 307 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 187 billion, which is an increase of NOK 36 billion compared with last year. The increase was caused by the transfer to the state being 36 billion lower than the annual result for accounting purposes. Overall debt amounted to NOK 120 billion, of which 79 billion was related to estimated future removal obligations. Removal obligations were reduced by just over NOK 5 billion compared with 2020, primarily as a result of updated removal estimates and a higher discount rate.

There were a total of 22 serious incidents in the SDFI portfolio in 2021, which results in a serious incident frequency on 0.7. This represents an improvement from 0.9 in 2020. Falling objects continue to dominate the range of incidents in raw numbers. The personal injury frequency was 3.8, which is at about the same level as 2020. Petoro always puts safety first, and this approach is clearly communicated through the company’s expectations for HSE management and HSE culture in the licences. In a major accident perspective, Petoro focuses on learning across the portfolio, as well as ensuring quality in risk assessments. Over the course of the year, Petoro has carried out multiple digital management visits at selected fields and onshore facilities with a focus on HSE.

As of the end of 2021, the portfolio consisted of 184 interests in production licences, 10 fewer than at the beginning of the year. In January 2022, the Ministry of Petroleum and Energy completed its awards in pre-defined areas, where an additional 7 production licenses were awarded with SDFI participation. As the largest partner on the Norwegian shelf, which provides a unique overview, Petoro is in a unique position to contribute to value creation by exploring opportunities and contributing to lessons learned across the portfolio.

At the end of the year, the portfolio consisted of 37 fields in production. The Martin Linge field came on stream in June 2021. Johan Castberg, Dvalin and Breidablikk are under development.

A plan for development and operation (PDO) was submitted in 2021 for Kristin South phase 1, as well as a change to the PDO for Ormen Lange phase 3, Troll Vest electrification, in addition to Oseberg increased gas capacity and partial electrification.

• The Kristin South phase 1 project is a joint subsea development of the Lavrans discovery and the southern part of the Kristin field.
• The Ormen Lange phase 3 project aims to improve recovery from the Ormen Lange field. The solution consists of a subsea wet gas compressor, which will provide pressure support to transport the gas from the field to the onshore facility at Nyhamna. There are multiple elements of new technology in the project, and the solution creates opportunities for use on other fields in Petoro’s portfolio.
• The Troll Vest electrification project involves switching the power supply on the Troll B and Troll C installations from gas turbine operation to power from shore. This measure will reduce CO2 emissions from the field by 466,000 tonnes per year and will help ensure very low emissions from production on Troll during the expected remaining lifetime leading up to 2060.
• The Oseberg increased gas capacity and partial electrification project will improve the recovery of gas on the Oseberg field by installing electric compressors on the Oseberg Field Centre, in addition to building a power cable from shore. The new compressor capacity is achieved without CO₂ emissions, and the access to electric power from shore will also help reduce CO₂ emissions from the field by 316,000 tonnes per year.

An investment decision has also been made for Askeladd West as part of the development of the Snøhvit field, and which will help secure the supply of gas to the LNG plant on Melkøya.

Production from mature oil fields continues to dominate liquids production from the SDFI portfolio, despite the fact that Johan Sverdrup accounted for 23 per cent of production in 2021. The Troll, Oseberg, Åsgard, Heidrun, Gullfaks and Grane fields accounted for  46  per cent of total liquids production in 2021. In 2021, gas accounted for two-thirds of overall production. More than 70 per cent of gas output came from Troll, Ormen Lange and Oseberg.

Petoro’s strategy describes the company’s goal-oriented efforts to create the greatest possible values, while at the same time safeguarding sustainability and the climate. The strategy has four priorities: (1) more wells by increasing drilling efficiency, (2) better understanding of reservoirs, particularly by utilise opportunities for digitalisation, (3) choosing solutions with a long-term perspective in field development, and by (4) increasing the utilisation of the facilities through safe and efficient operations.

Through focused follow-up, supported by in-depth professional commitment, Petoro works to reinforce value creation opportunities with emphasis on long-term business development.

In line with this strategy, the company has paid special attention to the fields and discoveries Grane, Heidrun, Maria, Oseberg, Åsgard, Gullfaks, Grosbeak and Wisting. Drilling efficiency has also been addressed as a special topic for the entire field portfolio.

On Åsgard, the company conducted its own studies in 2021 to identify and specify projects that could help improve the recovery rate. In light of disappointing production following the start-up on Maria, Petoro has taken an active role in identifying measures and concepts to improve production. This ended up with a concept choice for further development in accordance with Petoro’s preferred solution. On Grane, Petoro has carried out studies to identify additional resources. This was done using a new methodology which entailed significant streamlining of these types of studies. On Gullfaks, Oseberg and Snorre, the company has carried out its own studies to identify and refine volume bases from new drilling targets. Petoro has also conducted its own studies and analyses in 2021 to ensure equitable ownership interests in connection with the unitisation of Breidablikk.

As regards new fields in the portfolio, the company’s efforts are associated with assessing various development solutions leading up to a concept choice. Petoro emphasises the selection of development solutions with the capacity and expansion opportunities to realise the full value potential of each field.

The company conducted its own assessments for new development projects whose resource potential was associated with significant uncertainty. Examples of this include Grosbeak and Wisting.

In 2021, the company followed up a substantial portfolio of major development projects in the implementation phase, including Johan Sverdrup phase 2, Johan Castberg, Martin Linge and Troll phase 3. The follow-up has been focused on factors that affect HSE, climate and implementation risk as well as ensuring sound preparations for operations. In addition to these factors, the Cold Return repair project on Snøhvit was followed up closely, with an emphasis on strengthening the facility for further operations and safe implementation of the work.

Early technology adoption and technological advances are important in order to increase competitiveness. The primary technology areas Petoro is focusing on include technology to radically increase the drilling pace, optimising the recovery strategy by using new digital tools, next-generation developments with remote operation and low manning, as well as technology to reduce greenhouse gas emissions.

Petoro has been following up drilling efficiency on 10 of the fixed drilling facilities on the mature fields in the portfolio over a long period of time. 2021 was a weak year for the number of new wells from fixed facilities, and costs per well were at the same level as the previous year. The reason for this was that several drilling rigs were unavailable to drill new wells for large parts of the year. This was in part caused by prioritising other activity, such as larger projects and well maintenance, but was also a consequence of technical challenges. In order to realise resources in the mature fields and improve the recovery rate, the drilling efficiency must be increased and the cost per well reduced.

Digitalisation as an instrument to improve and increase competitiveness is high on the strategic agenda of most oil and gas companies and suppliers. Petoro actively uses its role in the joint ventures and on the Norwegian shelf to reinforce the momentum for improvement and contribute to change processes, as well as to facilitate efficient data sharing. Petoro has also employed strategic collaboration with Schlumberger, aimed special efforts toward improving quality and streamlining work processes in reservoir modelling.

In 2021, Petoro has seen significant activity associated with maturing electrification measures that will contribute to considerable reductions in greenhouse gas emissions from the SDFI portfolio. Electrification of mature fields is a time-critical measure as the projects’ income potential is reduced when the remaining operating period is curtailed. Petoro therefore actively works with operators and partnerships to maintain progress on these projects. Several large electrification projects at Snøhvit, Kårstø and Draugen were further matured throughout the year toward planned investment decisions in 2022 and 2023. Assessments have also been made of the opportunity for electrifying other fields in the portfolio, including Åsgard, Heidrun and Grane. If all the evaluated electrification projects can be realised, they can contribute alongside Hywind Tampen, planned shutdowns and downscalings on fields in reducing the SDFI’s share of emissions from the field portfolio by up to 55% by 2030.

Petoro was a participant in 9 exploration wells in 2021. They resulted in three discoveries that are deemed to be economically viable; the Dvalin North and Røver North gas discoveries, as well as the Isflak oil discovery. It is presumed that all discoveries can be tied into existing infrastructure.

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.

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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. The funds are managed by the respective operators. This amounted to NOK 562 million for the SDFI in 2021. This is in addition to projects aimed at field-specific qualification of new solutions or pilot application of technology in licences, where the costs are charged to the joint ventures. Petoro does not initiate its own technology development and research projects.

The people of Petoro are the company’s most important resource, and the company’s values are the foundation of the vision to be a driving force on the Norwegian shelf. The company’s human resources policy shall ensure that Petoro is an attractive workplace for existing and future employees.

The Covid-19 pandemic has also entailed challenges in 2021 as a result of national and local infection control measures. Our employees’ safety and infection control have been our foremost priorities in 2021, and implemented measures have been in accordance with the authorities’ guidelines. The offices have been closed for normal operations for large parts of the year. The company has facilitated the use of home offices and initiated various virtual and physical measures both to ensure continuity and to maintain mission-critical functions, in addition to safeguarding the working environment and welfare.

Petoro’s personnel have extensive experience from the petroleum industry and a high level of expertise. The individual employee is crucial to the company’s deliveries and success, and the board places emphasis on ensuring that Petoro offers competitive terms and a stimulating working environment that attracts people with the right expertise. Opportunities for professional and personal development help to retain, develop and attract skilled personnel.

As regards diversity, inclusion and equality, a plan with concrete steps for the upcoming year is prepared annually for these areas. This ensures that the company works actively, in a goal-oriented and planned fashion to promote diversity, inclusion and equality. More detailed information about these areas is provided in the company’s sustainability report, which will be published later this year.

At the end of 2021, Petoro had 70 employees, six more than the year before. The increase was partly caused by overlapping expertise to handle future resignations, in addition to employment replacing contracting. Eight new appointments were made in 2021. The percentage of women in the company was 33 at the end of the year, 57 per cent in company management and 57 per cent on the company’s board.

The ratio of women in Petoro has remained above 30 per cent since 2009, and was 33 per cent in 2021. The average age in Petoro is 51.4; 51.7 for men and 50.6 for women.

Petoro has had at least 40 per cent women on its board since its inception. The rules for electing employee representatives to the Board require one representative for each gender. The current ratio of women in company management is 57 per cent, compared with 43 per cent in 2020. There are two women among a total of six representatives in the AMU and SAMU.

Female representation in the company’s various wage groups is in accordance with the ratio of women in the company as a whole. 83 per cent of Petoro’s employees are in the job category “senior adviser”, while 7 per cent are in the job category “adviser”. In management, women’s fixed salaries amount to 90 per cent of men’s fixed salaries. Looking at the total compensation package, the women’s share is 92 per cent that of men. As regards senior advisers, women’s fixed salaries are 101 per cent that of men’s. Women’s total compensation package for senior advisers constitutes 102 per cent of men’s. As regards advisers, women’s fixed salaries amount to 92 per cent of men’s. Looking at the total compensation package for the adviser level, the women’s share is 91 per cent that of men.

21 per cent of promotions in 2021 involved women. The company has a number of employees from diverse cultural and ethnic backgrounds. Seven nationalities are represented among the company’s employees.

There were two instances of part-time employment in Petoro in 2021, both of which were voluntary, and both genders were represented. There were no temporary employees in 2021. Seven people have taken out parental leave over the last three years. These were all men, and they took out an average of 62 days.

Absence due to illness was 2.4 per cent, compared with 2.1 per cent the previous year. The company considers this to be low. Petoro emphasises close follow-up and dialogue as described in the inclusive workplace (IA) agreement to promote health and prevent absence due to illness. No occupational accidents were recorded among Petoro’s personnel in 2020. As part of the effort to safeguard a good working environment, the company conducts annual employee surveys, which are followed up with measures.

Collaboration in the company’s working environment committee (AMU) and works council (SAMU) lays an important foundation for a good working environment. Cooperation in these bodies is considered to be good.

Corporate governance was moved in 2021 moved from the Ministry of Petroleum and Energy to the Ministry of Trade, Industry and Fisheries. The Minister of Trade and Industry represents the state as sole owner and constitutes the company’s general meeting and highest authority.

The Board emphasises good governance to ensure that the state’s portfolio is managed in a way which maximises financial value creation in a long-term comprehensive perspective. Requirements for governance in the public sector are specified in “Regulations on Financial Management in Central Government” and in standards for good corporate governance. The Board observes the Norwegian state’s principles for sound corporate governance as expressed in Storting Report No. 8 2019-2020 “The Norwegian state’s direct ownership in companies - Sustainable value creation” and those sections of the “Norwegian Code of Practice for Corporate Governance” regarded as relevant to Petoro’s activities and the frameworks established by its form of organisation and ownership.

Petoro’s values base and ethics are embedded in its values and guidelines on business ethics.

The management system is tailored to Petoro’s distinctive nature, and enterprise management is based on balanced management by objectives, under which objectives are established that support the company strategy.  

Corporate social responsibility  

Petoro discharges its corporate social responsibility (CSR) in line with the relevant guidelines, which are tailored to the company’s role. Petoro’s funding for performing its management duties and for running the company is provided through appropriations from the government. Petoro does not have the opportunity to provide monetary support to social causes.

Measures which ensure that Petoro discharges its CSR include business ethics guidelines, the HSE declaration, the company’s strategy and an HR policy that ensures diversity, inclusion and equal opportunity. Petoro has no activity outside Norway, but participates indirectly in certain foreign activities as licensee and through the marketing and sale instructions. The Board provides a more detailed presentation of the exercise of CSR in a separate section of the annual report, and more extensively in the company’s sustainability report later this year.

Risk management and internal control 

Risk management in the form of avoiding threats and securing opportunities is an integrated part of Petoro’s governance and closely linked to the company’s strategy and business processes. The company’s general risk matrix with associated risk factors is continuously evaluated and identified measures are followed up. Sustainability and climate are reflected in the company’s strategy, goals and risk matrix. In 2021, the Board has focused special attention on two risks associated with climate: The risk of being unable to realise measures for CO2 reduction in the SDFI portfolio, as well as the risk of the value of the portfolio being affected over the longer term.

Three internal audit projects were carried out in 2021 aimed at following up the marketing and sale area, compliance with information security guidelines and the procurement process. The results were summarised in a report to the Board describing the audit actions undertaken, findings, as well as proposed and implemented measures for the internal audit projects. The result is satisfactory in all areas and the internal controls are in accordance with generally acceptable standards. The internal audit projects were conducted by PwC, which has also been responsible for the internal financial audit of the SDFI for the 2021 accounting year.

The Board has overall responsibility for the management of Petoro, including ensuring that appropriate management and control systems are in place, and for exercising supervision of the day-to-day conduct of the company’s business. The Board met 8 times in 2021. An annual schedule of meetings has been established for the work of the Board, with emphasis on considering topical commercial issues and following up strategies, budgets and interim results. Balanced scorecards are a key instrument used by the Board in following up the company’s results.  Sustainability and climate have been key in the Board’s handling of various issues throughout the year.

The Board considers major investment decisions in the portfolio. It also follows up activities in the licences and the monitoring of marketing and sales and financial management, including assessments of the overall risk scenario. 

The Board has chosen to organise its work related to compensation through a sub-committee comprising two of the shareholder-elected directors, one of whom is the deputy chair. No other sub-committees have been established. A declaration has been drawn up by the board on remuneration of the chief executive and senior personnel.

Conflicts of interest are a fixed item on the agenda at board meetings and in the consideration of matters, and directors with such a conflict withdraw from the Board’s consideration of the relevant issue.

An annual self-assessment is conducted by the Board, which encompasses an evaluation of its own work and mode of working, as well as its collaboration with company management. The self-assessment for 2021 is complete. 

The work of the Board is based on the “Board Instructions”, which describe its responsibilities and mode of working. As an appendix to the Instructions, the Board has adopted supplementary provisions for matters which it will consider. The Board also conducts annual reviews of the company guidelines on business ethics and CSR, as well as the Board Instructions. Directors must routinely report their ownership of shares or similar interest in other companies which could constitute, or which could be perceived as constituting, a conflict of interest with their position. Directors must also disclose other relationships with licensees in petroleum activities on the Norwegian shelf, or with companies that supply licensees.  

Each director and the Board as a collective shall seek to strengthen their expertise in various ways. These include participation in courses and conferences and generally following developments within the business area.

Kristin Fejerskov Kragseth was hired as the new CEO in December 2020 and started the position on 1 June 2021. At the same time as joining, Kjell Morisbak Lund resigned as acting CEO.

The Board of Directors of Petoro AS consists of Gunn Wærsted as chair, deputy chair Brian Bjordal, Trude J. H. Fjeldstad, Hugo Sandal and Kristin Skofteland as shareholder-elected directors. Board members May Linda Glesnes and Ragnar Sandvik were elected to represent the employees.

Directors and officers liability insurance has been taken out on commercial terms. The insurance covers policy holders’ legal liability for economic loss incurred by virtue of their positions, with the restrictions and endorsements that follow from the terms.

Petoro AS 
Share capital and shareholder 

Petoro AS was established as part of the restructuring of the state’s oil and gas activities in 2001, when Equinor (previously Statoil) was partially privatised and management of the SDFI was assigned to Petoro AS. The company’s operations are governed by Chapter 11 of the Petroleum Act. The company’s general meeting is the Ministry of Trade, Industry and Fisheries. 

Petoro’s share capital at 31 December 2021 was NOK 10 million, distributed among 10,000 shares owned by the Ministry of Trade, Industry and Fisheries on behalf of the Norwegian state. Petoro’s business office is in Stavanger.

Petoro AS maintains separate accounts for all transactions relating to participating interests in the joint ventures. Revenue and expenses from the SDFI portfolio are kept separate from day-to-day operation of the company. Cash flow from the portfolio is transferred to the central government’s own accounts with Norges Bank. Accounts for the portfolio are presented both on the cash basis used by the government and in accordance with the Norwegian Accounting Act and Norwegian generally-accepted accounting principles (NGAAP).

Funds for operating Petoro AS are provided by the state, which is directly responsible for the contractual obligations incurred by the company. NOK 356.6 million was appropriated for ordinary operation of Petoro AS in 2021, compared with NOK 360 million in 2020. 

Total expenses in 2020 were within the framework of the Board’s approved budget, the company’s appropriation and allocation letter. The financial result for Petoro AS totalled a net loss of NOK 0.4 million. The Board proposes that the deficit in Petoro AS be covered by other equity. Including net loss for the year, other equity amounted to NOK 17.6 million as of 31 December 2021. 

Pursuant to Section 3-2a of the Norwegian Accounting Act, the board affirms that the annual accounts for the portfolio and the company provide a true and fair picture of the company’s assets and obligations, financial position and results of the business, and that the annual accounts have been prepared under the assumption that the company is a going concern. The company has satisfactory equity and low financial risk.

Once the world has overcome the pandemic, there was an expectation of more normal times in terms of economic growth and development globally. Regardless of the pandemic, increased protectionism and nationalism over a long period of time have also contributed to creating challenges for international cooperation. With Russia’s recent entry into Ukraine, for the first time in decades, there is again war in Europe. This is a very serious development that creates fear and insecurity, not only for the Ukrainian population, but also for geopolitical cooperation. At the time of writing, the outcome of the war is completely uncertain. The ongoing war and pandemic have clearly shown how vulnerable the global economy is. Whether the supply problems that not only the commodity and energy markets are experiencing today will be solved remains to be seen.

How these conditions in total will affect future developments in the oil and gas markets is difficult to predict. At the same time, the UN’s sustainability goals and the ambitions of the Paris Agreement will require a significant energy shift to clean energy that challenges fossil energy such as coal, oil and gas. In terms of direction, the consumption of gas and oil must be reduced if the climate goals are to be achieved. But the green transition takes time, and in the meantime, developments in the gas market in particular over the past year show how important stable deliveries from the Norwegian continental shelf and the SDFI’s portfolio are. Decades of targeted work on the environment, climate and safety on the Norwegian continental shelf also contribute to strengthening the competitiveness of the SDFI’s oil and gas.

Troll and the other mature fields on the Norwegian shelf, with the addition of the Johan Sverdrup field, make up the backbone of the Norwegian petroleum industry in general and the SDFI portfolio in particular. These fields are the primary reason for the high and stable production that is the hallmark of the SDFI portfolio, and there will be considerable value creation opportunities associated with these areas in the years to come.

But extensive efforts will be needed in order to realise these values. Multiple areas will be important moving forward in order to secure the values in place through close cooperation with all players on the shelf.

94 fields are now in production on the Norwegian shelf, which is a historically high number. Realising the vast values still in the ground will require continuous efforts associated with further developing the field portfolio. At the same time, new developments will need to be taken into consideration, particularly from exploration close to fields, but also eventually a gradual consolidation of installations. This presumes a comprehensive and long-term perspective in order for the Norwegian shelf to maintain, and preferably strengthen its competitive position. The highest possible level of safety, the lowest possible production expenses and low emissions will be crucial in the future.

Improved drilling processes means that more wells can be drilled, which in turn can improve the recovery rate. An increasingly larger share of oil production is now coming from mature fields. Well maintenance and drilling new production wells is very important in order to realise the remaining potential in the fields. This provides good utilisation of existing infrastructure in that new identified resources can be rapidly phased in.

In order to identify opportunities for additional wells, we need an extensive understanding of the reservoir. Innovative solutions will be crucial, particularly within digitalisation. The oil industry on the Norwegian shelf has historically been at the forefront here, which is something the industry must ensure that it continues to develop. It is important that the industry maintains focus on the long-term ongoing efforts for additional efficiency measures, including technology development, digitalisation of work processes and data sharing across the industry.

The Norwegian shelf already has low greenhouse gas emissions in an international context. Both fields, plants, infrastructure and oil and gas can be subject to measures to reduce climate impact. Further reduction of greenhouse gas emissions will largely be contingent on additional electrification with power from shore or potentially offshore wind. Reductions can also be achieved through energy efficiency measures, as well as using hydrogen and ammonia to generate electricity. Solutions with an area perspective help realise measures that are difficult to implement for individual fields.

The production of hydrogen and ammonia from natural gas is contingent on access to carbon storage. Companies on the Norwegian shelf have extensive experience with carbon storage and numerous new areas have been mapped for the storage of CO₂. We expect multiple CO₂ storage licenses to be awarded over the next few years.

We are facing substantial challenges associated with the climate, green adaptation and security of supply for energy. There is extensive cooperation on energy, particularly in Europe, and it is important that this also continues toward a low-carbon-future. Despite the urgency, it is important to strike a good balance between fossil and renewable energy. Oil and gas cannot be phased out until sustainable alternatives are in place. Such a situation could contribute to creating high prices and increased volatility, which in turn results in a market in imbalance. This is an outcome that serves neither producers, consumers and certainly not  the climate.

With vast resources and high expertise in key areas such as offshore activities, major industrial projects and technology development, our industry has a good starting point for success in the transition. This will allow for the creation of value and higher employment both nationally and internationally. The Norwegian shelf is highly competitive as a result of a fine-tuned framework, a diversity of companies and good cooperation among authorities, companies and employees.

The oil and gas industry will continue its effort to provide sustainable and safe energy to our core markets. The SDFI portfolio has a competitive advantage in the form of low emissions from production and transport compared with other oil and gas on the international scale. This provides a good point of departure for further developing carbon neutral value chains, which in turn could strengthen the Norwegian shelf’s competitiveness in a generational perspective.

The necessary decarbonising of energy systems will require increased integration in the value chains. Maintaining Norway as a giant in industrial energy will require a significant ability to adapt. The SDFI and Petoro will continue to be a driving force on the Norwegian shelf, including in the future energy landscape.

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