Management comment regarding the SDFI annual accounts

Purpose

Since its establishment in 2001, Petoro has served as the licensee for the state's participating interests in production licences, fields, pipelines and land-based facilities. Petoro is charged with managing the SDFI portfolio on the basis of sound business principles. As of the end of 2023, the portfolio consisted of 175 production licences, three fewer than at the beginning of the year. Twelve production licences were relinquished in 2023. In January 2023, the Ministry of Petroleum and Energy completed its Awards in Pre-defined Areas (APA 2023), where an additional 20 production licenses were awarded with SDFI participation.

Confirmation

The annual accounts are presented in accordance with the Provisions on Financial Management in Central Government, circular R-115 from the Ministry of Finance, and requirements in the instructions on financial management of the SDFI in Petoro, with the exceptions granted for the SDFI. The board hereby confirms that the annual accounts, which comprise the appropriation and capital accounts prepared on a cash basis, provide a true and fair picture in accordance with the cash basis. The general ledger accounts report presents accounting figures for the SDFI as reported to the government accounts in accordance with the standard chart of accounts for state-owned undertakings.

The Board confirms that the company accounts have been prepared in accordance with the Accounting Act and Norwegian generally-accepted accounting principles (NGAAP), and provide a true and fair picture of the SDFI's assets, obligations and financial results at 31 December 2023.

Assessment of significant factors

Appropriation and capital accounts

In accordance with the supplemental allocation letter dated 21 December 2023, the SDFI's appropriation for investments¹ totalled NOK 30.0 billion. The appropriation for operating income² totalled NOK 287.1 billion. The appropriation for interest on the state's capital³ totalled NOK 2.7 billion. Operating income in accordance with the cash basis is affected first and foremost by the price of oil and gas and the volume of the SDFI's production sold. Equinor handles marketing and sale of SDFI's products through the Marketing and Sale Instructions issued by the Ministry of Petroleum and Energy.

The general ledger accounts report on the cash basis shows net reported revenues including financial income totalling NOK 355.2 billion in 2023, compared with NOK 630.1 billion in 2022. The revenues are greatly affected by lower oil and gas prices in 2023. Expenses reported in the appropriation accounts comprise payments of NOK 30.4 billion as investments and NOK 53.3 billion as operating expenses. Payments in 2022 amounted to NOK 28.4 billion related to investments and NOK 75.0 billion related to operations. Payments to operations were primarily related to the operation of fields and facilities, processing and transport costs, as well as exploration and field development expenses. This is in addition to payments of financial expenses. Depreciation of fields and facilities amounted to NOK 27.2 billion in 2023, compared with NOK 26.3 billion the previous year.

¹Ch./item 2440.30
²Ch./item 5440.24
³Ch./item 5440.80

The SDFI accounts include a number of significant estimates which are subject to uncertainties and rely on discretionary assessments. These e.g. include capitalised exploration costs, estimates of reserves as the basis for depreciation, decommissioning expenses based on estimates for costs to be incurred far into the future, and assessment of impairment charges on tangible fixed assets.

Net cash flow to the state from the SDFI at year-end amounted to NOK 277 billion, 251 billion lower than the previous year. The cash flow was mainly affected by a decline in oil and gas prices from the extraordinary levels of the year before, as well as lower gas sales. The decline was partly offset by increased cash flow as a result of lower costs associated with third-party gas purchases and a reduction in working capital. In spite of the significant reduction compared with 2022, the cash flow for the year is still the second-highest in Petoro's history.

Total production reached 994 thousand barrels of oil equivalent per day (kboed), a reduction of 50 kboed compared with the previous year.

Gas production amounted to 102 million standard cubic metres (mill. scm) per day, a reduction of seven per cent compared with the year before. The decline was primarily caused by a turnaround on Troll, as well as the temporary shutdown of fields tied back to the process plant at Nyhamna. The reduction was partly offset by production from Snøhvit, which was shut down during the first half of 2022, and Dvalin, which came on stream in 2023. The average realised gas price was NOK 5.76, compared with NOK 11.95 per scm the previous year. The reason for the lower gas prices is complex, but this was mainly caused by historically high LNG imports and filling up inventories in Europe, combined with lower demand.

Liquids production amounted to 354 kboed, a reduction of 5 kboed compared with the previous year. The decline in liquids production was primarily caused by natural production decline on several mature fields and a turnaround on Troll C, partly offset by increased production from Johan Sverdrup phase 2. The average realised oil price was USD 83, compared with USD 104 per barrel in 2022. However, the reduction measured in Norwegian kroner was somewhat offset by a weak NOK exchange rate, leading to an achieved oil price of NOK 876, compared with NOK 988 per barrel in the same period last year. The oil price reduction was caused by lower demand growth than expected due to rising interest rates, lower economic growth and a fear of recession in several parts of the world. This effect was offset by increased geopolitical unrest and persistent cuts from OPEC+.

Investments came to NOK 30 billion, NOK 1.6 billion higher than the previous year. The increase in investments was caused by high activity on several fields with projects in the implementation phase, partly offset by lower production drilling on Troll.

Total operating expenses amounted to NOK 86 billion, NOK 17 billion lower than the year before. The reduction was caused by lower costs for purchasing third-party gas, which was partly offset by impairment on operating fields.

Costs for purchasing third-party gas amounted to NOK 15 billion, NOK 21 billion lower than the previous year. This decline was caused by significantly lower gas prices in combination with lower volumes.

Production costs amounted to NOK 23 billion, which is on par with the previous year. CO2 costs and operating and maintenance expenses have increased in 2023, however, but the effect was offset by reduced electricity costs.

Transport costs came to just under NOK 12 billion, which is NOK 0.7 billion lower than the year before.

Fixed assets were impaired by a total of NOK 5.2 billion in 2023. Martin Linge, Valemon and Nøkken have been impaired by NOK 4.5, 0.5 and 0.2 billion, respectively. The primary drivers for the impairments are updates to production profiles and cost estimates.

Overall exploration costs during the period amounted to NOK 1.7 billion, while expensing of dry wells drilled during the year accounted for NOK 0.4 billion of this, and previously capitalised exploration expenses prior to 2023 amounted to NOK 0.7 billion.

Net income after financial items came to NOK 266 billion, NOK 273 billion lower than the previous year. This reduction was mainly caused by lower income as a result of substantially lower prices, as well as a lower volume of gas sales.

The book value of assets at 31 December 2023 was NOK 295 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 a reduction of NOK 11 billion compared with the year before. This reduction was caused by the transfer to the state being NOK 11 billion higher than the annual result for accounting purposes. Overall debt amounted to NOK 107 billion, while NOK 75 billion of this was related to estimated future removal obligations. Removal obligations increased by NOK 6 billion compared with 2022, primarily as a result of updated removal estimates.

The portfolio's estimated remaining reserves totalled 4,475 million boe at the end of the year, down by 304 million boe compared with the end of 2022. Reserve growth came to 59 million boe, and this mainly comes from the Snorre and Visund fields as a result of somewhat extended economic tail-end production. With a production of 363 million boe, this yielded a reserve replacement rate of 16 per cent, compared with 49 per cent in 2022 and 80 per cent in 2021.

Additional information

The Office of the Auditor General (OAG) is the external auditor, and approves the annual accounts for the SDFI. On completing its annual audit, the OAG issues a final audit letter (report) which summarises the conclusion of its audit work. The result of the audit will be reported by 1 May 2024.

The Board has appointed PwC to conduct a financial audit of the SDFI accounts as part of Petoro's internal audit process. As internal auditor, PwC submits its audit report to the Petoro AS board regarding the annual accounts pursuant to the accounting principles on a cash basis and in accordance with international auditing standards.