SDFI and Petoro annual report 2023
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SDFI - Notes 1-10

Note 1 - Asset transfers and changes

In January 2023, the Ministry of Petroleum and Energy (now Ministry of Energy) completed its Awards in Predefined Areas (APA 2022), where nine production licences were awarded with SDFI participation. 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 licences were awarded with SDFI participation.
 

Note 2 - Specification of operating revenue by area

All figures in NOK million20232022
Licence311,158591,764
Infrastructure and Market44,60952,911
Net profit agreements1,0511,245
Elimination internal sales(4,128)(5,494)
Total operating revenue (NGAAP)352,690640,426

Conversion to cash basis10,803(6,401)
Total cash basis363,492634,025
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 million20232022
Crude oil, NGL and condensate106,685121,144
Gas231,597503,924
Transport and processing revenue12,68813,689
Other revenue670425
Net profit agreements1,0511,245
Total operating revenue (NGAAP)352,690640,426

Conversion to cash basis10,803(6,401)
Total cash basis363,492634,025
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". Under gas revenues in 2023, the company allocated NOK 1.1 billion in net unrealised losses on outstanding financial derivatives associated with gas volumes. The corresponding figure in 2022 was NOK 7.3 billion. For more information, see Note 18 on financial instruments.

 

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

All figures in NOK million20232022
Production expenses
License17,98817,050
Infrastructure and Market5,3746,439
Total production expenses23,36223,489

Transport and processing expenses
License15,81317,814
Infrastructure and Market 86158
Elimination internal purchases(4,128)(5,494)
Total transport and processing expenses11,77112,478

Other operating expenses
Expenses for gas purchases, storage and administration15,80437,912
Total other operating expenses15,80413,923

Total operating costs50,93773,878
Conversion to cash basis4,173779
Total cash basis55,11074,658
Production costs were on par with previous years. CO2 costs and operating and maintenance expenses have increased in 2023, however, but the effect was offset by reduced electricity costs.

The reduction in transport and processing costs was mainly caused by lower volumes.

Reduced costs related to gas purchases, storage and administration are primarily caused by lower gas prices in combination with reduced volumes.

Over / underlift is included in the figure for Infrastructure and Market under production expenses. Gassled and other gas infrastructure are 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 703 million was expensed by the SDFI for R&D in 2023 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 2023 – 30 April 2024, and the result of the audit will be reported in the form of an auditor's report by 1 May 2024.
 
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 million20232022
Interest income1951
Other financial revenue12
Currency gain7,29810,688
Currency loss(3,479)(7,375)
Currency loss/gain - unrealised(1,544)(70)
Interest expenses(856)(153)
Other financial expenses00
Interest on decommissioning liability(2,024)(1,488)
Net financial items(409)1,605
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 2023 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 2023 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

Note9-en
*Transfers apply for the Dvalin and Breidablikk fields, which came on stream during 2023
 
 
Operating fields have been impaired by a total of NOK 5,177 million, primarily as a result of updated production profiles and cost estimates. The Martin Linge, Valemon and Nøkken fields have been impaired by NOK 4,462, 455 and 259 million, respectively.
 
Impairment tests are based on Petoro's best estimate of cash flows (market prices, production, investments, 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 for 2023:
Real prices/year2024202720302050
Oil NOK/bbl946648612540
Gas price NOK/scm6.93.72.72.5
Multiple different scenarios are taken into account in the preparation of price forecasts, including scenarios developed by the International Energy Agency (IEA) in the World Energy Outlook report.
 
However, the risk of periods with lower and higher prices is still significant, and volatility can be expected.
 

Sensitivity analysis

The table below shows alternative calculations of what the impairment and marginal change would have been in 2023 under various assumptions, given that all other assumptions remain constant. A price reduction of 10% on all products would have yielded an additional total impairment of NOK 1,641 million for the SDFI portfolio.
 
Note9-2-en2
The SDFI portfolio has also been tested for loss in value based on scenarios from the IEA. Prices from these scenarios are stated in actual 2023 terms for 2030 and 2050. Future expected prices have been applied for 2024, and they have been linearly interpolated from the price for 2024 to the IEA's scenario price for 2030, and then linearly interpolated from the IEA's scenario prices for 2030 to the IEA's scenario prices for 2050. The figures on the left represent alternative impairment calculations, and the figures on the right express changes from reported impairment for 2023 of NOK 5,177 million.
IEA scenarioPrices for 2030 and 2050Alternative calculations of impairment for 2023Økning / reduksjon (-) av nedskrivning for 2023
Net zeroOil 395-235 NOK/bbl, gas 1.5-1.5 NOK/scm 7,459 2,282
Announced pledgesOil 696-564 NOK/bbl, gas 2.3-1.9 NOK/scm 3,812 (1,365)
Stated policiesOil 799-781 NOK/bbl, gas 2.5-2.5 NOK/scm 3,730 (1,446)
Only the "net zero" scenario will result in increased impairment compared with the current base scenario for the SDFI portfolio. On the other hand, the two other scenarios will result in a reduced loss of value. The analysis indicates that the risk of potential stranded assets in the SDFI portfolio is limited under current market assumptions.
 
Financial assets totalling NOK 15,016 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 Instructions 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 Instructions. 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.
 
In 2023, the SDFI recognised an investment associated with Equinor's financial trading activity, including Global Financial Trading (GFT). GFT is operated from the United Kingdom and is formally owned by Equinor, but the SDFI participates in the investment through the Marketing and Sale Instructions for a share of the activities which affects the European gas market. The SDFI's participation in GFT is assessed as an investment in an associated company and is recorded in accordance with the equity method.
 
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 Instructions. At the time of acquisition in 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 short-term liabilities vis-à-vis Equinor. See Note 17 for more information.
Note10-en
* The book value of the shareholding in Norpipe Oil AS constitutes zero kroner and is therefore not included in the table above.