The State’s Direct Financial Interest in petroleum activities on the Norwegian continental shelf (SDFI) represents one-third of Norway’s oil and gas reserves. Petoro acts as steward for substantial assets on behalf of the Norwegian state. This requires good governance that safeguards expectations from the owner, our peers and society at large.
The Petoro board adheres to the requirements for governance in the public sector specified in “Regulations on Financial Management in Central Government” and in standards for good corporate governance. The board adheres to the state’s principles for good corporate governance with particular attention devoted to the state’s expectations for the companies, as expressed in the white paper Meld. St. 8, 2019-2020 “The state’s direct ownership in companies. Sustainable value creation”. The board also observes those sections of the Norwegian code of practice for corporate governance regarded as relevant to Petoro’s business and to the frameworks established by its form of organisation and ownership. A report is provided below on the main topics with relevance for Petoro AS.
Petoro’s values base is integrated in its business activities. Petoro’s values - dynamic, responsible, inclusive and bold – are the foundation that will define how the employees work and thereby support the company’s goals and strategy.
Guidelines for exercising corporate social responsibility are stipulated by the company’s board and are an integrated part of Petoro’s activities, strategy and values. Petoro reports on the follow-up of its corporate social responsibility (CSR) in a separate chapter of this annual report.
Petoro’s main duties are specified in Chapter 11 of the Petroleum Act and the company’s articles of association, and are defined in more detail by the Ministry of Petroleum and Energy in the annual letter of assignment.
The objective of the company is, on behalf of the state and at the expense and risk of the state, to be responsible for the commercial aspects related to the State’s Direct Financial Involvement in petroleum activities on the Norwegian continental shelf (NCS), and associated activities.
The company has three main duties:
Management of the state’s participating interests in the joint ventures where the state has such interests at any given time.
Monitoring Equinor’s marketing and sale of the petroleum produced from the state’s direct participating interests, in line with Equinor’s marketing and sale instructions.
Financial management for the state’s direct participating interests.
Petoro’s operations are subject to the Norwegian Limited Liability Companies Act and the Norwegian Petroleum Act, as well as the Regulations on Financial Management in Central Government — including the rules on appropriations and accounting. Its management of the SDFI’s activities is governed by the Ministry of Petroleum and Energy’s instructions for financial management of the SDFI and the annual letter of assignment. In addition, the company’s articles of association, strategy, values and guidelines on business ethics, including its guidelines for exercising the company’s CSR, provide guidance for exercising Petoro’s activities.
Petoro’s strategy takes a point of departure in the company’s vision and overall goals. The company’s vision is to be a driving force on the Norwegian shelf, and its objective is to create the greatest possible value and achieve the greatest possible revenue for the state from SDFI. The strategy is prepared with a point of departure in the SDFI portfolio and changes in its surroundings. Safety and climate requirements constitute an important framework for the strategy, and Petoro will work to ensure that the oil and gas industry on the Norwegian shelf remains a leader in facing the climate challenges, in line with the roadmaps and goals the industry has set for the Norwegian shelf.
Each primary task is broken down into defined strategic areas and strategic prioritisations. Strategic areas designate which areas are most important to influence in order to realise paramount goals, and strategic prioritisations elaborate on which key measures must be developed to realise the strategy. Maturing new wells, drilling efficiency, continuous optimisation of the recovery strategy, cost-effective field development and further development of existing fields and infrastructure, as well as efficient operations, have been selected as the company’s strategic priorities.
Digitalisation is a strategic priority across the company’s primary tasks. This applies both for the use of digital solutions in joint ventures, internally in the company and between Petoro and other companies. The company has prepared a dedicated digital strategy plan. Beyond this, a separate strategy has been established for sustainability and climate which intersects the three main tasks, taking into consideration that the company’s measures and decisions to an increasing extent must account for changed market needs as a result of changes in climate policy, customer needs and customer preferences.
The company is the licensee for the state’s portfolio on the NCS, with the same rights and obligations as other licensees. The scope of the SDFI portfolio gives Petoro the overview and insight to be a driving force on the Norwegian Shelf. The company works to reinforce value creation opportunities with emphasis on long-term business development through focused follow-up, supported by in-depth professional commitment. Petoro’s follow-up of activities in the joint ventures is differentiated on the basis of its capacity and the commitment required to perform its role. The company endeavours to achieve good governance in the joint ventures, and cooperates with other operators and partners on further development of good performance-management processes.
Pursuant to the agreements for petroleum activities, the commercial information Petoro receives is subject to confidentiality. The company has internal instructions for dealing with inside information received by Petoro. These apply to the company’s directors, employees, auditor, advisers or others in a relationship with the company who receive information that is not publicly known and/or expressly defined as “inside information” within the meaning of the Norwegian Securities Trading Act. Information that may have an impact on the stock market must be treated as “inside information”.
A special system has also been established for approving external directorships held by employees. Employees must ensure that their ownership of shares does not create any conflict between their personal interests and management of the state’s participating interests or the interests of Petoro AS. Senior employees (CEO and employees who report directly to the CEO) are prohibited from owning shares in licensee companies.
Petoro presents separate accounts for SDFI portfolio transactions, which form part of the government’s accounts. Cash flows generated from the portfolio are transferred to the state’s own accounts with Norges Bank.
Share capital and dividends
Petoro has a share capital of NOK 10 million and is wholly owned by the Norwegian state. The state guarantees the company’s liabilities. The limited company’s own operating costs are covered by annual appropriations over the fiscal budget. The operating contribution is presented as operating revenue in the limited company’s accounts. The company receives appropriations to meet its costs and does not pay a dividend. Shares in the company cannot be traded or transferred.
Equal treatment of shareholders
Shares in Petoro AS are owned by the state and the company has no personal shareholders.
The state employs a common ownership strategy to maximise the overall value of its ownership interests in Equinor ASA as well as the state’s own oil and gas interests. On this basis, Equinor ASA undertakes the marketing and sale of the state’s petroleum pursuant to a marketing and sale instruction approved by the general meeting of Equinor ASA. Through Petoro AS’ articles of association, Chapter 11 of the Petroleum Act and the marketing and sale instruction for Equinor ASA, the government has given Petoro responsibility for monitoring that Equinor ASA performs its duties in accordance with this instruction.
A duty of commercial confidentiality applies to information Petoro receives through its monitoring of Equinor ASA’s marketing and sales and in its work on the budget and accounts relating to the marketing and sale of the state’s petroleum. The company’s ethical guidelines emphasise that recipients of such confidential information must use it only for its intended purpose, and must not trade in Equinor ASA’s securities for as long as the information is not publicly known.
The Ministry of Petroleum and Energy, in the person of the minister, represents the government as sole owner and serves as the company’s general meeting and highest authority. Notice of general meetings is issued in accordance with the provisions of the Norwegian Limited Liability Companies Act relating to state-owned companies. The annual general meeting is held before the end of June each year. Guidelines for issues to be considered by the company’s general meeting are laid down in the Petroleum Act. Owner decisions and resolutions are adopted at the general meeting, which also elects the company’s external auditor.
Election of directors
The company is subject to the state’s procedures for selecting directors. Directors are elected by the general meeting, which also determines the remuneration of all directors. Directors elected by and from among the employees serve two-year terms.
Composition and independence of the board
Petoro’s board comprises seven directors, five of whom are elected by the general meeting. Two are elected by and from among the company’s employees. Four of the directors are women. Directors are elected for two-year terms and have no commercial agreements or other financial relationships with the company apart from the directors’ fees established by the general meeting and contracts of employment for the directors elected by the employees. All shareholder-elected directors are independent of the owner.
The board considers its composition in terms of expertise, capacity and diversity to be appropriate for following up the company’s goals and assignments. Each director and the board as a collective body seek to strengthen their expertise in various ways on a continuous basis. These include participation in courses and conferences and generally following developments within the business area.
Work of the board
The board has overall responsibility for the management of Petoro, including ensuring that appropriate management and control systems are in place, and for exercising supervision of the day-to-day conduct of the company’s business. The work of the board is based on instructions which describe its responsibilities and mode of working. The board met 8 times in 2020.
As an appendix to the instructions for its work, the board has adopted supplementary provisions for matters it shall consider. An annual schedule of meetings has been established for the work of the board, with the emphasis on considering topical commercial issues and following up strategies, budgets and interim results. The board utilises a balanced scorecard system as a key instrument for measuring results.
The board considers major investment decisions within the SDFI portfolio, follow-up and consideration of activities in the joint ventures, and monitoring of gas sales — including an assessment of the overall risk picture. The Board has chosen to organise its work related to compensation through a sub-committee comprising two of the shareholder-elected directors, one of whom is the deputy chair. No other sub-committees have been established. In the event of conflicts of interest, the established practice has been for the director concerned to abstain from the board’s consideration of the matter. Conflicts of interest are a fixed item on the agenda for the Board’s meetings and consideration of matters.
An annual self-assessment is conducted by the board, which encompasses an evaluation of its own work and mode of working, as well as its collaboration with company management. The self-assessment for 2020 is complete. The board reviewed the company’s CSR, business ethics guidelines and board instructions.
Risk management and internal control
Risk management in Petoro is a continuous process where management and the board identify and prioritise relevant risks for Petoro’s goal attainment. The board undertakes an annual review of the company’s most important risk areas and internal control. In this review, the board emphasises the risks and opportunities that Petoro itself can influence through its own measures within the frameworks available to it. The most important operational risks are followed up in the management committees for the prioritised joint ventures. Petoro works continuously on risk management in line with principles for integrated management and developments in the company’s risk picture.
Identification and management of risk and risk exposure make up part of Petoro’s business processes. The company works with risk management to handle matters that could affect its ability to attain specified targets and to implement chosen strategies, as well as matters that may affect its ability to submit accurate accounts. Risk management is integrated in Petoro’s performance management system. Climate risk was clarified in the company’s governance in 2020.
The company’s internal control shall ensure that its activities are carried out in accordance with the company’s governance model and compliance with regulatory requirements. The internal control function forms an integrated element in Petoro’s management processes, and is responsible for ensuring that integrity and completeness are assessed for all management information and that the management system is effective.
The framework for internal control has been formulated to provide a reasonable level of assurance that goals will be met in the following areas:
Purposeful and cost-effective operations
Reliable reporting of accounts
Compliance with applicable statutes and regulations
Guidelines have been adopted by Petoro to facilitate internal reporting of improprieties in its activities. Whistleblowing is also included in the company’s business ethics guidelines. Whistleblowers who want to preserve their anonymity or who do not wish to raise the matter with their superior for other reasons, can notify the internal auditor. The company’s values and business ethics guidelines clarify principles that shall govern the company’s commercial operations and employee conduct.
Remuneration of the board and senior management
The general meeting determines the remuneration of directors. The board determines the remuneration of the CEO. The CEO determines the remuneration of other members of the company’s senior management. The board’s guidelines for the remuneration of senior employees in Petoro comply with the framework specified in the Guidelines on pay and other remuneration for senior executives in wholly or partly state-owned enterprises and companies, which came into force on 13 February 2015. In 2020, the management team consisted of 7 people, including the CEO. Details of the actual remuneration paid are provided in a note to the annual accounts.
Information and communication
The Petoro board has established a communication strategy to ensure that an open dialogue is pursued both in-house and externally, so that the company’s employees and other stakeholders are well informed about its business activities.
The company publishes information via its website, including press releases as well as the interim and annual reporting of its results. Petoro’s annual report presents a broad description of the company’s operations, as well as the directors’ report and the annual accounts. The board’s presentation of the company’s CSR is included in this annual report.
The Office of the Auditor General (OAG) is the external auditor for the SDFI portfolio pursuant to the OAG Act. The OAG verifies that the company’s management of the portfolio accords with the decisions and assumptions of the Storting (parliament), and audits the annual accounts for the SDFI portfolio. On the basis of this work, the OAG submits its report in a final auditor’s letter.
The board has also appointed PwC to conduct a financial audit of the SDFI accounts as part of Petoro’s internal audit process. PwC conducts a financial audit of the portfolio’s accounts and submits an independent statement. This statement details whether the annual accounts pursuant to the accounting principles and on a cash basis were rendered pursuant to the rules of the Accounting Act and rules for state accountancy on a cash basis. The contract with the external auditor company covers both financial auditing of the SDFI and Petoro’s internal auditor function. In this role, the company audits the internal control systems in accordance with the instructions and an annual plan approved by the board. The internal auditor handles the company’s function for receiving notices.
The general meeting has chosen KPMG AS as the external auditor for Petoro AS.