SDFI and Petoro annual report 2022
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SDFI - Notes 11-22

Note 11 - Inventories

All figures in NOK million20222021
Petroleum products1,358599
Spare parts1,6551,530
Inventory3,0132,130
Petroleum products comprise LNG and natural gas. The SDFI does not hold inventories of crude oil, as the difference between produced and sold volumes is included in over/underlift. Not relevant to the accounts on a cash basis.

 

Note 12 - Accounts receivable

Accounts receivable and other receivables are recorded at nominal value in NGAAP following deduction for foreseeable losses.

 

Note 13 - Related parties

The state owns 67 per cent of Equinor through the Ministry of Trade, Industry and Fisheries, and 100 per cent of Gassco through the Ministry of Petroleum and Energy. These companies are classified as related parties of the SDFI. Petoro, as licensee for SDFI, has significant participating interests in pipelines and terminals operated by Gassco.

Equinor is the buyer of the state’s oil, condensate and NGL. Sales of oil, condensate and NGL from the SDFI to Equinor totalled NOK 121 billion (corresponding to 130 million boe) for 2022, compared with NOK 83 billion (143 million boe) for 2021.

Equinor markets and sells the state’s natural gas at the government’s expense and risk, but in Equinor’s name and along with its own production. The state receives the market value for these sales. The state sold dry gas directly to Equinor at a value of NOK 2,447 million in 2022, compared with NOK 763 million in 2021. Equinor is reimbursed by the state for its relative share of costs associated with the transport, storage and processing of dry gas, the purchase of dry gas for resale and administrative expenses relating to gas sales. These reimbursements amounted to NOK 48.7 billion in 2022, compared with NOK 21.8 billion in 2021. Open accounts with Equinor totalled NOK 16.0 billion in favour of the SDFI, converted at the exchange rate on the balance sheet date, compared with NOK 16.7 billion in 2021.
 
Pursuant to the marketing and sale instruction, the SDFI participates with a financial interest in Equinor Natural Gas LLC (ENG) in the US. Cash flows from ENG are settled continuously on a monthly basis in connection with the purchase and sale of LNG. The SDFI is also a participant in Equinor’s investment in Danske Commodities (DC) under the marketing and sale instruction for the part assigned to gas activities. This participating interest entitles Petoro to a share of future results. The investments are addressed in more detail in Note 10.

Open accounts and transactions relating to activities in the production licences are not included in the above-mentioned amounts. Hence, no information has been included with regard to open accounts and transactions relating to licence activities with Equinor or Gassco. The SDFI participates as a partner in production licences on the NCS. These are accounted for in accordance with the proportionate consolidation method.

 

Note 14 - Equity

All figures in NOK million20212021
Equity at 1 Jan.187,190 151,113
Net profit539,208 222,135
Cash transfers to the government (528,171) (186,058)
Equity at 31 Jan198,227187,190
Not relevant to the accounts on a cash basis. 
 

Note 15 - 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 anticipated removal date is largely 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. In 2022, the discount rate was 3.0%, compared with 1.9% in 2021.

The estimate for decommissioning costs has been lowered by a net of NOK 10.0 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 million20222021
Liability at 1 Jan78,73484,029
New liabilities4,3210
Actual decommissioning(782)(364)
Change in estimate(940)(3,483)
Change in discount rate(14,144)(2,874)
Interest expense1,4881,426
Liability at 31 Dec68,67778,734
NOK 782 million for cessation and decommissioning accrued in 2022, and is included in the accounts on a cash basis under operating expenses. The SDFI’s share of estimated expenses for 2023 associated with shutdown and removal amount to NOK 830 million.

 

Note 16 - 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 payments for financial leasing total NOK 633 million as of 31 December 2022. Of this, NOK 245 million will be disbursed in 2023, and 388 million will be paid over the subsequent two years. The disbursement for 2023 is classified as current liabilities in the balance sheet.

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 1,851 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 liabilities vis-à-vis Equinor linked to the investment for the SDFI share amounted to NOK 19,461 million at year-end, of which NOK 1,190 million is the historical acquisition cost, and the remaining amount is linked to investments in gas activities.

Other long-term liabilities amount to NOK 632 million.

Not relevant to the accounts on a cash basis.
 
 

Note 17 - Other current liabilities

Other current liabilities pursuant to NGAAP falling due in 2023 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 18 - 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 2022, the market value of the derivatives was NOK 12,406 million in assets and NOK 19,684 million in liabilities. The comparable figures at the end of 2021 were NOK 19,814 million in assets and NOK 10,280 million in liabilities. These figures include the market value of listed futures and unlisted instruments. The market value of built-in derivatives is associated with contracts entered into with end user customers on the Continent. This amounted to NOK 239 million in assets and NOK 219 million in liabilities in 2022. The comparable figures in 2021 were NOK 188 million in assets and NOK 0 million in liabilities, respectively. Net unrealised losses on outstanding positions at 31 December 2022 were carried to expense under the Norwegian Accounting Act and generally accepted accounting principles (NGAAP).

Price risk
The SDFI’s most considerable price risk is related to future market prices on oil and natural gas. The SDFI is also exposed to both positive and negative price developments through the marketing and sale instruction issued to Equinor. In an effort to manage price risk associated with natural gas, Equinor enters into raw materials-based derivatives contracts on behalf of the joint portfolio. These contracts include futures, unlisted (over-the-counter – OTC) forwards and various types of swap agreements. The contracts entered into normally have a maturity of less than three years. The bilateral gas sales portfolio is exposed to various price indices and to a combination of long and short-term price points. Equinor purchases all oil, NGL and condensate from the SDFI at market-based prices.

Currency risk
The majority of the company’s revenue from the sale of oil and gas is invoiced in USD, EUR or GBP. Parts 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 2022 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, the company 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 activities. Internal guidelines on managing the flow of liquidity have been established.

 

Note 19 - Leases/contractual liabilities

All figures in NOK millionLeasesTransport capacity and other liabilities
20232,2321,981
20246921,043
2025263909
2026178762
202785484
Beyond179514
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 13 wells with an expected cost to the SDFI in 2023 of NOK 1.7 billion.

The SDFI has also accepted contractual liabilities relating to investments in new and existing fields. Overall, this amounts to NOK 10 billion for 2023 and NOK 22 billion for subsequent periods, totalling NOK 32 billion. Through approved budgets and work programmes, the SDFI was also committed to operating and investment expenses for 2023. The mentioned liabilities are included in budgets and work programmes for 2023.

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 978 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 20 - 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 are 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. No provisions have been made for such issues in the annual accounts for 2022.

Some long-term gas sales agreements contain price review clauses that may lead to claims that become the subject of arbitration. The SDFI’s exposure associated with ongoing price review 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 review in the annual accounts for 2022.

Not relevant to the accounts on a cash basis.

 

Note 21 - 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 values of tangible fixed assets, reserves, shutdown and decommissioning of installations, exploration expenses and financial instruments could have the greatest significance.

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. The valuation is inherently uncertain due to the discretionary nature of the underlying estimates. This risk has increased as a result of the current market conditions with rapid fluctuations in supply and demand for oil and gas, which causes more volatility in prices.

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 approved 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 ratio 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.

As regards shutdown and removal obligations, there will be significant estimate uncertainty linked to multiple factors in the removal estimates, including assumptions for removal and the method of estimation, as well as technology and the time of removal. Changes in the discount rate and the currency exchange rates used may also have a substantial impact on the estimates, and the subsequent adjustment of the obligation thus involves significant discretionary assessment.

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.

Reference is otherwise made to the description of the company’s accounting principles and to Notes 15 and 18, 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 22 - Expected remaining oil and gas reserves – unaudited

Note22-en
*   Oil includes NGL and condensate   

The portfolio’s estimated remaining reserves totalled 4,779 million boe at the end of the year, down by 193 million boe from the year before. Reserve growth totalled 188 million boe, which is mainly derived from the Dvalin (incl. Dvalin Nord) and Irpa projects, as well as Gullfaks Sør, Statfjord blowdown and Åsgard (Blåbjørn). With a production of 381 million boe, this yielded a reserve replacement rate of 49 per cent, compared with 80 per cent in 2021 and 20 per cent in 2020.

 

Note 23 - Events after the balance sheet date

There were no significant events after the balance sheet date which will affect the reported figures in the accounts.