SDFI and Petoro annual report 2019
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SDFI - Notes 1-10

Note 1 - Asset transfers and changes

In January 2019, the Ministry of Petroleum and Energy completed its Awards in Predefined Areas (APA 2018), where 14 production licenses were awarded with SDFI participation. One production license was carved out from existing licenses with SDFI participation in 2019, one license was transferred to Petoro and 14 production licences were relinquished. In January 2020, the Ministry of Petroleum and Energy completed its Awards in Pre-defined Areas (APA 2019), where an additional 14 production licenses were awarded with SDFI participation.
 

Note 2 - Specification of fixed assets

Note2-eng
Tangible fixed assets for Snøhvit include a capitalised long-term financial charter for three ships used for LNG transport from the field.  These vessels are being depreciated over 20 years, which is the duration of the charter. 

Depreciation assessments calculate utility values by discounting future cash flows using a discount rate based on cost of capital (WACC). Impairment tests are based on Petoro’s best estimate of cash flows (market prices, production, costs and exchange rate assumptions). The real discount rate in the calculation of value in use is 7-8 per cent. Inflation is calculated at 2 per cent annually. When the value in use is assessed to be lower than the book value, the assets are written down to their utility value. 

The price assumptions used to calculate impairment are generally as follows:
Nominal prices/year2020202120252030
Oil NOK/bbl540539520520
Gas price NOK/scm1.91.92.02.0
Impairment in the order of NOK 1,408 million has been undertaken on Martin Linge as a result of further cost increases in 2019 and production start being postponed to the third quarter of 2020.
 
Intangible fixed assets include investments in further development of Etzel Gas Storage and a lesser amount in Åsgard Transport.  

Financial assets totalling NOK 1,464 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 acquisition of Danske Commodities (DC). 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.  SDFI’s share of DC are linked to gas activities under the marketing and sale instruction. These activities are assessed as investments in associated companies and recorded according to the equity method (see also Note 11).
 

Note 3 - Specification of operating revenue by area

All figures in NOK million20192018
License134,186159,162
Infrastructure and Market23,73623,001
Net profit agreements193406
Elimination internal sales(4,720)(5,138)
Total operating revenue (NGAAP)153,395177,431

Conversion to cash basis1,711(1,968)
Total cash basis155,106175,463
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 4 - Specification of operating revenue by product

All figures in NOK million20192018
Crude oil, NGL and condensate64,93770,340
Gas73,88394,786
Transport and processing revenue12,56211,178
Other revenue1,820721
Net profit agreements193406
Total operating revenue (NGAAP)153,395177,431

Conversion to cash basis1,711(1,968)
Total cash basis155,106175,463
All oil, NGL and condensate from SDFI is sold to Equinor. All gas is sold by Equinor through the marketing and sale instruction 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”. About 30 per cent of annual gas volumes is purchased by the five largest customers.
 

Note 5 - Specification of production and other operating expenses by area

All figures in NOK million20192018
Production expenses
License10,26513,819
Infrastructure and Market3,4263,621
Total production expenses13,69017,440

Transport and processing expenses
License14,22414,907
Infrastructure and Market 182(49)
Elimination internal purchases(4,720)(5,138)
Total transport and processing expenses9,6869,720

Other operating expenses
Expenses for gas purchases, storage and administration5,4055,815
Total other operating expenses5,4055,815

Total operating expenses28,78032,975
Conversion to cash basis1,271(939)
Total cash basis30,05132,036
Production expenses for License includes settlement in the case associated with the Troll Unit. An allocation of NOK 2.2 billion was made for the initial verdict from the court in 2018. The verdict was appealed, but the parties entered into a settlement in early January 2020, before final legal proceedings. The allocation for SDFI’s share was reversed in 2019, and the actual settlement of NOK 926 million was allocated in 2019. See also Note 23 regarding incidents after the balance sheet date. 

Over / underlift is included in the figure for Infrastructure and Market under production expenses.  Gassled and other gas infrastructure is organisationally placed under Market as regards reporting of production expenses and transport- and processing expenses. 

Note 6 - Inventories

All figures in NOK million20192018
Petroleum products9202,194
Spare parts1,4321,413
Inventory2,3533,608
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 7 - 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 2019 letter of assignment to Petoro from the Ministry of Petroleum and Energy. 

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 government which represents the difference between the recorded amount in the chapter/item in the appropriation accounts and changes in liquidity. 

Interest on the open account with the government is calculated in accordance with the 2019 letter of assignment to Petoro from the Ministry of Petroleum and Energy. 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 8 - Net financial items

All figures in NOK million20192018
Interest income4065
Other financial revenue12
Currency gain1,4291,698
Currency loss(886)(1,577)
Unrealised currency loss/gain(635)166
Interest expenses(48)(56)
Other financial expenses115(171)
Interest on decommissioning liability(1,686)(1,397)
Net financial items(1,304)(1,331)
Not relevant to the accounts on a cash basis. 
 

Note 9 - Related parties

The state, represented by the Ministry of Petroleum and Energy, owns 67 per cent of Equinor and 100 per cent of Gassco. 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 65 billion (corresponding to 126 million boe) for 2019, compared with NOK 70 billion (132 million boe) for 2018.

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 270 million in 2019, compared with NOK 387 million in 2018. 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 12.6 billion in 2019, compared with NOK 13.8 billion in 2018. Open accounts with Equinor totalled NOK 8.3 billion in favour of the SDFI, converted at the exchange rate on the balance sheet date, compared with NOK 7.3 billion in 2018.
 
Pursuant to the marketing and sale instruction, the SDFI also 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. Equinor finalised its acquisition of Danske Commodities (DC) in 2019 and the SDFI is a participant under the marketing and sale instruction for the part associated with the gas activities. This participating interest entitles Petoro to a share of future results. The investments are recorded in accordance with the equity method and are covered in more detail in Note 11.

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 and 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 10 - Accounts receivable

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