SDFI - Notes 1-10

Note 1 - Asset transfers and changes

In January 2022, the Ministry of Petroleum and Energy completed its Awards in Predefined Areas (APA 2021), where 7 production licences were awarded with SDFI participation. Over the course of 2022, 2 production licences were carved out from existing licences with SDFI participation, and 15 production licences were relinquished. In January 2023, the Ministry of Petroleum and Energy completed its Awards in Pre-defined Areas (APA 2022), where an additional 9 production licences were awarded with SDFI participation.

Note 2 - Specification of operating revenue by area

All figures in NOK million	2022	2021
Licence	591,764	264,485
Infrastructure and Market	52,911	25,434
Net profit agreements	1,245	(9)
Elimination internal sales	(5,494)	(3,769)
Total operating revenue (NGAAP)	640,426	286,141

Conversion to cash basis	(6,401)	(36,467)
Total cash basis	634,025	249,674

Infrastructure and Market generally consists of revenues from the resale of gas, tariff revenues for transport and processing, unrealised losses and revenues from trading inventory. Trading inventory mainly relates to physical volumes.

Note 3 - Specification of operating revenue by product

All figures in NOK million	2022	2021
Crude oil, NGL and condensate	121,144	82,644
Gas	503,924	192,057
Transport and processing revenue	13,689	11,043
Other revenue	425	405
Net profit agreements	1,245	(9)
Total operating revenue (NGAAP)	640,426	286,141

Conversion to cash basis	(6,401)	(36,467)
Total cash basis	634,025	249,674

All oil, NGL and condensate from SDFI is sold to Equinor. All gas is sold by Equinor through the marketing and sale instructions issued to Equinor at SDFI’s expense and risk. Virtually all gas is sold to customers in Europe under bilateral contracts, or over the “trading desk”. About 33 per cent of annual gas volumes are purchased by the four largest customers. Under gas revenues in 2022, the company allocated NOK 7.3 billion in net unrealised losses on outstanding financial derivatives associated with gas volumes. For more information, see Note 18 on financial instruments.

Note 4 - Specification of production and other operating expenses by area

All figures in NOK million	2022	2021
Production expenses
License	17,050	13,245
Infrastructure and Market	6,439	4,466
Total production expenses	23,489	17,711

Transport and processing expenses
License	17,814	12,939
Infrastructure and Market	158	(1,055)
Elimination internal purchases	(5,494)	(3,769)
Total transport and processing expenses	12,478	8,115

Other operating expenses
Expenses for gas purchases, storage and administration	37,912	13,923
Total other operating expenses	37,912	13,923

Total operating costs	73,878	39,749
Conversion to cash basis	779	(1,440)
Total cash basis	74,658	38,308

Production costs have increased due to higher electricity costs and increased CO₂ emission credit prices, as well as increased maintenance activity on certain fields and facilities.

The increase in transport and processing costs was mainly caused by increased gas production in combination with increased tariffs. Increased costs related to gas purchases, storage and administration are primarily caused by higher gas prices in combination with higher volumes.

Over / underlift is included in the figure for Infrastructure and Market under production expenses. Gassled and other gas infrastructure is organisationally placed under Infrastructure and Market as regards reporting of production expenses and transport and processing expenses.

Note 5 - 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 638 million was expensed by the SDFI for R&D in 2022 as regards charges from the operators during the accounting year.

Note 6 - 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 2022 – 30 April 2023, and the result of the audit will be reported in the form of an auditor’s report by 1 May 2023.

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. As internal auditor, 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 7 - Net financial items

All figures in NOK million	2022	2021
Interest income	1	0
Other financial revenue	2	0
Currency gain	10,688	3,210
Currency loss	(7,375)	(2,915)
Currency loss/gain - unrealised	(70)	(32)
Interest expenses	(153)	(134)
Other financial expenses	0	0
Interest on decommissioning liability	(1,488)	(1,426)
Net financial items	1,605	(1,296)

Not relevant to the accounts on a cash basis.

Note 8 - Interest included in the SDFI’s appropriation accounts

Interest on the state’s fixed capital is incorporated in the accounts on a cash basis. Interest amounts are calculated in accordance with the requirements in the 2022 letter of assignment to Petoro from the Ministry of Trade, Industry and Fisheries.

Interest on the state’s fixed capital is charged to operations in order to take account of capital costs and to provide a more accurate picture of the use of resources. This is a calculated expense without cash effect.

The accounts on a cash basis include an open account with the state which represents the difference between the recorded amount in the chapter/item in the appropriation accounts and ingoing and outgoing payments in the settlement accounts in Norges Bank.

Interest on the open account with the state is calculated in accordance with the 2022 letter of assignment to Petoro from the Ministry of Trade, Industry and Fisheries. The interest rate applied is linked to the interest rate on short-term government securities and corresponds to the interest rate applied to short-term loans to the Treasury, calculated on the basis of the average monthly balance in the open account with the government.

Not relevant to the accounts based on the Accounting Act (NGAAP).

Note 9 - Specification of fixed assets

* Due to reclassification of well costs in 2022, a net amount of NOK 360 million has been moved from “Fields in operation” to “Capitalised exploration expenses” in the incoming balance.

Historical impairment totalling NOK 673 million has been reversed for fields in operation, related to Ekofisk, as a result of changes in applied short-term price trajectories, as well as updated production profiles and cost estimates.

Impairment tests are based on Petoro’s best estimate of cash flows (market prices, production, costs and exchange rate assumptions). The real discount rate in the calculation of utility value is 7-8 per cent. Inflation is estimated at 2 per cent annually. When the utility value is assessed to be lower than the book value, the assets are written down to their utility value.

The following price assumptions have been used to calculate impairment/reversal of historical impairment:

Real prices/year	2023	2026	2028	2038
Oil NOK/bbl	838	631	585	540
Gas price NOK/scm	13.4	6.7	2.56	2.39

The long-term oil price is somewhat higher than what the IEA presumes in its Sustainable Development Scenario, which is in line with the Paris Agreement.

The long-term gas price reflects an increased probability of scenarios with higher demand, loss of Russian gas and generally higher prices in the global gas market. The projected gas price is somewhat higher than the price trajectory the IEA presumes in its Sustainable Development Scenario.

However, the risk for periods with both lower and higher prices is still significant, and volatility can be expected.

Sensitivity analysis

The table below shows a marginal change in what the impairment or reversal of previous impairment would have been in 2022 under various alternative assumptions, presuming that all other assumptions remain constant. A price reduction of 30% on all products would have yielded a total impairment of NOK 595 million for the SDFI portfolio. The analysis indicates that the risk of potential stranded assets in the SDFI portfolio is relatively limited under current market assumptions.

Tangible fixed assets for Snøhvit include a capitalised long-term financial charter for three ships used for LNG transport from the field. These vessels are being depreciated over 20 years, which is the duration of the charter.
Depreciation assessments calculate utility values by discounting future cash flows using a discount rate based on capital costs (WACC).

Intangible fixed assets include investments in further development of Etzel Gas Storage and a lesser amount in Åsgard Transport.

Financial assets totalling NOK 24,668 million include capacity rights for regasification of LNG at the Cove Point terminal in the US with an associated agreement regarding the sale of LNG from Snøhvit to Equinor Natural Gas LLC (ENG) in the US, as well as SDFI’s share of Equinor’s investment in Danske Commodities (DC). 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. SDFI’s share of DC is linked to gas activities under the marketing and sale instruction. These activities are assessed as investments in associated companies and recorded according to the equity method (see also Note 10).

Note 10 - 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 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.

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 2019, the investment was recorded at the original acquisition cost of NOK 1,190 million. The SDFI’s share of investments in gas activities in DC are recognised as increased acquisition cost and long-term liabilities vis-à-vis Equinor. See Note 16 for more information.

* The book value of the shareholding in Norpipe Oil AS constitutes zero kroner and is therefore not included in the table above.

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5. Assessment of future prospects

Outlook is described in the Directors’ report, Chapter 1.2.

5. Outlook

6. Annual accounts 2022

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