SDFI - Notes
Note 11 - Investment in associate
The SDFI’s participation in Statoil Natural Gas LLC (SNG) in the USA has been treated with effect from 1 January 2009 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 as an investment in intangible fixed assets at an original acquisition cost of NOK 798 million. This activity has been treated in earlier years as a joint venture and recorded in accordance with the proportional consolidation method.
SNG has its business office at Stamford in the USA and is formally owned 56.5 per cent by Statoil 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 Statoil North America Inc. As a result of the merger between Statoil and Hydro’s petroleum business in 2007, the profit/loss is allocated in accordance with a skewed distribution model which gives 48.4 per cent to the SDFI.
Statoil consolidates its holding in SNG with other US operations, and uses SNG as a marketing company for gas sales in the American market. Pursuant to the marketing and sale instruction, the SDFI participates in SNG with regard to activities related to the sale of the government’s LNG from Snøhvit. Nothing indicates that a new test for write-down is required. Accumulated cash flows corresponding to NOK 1.3 billion at 30 September 2012 were reversed to the SDFI in 2012.
In addition to SNG, the shareholdings in Norsea Gas AS and Norpipe Oil AS are included in the table below.
Note 12 - Abandonment/removal
The liability comprises future abandonment and removal of oil and gas installations. Norwegian government legal 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 removal liability.
The liability is calculated on the basis of estimates from the respective operators. Great uncertainty relates to a number of factors underlying the removal estimate, including assumptions for removal and estimating methods, technology and the removal date. The last of these is expected largely to fall one-two years after the cessation of production. See note 22.
Interest expense on the liability is classified as a financial expense in the income statement. The discount rate is based on the interest rate for Norwegian government bonds with the same maturity as the removal liability. An extrapolated interest rate derived from foreign rates is applied for liabilities which extend beyond the longest maturity for such bonds.
The estimate for removal costs has been reduced by NOK 3.2 billion as a result of changes to future estimated costs from operators, alterations to cessation dates and change to expected price rises. This change includes higher estimates for plugging and abandoning wells and for shutting down installations, which is offset by lower expected price inflation. Estimates for removal expenses include operating costs for rigs and other vessels required for such complex operations. A reduction in the discount rate increases the liability by NOK 1.3 billion.
Note 13 - Other long-term liabilities
Other long-term liabilities comprise:
Three financial leasing contracts were entered into in 2006 on the delivery of three ships for transporting LNG from Snøhvit. These contracts run for 20 years, with two options for five-year extensions. The future discounted minimum payment for financial leasing totals NOK 1 140 million. Of this, NOK 142 million falls due for payment in 2013, NOK 567 million in the subsequent four years and the residual NOK 431 million after 2017.
Other long-term liabilities total NOK 942 million, of which NOK 759 million falls due longer than five years from the balance sheet date.
Note 14 - Other current liabilities
Other current liabilities falling due in 2013 mainly comprise:
Note 15 - Financial instruments and risk management
Only limited use is made of financial instruments (derivatives) to manage risk in the SDFI portfolio. This is primarily because the SDFI is owned by the state and is accordingly included in the government’s overall risk management. The SDFI does not have significant interest-bearing debt, and all crude oil and NGL is sold to Statoil. Instruments used to hedge gas sales relate to forwards and futures. At 31 December 2012, the market value of the financial instruments was NOK 350 million in assets and NOK 360 million in liabilities. The comparable figures at the end of 2011 were NOK 1 701 million and NOK 548 million respectively. These figures include the market value of unlisted instruments. The market value of built-in derivatives related to end-user customers in continental Europe. This amounted to a supplementary NOK 1 438 million in assets and 18 million in liabilities. The corresponding figure for 2011 was NOK 1 988 million in assets and NOK 17 million in liabilities. The unrealised gain for the trading portfolio was virtually the same as the unrealised loss at 31 December 2012. Following a portfolio assessment, no provision has been made in the accounts.
The SDFI is exposed to fluctuations in oil and gas prices in the world market. Statoil purchases all oil, NGL and condensate from the SDFI at market-based prices. SDFI revenue from gas sales to end users reflects market value. Based on the arrangement relating to the marketing and sale instruction together with the SDFI’s participation in the government’s overall risk management, the SDFI’s strategy is to make only limited use of financial instruments (derivatives) to counteract fluctuations in profit and loss owing to variations in commodity prices.
The most significant part of the SDFI’s revenue from the sale of oil and gas is billed in USD, EUR or GBP. Part of its operating expenses and investments is 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 make use of currency hedging in relation to future sales of the SDFI’s petroleum, and its exposure in the balance sheet at 31 December 2012 was largely related to one month’s outstanding revenue.
The SDFI is primarily exposed to credit risk through financial leases. Together with Statoil, it has a financial liability related to charters for LNG ships pursuant to the marketing and sale instruction. The SDFI has no other interest-bearing debt exposed to interest rate fluctuations.
The SDFI’s sales are made to a limited number of parties, with all oil and NGL sold to Statoil. 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-related risk during consecutive transactions is accordingly regarded as insignificant.
The SDFI generates a significant positive cash flow from its operations. Internal guidelines on managing the flow of liquidity have been established.
Note 16 - Leases/contractual liabilities
Leases represent operation-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. The figures represent cancellation costs.
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 USA. 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.
In connection with the award of licences to explore for and produce petroleum, licensees may be required to undertake to drill a certain number of wells. Petoro was committed at 31 December 2012 to participate in 12 wells with an expected cost to the SDFI of NOK 1.2 billion. Of this, NOK 829 million is expected to be incurred in 2013.
The company has also accepted contractual liabilities relating to investment in new and existing fields. These obligations total NOK 11.4 billion for 2013 and NOK 7.6 billion for subsequent periods, a total of NOK 19 billion. The SDFI is also committed in 2013 through approved licence budgets to operating and investment expenses for subsequent years. The above-mentioned liabilities for 2013 are included in this total.
In connection with the sale of the SDFI’s oil and gas, Statoil has issued a limited number of warranties to vendors and owners of transport infrastructure relating to operations in the USA, the UK and continental Europe. Warranties issued in connection with trading operations are provided as security for the financial settlement.
The SDFI and Statoil deliver gas to customers under common 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.
Note 17 - Other liabilities
The SDFI could be affected by possible legal actions and disputes as a participant in production licences, fields, pipelines and land-based plants, and in the joint sale of the SDFI’s gas together with Statoil. The SDFI is involved in current disputes relating to issues in joint ventures in which Petoro is a licensee. Provisions have been made in the accounts for issues where a negative outcome for the SDFI portfolio is thought to be more likely than not.
Note 18 - 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 substantial effect on the accounts. Where the SDFI portfolio is concerned, it is presumed that assessments of reserves, removal of installations, exploration expenses and financial instruments could have the largest significance.
Recoverable reserves include volumes of crude oil, NGL (including condensate) and dry gas as reported in resource classes 1-3 in the NPD’s classification system. Only reserves for which the licensees’ plan for development and operation (PDO) has been sanctioned 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 relationship between low and basis reserves. This common share is used to calculate the depreciation basis for each field. The downwardly adjusted basis reserves which form the basis for depreciation expenses have great significance for the result, and adjustments to the reserve base can cause major changes to the SDFI’s profit.
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.
Substantial investments in tangible fixed assets have been made in the SDFI portfolio. Each time the accounts are made up, these are reviewed for indications of a fall in value. The assessment of whether an asset must be written down builds to a great extent on judgements and assumptions about the future.
Reference is otherwise made to the description of the company’s accounting principles and to notes 12 and 15, which describe the company’s treatment of exploration expenses, uncertainties related to removal and financial instruments.
Note 19 - Equity
Equity at 1 January includes a capital contribution of NOK 9.1 billion paid to Statoil on 1 January 1985 for the participatory interests acquired by the SDFI from Statoil. It otherwise includes accumulated income reduced by net cash transfers to the government.
Note 20 - Auditors
In accordance with the Act on the Auditing of Governmental Accounts of 7 May 2004, the Office of the Auditor General is the external auditor for the SDFI. The Auditor General issues a final audit letter (report) concerning the SDFI accounts and budget, which is first published after the government accounts have been submitted and when the Auditor General’s annual report, Document no 1, is submitted to the Storting (parliament).
In addition, Deloitte AS has been engaged by the board of directors of Petoro AS to perform a financial audit of the SDFI as part of the internal audit function. Deloitte submits its audit report to the board in accordance with Norwegian auditing standards. Deloitte’s fee is expensed in the Petoro accounts.
Note 21 - Expected remaining oil and gas reserves (unaudited)
* Oil includes NGL and condensate.
** Correction in 2011 as a result of reconciliation with official production figures from the NPD.t
The SDFI added 290 million boe in new reserves during 2012. The biggest contributions came from the decision to develop the Martin Linge field. At the same time, adjustments on certain fields resulted in a net increase of 278 million boe in reserves.
At 31 December 2012, the portfolio’s expected remaining oil, condensate, NGL and gas reserves totalled 6 623 million boe. This represented a decline of 136 million boe from the end of 2011. Petoro reports the portfolio’s expected reserves in accordance with the NPD’s classification system and on the basis of resource classes 1-3.
The net reserve replacement rate for 2012 was thereby 67 per cent, compared with 160 per cent the year before. The average reserve replacement rate for the portfolio over the past three years was 86 per cent. The corresponding figure for the 2009-11 period was 49 per cent.