SDFI and Petoro annual report 2023
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SDFI - Notes 11-22

Note 11 - Inventories

All figures in NOK million20232022
Petroleum products5151,358
Spare parts1,5651,655
Inventory2,0803,013
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 - Close associates

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 Energy. These companies are classified as close associates of the SDFI. Petoro, as the SDFI licensee, 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 106 billion (corresponding to 130 million boe) for 2023, compared with NOK 121 billion (130 million boe) for 2022.
 
Equinor markets and sells the state's natural gas at the state'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 817 million in 2023, compared with NOK 2,447 million in 2022. 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 27.0 billion in 2023, compared with NOK 48.7 billion in 2022. Open accounts with Equinor totalled NOK 11.2 billion in favour of the SDFI, converted at the exchange rate on the balance sheet date, compared with NOK 16.0 billion in 2022.
 
Pursuant to the Marketing and Sale Instructions, 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) and Global Financial Trading (GFT) under the Marketing and Sale Instructions 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 million20232022
Equity at 1 Jan. 198,227 187,190
Net profit 266,172 539,208
Cash transfers to the government (276,905) (528,171)
Equity at 31 Jan187,494198,227
Not relevant to the accounts on a cash basis. 
 

Note 15 - Shut-down/decommissioning

This 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 removal date is expected largely to occur 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 2023, the discount rate was 3.1%, compared with 3.0% in 2022.
 
The estimate for decommissioning costs has been reduced 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 million20232022
Liability at 1 Jan68,67778,734
New liabilities804,321
Actual decommissioning(417)(782)
Change in estimate5,734(940)
Change in discount rate(1,298)(14,144)
Interest expense2,0241,488
Liability at 31 Dec74,80068,677
NOK 417 million has been accrued for cessation and decommissioning in 2023, and is included in the accounts on a cash basis under operating expenses. The SDFI's share of estimated expenses for 2024 associated with shutdown and amounts to NOK 877 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
 
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 payment for financial leasing totals NOK 414 million as of 31 December 2023. Of this, NOK 252 million will be disbursed in 2024 and 162 million will be paid the following year. The disbursement for 2024 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 1,963 million.
 
Other long-term liabilities amount to NOK 663 million.
 
Not relevant to the accounts on a cash basis.

 

Note 17 - Other current liabilities

The following other current liabilities fall due in 2024:
  • Provisions for accrued unpaid costs, adjusted for cash calls in December, amounting to NOK 15,100 million as of year-end 2023, compared with NOK 14,479 in 2022.
  • Open account vis-à-vis Equinor related to financial instruments under the Marketing and Sale Instructions amounting to NOK 1,062 million as of year-end 2023, compared with NOK 15,436 million in 2023.
  • Outstanding debt vis-à-vis Equinor related to investment in Danske Commodities amounted to NOK 8,135 million as of year-end 2023. This liability is classified as short-term this year, as settlement is expected to take place in 2024.
  • Other provisions for accrued unpaid costs not included in the accounts received from operators amounted to NOK 1,444 million in 2023, compared with NOK 6,431 million in 2022.
 
Accounts receivable vis-à-vis licence operators are classified as 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 Instructions issued to Equinor utilise derived financial instruments (derivatives) to manage risk in the SDFI portfolio. The SDFI does not have significant interest-bearing debt, and primarily sells oil, gas and NGL at current prices. Instruments used to manage price risk for sales at fixed prices or for deferred gas production are linked to forwards and futures.
 
At 31 December 2023, the market value of the derivatives was NOK 5,079 million in assets and NOK 6,141 million in liabilities. The comparable figures at the end of 2022 were NOK 12,406 million in assets and NOK 19,684 million in liabilities. These figures include the market value of listed "futures", unlisted instruments and embedded derivatives. The market value of embedded derivatives is linked to contracts entered into with end-user customers on the Continent. This amounted to NOK 104 million in assets and NOK 666 million in liabilities in 2023. The comparable figures in 2022 were NOK 239 million in assets and NOK 219 million in liabilities, respectively. Net unrealised losses on outstanding positions at 31 December 2023 were carried to expense under the (Norwegian) Accounting Act and generally accepted accounting principles (NGAAP).
 
Price risk
The SDFI's most significant price risk is related to future market prices for oil and natural gas. The SDFI is also exposed to both positive and negative price developments through the Marketing and Sale Instructions issued to Equinor. Equinor enters into raw materials-based derivatives contracts on behalf of the joint portfolio in an effort to manage price risk associated with natural gas. 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. Petoro 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 2023 was largely related to a single 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). Alongside Equinor, the company has a financial liability related to leasing contracts for LNG ships pursuant to the Marketing and Sale Instructions. 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 counterparties which are considered to have high creditworthiness, and all oil, NGL and condensate is sold to Equinor. In accordance with the Marketing and Sale Instructions, financial instruments for the SDFI's operations are purchased from buyers with sound credit ratings. Financial instruments are only established with large banks or financial institutions within pre-approved exposure levels and margin requirements. 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 operations. Internal guidelines have been established to manage the flow of liquidity.
 

Note 19 - Leases/contractual liabilities

All figures in NOK millionLeasesTransport capacity and other liabilities
20241,1701,571
20259261,088
2026276874
2027112593
202899260
Beyond117709
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 are associated with gas sales activities and mainly consist of transport and storage obligations in the United Kingdom and continental Europe. 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 14 wells with an expected cost to the SDFI in 2024 of NOK 1.3 billion.
 
The SDFI has also accepted contractual liabilities relating to investments in new and existing fields. Overall, this amounts to NOK 12 billion for 2024 and NOK 14 billion for subsequent periods, totalling NOK 26 billion. The SDFI also committed itself to operating and investment expenses for 2024 through approved budgets and work programmes. The mentioned liabilities are included in work programmes and budgets for 2024.
 
In connection with the sale of the SDFI's oil and gas, Equinor has issued guarantees to suppliers and owners of transport infrastructure 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 894 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 2023.
 
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 reviews 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 reviews in the annual accounts for 2023.
 
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 impaired 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. In recent years, 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' plan for development and operation (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) is used as a basis for depreciation. A share of oil and gas, respectively, is calculated annually for the portfolio to represent the relationship between low and expected reserves in production. This joint share is used to calculate the depreciation basis for each field. The reduced expected reserves forming the basis for the depreciation expenses are of great significance for net income, 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 4,475 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.

 

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.