DNO International ASA DNOInternational DNO International ASA Stranden 1, Aker Brygge 0250 Oslo NORWAY Phone: (+47) 23 23 84 80 Fax: (+47) 23 23 84 81 DNO International ASA
Annual Report and Accounts Report 2007 Annual Annual Report and Accounts 2007
Visionary Oil & Gas Exploration and Production www.dno.no Fast facts and figures
The vision to Balanced portfolio We hold and operate a diverse explore innovatively. and balanced exploration portfolio, with particularly strong potential of unrisked resources in Yemen The strength to and Kurdistan. deliver consistently. Profitability We have high-margin producing assets generating strong cash flow for reinvestment in future growth Discover DNO opportunities. an International Oil Exploration Transparency and Production Company We are transparent in our business practices and reporting, controlling DNO is an independent international upstream oil the Group risks operationally in and gas company. DNO’s main objective is sustainable line with corporate governance growth and value creation through smart exploration, guidelines. cost-effective field development and high-margin production. DNO is committed to conducting its activities in a socially, environmentally and Partnership economically responsible manner. We form long-term trusted DNO International ASA is now focused on its assets partnerships with operators and in the Middle East, the UK and Africa. Our interest on governments, behaving ethically and the Norwegian Continental Shelf is operated through with integrity in the communities in our investment in the associated company Det norske oljeselskap ASA. We have a proven track record as a ‘fast which we work. to market’ developer and low-cost operator of assets, by rapidly commercialising our asset finds and acquisitions Skills and knowledge and extending the life and commercial viability of our We are skilled operators and fast to existing sites. We form long-lasting partnerships and we have built a reputation for being a trusted operator and market, adopting best practices and quick decision-maker. latest technologies in all aspects of our business. Contents Netback before exploration (NOK million) 2 An overview of 2007 4 DNO in depth: Our mission, strategy, structure and assets 953 6 A merger for growth 8 Managing Director’s Report Working interest production (bopd) 10 Operating Review 12 > Kurdistan region of Iraq 16 > Yemen 14,462 22 > New Ventures 24 Fast Track Development 26 People and Society Lifting cost (USD/bbl) 28 Financial Review
32 Directors and Advisors 7.65 34 Corporate Governance 37 Board of Directors’ Report Netback coverage of 43 Financial Accounts with Note Disclosures exploration expenses 118 Parent Company Accounts
137 Auditor’s Report 360% 138 Glossary and Definitions Working interest reserves and resources (mboe)* 156.8 Net profit (NOK million) 1,006
*Working interest reserves and resources (mboe) corresponds to class 1-7 definitions (Norwegian Petroleum Directorate – NPD)
DNO International ASA Annual Report and Accounts 2007 | 1 An overview of 2007
2007 has been another successful and important year for DNO, adding new reserves at low cost.
2 | DNO International ASA Annual Report and Accounts 2007 Financial highlights Operational Highlights • Net profit exceeds NOK 1,006 million, including • First oil produced after fast track development NOK 871 million contribution from the integration of the Tawke field. of our Norwegian subsidiary with Pertra ASA. • 2007 exit production reached 18,000 bopd, • Strong increase in netback to NOK 690 million up 55% on 2006. (2006: NOK 420 million). • Maintained stable production in Yemen through • Revenue up 11% to NOK 1,320 million successful infill drilling. (2006: NOK 1,193 million). • Tawke gross reserves up by 130% to 230 million • Equity ratio up to 48% (2006: 22%). barrels. • NCS operations restructured with DNO becoming largest shareholder in the combined company company.
highlights of the year
Revenues Netback before exploration Net profit (NOK million) (NOK million) (NOK million)
1,320 953 1,006 1,006 953 1,320
+11% 1,193 +25% +1,547% 760 626 299 191 61 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2005 2007 2006 2007 2005 2006 2005 2007 2006 2007 2005 2006 2007
DNO International ASA Annual Report and Accounts 2007 | 3 DNO currently holds 15 licenses in 6 countries.
DNO in depth: Our mission, strategy, structure and assets
Mission and Strategy Structure Our international oil and gas assets Our mission is to be a leading independent exploration DNO International ASA is now focused on its assets in and production company focused on transforming the Middle East, UK and Africa. Our interests on the Licenses Reserves and resources Production 2007 Owner possible resources to reserves at low cost, generating Norwegian Continental Shelf are transacted through substantial and consistent returns for shareholders. our associated company, Det norske oljeselskap ASA, a pure play Norwegian exploration and production Yemen 8 Oil 13.0 mboe Oil 11,637 bbl/day DNO Yemen AS Our strategy aims to convert resources to reserves company in which we hold a 36.9% share. at low cost. As part of this strategy we aim to: Kurdistan 2 Oil 142.3 mboe Oil 2,826 bbl/day* DNO Iraq AS
• Further explore and develop our strong position Syria 1 Oil 0 mboe 0 DNO International ASA in Yemen. • Fully exploit the exploration potential of our acreage and develop discoveries in Kurdistan Mozambique 1 Oil 0 mboe 0 DNO International ASA region of Iraq. • Increase our production levels whilst maintaining Equatorial Guinea 1 Oil 1.5 mboe 0 DNO International ASA our competitive position as a low-cost producer. • Take a balanced risk based approach spreading UK 2 Oil 0 mboe 0 DNO International ASA technical, political, operational and financial risk across the portfolio. • Actively manage and optimise the portfolio to Our ASSOCIATED oil and gas assets reduce financial exposure and over time maximise returns to shareholders. Norway 46 Oil 47.7 mboe Oil 1,039 bbl/day** Det norske oljeselskap ASA
4 | DNO International ASA Annual Report and Accounts 2007 Norway
UK
Syria
Iraq
Licenses Reserves and resources Production 2007 Owner
Yemen 8 Oil 13.0 mboe Oil 11,637 bbl/day DNO Yemen AS
Yemen Kurdistan 2 Oil 142.3 mboe Oil 2,826 bbl/day* DNO Iraq AS
Syria 1 Oil 0 mboe 0 DNO International ASA
Mozambique 1 Oil 0 mboe 0 DNO International ASA
Equatorial Guinea 1 Oil 1.5 mboe 0 DNO International ASA
Equatorial Guinea UK 2 Oil 0 mboe 0 DNO International ASA
Our ASSOCIATED oil and gas assets
Norway 46 Oil 47.7 mboe Oil 1,039 bbl/day** Det norske oljeselskap ASA Mozambique
* Average production of 5,665 bbl/day from production start June 2007 ** Including production in NOIL Energy until November 2007 DNO International ASA Annual Report and Accounts 2007 | 5 DNO is the largest shareholder in the new second largest E&P company on the NCS.
A merger for growth
In October 2007, DNO and Pertra ASA entered into >> with reserve growth potential through an integration agreement in order to merge DNO’s exploration; and Norwegian subsidiary with Pertra. The merger has >> with capacity to build critical mass. created the second largest Norwegian exploration and production company focused on the Norwegian Continental Shelf (NCS) that: NOIL and Pertra have both achieved successful growth on the NCS. • Builds on existing portfolio by utilising expertise established in the two companies. • Pertra and NOIL have cooperated extensively in the • Creates a stronger player on the NCS than either last three APA rounds. NOIL or Pertra on a stand-alone basis. • NOIL and Pertra have talented teams, totalling • Enhances capabilities to: more than 80 people. >> accelerate growth; • The combined company will have the second >> respond to commercial and technical challenges; largest exploration capacity in terms of employees, The merger timeline: and asset base and rig contracts in Norway. During 2007, DNO International ASA completed >> deliver long term value to shareholders and • The company will participate in E&P activities over the integration of the Norwegian subsidiary society. the entire Norwegian Shelf. NOIL Energy ASA and Pertra ASA, to form the • Creates new opportunities through structural • The merger of NOIL and Pertra is a sound platform second largest Norwegian E&P company on the change to: for aggressive growth and expansion. Norwegian Continental Shelf (NCS). >> become a leader in sector consolidation; • The company’s key value-creation strategy is to >> exploit competitive advantage in acreage discover and put into production undiscovered oil awards; and resources on the NCS. >> utilise size to enhance organic growth, farm-ins • The company will acquire licenses primarily and M&A activity. by license applications and also by farm-in • Is more attractive to investors: agreements, trades and M&A activity. >> as a pure NCS investment opportunity; • In-house capacity is expected to increase from approximately 80 employees today to 150 by 2009.
6 | DNO International ASA Annual Report and Accounts 2007 2007 Integration Process
84% 60% 36.9%
NOIL Energy NOIL Energy Pertra ASA ASA ASA renamed Det norske oljeselskap ASA
June 2007 October 2007 November 2007 DNO International ASA completed Pertra ASA and NOIL Energy ASA Integration of the two companies a private placement in its wholly combined to form the second largest was completed, with DNO as the owned subsidiary Det Norske E&P company on the NCS. Prior to largest shareholder. Pertra ASA Oljeselskap ASA (later renamed the combination, DNO made a sell changed its name to Det norske NOIL Energy ASA), immediately down to institutional investors, oljeselskap ASA. DNO changed its prior to registering it on the reducing its share in NOIL to 60%. name to DNO International ASA. Det Norwegian OTC market. Pertra acquired all of DNO’s shares norske oljeselskap ASAs results will DNO retained an 84% share. in an exchange offer whereby Pertra be accounted for in DNO’s financial offered one share in Pertra for three statements as an associated company. shares in NOIL. DNO retained a 36.9% share in Pertra.
DNO International ASA Annual Report and Accounts 2007 | 7 Several important achievements were made by DNO in 2007. World Oil and Gas Reserves* We passed new milestones in the Kurdistan region of Iraq, maintained our level of production in Yemen and completed Our producing major restructuring of our Norwegian operation. assets are located in the Middle East, the most hydrocarbon-rich region in the world. Managing Director’s Report
Several important achievements were made by DNO Det norske oljeselskap. The merger of Statoil and Hydro in 2007. We passed new milestones in the Kurdistan created a need for a new NCS player. By forming a pure region of Iraq, maintained our level of production play Norwegian E&P company, we created a business in Yemen and completed major restructuring of our with the scale and structure to succeed in this market Norwegian operation. and, at the same time, released value to invest in Fig 1: Oil Fig 2: Gas our international business. DNO remains the largest At the end of 2007, exit production levels were up 55% shareholder, holding 36.9% of the combined company to 18,000 bopd and our P50 reserves were up 90% to and will exercise a proactive ownership through board 152 mboe, despite a revision of reserves in Yemen and representation. excluding the reserves attributable to our associated Oil1 Gas2 company in Norway. Although a number of our previous staff will stay in the combined company, we have retained a strong Middle East 742.7 73.47 We delivered a strong financial performance. Our net competence and capacity within DNO. We have also Europe and EurAsia 144.4 64.13 profit passed the NOK 1,000 million mark, including a recently strengthened our top team adding two new Africa 117.2 14.18 NOK 871 million contribution from the NOIL Energy highly experienced members: Ivar Brandvold as Chief South and Central America 103.5 6.88 ASA restructuring in the fourth quarter. Operating Operating Officer together with Tore Lilloe-Olsen as North America 59.9 7.98 revenues rose to NOK 1,320 million, up 11% on 2006. Corporate Head of Exploration. Asia Pacific 40.5 14.82 Cash flow from production improved substantially with * Source: All figures are taken from the BP Statistical Review one of our most important performance indicators, The key element of our strategy remains the same: of World Energy 2007, and are dated at the end of 2006 netback, increasing by 64% to NOK 690 million. to achieve sustainable growth and create value 1 Thousand million barrels through smart exploration, cost-effective field 2 Trillion cubic metres During the year, we completed the integration of our development and high margin production. We are now Norwegian subsidiary, NOIL Energy ASA and Pertra able to have higher focus on international operations OIL Proved oil reserves continue to increase slowly year on year, ASA to form the second largest Norwegian E&P and have the financial flexibility to include both reaching 1208.2 billion barrels in 2006. The Middle East accounts company on the Norwegian Continental Shelf (NCS), organic and acquisitive growth in our forward plans. for 61.5% of global proven reserves. GAS Total gas reserves stood at 181.5 trillion cubic metres at the year-end, little change on 2005. 8 | DNO International ASA Annual Report and Accounts 2007 The key element of our strategy We are well positioned for growth with our extensive remains the same: to achieve exploration and drilling programme targeting a substantial unrisked resource potential in 2008. We are sustainable growth and create prepared for a step-change in production, once export value through smart exploration, permits are granted in Kurdistan. In a tightening cost-effective field development market, we have highly qualified staff, access to large, and high margin production. attractive acreages and a strong track record of moving from discovery to production fast. Going forward, we will continue delivering values through international expansion founded on an exciting license portfolio, combined with a strong balance sheet and improved financial flexibility.
Helge Eide Managing Director
DNO International ASA Annual Report and Accounts 2007 | 9 Photo: Iver Gjendem, Konsis. Ivar Brandvold Chief Operating Officer
Operating Review
During 2007, we delivered a substantial exploration and Key achievements Skills, resources and capabilities development programme drilling nine exploration and One year after discovery of the first oil in Kurdistan, DNO’s unique position in Yemen and Kurdistan 20 development wells respectively, a total of 29 wells. we commenced test production at the Tawke field, provides a strong platform for further growth in contributing to a significant uplift in production in the region. Over the last 10 years, we have built up We achieved a number of key milestones in the the second half of 2007. Successful exploration and a unique combination of geological competence Kurdistan region of Iraq, where we now have established appraisal drilling at the Tawke field also had a major and operational knowledge in the area. Our track a full scale E&P operation. In Yemen, production was impact on reserves, resulting in an increase of 130% record has manifested our position as an effective maintained at a stable level throughout 2007. Our lifting to 230 million barrels gross, 88.4 million barrels net operator, transforming reserves into production in costs remained stable at USD 7.65 per barrel (2006: USD to DNO. a fast, flexible and cost-effective manner. 7.53 per barrel) as we increased production, bringing the Tawke field on-stream mid-year. Although the Yemen exploration drilling did not The Company has a highly competent workforce meet expectations in 2007 and reserves were reduced of 508 people, located throughout our offices by 10 million barrels, a successful infill drilling and sites in Norway, Yemen, Dubai, Kurdistan, programme maintained production throughout Mozambique and the UK. The organisation and the year, with stable high-margin production management are focused on developing the funding increased exploration activity. qualities and knowledge-base of the organisation and individuals – taking strong ownership in building the skills and competencies of the local employees.
10 | DNO International ASA Annual Report and Accounts 2007 We also have an open, learning and adaptive business The quality of our assets in combination with The year 2008 will mark a shift towards culture, with the ability to learn from and integrate high exploration and development activities, will a new exploration era within our licenses with local communities. Combined with our record add new resources and reserves to the Company. for fast track development, this contributes to our New reserves will be developed to production in a in Yemen, Kurdistan and Mozambique. excellent reputation as an operator – an essential cost-effective manner along the fast track approach. Seismic acquisition programmes in all prerequisite for continued success. three countries will form the basis for In Kurdistan, the facilities and wells at the Tawke assessing the full resource potential of Outlook field are ready for large scale production and export The year 2008 will mark a shift towards a new of oil. DNO is cooperating closely with the authorities these assets, defining exploration and exploration era within our licenses in Yemen, in terms of preparing the field for export of oil to the appraisal well locations throughout 2008. Kurdistan and Mozambique. Seismic acquisition international market. programmes in all three countries will form the basis for assessing the full resource potential of these assets, DNO will be committed to deliver value to the defining exploration and appraisal well locations shareholders focusing on fast, flexible and low cost throughout 2008. operations and projects, as well as through proactive ownership in the new second largest Norwegian E&P We have secured the rig capacity required to company in Norway. implement our exploration and development activities for 2008. A total of 40 wells are scheduled to be drilled, 22 exploration and 18 development wells.
DNO International ASA Annual Report and Accounts 2007 | 11 Operating Review Kurdistan region of Iraq
Kurdistan will continue to offer high quality, low cost development opportunities.
12 | DNO International ASA Annual Report and Accounts 2007 Magne Normann Managing Director, DNO Iraq AS
Key achievements DNO holds a unique position in frontier areas in Kurdistan after early entry in 2004, with significant oil reserves identified, a Central Processing Facility (CPF) and pipelines installed and the first wells on-stream.
Following a successful fast track development programme, we commenced test production in the Tawke field in June 2007, at an average rate of 5,665 bopd for 2007 and with a year end gross exit rate of 7,000 bopd. The crude oil has been sold to the local market in Northern Iraq. The test production has provided DNO with essential data on the reservoir behaviour in relation to production characteristics. Continued appraisal of the Tawke field resulted in a 130% increase in expected gross recoverable oil reserves to 230 million barrels (2006: 100 million barrels).
Production facilities, including export pipelines, have been installed to a tie-in point on the existing export pipeline infrastructure from Iraq to Turkey. DNO is cooperating closely with the authorities, in terms of preparing the Tawke field for export of oil to the international market and to obtain the authorities’ approval for such export.
DNO International ASA Annual Report and Accounts 2007 | 13 Images: Left: Construction of pipeline from the Tawke Field. Middle: Drilling on the Tawke field. Right: Onshore seismic vibrator crew doing maintenance on DNO’s Vibroseis vehicles.
Operating Review
Kurdistan
There will be focus on further exploration Production Sharing CONTracts (PSC) update Production drilling, making use of two of the drilling In March 2008 DNO signed the revised agreements Five production wells were drilled and completed with the Kurdistan Regional Government (KRG) in the Tawke field during the year, resulting in an rigs on contract within the Dohuk and amending the production sharing contracts it holds increase of total cumulative test rates to around Erbil PSC agreement areas. Furthermore, for the Dohuk and Erbil license areas. The Dohuk area 90,000 bopd from the field. Test production has 2D seismic acquisition (230 km) in the has been divided into two license areas, one for the confirmed excellent reservoir properties. The crude Dohuk PSC agreement area commenced Tawke oil field and one for the remaining Dohuk area. oil has 24-26 API quality and a very low gas content. in 2007 and will be completed in 2008. The Company now holds three PSCs in Kurdistan – Average production during the year was 5,665 bopd Northern Iraq: and the crude oil was sold to the local market. The crude oil has been collected by the buyers in the Tawke PSC, with a working interest to DNO of 55%. field so there were no transport costs to DNO. With exceptionally low operating costs at less than USD 2 Dohuk PSC, with a working interest to DNO of 40%. per barrel, the field is already operating with profit.
Erbil PSC, with a working interest to DNO of 40%. The Tawke field was developed with readily available equipment, delivering a fast track approach at a The balance of the working interests in all PSCs is held favourable development cost in a market where by the KRG as a Government Interest and Third Party much of the fabrication industry is extremely busy. Interest to be appointed by the KRG. The CPF, with a design capacity of 50,000 bopd, was installed along with the infrastructure required to support production operations including storage tanks, warehouses and workshops, a 120 man camp and water treatment facilities, etc.
14 | DNO International ASA Annual Report and Accounts 2007 Our pioneering exploration of this region has been rewarded.
the Kurdistan region of iraq Kurdistan covers around 65,000 km2 in Iraq. Geologically, the Kurdish region is dominated by the impressive Zagros Mountains. The hydrocarbon traps are to a large degree related to the formation of this Installation of a 42 km pipeline, also with a capacity Additional wells are ready to be brought on stream mountain chain. of 50,000 bopd, was completed to link the Tawke CPF in the Tawke field once tie-in approvals are received to the main Iraq/Turkey export pipelines. The tie-in and oil can be exported to the international markets. Reserves and resources includes a fiscal metering package and the final tie-in The production facilities and wells drilled and Oil 142.3 mboe will take place once government approval is given. completed to date will be capable of delivering a minimum of 50,000 bopd. A topping plant capable of Production 2007 Exploration producing 1,500 barrels of diesel per day is en route to Oil 2,826 bbl/day* Following the development drilling focus for most of the Tawke field for installation in the first half of 2008. 2007, two of the drilling rigs were moved to exploration structures during the latter part of the year to prove The year 2008 will mark a shift towards new TURKEY up additional reserves within the Dohuk and Erbil PSC exploration within the PSCs. A 2D seismic acquisition agreement areas. These wells were Summail-Extension (230 km) program in the Dohuk PSC agreement area #1 in the Dohuk PSC area and Hawler #1 in the Erbil commenced in 2007 and will be completed in 2008. Tawke PSC PSC area. The seismic acquisition programme and results of SYRIA Dohuk PSC ongoing wells will form the basis for assessing the IRAN Outlook full resource potential of the PSCs and defining the Kurdistan will continue to offer high quality, low cost exploration and appraisal well locations throughout Erbil PSC development opportunities. It is unexplored compared 2008. It is expected that this will increase focus on with the rest of Iraq and has substantial oil reserves of exploration and add new resources to the Company. 12-45 billion barrels (Source: Western Zagros, KRG and HIS Energy). IRAQ Strong momentum is building in the region, with new international entrants. DNO was the first international upstream oil company to explore Northern Iraq and, *Average production of 5,665 bbl/day from production start as such, holds a key position in developing the region. June 2007
DNO International ASA Annual Report and Accounts 2007 | 15 Our licenses in Yemen have entered into a new exploration era.
16 | DNO International ASA Annual Report and Accounts 2007 Sven-Erik Lie Managing Director, DNO Yemen AS
Key achievements Yemen remains the production powerhouse for DNO, delivering 80% of our oil production in 2007, and demonstrates our capabilities as an efficient, flexible, cost-effective operator. We have Production Sharing Agreements (PSAs) in eight blocks: three producing blocks and five exploration blocks. This includes Block 84, awarded at the end of 2006, where the PSA is still being ratified. In the second quarter of 2007, we farmed into Block 52, securing a 57.78% working interest.
Production levels for 2007 as a whole averaged 11,637 bopd, slightly above plan. An aggressive infill drilling schedule during the year made some headway into maintaining production levels in these mature fields, with particular success in Block 53. Achievements for 2007 include four new wells coming on stream during the second half of the year, with some promising discoveries in the fourth quarter in the Bayoot field.
We first entered Yemen in 1998 and now have a workforce of 283 people in the country, of which 83% are Yemen nationals. We are investing in building their skills and competencies in support of the Yemen government’s aspirations to continue developing the country’s world class oil industry.
DNO International ASA Annual Report and Accounts 2007 | 17 Images: Left: Nabrajah plant in Yemen. Middle: Manifold between Godah and Nabrajah. Right: Qishn CPF flaring gas.
Operating Review Yemen
We have built a strong reputation as an Production Block 53 operator in Yemen and are well positioned Block 32 Sharyoof Tasour This field performed ahead of expectations during to extend our assets in the area – either by Production in the mature Tasour field declined as the year. Four infill wells, two production and two farming into attractive opportunities or anticipated with an exit gross production of 5,280 bopd, injection wells, contributed to production increases participating in future licensing rounds. of which 2,100 bopd was net to DNO. during the year: Sharyoof #24, #26, #27 and #28. Gross exit production for 2007 reached 10,400 bopd, The Godah field has proved to be smaller than initially of which 3,300 bopd was net to DNO. expected in 2006 and 2007 exit production was 1,050 bopd net to DNO. Three development wells were drilled The Bayoot and Hekma hydrocarbon system discovered in the Godah field: Godah #6 and #7 came on stream in in 2006 has yielded some promising results in 2007. the second quarter and Godah #8 in the fourth quarter. Bayoot SW#3 came on stream in the third quarter, testing at 1,600 bopd gross. Drilling on Bayoot SW#4 Two exploration wells drilled during the year proved commenced in the fourth quarter into the same to be dry: Berhoot #1 and Nuzooh #1. basement area confirming additional oil.
DNO is the operator on the block with a working Oil from Bayoot and Hekma is currently being interest of 38.95% and a paying interest of 41.00%. transported by trucks to the Sharyoof facilities. With encouraging results from the recent wells, the license partners are considering building a pipeline back to Sharyoof to improve transportation efficiency.
DNO has a working interest of 24.45% and a paying interest of 32.60%, working with Dove Energy as operator.
18 | DNO International ASA Annual Report and Accounts 2007 We believe that the remaining exploration potential in Yemen is high.
YEMEN Yemen has a population of more than 20 million people. The total area of Yemen is 527,968 km2. From a hydrocarbon point of view the most important geological features in Yemen are the Mesozoic rift basins. DNO is present in the Block 43 Exploration Say’un Masilah Basin. Nabrajah Seismic acquisition of 2D data was completed in Overall, this field met expectations and 2007 gross Block 47 and the first exploration well, Yaalen #1, Reserves and resources exit production was 6,600 bopd, of which 4,300 bopd was spudded in January 2008. Oil 13.0 mboe was net to DNO. Further 3D seismic acquisition is currently underway Production 2007 Four new wells came on stream over the course of the in Block 72, following the unsuccessful appraisal well Oil 11,637 bbl/day year: Nabrajah #12 in the first quarter, Nabrajah #14 Nasim #1, which was plugged and abandoned in in the second quarter and Nabrajah #15 in the third early 2007. quarter. Nabrajah #16 was brought into production at the year end, delivering an initial gross flow rate The two exploration wells drilled in 2007 in Block 44 of 1,100 bopd. proved to be dry: Ardah #1 and Wasta #1. Depending on the results from ongoing geological studies, one well Two exploration wells were drilled which proved may be drilled in 2008. to be dry: Shaibah #1 and Thoub #1. A new exploration well, Dahgah #1, was spudded in January 2008. Planning for the acquisition of more 2D data in Block 52 and reprocessing of the old database was initiated YEMEN DNO is the operator on the block with a working in 2007. Seismic field work will be executed during the interest of 56.67% and a paying interest of 66.67%. first half of 2008, followed by two exploration wells planned for 2008 and 2009.
DNO International ASA Annual Report and Accounts 2007 | 19 We first entered Yemen in 1998 and now have a workforce of 283 people in the country, of which 83% are Yemen nationals. We are investing in building their skills and competencies in support of the Yemen government’s aspirations to continue developing the country’s world class oil industry.
Operating Review Yemen
Outlook Yemen is still under-explored territory with a large untested resource potential. We have built a strong reputation as an operator in the region and are well positioned to extend our assets in the area – either by farming into attractive opportunities or participating in future licensing rounds. We are currently evaluating the potential in offshore blocks contained in the fourth licensing round due in June 2008.
We have secured rig capacity for an intensive exploration programme planned for all blocks to help mitigate the expected decline in our current mature fields. Looking forward, the new Bayoot SW#4 shows good potential and the first well on Block 47, Yaalen #1 is ready for testing and commercial evaluation.
20 | DNO International ASA Annual Report and Accounts 2007 DNO International ASA Annual Report and Accounts 2007 | 21 Erik Syrdalen Manager, New Ventures
Operating Review New Ventures
East Africa – Mozambique estimates, the Green Sand discovery holds 33 million Brent Group reservoir. Preliminary engineering studies In Mozambique, DNO is the operator on the Inhaminga barrels of gross recoverable oil reserves on a P50 basis. are underway to assess the resource potential and the block, an Exploration and Production Concession (EPC), feasibility of drilling an appraisal well to confirm where we have an 80% interest. This is an on-shore The operator has submitted a field development plan the resources. exploration area of 16,400 square kilometres. (FDP) to the government, based on implementing a Floating Production and Storage Unit, to support DNO was awarded a promote license in early 2007, Preparation for and construction of access roads have two production wells and one injection well. The P1507, and we are currently evaluating the resource been undertaken and a 200 km 2D seismic survey partnership is currently awaiting government sanction potential on the license, aiming to secure a drilling was acquired in 2007. Field work is now in progress to of this FDP. This project will contribute to DNO’s partner for a possible exploration well. prepare for an exploration well, Sangussi #1, scheduled overall experience and expertise and at the same time to be drilled by mid-2008. The additional exploration provide an opportunity for DNO to contribute with its Outlook potential on the block is currently being assessed, North Sea experience and technological know how to Through our operator positions, DNO has, over the which will form the basis for defining a further data the project at relatively low financial exposure. last 10 years, gained a considerable and quite unique acquisition programme and drilling locations. geological and operational insight and knowledge Middle East – Syria onshore in the Middle East. With our presence as an West Africa – Equatorial Guinea DNO is partner on an onshore concession, Block 6, in operator in Mozambique, we are now extending our The offshore area of Equatorial Guinea is an emerging Syria. The resource potential is undergoing evaluation knowledge base to the Middle East – East Africa axis. region that has been opened for exploration activities. as a basis for defining the further exploration activities The East Africa region represents an unexplored By participating with a small interest (5%) in Block P, on the block. frontier area with a considerable resource potential for DNO has gained access to results from drilling exploration and development. We are targeting this axis operations as well as first hand information on geological United Kingdom as a region for new entries and growth to the Company. and seismic data and interpretations in this area. DNO currently holds two licenses on the UK Continental Shelf. Looking to the UK, we plan to participate in the 25th At the end of 2006, oil and gas were discovered in the UK licensing round. License transaction opportunities Green Sands structure in Block P, following the drilling We farmed into the P1067 license in 2005, currently will also be followed up, with the aim to capitalise on of the P-4 exploration well. Based on the current holding a 50% working interest as operator. In 2007, our current UK assets as well as to acquire new high we have re-evaluated an older well, 211/22-2, in the quality assets.
22 | DNO International ASA Annual Report and Accounts 2007 Images: Left: Beach near DNO’s office in Maputo. Middle: Rural scene near Savne-1 well site. Right: Seismic acquisition in Mozambique with Thumper technology.
We are exploring and appraising the potential of these areas.
Equatorial Guinea Mozambique UNITED KINGDOM
Equatorial Guinea has Mozambique has a Allthough UK hosts the largest an acreage of 28,051 NIGERIA population of 21,397,000 and onshore field in Europe, km2 and the population the total area is 801,590 km2. (Wytch Farm in Dorset), most is around 504,000. It is The present day geology in of the production comes from CAMEROON the smallest country in the Inhaminga area carries the offshore area. Working the continental Africa evidence from several rift hydrocarbon systems have in terms of population. episodes, including the Karoo MOZAMBIQUE been proven in a great variety EG’s territory includes BIOKO rifting, the Madagascar break of formations. Oil and gas are the island of Bioko, off up and the formation of the currently being produced from the Cameroonian coast, East African Rift Valley. reservoirs buried to depths which hosts the capital, ranging from 100’s of meters Malabo. The first oil to more than 6,000 meters. discovery in EG was PRINCIPE EQUAT. made off Bioko in the GUINEA mid-1990s. UK
GABON
Reserves and resources Reserves and resources Reserves and resources Oil 1.5 mboe Oil 0 mboe Oil 0 mboe
Production 2007 Production 2007 Production 2007 Oil 0 bbl/day Oil 0 bbl/day Oil 0 bbl/day
DNO International ASA Annual Report and Accounts 2007 | 23 Tore Lilloe-Olsen Corporate Head of Exploration Fast track development timeline
In the space of the last 10 years we have proven our ability to identify, develop and produce world class assets in frontier and prosperous territories. We are continuing to build on our success.
From exploration to production through fast track development
Converting resources to reserves at low cost and DNO’s flat organisational structure and ability to bringing reserves into production fast is one of DNO’s react quickly to opportunities is key to the fast pace competitive advantages. We focus on early entry into of these developments. We are prepared to take prosperous areas and aim for first-mover advantage. early risks, using a minimum level of resources, With successful fast track developments in the UK, taking small steps to build up competence and Sharyoof discovery Yemen and the Kurdistan region on Iraq over the last technology as required. The same team takes 10 years, we have built a wealth of expertise that we responsibility for moving from exploration to apply to both exploration and development activities. production, making transition seamless with no handover or loss of momentum. The core team is Tasour discovery Our first entry into Yemen in 1998 was swiftly followed made up of in-house resources so that knowledge 18 months by an appraisal well on the Tasour field in 1999, with is retained and built upon, adding more specialist production coming on stream in 2000. Since then four resources if required. further fields have all been brought into production within a year of discovery: Sharyoof, Nabrajah, Godah A good reputation as an operator and excellent and Bayoot/Hekma. communication links with the regional government has been equally important in helping to facilitate The principles and practices perfected in Yemen were approval processes and in maintaining the support used to accelerate the development of the Tawke field of the local community. in Kurdistan. Here we moved from discovery to first oil Entry in less than a year. YEMEN
1998 1999 2000
24 | DNO International ASA Annual Report and Accounts 2007 Godah production
Godah discovery 10 months
Nabrajah discovery Nabrajah production
15 months
Sharyoof production 20 months
Tawke discovery Tawke production Tasour production 11 months
Entry
KURDISTAN
2000 2001 2002 2003 2004 2005 2006 2007
DNO International ASA Annual Report and Accounts 2007 | 25 ‘We will pursue our business with integrity and focus on ensuring and supporting sustainable development in the communities in which we operate.’ Helge Eide, Managing Director
People and Society
Our corporate policy Our CSR principles are anchored in our ethics and in People DNO’s Corporate Social Responsibility (CSR) policy is our culture. Our commitments to social responsibility Our ethical framework and core values are critical based on a commitment to conduct our operations are integrated in our principles and standards: elements in developing the organisation as well in accordance with the principles set forth in the as in the recruitment processes. Our core values UN Global Compact. This is based on the Universal • DNO demands the highest level of personal conduct reflect expectations and we use our CSR framework Declaration of Human Rights, the Kyoto Treaty, from all employees and company representatives. to communicate how staff are expected to behave. the ILO Convention and agreements on efforts to • We will pursue our business with integrity, The framework is presented on our intranet combat corruption. respecting the different cultures and the dignity home page. and rights of individuals in all the countries in which we operate. Our objectives are to develop systems, staff and • The Company shall ensure and support sustainable competence which support and communicate our development in the communities in which we ability to deliver high ethical standards, integrity operate. and fairness in our business dealings. In order to • We duly take notice of society’s expectations to promote the required competence we facilitate openness and transparency in our reporting. presentations, training, workshops and external • The Company shall ensure that all leaders and staff consultancy. have the knowledge and competence required to fulfil these expectations. • The Company shall provide guidance by effective implementation of the Company’s CSR framework. Compliance shall be verified by use of relevant performance indicators.
26 | DNO International ASA Annual Report and Accounts 2007 Our systems Our guidelines on Code of Conduct cover employment rebuilding roads locally. Over recent years, the Corporate governance is the relationship between practice, books and records, conflict of interest, Company has developed a support program for corporate managers, directors and the providers of management of third parties, bribery and facilitated children born with a cleft palate. equity, people and institutions who save and invest payments, disclosure of confidential information, their capital to earn a return. The guidelines and management of company assets, communication, In the Kurdistan region of Iraq, DNO has established recommendations concern the capital market’s whistle blowing, entertainment and gifts. and is financing an educational programme for requirements to external reporting, documentation, local students at the University in Cairo. Further, management and internal control, transparency, Community we have provided IT equipment for the Hawler corporate responsibility, equality and independence All DNO staff and contractors shall behave in a Medical University in Erbil. In 2007 young and of roles and decisions. socially responsible way and respect cultural, local professionals became part of a competence national and regional diversity. We strive to maintain development program which involves training in To meet requirements and demands, DNO will a close and open communication with local authorities our Norway based organisation. Contributions to the continuously develop its corporate governance and relevant regional stakeholders. communities close to our operations include recruiting processes to ensure compliance at all times. and training local personnel, supporting community In Yemen in particular, we are supporting the road construction, installing fresh water supplies, DNO is in the process of implementing its new Internal development of local competence as part of the and refurbishment of the primary school in the Control and Risk Management System, which will Yemenisation programme – investing in building Tawke village. present our risk model (COSO based) and the way we technical and commercial skills and raising have organised our barriers. The system embraces awareness of health, safety and environmental issues. operational and social as well as financial risks and We provide equipment for local schools and healthcare will become an integral part of our existing Business support to local villages. Heavy rains often destroy Management System. local infrastructure so we use resources to support
DNO International ASA Annual Report and Accounts 2007 | 27 Our solid financial performance and strengthened CASH FLOW capital structure enables us to further build value through exploration and development in 2008. Cash flow covered 64% of our total investments in 2007 and also covered the expensed exploration by Financial Review 3.6 times. 700 We delivered strong financial results for 2007 with The shares are valued at NOK 1.3 billion in the Increasing Cash Flow60 Funding0 (NOK mill) strengthened key figures such as netback and consolidated balance sheet. Net profit from sale of the 500 2,500 New Interest-Bearing Debt equity ratio. Increased production and reduced subsidiary provided a P&L/equity effect of NOK 871 400 exploration costs contributed to the increase in our million on group level in the fourth quarter. 2,000 Divestment 300 netback. We also continued to build value through 1,500 Netback before Exploration 200 successful exploration and development, as our Going forward, DNO will account for the investment 1,000 Development Capex
Sources 100 P50 reserves increased by 90% in 2007. Our finding, in Det norske oljeselskap ASA as an investment in an 500 Exploration Expensed development and acquisition costs per barrel were associated company, using the equity method. DNO’s 0 0 again significantly lower than the industry average, share of the results in the associated company will -100 contributing to sector leading reserve economics for thereby be shown in the P&L and adjust the carrying -500 2005 2006 2007 Uses DNO. The restructuring of our Norwegian subsidiary amount of the investment in the balance sheet. -1,000 2008E
NOIL Energy ASA increased our net profit for 2007 and -1,500 also strengthened our balance sheet and financial KEY FIGURES (excluding discontinued operations) -2,000 flexibility at year end. 2005 2006 2007 (NOK million) 2007 2006 Merger Accounting Effects Expensed and Capitalised Exploration (NOK mill) Sales 1,320 1,193 As the first step in the merger process between NOIL 700 Yemen Profit/(loss) from operating activities 492.2 460.5 Energy ASA and Pertra ASA, DNO initially reduced its 600 Kurdistan shareholding in NOIL from 83.7% to 60% prior to the Net profit/(loss) 1,006.3 61.1 500 Africa Other combination. This sell down had no P&L effect as this Netback before exploration 953.12,500 759.8 400 Northern Europe was considered an equity transaction for the group, 2,000 Capitalized Exploration contributing a gross cash effect of NOK 660 million. Exploration cost expensed 263.6 339.5 300 Acquisitions and development cost 1,2171,500 1,279 200 1,000
Det norske oljeselskap ASA (former Pertra ASA) Sources 100 subsequently acquired all of DNO’s shares in NOIL, Working interest production (mboe) 5.28500 5.05 0 with shares in Det norske oljeselskap as consideration. Achieved oil price (working interest, 0 USD/bbl) 62.73 63.06 -100 -500 2005 2006 2007 Uses -1,000 2008E 28 | DNO International ASA Annual Report and Accounts 2007 -1,500
-2,000 2005 2006 2007 Operating revenues were up by 11% from 2006, mainly due to higher production. Test production commenced in the Kurdistan Region of Iraq at mid-year, with a total production for 2007 of 1.03 mboe. High oil prices in 2007 also contributed to higher sales, although offset by a lower achieved oil price on domestic sales in Northern Iraq.
The gross margin remained robust in 2007, although reduced by higher DD&A costs due to revisions of reserves in Yemen. The net profit for the year was highly influenced by the NCS transaction.
Increasing Cash Flow Funding Cash flow, represented by netback before exploration expenses, covered 64% of our total investments in 2007, and also covered the 2007 expensed exploration by 3.6 times. The increase in post-tax netback is due to increased production, reduced exploration costs, high netback per barrel in both Yemen and Kurdistan, and also lower taxes paid. The growth in netback supports our investment program for 2008. Photo: Iver Gjendem,Iver Konsis. Photo:
DNO International ASA Annual Report and Accounts 2007 | 29 We also continued to build value through successful reserves exploration and development, as our P50 reserves increased by 90% in 2007. The P50 reserves are up 90% from 79.7 mboe at year end 2006 to 151.8 mboe at year end 2007.
Financial Review (continued)
Cost-Effective Exploration and Continued Low Operating Costs Three year development of P50 reserves (mboe) Development Our operating costs remain low with lifting costs The pre-tax exploration costs decreased by 29% to at USD 7.65 per barrel in 2007. 160 NOK 263.6 million in 2007. The decrease is mainly due to lower dry well costs (down 49%) in 2007. We have The decline in production on some of our mature fields 140 had several dry wells in Yemen during the year, but in Yemen has increased lifting costs per barrel, but the with average finding costs of USD 1.2 per barrel, our addition of new low-cost production in Kurdistan has 120 exploration results remain strong. Of the NOK 263.6 offset some of this effect. DD&A costs are significantly million in exploration costs, NOK 95.6 was expensed higher in 2007 due to reductions in reserve estimates as dry well cost and NOK 168 million in seismic data, in Yemen. The reduction in reserves increases the unit- 100 G&G and field surveys. of-production depreciation charges. The upgrade of reserves in Kurdistan does not significantly affect the 80 Our finding, development and acquisition costs DD&A costs as the production is still at a low level. remained at a competitive level of USD 3.5 per barrel 60 in 2007, supported by substantial reserve additions Growth in Reserves in Kurdistan. In 2007, DNO adapted new guidelines issued by the 40 Oslo Stock Exchange for its reserves and resources In 2008 the high exploration drilling activity will classification. Under these guidelines, E&P companies continue as we are targeting a substantial unrisked listed in Oslo should present hydrocarbon reserves and 20 potential both in Yemen and Kurdistan. A total of 24 contingent resources in a separate Annual Statements 2005 2006 2007 exploration wells are planned for 2008, of which 16 in of Reserves (ASR) report. 0 Yemen, seven in Kurdistan and one in Mozambique.
30 | DNO International ASA Annual Report and Accounts 2007 As reported in the Company’s ASR report for 2007, Investor Relations (IR) Several appraisal wells and other development the total P50 reserves class 1-3 net to DNO as of We have enjoyed strong interest in DNO from activity will also be completed in 2008. As most of 31 December 2007 are estimated to 151.8 mboe. international investors during 2007. the first phase development investments on the Tawke We are pleased to note that 2007 was another year field have now been completed, we expect to reduce with strong increase in reserves at low costs. At year-end 2007, international shareholders hold development spending this year compared to the peak 43% of the shares in DNO, an increase of 12% from years in 2006-2007. Stronger Balance Sheet last year. Frequent presentations and road shows The NCS combination contributed to a strong increase for investors have contributed to maintaining high Based on the guided production levels for 2008, we in group equity in 2007. The equity ratio increased from IR activity throughout the year. A total of 18 equity expect to continue strong cash flow generation this year. 22% to 48% during the year. The net interest-bearing analysts, of which two are based in London, are now A potential step-change in production above the guided debt to capitalisation was reduced from 52% in 2006 following DNO on a regular basis. levels could be achieved provided that issues related to 29% at year-end 2007. to crude oil export from the Tawke field are settled. Outlook If achieved, this production increase would have a The financial flexibility at year-end is supported by We will in 2008 maintain our focus on value creation strong positive impact on our revenues and cash flow. cash balances of NOK 755 million and other financial through cost-effective exploration and development. assets. Short-term bond refinancing requirements An extensive exploration program is planned for this Our solid financial performance and strengthened are limited as our bond loans mainly mature in 2011 year, including several new exploration wells and capital structure enables us to further build value and 2012. seismic data acquisition in our core areas. We thereby through exploration and development in 2008. plan on further increasing exploration expenditures in 2008.
DNO International ASA Annual Report and Accounts 2007 | 31 The Board of Directors is responsible for the supervision of the risk management and internal control system. An effective risk management and internal control system contributes to safeguarding the Company’s assets and the shareholders’ interests.
Directors and Advisers
1. Trygve Bruvik 3. Elin Karfjell 5. Berge Gerdt Larsen Vice Chairman and NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR CHAIRMAN OF THE BOARD OF DIRECTORS Trygve Bruvik was elected to the Board of Directors Elin Karfjell was elected to the Board of Directors Berge G. Larsen has served as the Executive Chairman at the Extraordinary Shareholders Meeting on 30 at the Extraordinary Shareholders Meeting on of DNO’s Board of Directors since 2002 and as CEO September, 2003. Mr Bruvik serves as the Chairman of 8 November, 2007. In addition, Ms Karfjell is a from 1996 to 2002. Mr Larsen has more than 30 years the Remuneration Committee of the Board of Directors. member of the Audit committee. Ms Karfjell has broad experience from the oil and offshore industry. From Mr Bruvik has more than six years of experience in experience in finance and accounting and is currently 1989 to 1995, Mr Larsen served as managing director the oil industry and 20 years of experience in finance. Director of Finance in Ementor Norge ASA. Ms Karfjell of Odfjell Drilling & Consulting Company AS. He has From 1994 to 2003, Mr Bruvik held the position as holds a degree as a state authorized public accountant. also served as chairman of the boards of directors of group chief executive of Vesta Insurance Company. Ms Karfjell is due for re-election in 2009. the Norwegian Rig Owners Association and the Bergen Mr Bruvik holds a degree in economics. Trygve Bruvik Ship Owners Association. Mr Larsen holds a BSc in is due for re-election in 2009. 4. Marit Instanes chemical engineering from the University of Newcastle NON-EXECUTIVE DIRECTOR and a master’s degree in business administration from 2. Gunnar Hirsti Marit Instanes was elected to the Board of Directors the University of Texas, Austin. Berge G. Larsen is due NON-EXECUTIVE DIRECTOR at the Extraordinary Shareholders Meeting on for re-election in 2009. Mr. Larsen is not pictured here. Gunnar Hirsti was elected to the Board of Directors 8 November, 2007. Ms Instanes is also a member at the Extraordinary Shareholders Meeting on of the Audit committee. Ms Instanes has many 8 November, 2007. Mr Hirsti has many years of years of experience in management and is experience in the oil industry and is currently holding currently responsible for remuneration and HR various managerial and board positions. Mr Hirsti in Opticonsult AS. Ms Instanes holds a degree holds a degree in drilling engineering. Mr Hirsti is in general management. Ms Instanes is due for due for re-election in 2009. re-election in 2009.
32 | DNO International ASA Annual Report and Accounts 2007 2.
1.
4.
3.
Photo: Iver Gjendem, Konsis. 1. Implementation and reporting Capital increase Corporate Governance on Corporate Governance The Board of Directors has been authorised by the DNO shares are listed on the Oslo Stock Exchange AGM to increase the Company’s share capital by up (OSE) and are subject to Norwegian rules. The to NOK 20 million by issuing up to 80,000,000 shares Company strives to comply with all requirements with a face value of NOK 0.25, at a price and other related to the stock listing. The principles which form subscription terms to be stipulated by the Board. the basis of the Group’s corporate governance are The authorisation also covers a capital increase against based on the Norwegian Code of Practice for corporate contributions in kind, including in connection with governance and the Group also aims to meet the mergers, and is valid for two years from the date of expectations of the international capital market. the AGM.
The Norwegian code of practice regarding corporate Purchase of own shares governance comprises 15 main points. In 2007, the The Company’s Board of Directors has been authorised Board of Directors performed a thorough review by the AGM to buy treasury shares within the of these points that forms the basis for this report. framework of the Public Limited Companies Act. Purchases and sales of treasury shares are made 2. business when the Board of Directors regard the transaction as The articles of association and the Norwegian favourable for the shareholders. At 31 December 2007, Public Limited Liability Companies Act form the DNO holds 18,873,960 treasury shares. legal corporate framework for DNO’s business. The articles of association describe the objectives 4. equal treatment of shareholders of DNO’s activities, along with provisions for the and transactions with related parties annual general meeting (AGM), the Board of DNO has one class of shares and each share gives Directors and the corporate assembly. one vote at the AGM.
DNO International ASA is an independent international The articles of association contain no restrictions upstream oil and gas company. regarding the right to vote.
3. equity and dividends The repurchase of treasury shares is made through Shareholder’s equity the Oslo Stock Exchange. The Group’s booked equity at 31 December 2007 was NOK 2,424.7 million, which represented 48% Transactions with related parties of the total assets. The Board of Directors finds this Related parties are defined to all parties that have the satisfactory given the Group’s business, strategies ability, directly or indirectly, to control the other party and risk profile. or exercise significant influence over the other party in making financial and operating decisions. Parties Dividend policy are also related if they are subject to common control A review is made annually to assess whether a or common significant influence. All transactions dividend should be proposed. The review will take into between related parties are based on the principle consideration both the planned capital expenditures of ‘arms length’, which is estimated market prices. and the cash flows for future periods. For more information about related parties, please refer to note 25 in the consolidated financial statements for 2007.
34 | DNO International ASA Annual Report and Accounts 2007 Corporate Governance 5. Freely negotiable shares 9. the work of the Board of Directors DNO shares are listed on the Oslo Stock Exchange. The Board has approved rules of procedures for the (continued) The shares are freely negotiable. Board and the work of the Board of Directors.
6. Annual General Meeting The Board of Directors normally meets 11 times per The annual general meeting (AGM) is the Group’s year. Additional meetings are held when required. highest body. DNO’s articles of association and the Meetings may be undertaken via telephone or video Norwegian Public Limited Liability Companies Act conference. The rules of procedures for the Board stipulate the role and mandate of the AGM. outline a number of topics that should be on the agenda in the regular meetings. The AGM should be held by the end of June each year. For the last few years, DNO’s AGM has been held in the The Board members are elected for two years. middle of June. The role of the Company’s Board of Directors is to All shareholders receive an invitation to the AGM. supervise the management and the Company’s The notice of meeting is distributed at the latest two strategic development; and to ensure that the weeks before the AGM is held. The agenda for the AGM long-term interests of all the shareholders and follows the notice. other stakeholders are being served.
In accordance with Norwegian law, an auditor or An audit committee was set up at the beginning of a shareholder representing at least 5% of the share 2008 to strengthen the internal control. The audit capital may request an extraordinary general meeting committee comprises of two non-executive directors (EGM) to discuss a particular matter. The Board must with financial expertise and it is responsible for the ensure that the meeting is held within a month of the quality control of the Company’s financial reporting. request being submitted. The committee will also monitor the internal control arrangements and the risk evaluation systems. Beyond this, only the Board of Directors and the corporate assembly have a mandate to call an EGM. 10. Risk Management and Internal Control The Board of Directors is responsible for the 7. Nomination committee supervision of the risk management and internal Based on the size of the Company, DNO has concluded control system. Risk management and internal control that there is no need for a nomination committee. is a way of handling the different risks within the business and strengthening the quality of the financial 8. cOrporate assembly and Board reporting. An effective risk management and internal of Directors control system contributes to safeguarding the DNO is not required to elect a corporate assembly. Company’s assets and the shareholders’ interests.
The Board of Directors in DNO has five members The internal control system consists of different key who have wide experience from the oil industry elements including environmental risk assessment, as well as broad financial experience. Two of the control of activities, information and communication, five board members are female. and also follow-up activities.
DNO International ASA Annual Report and Accounts 2007 | 35 Corporate Governance 11. Remuneration of the Board of Directors DNO publishes an annual financial calender showing The remuneration of the Board of Directors is decided important dates and events such as quarterly (continued) by the AGM. presentations. All information to shareholders is published on the website at the same time as it In 2007, the following fees have been received by each is sent to the shareholders. of the Board members: 14. Takeover Chairman of the Board, Berge G. Larsen NOK 205,000 In the event of a bid situation, the Board has a Board member, Anders Farestveit NOK 180,000 responsibility to ensure that the shareholders have Board member, Bjørge Gretland NOK 180,000 sufficient information to evaluate the bid. The Board Board member, Trygve Bruvik NOK 180,000 will evaluate the bid and will make a statement Board member & managing director, which includes an evaluation of the bid and a Helge Eide NOK 180,000 recommendation as to whether the shareholders should accept or not. 12. Remuneration of the executive management 15. Auditor The remuneration for the managing director is DNO’s external auditor is elected by the AGM, discussed annually and reviewed by the Board without which also approves the auditors fees for DNO the managing directors participation. The managing International ASA. director is entitled to an annual bonus based on an evaluation by the Board of Directors and the bonus The auditor participates in board meetings where the is made at the Board’s discretion. financial statements are discussed and other meetings where it is considered appropriate. The Board of Directors also approves, on a general basis, the remuneration and terms of employment Information about the auditor’s fees, including a split for key employees reporting to the managing director. between audit and other services, is included in the Some of these employees have bonus arrangements notes to the financial statements according to the which are determined at the discretion of the Board Norwegian Accounting Act. of Directors. DNO’s external auditor is Ernst & Young AS. The remuneration of the management is presented in the notes to the annual accounts.
13. Information and communication DNO is committed to treating its Norwegian and international investors equally and ensuring that it provides timely information so that a value assessment of the Group can be formed on the best possible basis.
DNO’s Investor Relations policy encourages the communication with the capital market and the shareholders. DNO regularly holds presentations for investors and analysts, as well as scheduled quarterly presentations. The interim reports and other relevant information are published on DNO’s website.
36 | DNO International ASA Annual Report and Accounts 2007 DNO is an independent international upstream oil Production Board of Directors’ Report and gas company with strong growth potential. We With test production in the Tawke field commencing are a low cost, high margin producer with a record in the third quarter and four new wells in Yemen for successful fast track field development. Our coming on stream, production levels increased in the license portfolio is currently located in the following second half of the year. Exit production at the end of geographical areas: Yemen, Kurdistan region of Iraq, December 2007 rose to 18,000 bopd, up 55% on 2006 Africa and the UK. exit production.
Our interests in Norway are run through a newly Revenue is already being generated from initial oil formed associate company, created in October 2007 by production in Kurdistan, commencing payback on the the combination of our former Norwegian subsidiary, investment. Nine production wells have been drilled NOIL Energy ASA and the former Pertra ASA. The in Tawke and tested cumulatively at more than 90,000 combined company, Det norske oljeselskap ASA is bopd. With the completion of a Central Processing targeting the position as the second largest E&P Facility (CPF) with a capacity of 50,000 bopd and Company on the Norwegian Continental Shelf and installation of a pipeline ready to be connected to the we retain a 36.9% share as the largest owner in the main export pipeline, we have the capacity to rapidly combined company. increase volumes once the necessary export permits are in place. The combination made a significant contribution to our financial performance, contributing NOK 871 million Production levels in Yemen were above the guided level in net profit in the last quarter and strengthening the for 2007, at 11,637 bopd. Successful appraisal wells in Group’s balance sheet. Sharyoof and Bayoot began contributing to production towards the end of 2007. Exploration Exploration during 2007 focused on existing license Financial Performance areas in Kurdistan and Yemen. Continued appraisal In 2007, our operating revenues were up 11% from of the Tawke oil field led to a 130% increase in gross 2006, and our net profit was up from NOK 61 million to reserve estimates to 230 million barrels and new NOK 1,006 million. The increase in net profit is highly discoveries in Block 53 in Yemen showed promising affected by the NCS transaction in the fourth quarter, results. where our subsidiary NOIL Energy ASA was combined with Pertra ASA, with the aim of creating the second The Yemen exploration drilling in 2007 did not meet largest exploration and production company in the expected results and several dry wells were Norway. expensed during the year. Achieved oil price for 2007 was 62.73 USD/bbl, Exploration costs were lower than in 2006 at NOK compared to 63.06 USD/bbl for 2006. The achieved 264 million (2006: NOK 340 million), primarily due oil price for 2007 is affected by the lower prices in to reduced dry well costs. Of the exploration costs Kurdistan due to sale to local market. However, the expensed in 2007, NOK 105 million were dry well costs. operation costs in Kurdistan are at a very low level, Seismic acquisitions amounted to NOK 51 million and less than USD 2 per barrel. other G&G costs amounted to NOK 108 million. Working interest production was up to 5.28 mboe Our focus on low cost on-shore exploration ensured in 2007 (2006: 5.05 mboe). that our finding, development and acquisition costs (FDA) remained in the top quartile of the industry at Cash flow from operating activities decreased from USD 3.5 per barrel. NOK 303.6 million in 2006 to NOK 20.8 million in 2007.
DNO International ASA Annual Report and Accounts 2007 | 37 Board of Directors’ Report (continued) The decrease is mainly due to negative operating Non-financial information cash flow related to discontinued operations, which Health, Safety and the Environment is included in the cash flow number. We continually strive to improve our health, safety and environment (HSE) record and take the initiative Operating profit was quite stable with NOK 492.2 to provide appropriate guidance and implement best million in 2007 compared to NOK 460.5 million in practice, where controlling laws or regulations do not 2006 (excluding discontinued operations). exist. HSE performance is reported to the Board each month. Gross margin was down to 58.6% in 2007 from 68% in 2006. The decrease is mainly due to higher We recognise that health and safety are paramount to DD&A costs in 2007 as a result of the reduction of our license to operate, so we design and operate our reserves in Yemen. facilities and equipment with the aim of eliminating unacceptable health and safety risks. Therefore, in The financial results for 2007 are highly affected by 2007 DNO again worked proactively and systematically the NCS transaction, contributing NOK 871 million to ensure continuous improvements in the working in net profit in the fourth quarter. environment at all levels in the Company. Special attention was given to further development of our The initial sell down of the shares in NOIL Energy ASA management systems, management of risk, training, prior to the transaction contributed NOK 660 million emergency preparedness and technical integrity. in cash. We have a strong cash balance at year-end, ensuring us flexibility and ability to fund our highly Absence due to illness in DNO was 2.0%, an increase active exploration programme in 2008. of 0.6% from 2006. A total of three injuries resulting in absence from work were registered in 2007. We are Purchases and sales of treasury shares are made when pleased to report that all those involved have recovered the Board of Directors regard this to be favourable for from the injuries caused. the shareholders. Despite operating in some areas with potential security The Board of Directors confirm that the annual risks, our record is excellent. During 2007, there were financial statements have been prepared based on again no security incidents related to DNO operations the going concern assumption, in accordance with recorded in Yemen or Kurdistan. Security remains, the paragraph 3-3 of the Norwegian Accounting Act. however, a key priority. We continue to take steps to reduce risks and ensure we have high quality systems Financial Risk for security. In order to maintain this performance we Risks related to oil price, interest rates and currency continue to develop competence and systems. This also constitute significant financial risks to the Group. proves to be an efficient way to secure learning and Financial risk management is carried out by a transfer of experience. central treasury function and the risk management programme seeks to minimise the potential adverse effects on the Group’s financial performance. Derivative financial instruments are used to hedge certain risk exposures. For further information about the financial risk management objectives and policies, see Note 13.
38 | DNO International ASA Annual Report and Accounts 2007 Board of Directors’ Report (continued) External environment Significant efforts have been made in order to improve Producing oil inevitably exposes the environment to our systems throughout 2007. We have improved in the risk and we focus on mitigating our impact, operating way we communicate our ambitions and expectations, with care and attention to detail and satisfying all and implemented a new Risk Management System statutory requirements. The Board is pleased to report which also includes management of risk in a social that for the fourth year running, we operated without and political perspective. creating environmental damage. There were two small unplanned discharges of mud from drilling operations Our People – Diversity and equal that were dispersed. opportunities We operate in a dynamic, vibrant market where DNO is taking active steps to reduce the Company’s competition for key skills and experienced individuals environmental footprint, with a special focus on remains fierce. Through our flat organisational greenhouse emissions through oil production, energy structure and fast moving environment, DNO offers consumption and installations. DNO is in the process broad and varied opportunities and a high degree of of implementing an environmental accounting system. responsibility. Hence we are able to retain key staff The system, which will be implemented through 2008, and recruit talented people. will include energy consumption and calculations of emissions to air. Our objective is to meet expectations During 2007, we strengthened the management team in set by international standards. two key areas. Ivar Brandvold joined as Chief Operating Officer from Norsk Hydro ASA where he was responsible Our Norwegian activities is now a part of the for global drilling operations. Tore Lilloe-Olsen joined associated company, Det norske oljeselskap ASA, as Corporate Head of Exploration, also from Norsk therefore the health, environment and safety matters Hydro ASA following 25 years of experience in the oil for 2007 related to NOIL Energy ASA will not be and gas industry. mentioned in this section. A number of staff working in our Norwegian subsidiary Corporate Social Responsibility NOIL Energy ASA, left the Group following the DNO’s activities and commitment to ethics, the integration between Pertra ASA (later renamed to environment and society – our corporate social Det norske oljeselskap ASA) and our subsidiary. responsibility – have been developing throughout However, in the rest of the business, staff turnover 2007. The Company is in the process of establishing remained low. strategies and routines for the continued improvement in both results and communication. Corporate social DNO is keen to promote diversity and has achieved responsibility also means that DNO must be aware good results in this area. We firmly believe in treating of its duty towards shareholders and stakeholders all employees and applicants equally for vacancies alike and how the Company’s actions may contribute at any level, regardless of race, gender, or any other towards sustainable and responsible business factor. This also applies to remuneration, which is operations. It is DNO’s ambition at all times to related to job content and qualification. A salary improve cooperation both internally and externally. review exercise was undertaken by the Remuneration Consideration for corporate social responsibility Committee and a number of adjustments were made is incorporated in general guidelines and in the to keep DNO salaries in line with the industry. Company’s management systems under specific headings such as ethics, HSE and the external environment.
DNO International ASA Annual Report and Accounts 2007 | 39 Board of Directors’ Report (continued) Equal opportunities statistics show that, in the Board Changes Norwegian part of the DNO’s operations, women In line with Norwegian Corporate Regulations, accounted for 31% of the overall workforce. This a number of changes to the Board took place during represents an increase of 9% from 2006. DNO the year. International ASA’s Board of Directors consists of 40% women and 60% men at the end of 2007. Three new non-executive directors were appointed to the Board at the Extraordinary Shareholders Meeting Organisation and personnel on 8 November 2007, bringing strong financial and At the end of 2007, DNO had a total workforce of 508 management expertise. people, of whom 41 were employed in Norway and 467 abroad. This represents a substantial increase since Elin Karfjell has broad experience in finance and the end of 2006 and is mainly related to the operations accounting and is currently Director of Finance in in Kurdistan. Ementor Norge ASA.
Work of the Board Marit Instanes has many years of experience in The Board held 18 board meetings in 2007. In line management and is currently responsible for with DNO’s corporate governance policy, the Board remuneration and HR in Opticonsult AS. supervised the strategic development of the Company and reviewed its performance to ensure that the long- Gunnar Hirsti has long experience in the oil and gas term interests of shareholders and other stakeholders industry, particulary in mapping offshore structures, were being served. This includes for example, financial and currently holds various managerial and board and operational reviews, approval of financial positions. statements and formal review of DNO’s reserves and resources. Managing Director, Helge Eide resigned from the Board on 8 November 2007, as recommended by regulation. It is also responsible for the supervision of the Company’s risk management and internal control Anders Farestveit, non-executive Vice Chairman and systems. non-executive director, Bjørge Gretland also resigned from the Board on 8 November 2007. The Board During the year the Board also considered: would like to thank them for their commitment • The integration agreement with Pertra ASA. and contribution to DNO. • Significant reserve and resource additions through the successful development programme Outlook in Kurdistan. We will in 2008 continue to pursue our strategy of • Disappointing exploration drilling in Yemen. achieving sustainable growth and creating value • New license interest in Yemen acquired through through smart exploration, cost-effective field farm-in. development and high margin production. Further • The terms of new long-term bond loan financing. reserve growth will be targeted through an extensive exploration program in both Yemen and Kurdistan. In addition to the Remuneration Committee, an A step-change in production could also be achieved Audit Committee was set up at the beginning of once the crude oil export issues in Kurdistan have been 2008 to strengthen internal controls. The Audit clarified, so that the production capacity of the Tawke Committee comprises of two non-executive directors field may be fully utilised. With a strong balance sheet with financial expertise and it will be responsible and cash position following the combination of NOIL for the quality control of the Company’s financial Energy and Pertra, our financial flexibility has also reporting, monitoring the Company’s internal control been strengthened. arrangements and its risk evaluation systems.
40 | DNO International ASA Annual Report and Accounts 2007 Board of Directors’ Report (continued) We believe Yemen still represents under-explored Our interest in Equatorial Guinea will contribute territory with a large untested resource potential. Our to DNO’s overall experience and expertise, and licenses have entered into a new exploration phase and at the same time provide an opportunity for DNO an aggressive exploration and development program to contribute with its North Sea experience and is planned in Yemen for 2008, with a total of 16 wells technological know how. to be drilled. The aim is to add new reserves and to maintain stable production from our Yemen fields. In the UK, we are considering to participate in the Three rigs will be drilling full time in Yemen for DNO 25th licensing round in 2008 and also to look out for this year. Among the promising prospects in the 2008 other opportunities to capitalise on our current assets. exploration program, our first exploration well in Block 47, Yaalen #1, is ready for testing and commercial Parent Company evaluation. Further exploration and appraisal drilling The Parent Company’s net profit for 2007 was NOK will also take place in Block 53 and in several of the 2,154.5 million, whereas the net profit related to the new licenses that DNO has recently secured in Yemen. sale of shares in the Norwegian subsidiary NOIL Energy ASA, contributed NOK 2,340.5 million. Total In Kurdistan, drilling of a total of seven exploration assets as of 31 December 2007 were NOK 5,407.7, wells is planned for 2008 in our three revised PSC whereof the carrying amount of the investment in areas, which we expect to add new reserves to DNO. Det norske oljeselskap ASA accounts for NOK 1,917.4. The Hawler #1 exploration well in the Erbil PSC is The Company’s cash balance at year end 2007 was expected to be important in this respect. There will NOK 684.4 compared to NOK 219.8 for 2006. Total be three rigs drilling for DNO in Kurdistan in 2008. shareholders equity as of 31 December 2007 was A broad 2D seismic program also commenced in 2007 NOK 3,128.0 compared to NOK 971.1 at year end 2006. and will be completed this year. On the Tawke field, the The equity ratio thereby increased from 34% as of production facilities and wells drilled and completed to 31 December 2006 to 58% at year end 2007. No ordinary date will be capable of delivering a minimum of 50,000 dividend is proposed as the Board believe that bopd once the tie-in approvals are received and the oil investment in the Company’s extensive exploration can be exported to international markets. programme will deliver increased shareholder returns over the long–term. We will continue our value creation on the Norwegian Continental Shelf through our 36.9% interest in The Company’s unrestricted equity as at 31 December 2007 the new second largest Norwegian E&P Company totalled NOK 2,587.3 million. in Norway. DNO is the largest owner in Det norske oljeselskap ASA, and we will maintain a proactive The Board proposes the following allocations ownership through Board representation. (NOK million):
The East Africa region represents an unexplored Annual profit 2,154.5 frontier area with a considerable resource potential for Transferred to other equity 2,154.5 exploration and development. Through our operator Total allocations 2,154.5 position and long experience in the Middle East, we are now targeting the Middle East – East Africa axis as a region for new entries and growth to the Company. In 2008, we will be drilling an exploration well as operator in Mozambique.
DNO International ASA Annual Report and Accounts 2007 | 41 Board of Directors’ Report (continued) In 2007 a new Oil and Gas Law for the Kurdistan region Risks and Uncertainties of Iraq was endorsed by the Regional Parliament. Principle Risks DNO’s PSCs were reviewed by KRG in accordance with and Uncertainties Risk Management and mitigation article 54 of this new law. This required review of the Misstatement > External validation of reserves being PSCs by the Regional Council of the Oil and Gas Affairs of reserves undertaken as appropriate. of the Kurdistan Region – Iraq (the ‘Regional Council’), > Reserves reviewed by Reserves taking into consideration the prevailing conditions Board annually. when the PSCs were originally entered into. Following Political situation in > Good channels of communication in this review, there are three PSCs; the Tawke PSC, the Iraq hindering place with government organisations. Dohuk PSC and the Erbil PSC. The revised PSCs were oil export > Tawke oil delivered to the domestic signed in March 2008. market at low cost, awaiting export permit. It is the opinion of DNO that the potential risks associated to our PSCs and future export of oil are Exchange rate > Financial risk management closely variations in controlled by a central treasury at an acceptable level. Norwegian Krone function. and US Dollar 2007 has been a year of tremendous change for the Company and the Board would like to thank all our Business currently > Initial exploration in East Africa employees for their focus and commitment during a dependent on yielding potential opportunities to dynamic period of the Company’s history. Middle East build third area. > Board strategic review to take place by mid 2008. Health, Safety and > Robust, effective HSE systems in place. Environmental > HSE performance reviewed monthly performance by the Board.
Oslo, 27 March 2008
Berge Gerdt Larsen Trygve Bruvik Gunnar Hirsti Executive Chairman Non-executive Non-executive Director Vice-chairman
Elin Karfjell Marit Instanes Helge Eide Non-executive Director Non-executive Director Managing Director
42 | DNO International ASA Annual Report and Accounts 2007 Financial Accounts with Contents Note Disclosures 44 Consolidated Income Statements 45 Consolidated Balance Sheets 47 Consolidated Cash Flow Statements 48 Consolidated Statements of Changes in Equity
Note Disclosures 51 1 Summary of IFRS accounting principles applicable for 2007 66 2 Segment Information 72 3 Sales 72 4 Cost of goods sold 73 5 Administrative and other expenses 76 6 Exploration expenses 77 7 Net finance 78 8 Taxes 80 9 Discontinued operations 82 10 Property, plant and equipment 88 11 Investment in associate 89 12 Available for-sale financial assets 90 13 Financial risk management objectives and policies 95 14 Derivative financial instruments 96 15 Trade and other receivables 96 16 Cash, cash equivalents and other short term financial assets 99 17 Equity 103 18 Interest-bearing liabilities 105 19 Provisions for other liabilities and charges 107 20 Commitments and contingencies 108 21 Trade and other payables 109 22 Earnings per share 110 23 Share options and share-based payments 110 24 Group companies 111 25 Related party disclosures 113 26 Significant transactions in 2007 and Events after the balance sheet date 115 27 Dividends paid and proposed 116 28 Working interest proven and probable reserves and resources after royalty (unaudited)
DNO International ASA Annual Report and Accounts 2007 | 43 Years ended 31 December Consolidated Income Note 2007 2006 2005 Statements Sales 2, 3 1,319.9 1,192.5 625.7 (NOK mill) Cost of goods sold 4 (547.1) (381.1) (306.6) Gross profit 772.8 811.5 319.1
Other operating income – 4.4 5.8 Tariffs and transportation (33.9) (46.4) (42.4) Administrative expense 5 19.1 31.7 (29.7) Other operating expenses 5 (2.3) (1.1) (45.5) Exploration cost expensed 6 (263.6) (339.5) (82.7) Net gain/(loss) from sale of PP&E 10 – – 30.9
Profit/(loss) from operating activities 492.2 460.5 155.5
Share of profit/(loss) from associates 11 (5.3) – – Financial income 7 25.4 34.2 56.1 Financial expenses 7 (214.5) (138.8) 16.4
Profit/(loss) before income tax 297.8 356.0 227.9
Income tax expense 8 (206.8) (254.8) 40.2
Net profit/(loss) before discontinued operations 91.1 101.1 268.1
Net profit from discontinued operations 9 915.2 (40.0) 30.9
Net profit/(loss) 1,006.3 61.1 299.0
Attributable to: Equity holders of the parent 1,005.2 61.1 299.0 Minority interests 1.1 – –
Earnings per share, basic 22 1.14 0.07 0.34 Earnings per share, diluted 22 1.14 0.07 0.34
Earnings per share, basic for continuing operations 22 0.10 0.11 0.30 Earnings per share, diluted for continuing operations 22 0.10 0.11 0.30
44 | DNO International ASA Annual Report and Accounts 2007 As at 31 December Consolidated Balance ASSETS Note 2007 2006 2005 sheets Non-current assets (NOK mill) Deferred income tax assets 8 294.4 315.1 312.2 Other intangible assets 10 84.3 322.3 165.6 Property, plant and equipment 10 2,148.4 1,559.3 586.4 Investment in associates 11 1,324.9 – – Available-for-sale investments 12 165.0 192.1 187.7 Derivative financial instruments 13, 14 0.9 9.5 2.8 Non-current receivables – – 44.7
Total non-current assets 4,018.0 2,398.2 1,299.4
Current assets Trade and other receivables 15 263.0 424.4 285.0 Derivative financial instruments 13, 14 – – 45.7 Other financial assets at fair value through P&L 16 68.2 54.8 268.3 Cash and cash equivalents 16 691.7 418.0 1,081.5
Total current assets 1,022.9 897.1 1,680.4
TOTAL ASSETS 5,040.8 3,295.4 2,979.8
DNO International ASA Annual Report and Accounts 2007 | 45 As at 31 December Consolidated Balance sheets EQUITY AND LIABILITIES Note 2007 2006 2005 (continued) Equity (NOK mill) Share capital 221.5 220.3 223.8 Other reserves – – 170.5 Retained earnings 2,203.2 504.2 573.1
Total equity 17 2,424.7 724.5 967.4
Non-current liabilities Interest-bearing liabilities 18 1,976.4 1,754.3 1,396.5 Deferred income tax liabilities 8 153.1 184.2 55.8 Provisions for other liabilities and charges 19, 20 16.3 41.0 85.1
Total non-current liabilities 2,145.9 1,979.5 1,537.4
Current liabilities Trade and other payables 21 104.6 182.1 129.3 Income taxes payable 8 39.7 16.0 21.4 Current interest-bearing liabilities 18 50.0 55.7 100.0 Derivative financial instruments 14 15.4 – – Provisions for other liabilities and charges 19, 20 260.6 337.6 224.3
Total current liabilities 470.2 591.4 475.0
TOTAL EQUITY AND LIABILITIES 5,040.8 3,295.4 2,979.8
Oslo, 27 March 2008
Berge Gerdt Larsen Trygve Bruvik Gunnar Hirsti Executive Chairman Non-executive Non-executive Director Vice-chairman
Elin Karfjell Marit Instanes Helge Eide Non-executive Director Non-executive Director Managing Director
46 | DNO International ASA Annual Report and Accounts 2007 Years ended 31 December Consolidated Cash Flow Note 2007 2006 2005 Statements Operating activities (NOK mill) Profit/(loss) from operations before exploration expenses 755.8 800.0 238.2 – Exploration cost expensed 6 (263.6) (339.5) (82.7) Profit/(loss) from operations 492.2 460.5 155.5
Adjustments for: Income taxes paid (118.3) (175.7) (200.9) Depreciation of PP&E 4 315.6 173.5 118.4 (Gain)/loss on sale of PP&E – – (35.9) Fair value gain/(loss) on financial assets 7 (11.4) (3.4) 37.2 Other financial income/(expenses) (10.9) (39.0) (1.6) Share of profit/(loss) from associates 11 (5.3) – – Exchange gains/(losses) (38.0) 73.0 36.7 Interest paid (174.8) (126.0) (79.7) Changes in working capital (181.7) 200.0 (40.4) Other 30.6 (131.5) 28.4 Net cash from operating activities, discontinued (277.2) (127.8) 81.3
Net cash from operating activities 20.8 303.6 98.9
Investing activities Proceeds from sale of subsidiary, net of cash sold 9 459.5 – – Purchases of PP&E (1,187.3) (1,055.5) (411.4) Proceeds from sale of PP&E – – 30.3 Purchases of available-for-sale financial assets (20.0) (203.5) (129.5) Proceeds from sale of available-for-sale financial assets 45.6 249.3 17.2 Interest received 18.3 27.3 36.0 Other investing activities, net – (188.6) (28.0) Net cash from investing activities, discontinued (87.0) 107.2 (321.6)
Net cash used in investing activities (770.9) (1,063.8) (806.9)
Financing activities Proceeds from borrowings 18 300.0 904.4 997.7 Repayment of borrowings 18 (5.7) (584.4) (100.0) Purchase of Treasury Shares, including options (870.8) (1,038.8) (1,004.0) Proceeds from sale of Treasury Shares 873.3 886.3 1,128.8 Dividends paid – (21.8) (40.3) Net cash from financing activities, discontinued 734.0 – –
Net cash (used in)/from financing activities 1,030.7 145.7 982.3
Net increase/(decrease) in cash and cash equivalents 280.6 (614.5) 274.3 Cash and cash equivalents at beginning of the period 418.0 1,081.5 747.8 Exchange gain/(losses) on cash and cash equivalents (6.8) (49.0) 59.3
Cash and cash equivalents at end of the period 16 691.7 418.0 1,081.6 Share Other Retained Total Consolidated statements Note Capital Reserves Earnings Equity of changes in equity Balance at 31 December 2004 222.2 120.7 298.9 641.9 (NOK mill) Effect of implementing IFRS – (242.4) 15.5 (226.9)
Balance at 1 January 2005 222.2 (121.7) 314.4 415.0
Fair value gains, net of tax: – available-for-sale financial assets – 66.2 – 66.2 Cash flow hedges, net of tax (28%) 130.2 130.2 Currency translation differences – 14.8 – 14.8 Net income/(expense) recognised directly in equity – 211.2 – 211.2 Profit for the period – – 299.0 299.0 Total recognised income for the period – 211.2 299.0 510.2
Share option scheme: – value of services provided – 5.7 – 5.7 – proceeds from shares issued – – – – Purchase of Treasury Shares (64.7) (486.0) – (550.7) Sale of Treasury Shares 66.3 1,569.8 – 1,636.1 Derivative contracts Treasury Shares – (478.8) – (478.8) Dividends – (529.8) (40.3) (570.1) (1.5) 80.9 (40.3) 42.2
Balance at 31 December 2005 17 223.8 170.5 573.1 967.4
48 | DNO International ASA Annual Report and Accounts 2007 Share Other Retained Total Consolidated statements of changes Note Capital Reserves Earnings Equity in equity (continued) (NOK mill) Balance at 31 December 2005 223.8 170.5 573.1 967.4 Changes in accounting policy – – – – Effect of implementing IFRS – – – –
Balance at 1 January 2006 223.8 170.5 573.1 967.4
Fair value gains, net of tax: – available-for-sale financial assets – (36.0) – (36.0) Cash flow hedges, net of tax (28%) – – – – Currency translation differences – (81.1) – (81.1) Net income/(expense) recognised directly in equity – (117.1) – (117.1) Profit for the period – – 61.1 61.1 Total recognised income for the period – (117.1) 61.1 (56.0)
Share option scheme: – value of services provided – – – – – proceeds from shares issued – – – – Issue of share capital – – – – Purchase of Treasury Shares (23.9) (1,056.6) – (1,080.5) Sale of Treasury Shares 20.4 858.9 – 879.3 Derivative contracts Treasury Shares – 14.3 – 14.3 Dividends – – – – Transferred to retained earnings – 130.0 (130.0) – (3.5) (53.4) – (186.9)
Balance at 31 December 2006 17 220.3 – 504.2 724.5
DNO International ASA Annual Report and Accounts 2007 | 49 Share Other Retained Total Consolidated statements of changes Note Capital Reserves Earnings Equity in equity (continued) (NOK mill) Balance at 1 January 2007 220.3 – 504.2 724.5
Fair value gains, net of tax: – available-for-sale financial assets – – 4.1 4.1 Cash flow hedges, net of tax (28%) – – – – Currency translation differences – – (172.9) (172.9) Net income/(expense) recognised directly in equity – – (168.8) (168.8) Profit for the period* – – 1,005.1 1,005.1 Total recognised income for the period – – 836.3 836.3
Share option scheme: – value of services provided – – – – – proceeds from shares issued – – – – Issue of share capital – – – – Purchase of Treasury Shares (20.0) (814.5) – (834.5) Sale of Treasury Shares 21.2 850.0 – 871.2 Derivative contracts Treasury Shares – (32.1) – (32.1) Dividends – – – – Equity effect from disposal of subsidiary – – 859.3 859.3 Transferred to retained earnings – (3.4) 3.4 – 1.2 (0.0) 862.7 863.9
Balance at 31 December 2007 17 221.5 – 2,203.2 2,424.7
* There has been minority interests related to the subsidiary NOIL Energy ASA for parts of 2007. The subsidiary was divested in November 2007.
50 | DNO International ASA Annual Report and Accounts 2007 Note 1. Summary of IFRS accounting Changes in Accounting Policies and Note Disclosures principles applicable for 2007 Disclosures The accounting principles adopted are consistent with Principal Activities and Corporate those of the previous financial year except as follows: Information DNO is an international exploration and production The Group has adopted the following new and company engaged in the acquisition, development and amended IFRS and IFRIC interpretations during operation of oil and gas properties. the year. Adoption of these revised standards and interpretations did not have any effect on the financial DNO International ASA (previously DNO ASA) is a performance or position of the Group. They did public limited company incorporated and domiciled however give rise to additional disclosures. in Norway. DNO International ASA has its registered office in Oslo. DNO International ASA is the ultimate • IFRS 7 Financial Instruments: Disclosures parent of the Group. • IAS 23(R) Borrowing Costs • IAS 1 Amendment – Presentation of Financial Statement of Compliance Statements: Capital Disclosures The consolidated financial statements of DNO and all • IFRIC 8 Scope of IFRS 2 its subsidiaries have been prepared in accordance with • IFRIC 9 Reassessment of Embedded Derivatives International Financial Reporting Standards (IFRS), • IFRIC 10 Interim Financial Reporting as adopted by the EU, and in accordance with the and Impairment Norwegian Accounting Act of 1998. The consolidated • IFRIC 11 IFRS 2 – Group and Treasury Share financial statements were approved by the Board of Transactions Directors on 27 March 2008. • IFRIC 12 Service Concession Agreements
Basis for Preparation These consolidated financial statements have been Significant Accounting Estimates prepared on a historical cost basis, with the following and Assumptions exemption: The preparation of financial statements in conformity with IFRS requires management to make judgements, • All derivatives, all financial assets and liabilities estimates and assumptions that affect the application held for trading and all financial assets that are of policies and reported amounts of assets and classified as available-for-sale, are recognised at liabilities, the disclosure of contingent assets and fair value. liabilities at the date of the financial statements, and the reported amounts of revenues and expenses As permitted by IAS 1, the income statement is during the reporting periods. presented on a mixed basis as a blend of expenses by nature and function, as this gives the most relevant Accounting estimates are employed in the financial and reliable presentation for the Group. statements to determine reported amounts, including the possibility for realisation of certain assets, the useful lives of tangible and intangible assets, and income taxes. Although these estimates are based on management’s best knowledge of historical experience, current events and actions, actual results may differ from these estimates. The estimates and the underlying assumptions are reviewed on an ongoing basis. Changes in estimates will be recognised when new estimates can be determined with certainty.
DNO International ASA Annual Report and Accounts 2007 | 51 Note Disclosures Note 1. Summary of IFRS accounting Reserves and resources – All estimates of oil and gas principles applicable for 2007 (continued) reserves and resources involve uncertainty. In the (continued) estimation, DNO has applied deterministic or scenario The key sources of estimation uncertainty for DNO based methods. The figures represent a most likely relate to the following: quantity of oil and gas that will be recovered from a field or reservoir given the information available at the • The amount, nature and timing of capital end of the year. expenditures. • The projected drilling of wells. Important factors that could cause actual results • Estimates of proven and probable reserves. to differ from the estimates include among others; • The timing and amount of future production of oil technical, geological and geotechnical conditions, and natural gas. economic and market conditions oil prices, changes • Operating costs, including asset retirement costs, in governmental regulations, interest rates and and other expenses. fluctuations in currency exchange rates. Specific • Cash flow, anticipated liquidity and prospects parameters of uncertainty related to the field/reservoir for growth. include, but are not limited to; reservoir pressure and porosity, recovery factors, water cut development In addition to the above, there is general uncertainty and production decline rates, gas/oil ratios and oil related to seismic and geological models. Political risk properties. may also influence management judgements and estimates. Analogy to similar fields and reservoirs has been applied when production history and information Deferred tax assets – Deferred tax assets are is limited and/or the field/reservoir has a complex recognised for all unused tax losses to the extent structure. It is important to stress that the uncertainty that it is probable that taxable profit will be available span is larger for fields/reservoirs with limited field against which the losses can be utilised. Significant information and production history, compared to management judgement is required to determine fields/reservoirs with longer production history. the amount of deferred tax asset to be recognised. Specifically, the uncertainty is related to the timing The estimates for reserves and resources are made in and value of tax planning activities, as well as the accordance with the guidelines advised by the Society general uncertainty related to the budgeting process. of Petroleum Engineers (SPE) and are in conformity For further details see note 8. with procedures from Oslo Stock Exchange for reporting of reserves. Impairment of oil and gas assets – Management must determine whether there are circumstances indicating Group Accounting and Consolidation a possible impairment of its oil and gas assets. The Principles estimation of the recoverable amount for the oil and Subsidiaries gas assets include management evaluations in addition The consolidated financial statements of DNO include to both expected future cash flows and future market the financial statements of the Parent Company, conditions, including production and oil price. DNO International ASA, and its subsidiaries. Subsidiaries are those entities in which DNO either Contingent liabilities, litigations – Management must owns, directly or indirectly, over 50% of the voting use judgement to evaluate the probabilities regarding rights, or otherwise has the power to govern their contingent liabilities and litigations, in order to ensure operating and financial policies. Share options, the correct accounting treatment. This also includes convertibles and other equity instruments are the evaluation of future asset retirement obligations. considered when assessing whether an entity is controlled.
52 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 1. Summary of IFRS accounting The reporting dates of the associate and the Group are identical and both use consistent accounting policies. (continued) principles applicable for 2007 (continued) Acquisitions of subsidiaries are accounted for using The investment in an associate is carried in the the purchase method of accounting. The cost of an balance sheet at cost plus post-acquisition changes acquisition is measured as the fair value of the assets in the Group’s share of net assets of the associate, acquired, shares issued or liabilities undertaken at the less any impairment in value. The income statement date of acquisition plus costs directly attributable to reflects the share of the results of operations of the acquisition. The excess cost of acquisition over the the associate as financial income/expense. Where fair value of the net assets of the subsidiary acquired, there has been a change recognised directly in the measured at the date of change of control, is recorded associate’s equity, the Group recognises its share of as goodwill (see ‘Intangible Assets’ for the accounting any changes and discloses this, when applicable, in the policy on goodwill). statement of changes in equity.
Subsidiaries acquired during the year are included Impairment is assessed at each balance sheet date. in the consolidated financial statements from the A significant and prolonged decline in fair value of the date on which control is transferred to the Group. investment indicates that the cost of the investment Consolidation ceases from the date when the Group may not be recovered and the investment is impaired. no longer has control. A decline in fair value of more than 20% is considered to be significant, while a decline in fair value between Where necessary, the accounting policies of 10% and 20% will be assessed specifically for each case. subsidiaries have been adjusted to ensure consistency A decline in fair value less than 10% is considered to with the policies adopted by the Group. be insignificant. The decline is considered to be prolonged if it has lasted more than 12 months, while Investments in subsidiaries are assessed for a decline lasting less than six months is not considered impairment when facts and circumstances suggest prolonged. A decline for a period between six and that the carrying amount may exceed recoverable 12 months will be assessed specifically for each case. amount. Relevant factors to consider are oil price and technical performance on the different fields. The impairment loss can be reversed in a subsequent period if there is evidence that the impairment no All intercompany transactions, receivables, liabilities longer exist. The assessment follows the same criteria and unrealised profits, as well as intragroup profit as mentioned above. distributions, are eliminated. Equity accounting is discontinued when the carrying Investment in an associate amount of the investment in an associated company The Group’s investment in an associate is accounted reaches zero, unless the Group has incurred or guaranteed for under the equity method of accounting. This is an obligations in respect of the associated company. entity in which the Group generally holds between 20% and 50% of the voting rights and over which the Group has significant influence, but not overall control. Share options, convertibles and other equity instruments are considered when assessing whether an entity is under significant influence.
DNO International ASA Annual Report and Accounts 2007 | 53 Note Disclosures Note 1. Summary of IFRS accounting arising in respect of operating business items are principles applicable for 2007 (continued) included in operating profit in the appropriate income (continued) statement account. Those arising in respect of financial Interest in joint ventures assets and liabilities are recorded net as a financial item. The Group accounts for joint ventures, including jointly controlled operations (oil and gas licenses), Foreign exchange gains or losses resulting from by recording its share of the arrangement’s assets, changes in the fair value of financial investments liabilities and cash flows. The Group combines its share classified as available-for-sale are recognised directly of the joint ventures’ individual income and expenses, in equity until the investment has been disposed of. assets and liabilities and cash flows on a line-by- line basis with similar items in the Group’s financial On consolidation, exchange differences arising from statements. the translation of the net investment in foreign operations, and of borrowings and other currency The Group does not recognise its share of profits or instruments designated as hedges of such investments, losses from the joint venture that result from the are taken to shareholders’ equity. When a foreign Group’s purchase of assets from the joint venture operation is sold, exchange differences that were until it divests the assets to an independent party. recorded in equity are recognised in the income However, if a loss on the transaction provides evidence statement as part of the gain or loss on sale. of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised Group companies immediately. Income statements and cash flows of subsidiaries, associated companies and joint ventures, whose Foreign Currency Translation functional currency is not NOK, are translated into and Transactions NOK at average exchange rates for the period. Their Functional currency balance sheets are translated at the balance sheet The consolidated financial statements are presented date exchange rate and the translation differences in Norwegian Kroner (NOK), which is the functional are taken directly to a separate component of equity. and presentation currency of the Parent Company. When a foreign entity is sold, such translation differences are recognised on the income statement Items included in the financial statements of each as part of the gain or loss on sale. subsidiary in the Group are initially recorded in the functional currency, i.e. the currency that best reflects Balance sheet classification the economic substance of the underlying events and Current assets and short-term liabilities include items circumstances relevant to that subsidiary. due less than a year from the balance sheet date and items related to the operating cycle, if longer. The Transactions and balances current portion of long-term debt is included under Foreign currency transactions are translated into current liabilities. Financially motivated investments the functional currency using the exchange rates in shares are classified as current assets, while strategic prevailing at the dates of the transactions. Receivables investments are classified as non-current assets. and liabilities in foreign currencies are translated Other assets are classified as non-current assets. into functional currency at the balance sheet date exchange rates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign exchange differences
54 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 1. Summary of IFRS accounting Borrowing costs principles applicable for 2007 (continued) Interest costs on borrowings to finance the (continued) construction of property, plant and equipment are Property, Plant and Equipment capitalised during the period of time that is required General to complete and prepare the asset for its intended use, Property, plant and equipment acquired by Group which is defined as the development phase. Other companies are stated at historical cost of the property, borrowing costs are expensed when incurred. The plant and equipment on the balance sheet represents capitalisation of borrowing costs is made monthly the cost less accumulated depreciation and any based on the yearly average interest rate for the impairment charges. Land is not depreciated. Other Group in the period. fixed assets in use (excluding oil and gas properties) are depreciated on a straight line basis, at rates varying The basis for the monthly capitalisation is average from 3 to 5 years and adjusted for impairment charges, capitalised assets for each project. The capitalised if any. Expected useful lives of long-lived assets are borrowing costs can not exceed the actual reviewed at each balance sheet date and, where borrowing costs. they differ significantly from previous estimates, depreciation periods are changed accordingly. Exploration and development costs Any change is accounted for prospectively. for oil and gas properties DNO uses the ‘successful efforts’ method to account Ordinary repairs and maintenance costs, defined as for exploration and development costs. All exploration day-to-day servicing costs, are charged to the income costs with the exception of acquisition costs of licenses statement during the financial period in which they and drilling costs of exploration wells, are charged to are incurred. The cost of major renovations is included expense as incurred. in the asset’s carrying amount when it is probable that the Group will derive future economic benefits Drilling costs of exploration wells are temporarily in excess of the originally assessed standard of capitalised pending the determination of oil and performance of the existing asset. Major renovations gas reserves. If reserves are not found, or if discoveries are depreciated over the period to the next major are assessed not to be technically and commercially renovation. recoverable, the drilling costs of exploration wells are expensed. Costs of acquiring licenses are capitalised Gains and losses on disposals are determined by and assessed for impairment at each reporting date. comparing the disposal proceeds with the carrying amount and are included in operating profit. Assets to For accounting purposes, the field enters into the be disposed of are reported at the lower of the carrying development phase when the partners in the license amount and the fair value less selling costs. declare the commerciality decision, or the field has matured to a similar level. The fair value of property, plant and equipment recognised as a result of a business combination is All costs of developing commercial oil and/or gas fields based on market values. The market value of property are capitalised, including direct costs/own time. is the estimated amount for which a property could Pre-operating costs are expensed as incurred. Capitalised be exchanged on the date of valuation between a development costs are classified as tangible assets. willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of items of plant, equipment, fixtures and fittings is based on the quoted market prices for similar items.
DNO International ASA Annual Report and Accounts 2007 | 55 Note Disclosures Note 1. Summary of IFRS accounting Exploration and evaluation assets principles applicable for 2007 (continued) IFRS 6 Exploration for and Evaluation of Mineral (continued) Resources requires exploration and evaluation assets Oil and gas properties to be classified as tangible or intangible according to Capitalised costs for oil and gas properties are the nature of the assets. depreciated using the unit-of-production method. The rate of depreciation is equal to the ratio of oil Some exploration and evaluation assets should be and gas production for the period over the estimated classified as intangible, for example license acquisition remaining proved and probable reserves (expected to costs and capitalised exploration assets. When be recovered during the concession or contract period) technical feasibility and commercial viability of the at the beginning of the period. The future development assets are demonstrable, the assets are reclassified to expenditures necessary to bring those reserves into tangible assets and depreciated. The exploration and production are included in the basis for depreciation evaluation assets which are classified as intangible are and are estimated by the management. Any changes assessed for impairment before reclassification. in the reserves estimate that affect unit-of-production rates, are dealt with prospectively. Other intangible assets Expenditure on acquired patents, trademarks and Component cost accounting/decomposition licenses is capitalised and amortised using the The Company allocates the amount initially recognised straight-line method over their useful lives. Intangible in respect of an item of property, plant and equipment assets are held at cost less accumulated depreciation to its significant parts and depreciates separately each and impairment losses. such part over its useful life. For oil and gas assets, the Company uses field as the level of aggregation. Impairment of Long-Lived Assets This means that there is no decomposition beyond Property, plant and equipment and other non-current field level. A plan for development is defined for each assets are reviewed for potential impairment annually field, taking into consideration both exploration wells, and whenever events or changes in circumstances production wells and infill wells. The field reserves indicate that the carrying amount of an asset may not are evaluated together according to the chosen be recoverable. production plan. For the purposes of assessing impairment, assets According to the Company’s PSAs, the ownership of are grouped at the lowest levels for which there are the property, plant and equipment is transferred back separately identifiable cash inflows. An oil and gas field to the government when production ceases. is considered one cash generating unit, all other assets are assessed separately. An impairment loss is the Intangible Assets amount by which the carrying amount of the assets Amortisation of intangible assets is based on the exceeds the recoverable amount. The recoverable following expected useful lives: amount is the higher of the asset’s net selling price and its value in use. The value in use is determined by • computer software 3–5 years reference to discounted future net cash flows expected • other intangible assets 5–10 years. to be generated by the asset. Cash flows are discounted using a pre-tax discount rate that reflects current The fair value of patents and trademarks acquired market assessments of the time-value of money and in a business combination is based on the discounted the risks specific to the asset. estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. 56 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 1. Summary of IFRS accounting Oil companies may exchange license interests as part principles applicable for 2007 (continued) of a portfolio structuring. License swaps are measured (continued) at fair value at the time of the transaction, with A previously recognised impairment loss is reversed recognition of profit or loss. only if there has been a change in the estimates used to determine the recoverable amount. It is not reversed Financial Instruments to a higher amount than if no impairment loss had Financial instruments, that are not derivatives, been recognised. Such reversal is recognised in profit consist of investments in debt and equity instruments, or loss unless the asset is carried at a revalued amount, trade receivables and other receivables, cash and in which case the reversal is treated as a revaluation cash equivalents, loans, trade payables and other increase. After such a reversal, the depreciation charge payables. These are initially recognised at fair value, is adjusted in future periods to allocate the asset’s which in most cases will be identical to cost. After revised carrying amount, less any residual value, initial recognition, the measurement and accounting on a systematic basis over its remaining useful life. treatment depend on the type of instrument and classification. Farm In and Farm Out A farm in/farm out involves a situation where the Cash and bank deposits, including deposits on special owner of a working interest (the farmor) transfers all terms, other short-term highly liquid investments or a portion of its working interest to another party with original maturities of three months or less, and (the farmee) in return for the farmee’s performance bank overdrafts, form cash and cash equivalents. Bank of some agreed upon action. For example, the farmee overdrafts are included within borrowings in current may agree to undertake exploration of a property, liabilities on the balance sheet. drill a well or wells, or develop the property. In return, the farmor agrees to transfer all or a portion of the The fair value of forward exchange contracts is working interest in the property to the farmee. based on their listed market price, if available. If a listed market price is not available, than fair value is The farmee should capitalise or expense the estimated by discounting the difference between the exploration, drilling and development costs as incurred contractual forward price and the current forward according to the accounting method it is using, i.e. price for the residual maturity of the contract using a successful efforts or full cost. The farmee does not risk-free interest rate (based on government bonds). record any receivable nor any of its costs assigned to the acquisition of a mineral interest. In other words, The fair value of interest rate swaps is based on broker the farmee may have capitalised wells and equipment quotes. Those quotes are tested for reasonableness costs but no capitalised property acquisition costs. by discounting estimated future cash flows based on The farmor does not record any well and equipment the terms and maturity of each contract and using costs. There are no accruals for future commitments market interest rates for a similar instrument at the in farm in/out agreements in the exploration and measurement date. evaluation phase and no profit or loss is recognised by the farmor. In the development phase, a farm in/ The fair value of non-derivative financial liabilities, farm out agreement will be treated as a transaction which is determined for disclosure purposes, recorded at fair value as represented by the costs borne is calculated based on the present value of future by the farmee. principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect License Swaps/Asset Swaps of the liability component of convertible notes, the A situation where one or more items of property, market rate of interest is determined by reference to plant and equipment is exchanged for a non-monetary similar liabilities that do not have a conversion option. asset or assets, or a combination of monetary and For finance leases the market rate of interest is non-monetary assets, should be measured at fair value. determined by reference to similar lease agreements. DNO International ASA Annual Report and Accounts 2007 | 57 Note Disclosures Note 1. Summary of IFRS accounting For investments that are actively traded in organised principles applicable for 2007 (continued) financial markets, fair value is determined by reference (continued) to Stock Exchange quoted market prices at the close Investments and other financial assets of business on the balance sheet date. For investments All purchases and sales of financial assets made in the where there is no quoted market price, fair value is regular way are recognised on the trade date. determined by using generally accepted valuation techniques. The valuations are primarily collected from • Investments classified as available-for-sale are external parties (banks, other financial institutions), measured at fair value. Adjustments to fair value or if not available, performed by the Group. are recognised as a separate component of equity until the investment is sold, collected or otherwise Amortised cost is calculated by taking into account disposed of, at which time the cumulative gain or any discount or premium on acquisition, over the years loss previously reported in equity is included in the to maturity. For investments carried at amortised income statement. Impairment of available-for-sale cost, gains and losses are recognised in the income investments is recognised in the income statement statement when the investments are derecognised or immediately, but any subsequent reversal of the impaired, as well as through the amortisation process. impairment is not recognised in the income statement, but as a fair value adjustment to equity. Derecognition of financial assets and liabilities • Investments classified at fair value through profit or A financial asset is derecognised where: loss are measured at fair value, with adjustments to fair value recognised immediately in the income • the Group no longer has the right to receive cash statement. flows from it; • Investments classified as loans and receivables are • the Group retains the right to receive cash flows measured at amortised cost using the effective from the asset, but has assumed an obligation to interest rate method. This classification is used for pay them in full without material delay to a third non-derivative assets with fixed or determinable party under a ‘pass-through’ arrangement; or payments that are not quoted in an active market. • the Group has transferred its rights to receive cash Gains and losses are recognised in income when the flows from the asset and either (a) has transferred loans and receivables are derecognised or impaired, substantially all the risks and rewards of the as well as through the amortisation process. asset, or (b) has neither transferred nor retained • Held-to-maturity investments are non-derivative substantially all the risks and rewards of the asset, financial assets with fixed or determinable but has transferred the control of the asset. payments and fixed maturity, which the Group has the positive intention and ability to hold to A financial liability is derecognised when the obligation maturity. These assets are subsequently measured under the liability is discharged or cancelled or expires. at amortised cost. This cost is computed as the A bond loan is derecognised when it is repurchased. amount initially recognised minus principal repayments, plus or minus the cumulative Derivative financial instruments and hedging amortisation using the effective interest method Derivative financial instruments are initially and of any difference between the initially recognised subsequently recognised on the balance sheet at fair amount and the maturity amount. This calculation value. Certain derivative instruments, while providing includes all fees and points paid or received effective economic hedges under the Group Financial between parties to the contract that are an integral Policy, do not qualify for hedge accounting under part of the effective interest rate, transaction costs the specific rules in IAS 39. These are accounted for and all other premiums and discounts. as financial assets or liabilities at fair value through profit and loss. Changes in fair value are classified as financial income or expense.
58 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 1. Summary of IFRS accounting of the cash flows of the combined instrument vary in principles applicable for 2007 (continued) a way similar to a stand-alone derivative. Embedded (continued) derivatives are separated from the host contracts and At the inception of the transaction, the Group accounted for as derivatives at fair value, only if; (a) the documents the relationship between hedging economic characteristics and risks of the embedded instruments and hedged items, as well as its risk derivative are not closely related to the host contract, management objective and strategy for undertaking (b) a separate instrument with the same terms as the various hedge transactions. Derivatives that are embedded derivative would meet the definition of a expected to be highly effective in offsetting exposure derivative; and (c) the hybrid (combined) instrument is to risks are designated as either a hedge of the fair not measured at fair value with changes in fair value value of a recognised asset or liability (fair-value recognised in profit or loss. When bond loans include hedge), a hedge of a forecasted transaction (cash-flow a prepayment option, an evaluation is performed in hedge), or of a firm commitment (cash-flow hedge). order to decide whether the options are closely related The effectiveness of the hedge relationship is to the bond loan. Whether or not the option is closely measured and documented both prospectively related, depends on the difference between the option and retrospectively. premium and amortised cost at the time of repayment.
Changes in the fair value of derivatives that are Hedges of net investments in foreign operations are designated and qualify as fair-value hedges are accounted for similarly to cash-flow hedges. Any gain recorded in the income statement as financial income or loss on the hedging instrument relating to the or expense along with any changes in the fair value of effective portion of the hedge is recognised in equity. the hedged asset or liability that is attributable to the The gain or loss relating to the ineffective portion is hedged risk. Changes in the fair value of derivatives recognised in the income statement. Gains and losses that are designated and qualify as cash-flow hedges accumulated in equity are included in the income are recognised in equity. Amounts deferred in equity statement when the foreign operation is disposed of. are transferred to the income statement and classified as revenue or expense in the period during which the As of 31 December 2007, the Group has no hedging hedged firm commitment or forecasted transaction instruments. affects the income statement (e.g. when the forecasted external sale for the Group takes place). If a committed Share capital or forecasted transaction is no longer expected to Ordinary Shares occur, any cumulative gain or loss existing in equity Ordinary Shares are classified as equity. Incremental at that time is recognised immediately in the income costs directly attributable to the issue of Ordinary statement. If a hedging instrument expires or is sold, Shares and share options, are recognised as a or when a hedge no longer meets the criteria for reduction of equity, net of any tax effects. hedge accounting under IAS 39, amounts previously recognised in equity remain in equity until the Repurchase of share capital (Treasury Shares) forecasted transaction occurs. When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes To the extent that derivative contracts on own directly attributable costs, is net of any tax effects shares contain an obligation to settle in cash or and is recognised as a deduction from equity. another financial asset, the financial liability for the Repurchased shares are classified as Treasury Shares redemption amount is recognised as a liability with and are presented as a deduction from total equity. a corresponding entry against equity. When Treasury Shares are sold or reissued subsequently, the amount received is recognised as an increase in An embedded derivative is a component of a hybrid equity and the resulting surplus or deficit on the (combined) instrument that also includes a non- transaction is transferred to/from retained earnings. derivative host contract, with the effect that some DNO International ASA Annual Report and Accounts 2007 | 59 Note Disclosures Note 1. Summary of IFRS accounting Petroleum products and over and under lifts of crude oil are recorded at net realisable values. (continued) principles applicable for 2007 (continued) Leases The fair value of inventories acquired in a business Leases of property, plant and equipment where the combination is determined based on its estimated Group has substantially all the risks and rewards of selling price in the ordinary course of business, less ownership are classified as finance leases. Finance the estimated costs of completion and sale and a leases are capitalised at the inception of the lease at reasonable profit margin based on the effort required the lower of the fair value of the leased property or to complete and sell the inventories. the present value of the minimum lease payments. The corresponding rental obligations, net of finance Trade Receivables charges, are included in other long-term interest- Trade receivables are recognised and carried at their bearing liabilities. Each lease payment is allocated anticipated realisable value, which is the original between liability and finance, where the interest invoice amount less an estimated valuation allowance element of the finance cost is charged to the income for any uncollectible amounts. A provision is made statement over the lease period so as to produce a when there is objective evidence that the Group will constant periodic rate of interest on the remaining not be able to collect the debts. Bad debts are written balance of the liability for each period. Property, plant off when identified. and equipment acquired under finance leases are depreciated over the shorter of the useful life of the The fair value of trade and other receivables, excluding asset or the lease term. construction work in progress, is estimated as the present value of future cash flows, discounted at the Leases where a significant portion of the risk and market rate of interest at the reporting date. reward of ownership is retained by the lessor are classified as operating leases. Payments made under Interest-Bearing Liabilities operating leases, net of any incentives received from All loans and borrowings are initially recognised at the lessor, are charged to the income statement on cost, being the fair value of the consideration received a straight-line basis over the period of the lease. net of issue costs associated with the borrowing.
Other Long-Term Receivables After initial recognition, interest-bearing loans and Other long-term receivables are measured at net borrowings are subsequently measured at amortised present value when the expected payments are long cost using the effective interest method. Any difference due and these are not interest-bearing. between proceeds (net of transaction costs) and the redemption value is recognised on the income Inventories statement over the period of the interest-bearing Inventories, other than inventories of oil, are valued liabilities. Amortised cost is calculated by taking into at the lower of cost and net realisable value. Cost is account any issue costs and any discount or premium determined by the first-in, first-out (FIFO) method. on settlement. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct Gains and losses are recognised in net profit or loss costs and related production overheads (based on when the liabilities are derecognised or impaired, normal operating capacity) but excludes borrowing as well as through the amortisation process. costs. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated selling expenses.
60 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 1. Summary of IFRS accounting hydrocarbons. DNO is also entitled to receive a principles applicable for 2007 (continued) share of production in excess of cost oil (‘profit oil’). (continued) The sharing of profit oil varies between the working Revenue Recognition interest holders and the government from PSA contract Revenues from the production of oil and gas properties to PSA contract. are recognised on the basis of the Group’s net working interest in those properties, regardless of whether The sum of cost oil attributable to DNO’s share of the production is sold (the entitlement method). costs and DNO’s share of profit oil represents DNO’s The revenue recognition according to the net entitlement to oil produced under a PSA. entitlement method is based on actual production in the period. DNO’s share of cost oil in the PSAs varies from 50% to 60%. Overlift and underlift of oil and gas follows from the entitlement method and is valued at its net realisable Under a PSA the government typically receives value on the balance sheet date. Overlift and underlift portions of oil produced in several steps. Normally, are calculated as the difference between the Group’s there is a fraction of gross oil production (a royalty), share of production and its actual sales and are before any attribution to cost oil, payable to a classified as other current liabilities/assets. governmental body. As described above, the government will also have a specified share of profit Revenues from services are recorded when the service oil and in some instances a governmentally controlled has been performed. enterprise will have its share as well. The sum of royalties and governmental share of profit oil, Revenues from lease arrangements are recognised including that of a governmentally controlled over the life of the agreement. Revenues from other enterprise, represents the ‘government take’ activities are recognised when the title passes to of oil produced under a PSA. the customer. DNO presents its operations governed by PSAs Production Sharing Agreements (PSAs) according to the net entitlement method. The net In many countries ownership of unexploited petroleum entitlement method means that DNO recognises as resources remains with the state, whereas exploration revenue only its working interest of oil produced, and production is carried out by private contractors after deduction of the government take. under a specific production sharing agreement, or PSA. The PSA typically is a contract between an Financial income and expenses oil-producing company and the host government that Financial income comprises interest income on funds governs the rights and duties of both parties in respect invested (including available-for-sale financial assets), of the operations of a production block. In particular, dividend income, gains on the disposal of available- it governs how the revenues from oil produced for-sale financial assets, changes in the fair value of are to be shared between the government and the financial assets at fair value through profit or loss, contracting oil producers. DNO operates currently and gains on hedging instruments that are recognised under PSAs in Yemen and Iraq. in profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest Under the PSAs, DNO, along with other working method. Dividend income is recognised in profit or interest holders, typically bears all risk and costs for loss on the date that the Group’s right to receive exploration, development and production. In return, payment is established, which in the case of quoted if exploration is successful, DNO recovers the sum of securities is the ex-dividend date. its investment and operating costs (‘cost oil’) from a percentage of the production and sale of the associated
DNO International ASA Annual Report and Accounts 2007 | 61 Note Disclosures Note 1. Summary of IFRS accounting classified as non-current assets (long-term liabilities) in the balance sheet. (continued) principles applicable for 2007 (continued) Finance expenses comprise interest expense on Taxes payable and deferred tax are recognised directly borrowings, unwinding of the discount on provisions, in equity to the extent that they relate to items that are changes in the fair value of financial assets through charged directly to equity. profit or loss, impairment losses recognised on financial assets, and losses on hedging instruments The effect of uplift, a special deduction for petroleum that are recognised in profit or loss. surtax in Norway, is recognised at the investment date.
Foreign currency gains and losses are reported on a Production Sharing Agreements (PSAs) net basis. DNO presents its operations governed by PSAs according to the net entitlement method. For more Income Taxes information see description under revenue recognition. The tax expense consists of taxes payable and changes to deferred tax. A PSA may also affect payment of corporate taxes. Normally, the contractor is liable for national corporate Taxes payable are provided based on taxable profits at tax on taxable profits, which, in a successful operation, the current tax rate. will be a function of its share of profit oil (taking into account that costs over time will be recovered Deferred tax/tax assets are calculated on all taxable through cost oil). However, some PSAs include clauses temporary differences, except to the extent that both for corporate taxes to be paid out of the government of the following conditions are satisfied: take. To the extent that the government take includes a portion assigned to cover DNO’s corporate tax • the Group is able to control the timing of the eligible for classification as tax according to the IAS 12 reversal of the temporary differences; and definition, DNO presents this element as an income • it is probable that the temporary differences will tax expense with a corresponding increase in revenue. not reverse in the foreseeable future. Employee Benefits Deferred tax assets are recognised when it is probable Pension obligations that the Company will have a sufficient profit for tax The Group has currently only contribution plans. For purposes to utilise the tax asset. At each balance sheet defined contribution plans, contributions are paid to date, the Group carries out a review of its unrecognised pension insurance plans and charged to the income deferred tax assets and the value it has recognised. statement in the period to which the contributions The companies recognise formerly unrecognised relate. Once the contributions have been paid, there deferred tax assets to the extent that it has become are no further payment obligations. probable that the Company can utilise the deferred tax asset. Similarly, the Group will reduce its deferred tax Equity compensation benefits assets to the extent that it can no longer utilise these. Share options are granted to management and directors of the board. The cost of equity-settled Deferred tax and deferred tax assets are measured on transactions is measured by reference to the fair the basis of the expected future tax rates applicable to value at the date on which they are granted. The the companies in the Group. Deferred tax and deferred fair value is determined by using generally accepted tax assets are set off within the same tax regime only valuation techniques, such as the Black-Scholes model if the use of group contribution is available. and volatility based on historic volatility. In valuing equity-settled transactions, no account is taken of any Deferred tax and deferred tax assets are recognised performance conditions other than conditions linked irrespective of when the differences will be reversed. to the price of the shares of DNO. 62 | DNO International ASA Annual Report and Accounts 2007 They are recognised at their nominal value and Note Disclosures Note 1. Summary of IFRS accounting Provisions and Contingent Liabilities principles applicable for 2007 (continued) A provision is recognised when the Group has a (continued) present obligation (legal or constructive) as a result of a The cost of equity-settled transactions is recognised, past event, it is probable (i.e. more likely than not) that together with a corresponding increase in equity, an outflow of resources embodying economic benefits over the period in which the performance conditions will be required to settle the obligation, and a reliable are fulfilled, ending on the date on which they estimate can be made of the amount of the obligation. become fully entitled to the award (‘vesting date’). Provisions are reviewed at each balance sheet date and The cumulative expense recognised reflects the adjusted to reflect the current best estimate. extent to which the vesting period has expired and the number of awards that will ultimately vest. This is The amount of the provision is the present value of the based on the opinion of the directors of the Company risk-adjusted expenditures expected to be required to at that date and on the best available estimate of the settle the obligation, determined using the estimated number of equity instruments. The income statement risk-free interest rate as the discount rate. Where charge or credit for a period represents the movement discounting is used, the carrying amount of provision in cumulative expense recognised at the beginning increases in each period to reflect the unwinding of and end of that period. the discount by the passage of time. This increase is recognised as interest expense. No expense is recognised for awards that do not ultimately vest. An exception is for awards where Contingent liabilities are not recognised but are vesting is conditional upon a market condition, which disclosed, unless the possibility of an outflow of are treated as vesting irrespective of whether or not resources embodying economic benefits is remote. the market condition is satisfied, provided that all other performance conditions are satisfied. Environmental remediation provisions Expenditure that results from remediation of an Where the terms of an equity-settled award are existing condition caused by past operations and does modified, as a minimum an expense is recognised not contribute to current or future revenues is expensed. as if the terms had not been modified. In addition, Environmental remediation provisions are recognised an expense is recognised for any increase in the value based on current interpretations of environmental of the transaction as a result of the modification, laws and regulations when it is likely that the liability as measured at the date of modification. has been incurred and the amount of such liability can be reasonably estimated. Amounts provisioned are not Where an equity-settled award is cancelled, it is discounted and do not include third-party recoveries. treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is Asset retirement obligations recognised immediately. However, if a new award is Provisions for decommissioning liabilities for oil and substituted for the cancelled award and designated as natural gas production facilities are recognised in a replacement award on the date that it is granted, full. The amount recognised is the present value the cancelled and new awards are treated as if they of the estimated future expenditure determined in were a modification of the original award, as described accordance with local conditions and requirements. in the previous paragraph. A corresponding tangible fixed asset of an amount equivalent to the provision is also created. This The dilutive effect of outstanding options is reflected is subsequently depreciated as part of the capital as additional share dilution in the computation of costs of the production and transportation facilities. earnings per share. The decommissioning provision is accreted to the discounted liability, with the accretion of the discount
DNO International ASA Annual Report and Accounts 2007 | 63 Note Disclosures Note 1. Summary of IFRS accounting Discontinued Operations principles applicable for 2007 (continued) A discontinued operation results from a decision, (continued) pursuant to a single disposal plan, to divest an being classified as interest expense. The discount operation comprising a separate major line of business, rate used is a modified interest rate which equals for which the assets less liabilities and net financial the Group’s average interests on debts. results may be distinguished physically, operationally and for financial reporting purposes. The pre-tax gain The provision and the discount rate are reviewed or loss on disposal of discontinued operations, as well at each balance sheet date. According to IFRIC 1.5, as the financial results from discontinued operations, changes in the measurement of the decommissioning are shown as a separate item on the consolidated liability that result from a change in the timing income statement. or amount of the outflow of resources embodying economic benefits required to settle the obligation, Earnings Per Share or a change in the discount rate, are added to or The calculation of basic earnings per share is based on deducted from the cost of the related asset in the the profit attributable to ordinary shareholders using current period. Changes in estimated asset retirement the weighted average number of shares outstanding obligations will impact both the cost of the asset during the year after deduction of the average and the income statement in the period in which the number of Treasury Shares held over the period. The estimate is revised. calculation of diluted earnings per share is consistent with the calculation of basic earnings per share while Segment Reporting giving effect to all dilutive potential Ordinary Shares The Company has identified its reportable segments that were outstanding during the period. That is: based on the nature of the risk and return within its business. After the shares in IOT ASA were distributed • The net profit for the period attributable to to DNO’s shareholders in December 2004, the only Ordinary Shares is increased by interest recognised business segment under IFRS is oil and gas. Therefore in the period in respect of the dilutive potential the Group’s primary reporting format is geographical Ordinary Shares. It is adjusted for any other segments. Geographical segments provide products changes in income or expense that would result or services within a particular economic environment from the conversion of the dilutive potential that is subject to risks and returns that are different Ordinary Shares. from those of components operating in other economic • The weighted average number of additional environments. The Group’s geographical segments are Ordinary Shares that would have been outstanding determined by the location of the Group’s assets assuming the conversion of all dilutive potential and operations. Ordinary Shares increases the weighted average number of Ordinary Shares outstanding. Transfer prices between geographical segments are set on an arm’s length basis in a manner similar to The amount of the dilution is the average market price transactions with third parties. of Ordinary Shares during the period minus the issue price of the options. Non-Current Assets Held for Sale Non-current assets held for sale are classified as held Related parties for sale when it is highly probable that their carrying Parties are related if one party has the ability, directly amount will be recovered principally through a sale or indirectly, to control the other party or exercise transaction rather than through continuing use. significant influence over the party in making financial Such assets are measured at the lower of the or operational decisions. Parties are also related if they carrying amount and fair value less sales costs. are subject to common control.
64 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 1. Summary of IFRS accounting IAS 1 (R) Presentation of Financial principles applicable for 2007 (continued) Statements: A revised presentation (continued) The revised standard involves changes to the primary Transactions between related parties are transfers statements, especially to the statement of changes of resources, services or obligations, regardless of in equity, and introduces a ‘statement of recognised whether a price is charged. All transactions between income and expense’. This statement will show related parties are made based on the principle of changes in equity other than those arising from ‘arm’s length’, which is the estimated market price. transactions with equity holders. DNO will apply IAS 1 (R) from annual periods beginning 1 January 2009. For more information about related parties, see note 25. IAS 27 (R) Consolidated and Separate Comparatives Financial Statements Where necessary, comparative figures have been The revised standard requires that changes in adjusted to conform to changes in presentation in the ownership interest in subsidiaries are accounted current year. for as an equity transaction.
IFRS and IFRIC Interpretations Not Yet Effective IFRS 3 (R) Business Combinations Changes in the standard, effective from periods beginning after 1 January 2009, will affect recognised amount of goodwill and the reported profit, both in the period when the business combination takes place and in future periods. The implications will only have impact prospectively.
IFRS 8 Operating Segments IFRS 8 replaces IAS 14 Segment Reporting. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision-maker in order to allocate resources to the segment and to assess its performance. IFRS 8 also requires additional disclosures, including information on how the entity identifies its operating segments and the types of products and services from which each segment derives its revenues. The Group will apply IFRS 8 from annual periods beginning 1 January 2009.
DNO International ASA Annual Report and Accounts 2007 | 65 Note Disclosures Note 2. Segment information (continued) DNO only has one business segment and is therefore not presenting any secondary reporting format.
The primary segment reporting format is determined to be based on geography as DNO’s risks and rates of return are affected by the differences in these economic environments. Internal organisational structure, management structure and DNO’s internal financial reporting system are organised by geography.
DNO’s geographic segments consist of Northern Europe (NE), Yemen (YEM), Kurdistan region of Iraq (KUR) and Africa (AFR).
The segment Northern Europe (NE) includes operations in the UK. The operation in Norway has been sold in 2007 (see note 9). The segment Africa (AFR) includes both Equatorial Guinea and Mozambique, where DNO participates in one block in each country. Yemen (YEM) consists of Yemen (8 blocks) and Syria.
NOK mill Total report. Unalloc. Twelve months ended 31 December 2007 Note NE YEM KUR AFR segm. /elimin. GROUP
Income statement information External sales 3 – 1,154.4 165.5 – 1,319.9 – 1,319.9 Inter-segment sales – 12.3 31.3 0.7 44.3 (44.3) – Cost of goods sold 4 – (498.5) (48.1) (0.0) (546.7) (0.4) (547.1)
Gross profit – 668.2 148.6 0.7 817.4 (44.6) 772.8
Other operating income – – – – – – – Tariffs and transportation – (33.9) – – (33.9) – (33.9) Administrative expenses 5 (8.6) 3.4 – – (5.2) 24.3 19.1 Other operating expenses 5 (0.4) 0.9 (2.0) – (1.5) (0.8) (2.3) Exploration cost expensed 6 (6.0) (154.0) (71.3) (19.9) (263.6) (0.0) (263.6) Net gain/(loss) from sale of PP&E – – – – – – – Finance costs – net (excl. interest, gain/(loss) on sale of shares) (2.4) (5.6) (1.7) – (10.6) (56.6) (67.1)
Segment result before disc. operations (17.3) 479.0 73.6 (19.2) 502.8 (77.7) 425.1
Net profit discontinued operations 9 915.2 – – – 915.2 – 915.2
Segment result after disc. operations 897.9 479.0 73.6 (19.2) 1,418.0 (77.7) 1,340.3
Share of profit/(loss) from associates 11 (5.3) – – – (5.3) – (5.3) Interest – net (126.3) Gain/(loss) on sale of shares 4.4 Income tax expense (206.8)
Net profit/(loss) 1,006.3
66 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 2. Segment information (continued) NOK mill Total report. Unalloc. (continued) 31 December 2007 NE YEM KUR AFR segm. /elimin. GROUP
Balance sheet information Capital expenditures this period 1.5 312.1 878.9 22.8 1,215.3 1.9 1, 217. 2 Property, plant and equipment 0.7 723.9 1,375.2 48.1 2,147.8 0.7 2,148.4
Total segment assets (excl. tax assets, interest-bearing receivables) (1.5) 941.9 1,479.6 60.6 2,480.6 2,265.9 4,746.4
Net assets, discontinued operations – – – – – – –
Total segment assets including discontinued operations (1.5) 937.8 1,479.6 60.6 2,480.6 2,265.9 4,746.4
Unallocated corporate assets 294.4
Consolidated total assets 5,040.8
Total segment liabilities (excl. tax liabilities, interest-bearing liabilities) 2.4 20.5 54.1 – 77.0 319.9 396.8
Unallocated corporate liabilities 2,219.3
Consolidated total liabilities 2,616.1
Other segment information Net entitlement production – 2,894.1 1,031.3 – 3,925.4 – 3,925.4 Sale of oil (0.0) 1,154.4 165.5 – 1,319.9 – 1,319.9 Allocated profit/(loss) on oil price hedging contracts – – – – – – – Lifting cost – (213.1) (18.4) – (231.5) – (231.5) Lifting cost (USD/bbl) – (12.6) (3.0) – (15.6) – (10.1) Amortisation and depreciation 0.0 (285.3) (28.7) – (313.9) – (313.9) Netback, including asset sale proceeds 208.6 639.4 105.0 (19.2) 933.7 (20.7) 689.5
DNO International ASA Annual Report and Accounts 2007 | 67 Note Disclosures Note 2. Segment information (continued) NOK mill Total report. Unalloc. (continued) Twelve months ended 31 December 2006 Note NE YEM KUR AFR segm. /elimin. GROUP
Income statement information External sales 3 – 1,192.5 – – 1,192.5 – 1,192.5 Inter-segment sales – 12.2 18.9 – 31.1 (31.1) – Cost of goods sold 4 – (378.6) (1.8) (0.0) (380.4) (0.6) (381.1)
Gross profit – 826.1 17.0 (0.0) 843.2 (31.7) 811.5
Other operating income – – 4.4 – 4.4 – 4.4 Tariffs and transportation – (46.4) – – (46.4) – (46.4) Administrative expenses 5 (3.4) – – – (3.4) 35.1 31.7 Other operating expenses 5 (0.0) (1.1) (0.0) – (1.1) – (1.1) Exploration cost expensed 6 (119.9) (113.4) (93.5) (12.7) (339.5) – (339.5) Net gain/(loss) from sale of PP&E – – – – – – – Finance costs – net (excl. interest, gain/(loss) on sale of shares) (1.8) (4.4) (1.2) – (7.4) (11.0) (18.4)
Segment result before disc. operations (125.2) 660.9 (73.2) (12.7) 449.7 (7.6) 442.1
Net profit/(loss) discontinued operations 9 (40.0) – – – (40.0) – (40.0)
Segment result after disc. operations (165.2) 660.9 (73.2) (12.7) 409.7 (7.6) 402.1
Share of profit/(loss) from associates 11 – – – – – – – Interest – net (91.1) Gain/(loss) on sale of shares 4.9 Income tax expense (254.8)
Net profit/(loss) 61.1
68 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 2. Segment information (continued) NOK mill Total report. Unalloc. (continued) 31 December 2006 NE YEM KUR AFR segm. /elimin. GROUP
Balance sheet information Capital expenditures this period 117.5 518.0 737.5 17.6 1,390.6 0.3 1,390.9 Property, plant and equipment 38.4 792.2 727.7 0.1 1,558.3 1.0 1,559.3
Total segment assets (excl. tax assets, interest-bearing receivables) 740.6 960.9 763.9 38.0 2,503.4 476.9 2,980.3
Net assets, discontinued operations – – – – – – –
Total segment assets including discontinued operations 740.6 960.9 763.9 38.0 2,503.4 476.9 2,980.3
Unallocated corporate assets 315.1
Consolidated total assets 3,295.4
Total segment liabilities (excl. tax liabilities, interest-bearing liabilities) 126.8 62.9 118.0 1.1 308.8 251.9 560.7
Unallocated corporate liabilities 2,010.2
Consolidated total liabilities 2,570.9
Other segment information Net entitlement production – 2,995.2 – – 2,995.2 – 2,995.2 Sale of oil – 1,192.5 – – 1,192.5 – 1,192.5 Allocated profit/(loss) on oil price hedging contracts – – – – – – – Lifting cost – (207.5) – – (207.5) – (207.5) Lifting cost (USD/bbl) – (10.8) – – (10.8) – (10.8) Amortisation and depreciation – (170.8) – – (170.8) – (170.8) Netback, including asset sale proceeds (346.9) 622.6 (70.2) (12.7) 192.8 4.0 420.3
DNO International ASA Annual Report and Accounts 2007 | 69 Note Disclosures Note 2. Segment information (continued) NOK mill Total report. Unalloc. (continued) Twelve months ended 31 December 2005 Note NE YEM KUR AFR segm. /elimin. GROUP
Income statement information External sales 3 – 887.9 – – 887.9 (262.2) 625.7 Inter-segment sales – 11.1 4.4 – 15.4 (15.4) – Cost of goods sold 4 (2.3) (303.1) (0.6) – (306.0) (0.6) (306.6)
Gross profit (2.3) 595.9 3.7 – 597.4 (278.3) 319.1
Other operating income – – 4.6 1.2 5.8 – 5.8 Tariffs and transportation – (42.4) – – (42.4) – (42.4) Administrative expenses 5 – (1.4) – – (1.4) (28.3) (29.7) Other operating expenses 5 – 0.8 – (0.0) 0.8 (46.4) (45.5) Exploration cost expensed 6 (0.0) (24.7) (49.3) (7.9) (81.9) (0.8) (82.7) Net gain/(loss) from sale of PP&E – – – 30.9 30.9 – 30.9 Finance costs – net (excl. interest, gain/(loss) on sale of shares) (0.5) 41.9 (1.2) – 40.1 58.9 99.1
Segment result before disc. operations (2.8) 570.1 (42.2) 24.2 549.3 (294.8) 254.5
Net profit discontinued operations 9 30.9 – – – 30.9 – 30.9
Segment result after disc. operations 28.1 570.1 (42.2) 24.2 580.2 (294.8) 285.5
Share of profit/(loss) from associates 11 – – – – – – – Interest – net (43.8) Gain/(loss) on sale of shares 17.2 Income tax expense 40.2
Net profit/(loss) 299.0
70 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 2. Segment information (continued) NOK mill Total report. Unalloc. (continued) 31 December 2005 NE YEM KUR AFR segm. /elimin. GROUP
Balance sheet information Capital expenditures this period 144.3 364.9 21.6 14.3 545.1 0.6 545.8 Property, plant and equipment 31.0 522.8 4.5 – 558.4 1.3 559.7
Total segment assets (excl. tax assets, interest-bearing receivables) 1,102.8 655.7 93.1 22.8 1,874.3 793.3 2,667.6
Net assets, discontinued operations – – – – – – –
Total segment assets including discontinued operations 1,102.8 655.7 93.1 22.8 1,874.3 793.3 2,667.6
Unallocated corporate assets 312.2
Consolidated total assets 2,979.8
Total segment liabilities (excl. tax liabilities, interest-bearing liabilities) 126.1 41.3 1.4 0.3 169.1 269.7 438.7
Unallocated corporate liabilities 1,573.7
Consolidated total liabilities 2,012.4
Other segment information
Net entitlement production 521.0 2,648.9 – – 3,169.9 – 3,169.9 Sale of oil 167.0 887.9 – – 1,054.9 – 1,054.9 Allocated profit/(loss) on oil price hedging contracts – – – – – (262.2) (262.2) Lifting cost (57.0) (185.9) – – (243.0) – (243.0) Lifting cost (USD/bbl) (17.0) (10.9) – – (27.9) – (11.9) Amortisation and depreciation (24.9) (117.8) – – (142.6) (0.6) (143.3) Netback, including asset sale proceeds 28.0 480.1 (40.3) (6.6) 461.1 (353.1) 108.0
DNO International ASA Annual Report and Accounts 2007 | 71 Note Disclosures Note 3. Sales Years ended 31 December (continued) NOK mill 2007 2006 2005
Sale of petroleum products before profit/(loss) from oil price hedging contracts 1,319.9 1,192.5 887.9 Profit/(loss) from oil price hedging contracts – – (262.2)
Total sales 1,319.9 1,192.5 625.7
As required under the previous credit facility with ANZ Investment Bank, DNO hedged 1.3 million barrels (3,600 bbl/day) for 2005 through oil price swap contracts with an average fixed oil price of 23.67 USD/bbl. During 2005, NOK 262.2 million was realised and booked as a reduction of sales. At 1 January 2006, DNO returned to full value of production.
For 2006, DNO had a put option with a strike price of 31 USD, covering parts of the 2006 production. There has been no put option related to the 2007 production.
DNO presents its operations governed by PSAs according to the net entitlement method. For more information see accounting principles on revenue recognition.
Reconciliation sales – working interest/net entitlement Years ended 31 December NOK mill 2007 2006 2005
Sale of petroleum products working interest 1,898.5 2,017.5 1,623.5 Government share of production before income tax payable (578.7) (824.9) (735.6)
Sale of petroleum products net entitlement 1,319.9 1,192.5 887.9
Note 4. Cost of goods sold
Years ended 31 December NOK mill 2007 2006 2005
Lifting costs* (231.5) (207.5) (188.2) Depreciation, depletion and amortisation (315.6) (173.5) (118.4) Other cost of goods sold – – –
Total cost of goods sold (547.1) (381.1) (306.6)
* Lifting costs consist of expenses relating to the production of oil and gas, including operation and maintenance of installations, well intervention and workover activities, insurances, CO2 taxes, royalties to the state and costs in own organisation.
72 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 5. Administrative/other expenses (continued) This note should be read in conjunction with note 25 on related parties.
Years ended 31 December NOK mill 2007 2006 2005
Salaries and social expenses * (23.4) (7.3) (25.4) General and administration expenses ** (30.3) (27.8) (38.7) Reclassification to exploration cost 72.9 66.8 34.4 Other operating expenses *** (2.3) (1.1) (45.5)
Total administrative/other expenses 16.9 30.6 (75.2)
Average man-year labour 31 33 29
* Salaries and social expenses directly attributable to operations are reclassified to lifting cost and exploration cost in the income statement. ** General and administration expenses are positive due to a reclassification of costs to exploration costs. *** As part of the acquisition of Unocal’s 31.25% share in the West Heather/Broom field in 1997 (see note 17 g in the 2004 annual report), an agreement was entered into for the payment of royalties to Unocal according to certain criteria. The extent of the obligation to pay royalty is contingent on cumulative income exceeding cumulative expenditures on the Broom field. Due to high oil prices in 2005 and favourable production from the Broom field in 2005, NOK 48.0 million (USD 7 million) were expensed in the 2005 accounts. The total liability is currently estimated to USD 9.9 million but is pending on future performance of the Broom field and development in oil prices.
Specification of salaries and social expenses Years ended 31 December NOK mill 2007 2006 2005
Salaries, bonuses, etc. (24.5) (18.0) (20.7) Employer’s payroll tax expenses (2.8) 3.4 (14.1) Pensions (1.0) (0.4) (0.3) Other personnel costs (2.4) (1.4) (1.2) Reclassification of salaries and social expenses to lifting costs and exploration costs 7.2 9.1 11.0
Salaries and social expenses (23.4) (7.3) (25.4)
Salaries and social expenses in 2005 include bonuses to employees and expenses related to a share option programme granted to the Board.
For more information on the share option programme granted to the Board, see note 23 on share options and share-based payments.
Salaries and social expenses in 2006 include an ordinary bonus and a share-based bonus scheme. The total limit for the share-based bonus scheme is NOK 11.5 million, based on a minimum share price of NOK 15.63 as of 30 June 2007. The threshold for payments under this scheme is a share price of NOK 13.13. Estimated value recognised as of 31 December 2006 is NOK 1.3 million. Key management are included in the scheme. All other ordinary bonus payments will be deducted in a possible share-based bonus payment. DNO International ASA Annual Report and Accounts 2007 | 73 Note Disclosures Note 5. Administrative/other expenses (continued) (continued) Salaries and social expenses in 2007 include an ordinary bonus and a share-based bonus scheme. The total limit for the share-based bonus scheme is NOK 16.3 million, based on a minimum share price of NOK 15.60 as of 30 June 2008. The threshold for payments under this scheme is a share price of NOK 12.00 Estimated value recognised as of 31 December 2007 is NOK 1.3 million. Key management are included in the scheme. All other ordinary bonus payments will be deducted in a possible share-based bonus payment.
Pensions DNO has a defined contribution scheme for employees in DNO International ASA (parent company). In 2007, a total of NOK 1.0 million was expensed under the scheme.
The corresponding figures for 2006 and 2005 were NOK 0.40 million and NOK 0.26 million. The Group’s obligations are limited to the annual contributions.
DNO meets the Norwegian requirements for mandatory occupational pension (‘obligatorisk tjenestepensjon’).
Director and executive remuneration Expensed remuneration to Board of Directors, Executive Chairman and Managing Director:
Years ended 31 December NOK mill 2007 2006 2005
Managing Director: Remuneration 3.37 3.21 2.22 Pension 0.05 0.04 0.04 Bonus 0.34 1.10 2.00 Other remuneration (including options exercised) 9.37 0.19 0.19 Total compensation paid to Managing Director 13.12 4.54 4.45
Other key management: Remuneration 7.33 6.12 5.85 Pension 0.12 0.10 0.04 Bonus 0.40 2.63 0.76 Other remuneration (including options exercised)* 4.73 23.77 0.43 Total compensation paid to other key management 12.58 32.61 7.08
Number of managers included 5 4 3
Executive Chairman: Consulting allowance from Increased Oil Recovery Ltd/AS 4.20 4.20 3.68 Total compensation to Increased Oil Recovery Ltd/AS 4.20 4.20 3.68
Board of Directors 0.93 0.95 0.95
Total director and executive remuneration 30.83 42.30 16.16
* Compensation to Roar Tessem, Managing Director in NOIL Energy ASA, is included in the 2006 and 2005 numbers. For 2007, his compensation is included in other remuneration as part of discontinued operations.
74 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 5. Administrative/other expenses (continued) (continued) For further specifications of remuneration to key management, reference is made to note 3 in the Parent Company accounts.
The Managing Director is, depending on the circumstances, entitled to severance pay equivalent to two or three times annual salary.
Severance pay agreements (equal to one or two times annual salary) have also been entered into with the following executives in DNO International ASA: Magne Normann, Project Director Iraq, Ivar Brandvold, Chief Operating Officer, Tore Lilloe-Olsen, Corporate Head of Exploration and Haakon Sandborg, Chief Financial Officer.
The Executive Chairman has no bonuses, share options, nor severance pay agreement, and the consulting contract has a three month termination period.
No loans have been granted and no guarantees have been issued for executives, shareholders or directors of the board.
Shares and Options held by directors, executives and key management personnel as at 31 December 2007
Directors, executives and key management personnel Shares Options
Companies controlled by Berge G. Larsen, Executive Chairman 45,302,504 – Trygve Bruvik, Non-executive Vice-Chairman 1,999,996 – Elin Karfjell, Non-executive Director – – Marit Instanes, Non-executive Director 18,288 – Gunnar Hirsti, Non-executive Director – – Helge Eide, Managing Director 2,400,000 – Ivar Brandvold, Chief Operating Officer – – Tore Lilloe-Olsen, Corporate Head of Exploration 2,000 – Haakon Sandborg, Chief Financial Officer – – Magne Normann, Project Director Iraq 1,371,996 – Sven Erik Lie, E&P Manager Yemen – –
Total 51,094,784 –
For more information on options, see note 23.
DNO International ASA Annual Report and Accounts 2007 | 75 Note Disclosures Note 5. Administrative/other expenses (continued) (continued) Auditors’ fees Years ended 31 December NOK mill (excluding VAT) 2007 2006 2005
Auditors’ fee 2.29 1.91 1.78 IFRS – 0.19 – Other financial auditing 0.45 – –
Tax advisory services 0.47 0.15 0.92 Other advisory services 0.19 0.15 0.11
Total fees 3.40 2.39 2.80
Total auditors’ fees related to the divested subsidiary NOIL Energy ASA for 2007 are NOK 0.78 million, of which NOK 0.71 million is auditors’ fees and NOK 0.07 is other financial auditing.
Note 6. Exploration expenses
Years ended 31 December NOK mill 2007 2006 2005
Seismic acquisitions, analysis and general G&G (143.0) (120.7) (62.3) Exploration costs capitalised in previous years carried to cost – (3.8) – Exploration costs capitalised this year carried to cost (95.6) (182.0) 0.9 Impairment of capitalised exploration costs – – – Other exploration cost expensed (25.0) (32.9) (21.3)
Total exploration cost expensed (263.6) (339.5) (82.7)
Seismic studies have been performed in Yemen, in Kurdistan and in Mozambique in 2007. In addition, there have been field studies and geology work in all business segments.
Exploration costs expensed in 2007 include dry well costs related to Ardah, Nuzooh #1, Thoub #1, Berhout #1 and Wasta #1 in Yemen.
76 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 7. Net finance Years ended 31 December (continued) NOK mill 2007 2006 2005
Interest received 18.2 27.4 36.0 Other financial income 4.4 5.7 17.2 Interest expense (174.8) (126.3) (84.6) Capitalised interest 30.2 7.8 4.7 Exchange rate gain/(loss), realised items 1.3 (7.0) (0.1) Exchange rate gain/(loss), unrealised items (46.1) 30.9 63.6 Fair value gain/(loss) on financial instruments1)– net (11.4) (3.4) 37.2 Impairment of financial assets – – – Other financial expenses (10.9) (39.8) (1.6)
Net finance (189.1) (104.6) 72.5
1) Fair value gain/(loss) on financial instruments – net
Years ended 31 December NOK mill 2007 2006 2005
Interest rate derivatives (5.7) (1.0) 4.5 Oil price derivatives (6.8) (4.0) (9.6) Foreign exchange derivatives – – – Other derivative financial instruments – 5.0 41.4 Cash flow hedges – Part of cash flow hedge charged to P&L according to IAS 39.96 – – 0.8 Other financial assets at fair value through profit or loss 1.1 (3.4) –
Fair value gain/(loss) on financial instruments, net (11.4) (3.4) 37.2
Fair value gain on other derivative financial instruments in 2005 is a result of convertible options related to Petrolia Drilling ASA convertible bonds. The bonds were converted into 16,545,455 PDR shares in February 2006 with a total gain of NOK 50.6 million, of which NOK 49.8 million were recognised in 2005 and NOK 0.8 million were recognised in 2006.
Capitalised interest is mainly related to development projects in Kurdistan.
The increase in interest expense is mainly due to higher interest-bearing long-term liabilities.
DNO International ASA Annual Report and Accounts 2007 | 77 Note Disclosures Note 8. Taxes (continued) Income tax expense Years ended 31 December NOK mill 2007 2006 2005
Tax refund of exploration costs NCS – – – Deferred taxes (64.7) (51.4) 226.7 Income taxes payable related to production sharing agreements (PSAs) (142.0) (208.4) (186.6)
Total income tax expense (206.8) (254.8) 40.2
Reconciliation of the year’s income tax Years ended 31 December NOK mill 2007 2006 2005
Profit/(loss) before income tax 297.8 356.0 227.9
Expected income tax according to nominal tax rate (28%) (85.1) (99.7) (63.8) Expected petroleum tax – – – Effect of earned uplift – – – Taxes paid in kind under PSAs exceeding 28% (47.4) (61.3) (51.1) Adjustment of previous years – – – Adjustment of deferred tax assets not recorded (44.1) (108.1) 134.9 Non-deductible expenses/non-taxable income 5.1 3.9 16.7 Other items (35.2) 10.3 3.5
Total income taxes (206.8) (254.8) 40.2
Effective income tax rate 69.4% 71.6% (17.6%)
Taxes charged to equity – – –
78 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 8. Taxes (continued) (continued) Temporary differences relate to the following items: Years ended 31 December Tax effect of temporary differences, NOK mill 2007 2006 2005
Other current items 2.0 2.8 1.0 Tangible assets (13.6) (122.5) (24.9) Other fixed items (receivables, abandonment, etc.) 18.6 31.8 46.4 Losses carried forward 296.7 387.1 294.0
Total 303.7 299.2 316.5 Deferred tax asset allowance (162.4) (168.3) (60.1)
Total deferred taxes 141.3 130.9 256.4 Capitalised deferred tax assets 294.4 315.1 312.2 Capitalised deferred tax liabilities (153.1) (184.2) (55.8)
For taxes payable related to production sharing agreements (PSAs), reference is made to Note 1 Accounting principles.
The tax loss carry forward of NOK 296.7 million as of year end is significantly influenced by historical hedging losses related to oil price contracts in the Parent Company.
Deferred tax and deferred tax assets are offset within the same tax regime only if the use of group contribution is available.
The deferred tax asset is recognised based on identified and available tax planning opportunities. In addition to utilisation of group contribution in future years, this includes possible sale of assets, if considered feasible and favourable. The anticipated market values of the assets in question have been indicated by external parties.
DNO International ASA Annual Report and Accounts 2007 | 79 Note Disclosures Note 9. Discontinued operations (continued) In October 2007, DNO announced that it had entered into an Integration Agreement to combine its subsidiary NOIL Energy ASA and Pertra ASA, creating the second largest Norwegian oil company on the Norwegian Continental Shelf. On 8 November 2007, the agreement was approved by the General Meeting in all three companies. The combination was structured as an exchange offer, where DNO swapped its shares in NOIL Energy ASA with shares in Pertra ASA. After the transaction, DNO holds 36.92% of the shares in Pertra ASA (renamed to Det norske oljeselskap ASA). The shares in Pertra are assessed at fair value at the time of the transaction on 8 November 2007.
See note 11 for financial information regarding the investment in Det norske oljeselskap ASA.
Booked values of the subsidiary in group accounts at the date of disposal were:
NOK mill 8 Nov 2007
ASSETS
Non-current assets 447.3 Current assets 833.6
TOTAL ASSETS 1,280.9
EQUITY AND LIABILITIES
Equity 616.4 Non-current liabilities 256.8 Current liabilities 407.7
TOTAL EQUITY AND LIABILITIES 1280.9
Cash from initial sale of shares, prior to transaction 662.4 – sales costs (32.4) – cash sold (in subsidiary) (170.5)
Net cash inflow 459.5
Years ended 31 December NOK mill 2007 2006 2005
Net profit from discontinued operations1) 44.4 (40.0) 30.9 Net gain/(loss) from sale of operations2) 870.8 – –
Net profit from discontinued operations 915.2 (40.0) 30.9
1) Net profit from discontinued operations in 2007 is specified in the first table on page 81: 2) Net gain/(loss) from sale of operations is specified in the second table on page 81.
80 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 9. Discontinued operations (continued) Years ended 31 December (continued) NOK mill 2007 2006 2005
Sales 104.4 142.6 166.9 Cost of goods sold (69.6) (64.6) (79.6)
Gross profit 34.8 78.0 87.3
Other operating income 18.2 11.8 6.2 Tariffs and transportation (0.4) (0.6) (1.3) Administrative expenses (17.0) (39.1) (17.7) Other operating expenses (3.7) (1.0) (0.8) Exploration cost expensed (204.6) (226.2) (77.9) Net gain/(loss) from sale of PP&E 93.4 0.1 5.4
Profit/(loss) from operating activities (79.3) (177.0) 1.2
Net finance (9.5) (14.3) 56.3
Profit/(loss) before income tax (88.8) (191.3) 57.5
Income tax expense 133.2 151.5 (26.6)
Net profit/(loss) from discontinued operations 44.4 (40.0) 30.9
Earnings per share, basic 1.04 (0.04) 0.04 Earnings per share, diluted 1.04 (0.04) 0.04
2) Net gain/(loss) from sale of operations:
Corrected NOK mill Value Total SIC 13 value
23,800,000 shares received in Pertra ASA 80 1,904.0 (761.1) 1,142.9 – booked value in group accounts (excl. minority share) (379.2) 151.6 (227.6) – sales costs (10.9) (10.9) – translation differences through profit or loss (56.0) 22.4 (33.6)
Net gain from sale of operations 1,458.0 (587.2) 870.8
DNO has an indirect shareholding in the divested subsidiary through its investment in Det norske oljeselskap ASA. The SIC 13 correction is made based on the transfer of a ‘non-monetary asset’ where the gain only relates to the part going out of the Group. The part remaining in Group (equity method) is not recognised in profit or loss, but allocated to the investment in the balance sheet.
DNO International ASA Annual Report and Accounts 2007 | 81 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) Depreciation is charged to cost of goods sold in the income statement.
Property, plant and equipment Total Develop. Asset in oil & gas Other 2007 – NOK mill assets operatn. prop. PP&E Total
At 1 January 2007 Cost 740.2 1,683.7 2,423.9 15.4 2,439.3 Accumulated depreciation – (871.5) (871.5) (8.6) (880.0) Net book amount 740.2 812.2 1,552.5 6.8 1,559.3
Period ended 31 December 2007 Opening net book amount 740.2 812.2 1,552.5 6.8 1,559.3 Exchange differences (132.2) (144.2) (276.4) (1.0) (277.4) Additions 481.1 781.2 1,262.3 4.5 1,266.8 Transfers (1,041.1) 1,107.3 66.2 – 66.2 Disposals – (122.5) (122.5) (2.5) (124.9) Depreciation charge – (339.6) (339.6) (2.0) (341.6)
Closing net book amount 48.1 2,094.6 2,142.6 5.8 2,148.4 Discontinued depreciation – (25.6) (25.6) (0.4) (26.1)
At 31 December 2007 Cost 48.1 2,902.3 2,950.4 14.5 2,964.9 Accumulated depreciation – (807.7) (807.7) (8.7) (816.4)
Net book amount 48.1 2,094.6 2,142.6 5.8 2,148.4
82 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) (continued) Intangible assets License Explor. 2007 – NOK mill interest assets Total
At 1 January 2007 Cost 79.6 242.6 322.3 Accumulated depreciation – – –
Net book amount 79.6 242.6 322.3
Period ended 31 December 2007 Opening net book amount 79.6 242.6 322.3 Exchange differences (10.7) (32.7) (43.5) Additions 9.9 200.8 210.7 Transfers (8.6) (57.6) (66.2) Disposals (46.7) (292.3) (338.9) Depreciation charge – – –
Closing net book amount 23.5 60.8 84.3 Discontinued depreciation – – –
At 31 December 2007 Cost 23.5 60.8 84.3 Accumulated depreciation – – –
Net book amount 23.5 60.8 84.3
DNO International ASA Annual Report and Accounts 2007 | 83 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) (continued) Property, plant and equipment Total Develop. Asset in oil & gas Other 2006 – NOK mill assets operatn. prop. PP&E Total
At 1 January 2006 Cost 4.4 1,301.8 1,306.2 14.2 1,320.4 Accumulated depreciation – (727.4) (727.4) (6.7) (734.0) Net book amount 4.4 574.4 578.8 7.5 586.4
Period ended 31 December 2006 Opening net book amount 4.4 574.4 578.8 7.5 586.4 Exchange differences (16.5) (47.4) (63.9) (0.4) (64.3) Additions 698.2 495.7 1,193.9 2.8 1,196.7 Transfers 54.1 (26.7) 27.4 – 27.4 Disposals – – – – – Depreciation charge – (183.8) (183.8) (3.2) (187.0)
Closing net book amount 740.2 812.2 1,552.5 6.8 1,559.3 Discontinued depreciation – (13.0) (13.0) (0.5) (13.5)
At 31 December 2006 Cost 740.2 1,683.7 2,423.9 15.4 2,439.3 Accumulated depreciation – (871.5) (871.5) (8.6) (880.0)
Net book amount 740.2 812.2 1,552.5 6.8 1,559.3
84 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) (continued) Intangible assets License Explor. 2006 – NOK mill interest assets Total
At 1 January 2006 Cost 69.2 96.4 165.6 Accumulated depreciation – – –
Net book amount 69.2 96.4 165.6
Period ended 31 December 2006 Opening net book amount 69.2 96.4 165.6 Exchange differences (0.8) (1.9) (2.7) Additions 11.9 206.0 217.9 Transfers 26.7 (54.1) (27.4) Disposals (27.3) (3.8) (31.1) Depreciation charge – – –
Closing net book amount 79.6 242.6 322.3 Discontinued depreciation – – –
At 31 December 2006 Cost 79.6 242.6 322.3 Accumulated depreciation – – –
Net book amount 79.6 242.6 322.3
DNO International ASA Annual Report and Accounts 2007 | 85 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) (continued) Property, plant and equipment Total Develop. Asset in oil & gas Other 2005 – NOK mill assets operatn. prop. PP&E Total
At 1 January 2005 Cost 78.9 753.4 832.2 7.1 839.3 Accumulated depreciation – (542.7) (542.7) (4.7) (547.4)
Net book amount 78.9 210.7 289.5 2.3 291.9
Period ended 31 December 2005 Opening net book amount 78.9 210.7 289.5 2.3 291.9 Exchange differences 14.0 25.6 39.6 0.3 39.9 Additions 98.9 264.2 363.1 6.6 369.7 Transfers (187.4) 215.6 28.1 – 28.1 Disposals – – – – – Depreciation charge – (141.5) (141.5) (1.7) (143.3)
Closing net book amount 4.4 574.4 578.8 7.5 586.4 Discontinued depreciation – (24.7) (24.7) (0.2) (24.9)
At 31 December 2005 Cost 4.4 1,301.8 1,306.2 14.2 1,320.4 Accumulated depreciation – (727.4) (727.4) (6.7) (734.0)
Net book amount 4.4 574.4 578.8 7.5 586.4
86 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) (continued) Intangible assets License Explor. 2005 – NOK mill interest assets Total
At 1 January 2005 Cost 8.5 6.4 15.0 Accumulated depreciation – – –
Net book amount 8.5 6.4 15.0
Period ended 31 December 2005 Opening net book amount 8.5 6.4 15.0 Exchange differences 0.7 2.0 2.7 Additions 81.5 94.7 176.1 Transfers (21.5) (6.7) (28.1) Disposals – – – Depreciation charge – – –
Closing net book amount 69.2 96.4 165.6 Discontinued depreciation – – –
At 31 December 2005 Cost 69.2 96.4 165.6 Accumulated depreciation – – –
Net book amount 69.2 96.4 165.6
Impairment testing All assets have been reviewed for impairment as of 31 December 2007. For all assets, the recoverable amount equals or is higher than the carrying amount and no impairment loss has been recognised. The impairment test includes the following parameters: forward oil price, remaining reserves, future capital expenditures and lifting costs.
Capitalised interest Interest costs on borrowings to finance the construction of property, plant and equipment in the development phase are capitalised.
Capitalised interest for 2007 of NOK 30.2 million mainly relates to development projects in Kurdistan. The corresponding figure for 2006 was NOK 7.8 million.
The capitalisation of interest in Kurdistan ceased on 30 June 2007 as the Tawke field then entered into the production phase.
DNO International ASA Annual Report and Accounts 2007 | 87 Note Disclosures Note 10. Property, plant and equipment/Intangible assets (continued) (continued) Net gain/(loss) on sale of PP&E Net gain on sale of PP&E in 2005 relates mainly to a reimbursement of USD 4.8 Million as a result of a non-concluded farm-in agreement of a 40% working interest in Inhaminga Block in Mozambique.
Note 11. Investment in associate
The Group has, from 13 November 2007, a 36.92% interest in Det norske oljeselskap ASA, which is a Norwegian independent E&P company.
Det norske oljeselskap ASA is listed on the Oslo Stock Exchange and has its business offices in Trondheim and Oslo.
As of 31 December 2007, DNO holds a total of 23,967,500 shares in Det norske oljeselskap. The market value of Det norske oljeselskap as of 31 December 2007 is NOK 80 per share, indicating a market value of the investment as of 31 December 2007 of NOK 1,917 million.
According to the shareholder’s agreement, DNO is committed to reduce its shareholding to 25% within year end 2008, by sale of shares or by dilution.
Excess values at the acquisition date are allocated to oil and gas fields.
The following table illustrates summarised financial information of the Group’s investment in Det norske oljeselskap ASA:
Share of associate’s balance sheet: Years ended 31 December NOK mill 2007 2006 2005
Current assets 538.6 – – Non-current assets 1,833.8 – – Current liabilities (220.3) – – Non-current liabilities (844.4) – –
Net assets 1,307.7 – –
88 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 11. Investment in associate (continued) (continued) Share of associate’s revenue and profit: Years ended 31 December NOK mill 2007 2006 2005
Revenue 10.3 – – Profits/(Loss) (5.3) – –
Carrying amount of the investment 1,324.9 – –
Share of associate’s contingent liabilities: 0-12 1 to 5 Over 5 months years years Total
Lease commitments rig contracts 110.5 895.5 – 1,006.0 Lease commitments through license interests 22.2 100.7 11.1 134.0 Lease commitments offices 3.3 39.4 63.5 106.2
Total 136.0 1,035.6 74.6 1,246.2
Note 12. Available-for-sale financial assets
Available-for-sale financial assets are revalued at fair value (market price, where available) at the end of each period, with changes charged directly to equity. Impairment will be charged to the income statement, while reversal of impairment will be charged directly to equity. Years ended 31 December NOK mill 2007 2006 2005
Beginning of the period 192.1 187.7 58.5 Additions* – 59.9 70.8 Sales/Reclassifications** (31.3) (19.6) (7.7) Revaluation surplus/deficit transfer to equity 4.3 (36.3) 66.2 Exchange differences (0.2) 0.3 0.1
End of the period1) 165.0 192.1 187.7
Non-current portion 165.0 192.1 187.7 Current portion – – –
* Additions in 2006 relate to a conversion of bonds into 16.5 million shares in Petrolia Drilling ASA in February.
** Sales in 2006 relate to sale of shares in Rocksource ASA. Through a demerger in Rocksource ASA in May 2006, DNO acquired shares in Nordic Mining ASA. This is not regarded a long-term investment for DNO and the shares have been reclassified as held-for-trading (see note 16). Sales in 2007 relate to sale of shares in IOT ASA and Premier Oil plc.
DNO International ASA Annual Report and Accounts 2007 | 89 Note Disclosures Note 12. Available-for-sale financial assets (continued) (continued) NOK 4.3 million in revaluation surplus to equity is mainly contributed by an increase in value of the shares in Rocksource ASA.
1) Available-for-sale financial assets include the following: Years ended 31 December NOK mill 2007 2006 2005
Listed securities: – Petrolia Drilling ASA 59.0 89.1 28.2 – Independent Oil Tools ASA – 31.7 32.2 – Rocksource ASA 106.0 62.5 121.8 Equity securities – Norway 165.0 183.3 182.2 – Sterling Energy Ltd – – – – Premier Oil Plc – 8.8 5.5 Equity securities– UK – 8.8 5.5
Total available -for-sale financial assets 165.0 192.1 187.7
Note 13. Financial risk management objectives and policies
Overview The Group is exposed to a variety of risks from its use of financial instruments, including oil price risk, liquidity risk, currency risk, interest rate risk and credit risk.
The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.
This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risks, and the Group’s management of capital.
Risk management is carried out by a central treasury function (Group Treasury) under policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas.
The Audit Committee, established at the beginning of 2008, oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group.
Oil Price Risk Oil price fluctuations may have considerable impact on the Group’s earnings.
DNO enters into crude oil derivative contracts to reduce the volatility of the Group’s cash flows associated with anticipated sales of oil.
90 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 13. Financial risk management objectives and policies (continued) (continued) DNO’s main oil price hedging policy is to use hedging instruments (preferably put options) to meet strategic goals and to support execution of annual business plans, by focusing on securing defined cash flow levels through use of such instruments.
As required under the previous credit facility with ANZ Investment Bank, DNO hedged 1.3 million barrels (3,600 bbl/day) for 2005 through oil price swap contracts with an average fixed oil price of 23.67 USD/bbl. During 2005, NOK 262.2 million was realised and booked as a reduction of sales. As of 1 January 2006, DNO returned to full value of production.
DNO has entered into a put option for 2010 with a strike price of USD 40. At 31 December 2007, the market value of the put option was NOK 0.8 million. In addition, DNO had a put option for 2006 with a strike price of USD 31, covering parts of that year’s production. The put option matured on 29 December 2006.
Liquidity Risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying business, Group Treasury aims to maintain flexibility in funding by keeping both committed and uncommitted credit lines available.
The tables below summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted cash flows.
Less than 3 to 12 1 to 5 Over 5 At 31 December 2007 (NOK mill) 3 months months years years Total
Interest bearing loans and borrowings – 50.0 348.8 1,627.6 2,026.4 Other liabilities – – 16.3 – 16.3 Trade and other payables 104.6 – – – 104.6 2,147.3
Less than 3 to 12 1 to 5 Over 5 At 31 December 2006 (NOK mill) 3 months months years years Total
Interest bearing loans and borrowings – 55.7 349.8 1,404.5 1,810.0 Other liabilities – – 17.4 23.6 41.0 Trade and other payables 182.1 – – – 182.1 2,033.1
Less than 3 to 12 1 to 5 Over 5 At 31 December 2005 (NOK mill) 3 months months years years Total
Interest bearing loans and borrowings – 100.0 800.0 596.5 1,496.5 Other liabilities – – 18.1 67.0 85.1 Trade and other payables 129.3 – – – 129.3 1,710.9
DNO International ASA Annual Report and Accounts 2007 | 91 Note Disclosures Note 13. Financial risk management objectives and policies (continued) (continued) Currency Risk DNO’s corporate commercial revenues are earned in USD. The corporate operational costs are in USD, NOK and EUR. The currency risk of the USD costs is neutralised by the USD income. Corporate currency risk is related to the share of non-USD cash flow.
Trading in currency instruments is for hedging purposes only, to hedge underlying risk exposure linked to the Group’s commercial activities. The commercial risk exposure shall be hedged at the time the exposure becomes known.
The following table demonstrates the sensitivity to a reasonable possible change in the USD exchange rate, with all other variables held constant, of the Group’s profit before tax and equity.
Increase/ Effect on Effect on decrease profit before equity in USD rate tax (NOK mill) (NOK mill)
2007 +/- 10% +/- 5.7 +/- 5.7 2006 +/- 10% +/- 11.7 +/- 11.7
Interest Rate Risk The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk.
The main objective for interest rate risk hedging is to minimise exposure to variability of cash flows arising from changes in interest rates. The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps and vice versa.
Interest rate fixing is considered for large investments that have significant impact on the size of net liabilities. Factors such as the expected duration of the investment, its projected cash flow and DNO’s ability to withstand interest rate fluctuations following the new investment will determine whether the interest rate should be fixed in such cases. Lenders may also require interest rate hedging.
DNO has three interest swap agreements, two for the period 2003-2009 and one for the period 2007-2012. Under the agreements, DNO is receiving a floating interest rate and paying fixed interest rates of 3.85% and 3.99% for the first two arrangements. For the latest arrangement, DNO is receiving a fixed interest rate of 7.215% and is paying a floating interest. As hedge accounting is not used for these swaps, changes in their fair values are recognised into earnings. As of 31 December 2007, the market value of the interest swaps for the period 2003-2009 was NOK 0.1 million. The market value of the interest swap for the period 2007-2012 was NOK 15.4 million.
Fair value changes of NOK 5.7 million has been expensed for 2007. At 31 December 2007, DNO has two long-term bond loans that mature in 2009 and 2012 with fixed interest rates of 7.9% and 7.215% respectively.
92 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 13. Financial risk management objectives and policies (continued) (continued) The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Group’s profit before tax.
Increase/ Effect on Effect on decrease profit before equity in basic points tax (NOK mill) (NOK mill)*
2007 +/- 100 +/- 17.9 +/- 14.8 2006 +/- 100 +/- 13.3 +/- 12.3
* Adjusted for capitalised interest
Credit Risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales are only made to customers with an appropriate credit history.
Derivative counterparties and cash transactions are limited to high-credit-quality financial institutions. The Group has policies that limit the amount of credit exposure to any financial institution.
Market risk investments DNO is exposed to market risk on investments which are primarily classified as available-for-sale. Adjustments to fair-value are recognised in equity until the investment is sold. DNO is not significantly exposed to fair-value changes in listed shares.
Political Risk DNO’s worldwide operations are subject to different levels of political risk. DNO seeks to mitigate this risk through balancing of the asset portfolio.
A federal oil and gas law in Iraq is yet to be established, but in 2007 the new Oil and Gas Law for the Kurdistan region of Iraq was endorsed by the Regional Parliament. DNO’s PSCs were reviewed and are now in line with this recently enacted legislation. It is the opinion of DNO that the potential risks associated to our PSCs in the Kurdistan region of Iraq and future export of oil are at an acceptable level.
Capital Management The primary objective of the DNO’s management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value.
The Group manages its capital structure, and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
DNO International ASA Annual Report and Accounts 2007 | 93 Note Disclosures Note 13. Financial risk management objectives and policies (continued) (continued) DNO monitors capital on the basis of its book equity to total equity ratio. This ratio is calculated as book equity divided by total equity. It is the Group’s policy that this ratio be 30% or higher. As of 31 December 2007, the book equity ratio was 48% (2006: 22%; 2005: 32%). The higher book equity ratio for 2007 is mainly due to the sale of shares in the Norwegian subsidiary NOIL Energy ASA in the fourth quarter.
Years ended 31 December NOK mill 2007 2006 2005
Total equity 2 424.7 724.5 967.4 Total assets 5 040.8 3 295.4 2 979.8 Book equity ratio 48.1% 22.0% 32.5%
Financial instruments Set out below is a comparison by category for carrying amounts and fair values of all of the Group’s financial instruments that are carried in the financial statements. The following estimated fair values have been determined by the Group, using appropriate market information or accepted valuation methodologies. The carrying amount of bank deposits and current interest-bearing liabilities are a reasonable estimate for their fair values. DNO’s bond loans are listed on the Oslo Stock Exchange. The fair values of the bond loans are based on market quotations for these loans.
31 December 2007 31 December 2006 31 December 2005 Carrying Fair Carrying Fair Carrying Fair NOK mill Notes amount value amount value amount value
Financial assets Bank deposits 16 691.7 691.7 418.0 418.0 1,081.5 1,081.5 Derivative financial instruments (current) 13, 14 – – – – 45.7 45.7 Derivative financial instruments (non-current) 13, 14 0.9 0.9 9.5 9.5 2.8 2.8 Other financial assets at fair value through P&L 16 68.2 68.2 54.8 54.8 268.3 268.3 Available-for-sale investments 12 165.0 165.0 192.1 192.1 187.7 187.7 Investment in associate 11 1,324.9 1,917.4 – – – – Other financial assets (current) 15 263.0 263.0 424.4 424.4 285.0 285.0
2,513.7 3,106.2 1,098.8 1,098.8 1,871.0 1,871.0
Financial liabilities Current interest-bearing liabilities 18 50.0 50.0 55.7 55.7 100.0 100.0 Derivative financial instruments 14 15.4 15.4 – – – – Interest-bearing liabilities (non-current) 18 1,976.4 1,905.6 1,754.3 1,749.8 1,396.5 1,420.9
2,041.8 1,971.0 1,810.0 1,805.5 1,496.5 1,520.9
94 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 14. Derivative financial instruments Years ended 31 December (continued) NOK mill 2007 2006 2005
Non-current assets: – Oil price swaps/options 0.8 7.7 0.0 – Interest-rate swaps* 0.1 1.8 2.8 – Other derivative financial instruments – – –
Total non-current assets 0.9 9.5 2.8
Current assets: – Oil price swaps/options – – – – Interest-rate swaps – – – – Other derivative financial instruments** – – 45.7
Total current assets – – 45.7
Total assets 0.9 9.5 48.5
Non-current liabilities: – Oil price swaps/options – – – – Interest-rate swaps – – –
Total non-current liabilities – – –
Current liabilities: – Oil price swaps/options – – – – Interest-rate swaps* 15.4 – –
Total current liabilities 15.4 – –
Total liabilities 15.4 – –
* DNO holds three interest-rate swaps (IRS), two with a principal amount of USD 15 million and maturing on 31 December 2009. The fixed rates for these are 3.99% and 3.85% respectively. In addition, DNO holds an IRS with a principal amount of NOK 300 million, maturing on 12 October 2012. The fixed rate is 7.215%. This IRS is classified as held-to-maturity as it is closely related and has the same maturity as the loan. Changes in fair value of the IRSs during 2007 was NOK 5.7 million, recognised as financial expense.
** Other current derivative financial instruments consist of convertible options related to Petrolia Drilling ASA convertible bonds. Recognised amounts for derivative financial instruments equal the fair value.
DNO International ASA Annual Report and Accounts 2007 | 95 Note Disclosures Note 15. Trade and other receivables (continued) Current assets Years ended 31 December NOK mill 2007 2006 2005
Trade receivables 99.4 91.8 102.0 Less: provisions for impairment of receivables (1.9) – – Trade receivables – net 97.5 91.8 102.0 Prepayments 3.8 19.2 16.0 Receivables from related parties – – – Underlift, entitlement method 9.0 5.4 11.8 VAT receivable 3.3 2.6 2.8 Tax refund on exploration costs* (2.6) 259.2 0.4 Amortised short-term receivables – – 9.0 Other short-term receivables 151.9 46.2 143.0
Total trade and other receivables 263.0 424.4 285.0
* Tax refund on exploration costs relates to the Norwegian activities which have been divested in 2007.
As of 31 December, the ageing analysis of trade receivables is as follows:
Past due but not impaired NOK mill TOTAL Neither past due nor impaired <30 days 30-60 days 60-90 days >120 days
2007 99.4 99.4 – – – 2006 91.8 91.8 – – –
Trade receivables are non-interest bearing and are generally on 0-30 days terms.
Note 16. Cash, cash equivalents and other short-term financial assets
Years ended 31 December NOK mill 2007 2006 2005
Cash and cash equivalents, non-restricted 688.8 413.6 1,033.7 Cash and cash equivalents, restricted 2.9 4.4 47.8
Total cash and cash equivalents 691.7 418.0 1,081.5
96 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 16. Cash, cash equivalents and other short-term financial assets (continued) (continued) Cash held in currency 31/12/07 31/12/06 31/12/05 Amount in Amount in Amount in Amount in Amount in Amount in NOK mill Currency NOK Currency NOK Currency NOK
NOK 847.3 847.3 114.9 114.9 269.1 269.1 EUR – – 0.1 0.6 0.1 0.6 USD (28.9) (156.1) 47.3 296.2 119.5 808.6 GBP 0.0 0.5 0.5 6.3 0.3 3.2
Total cash and cash equivalents 691.7 418.0 1,081.5
Money market funds DNO has placed surplus liquidity in Norwegian money market funds with an investment profile based on short-term interest certificates.
Shares held-for-trading Through a demerger from Rocksource ASA in May 2006, DNO acquired shares in Nordic Mining ASA. The value of the shares at the time of the demerger was NOK 7.3 million.
Years ended 31 December NOK mill Currency Amount 2007 2006 2005
Money market funds Nordea Money Market USD 10.0 – – 67.9 Holberg Likviditet II NOK 50.0 – – 50.0 DnBNOR Likviditet 20 (V) NOK 100.0 – – 100.2 Terra Pengemarked II NOK 50.0 – – 50.1 Storebrand Likviditet NOK 50.0 53.3 51.0 – Larvikbanken, tidsinnskudd NOK 10.0 10.0 – –
Shares held-for-trading Nordic Mining ASA 4.9 3.8 –
Other financial assets at fair value through profit or loss 68.2 54.8 268.3
DNO International ASA Annual Report and Accounts 2007 | 97 Note Disclosures Note 17. Equity (continued) Share capital Number of Ordinary Treasury 2005 – NOK mill shares (1,000)* shares shares Total
At 1 January 2005 904,856 226.2 (4.0) 222.2
Share option scheme: – value of services provided – – – – – proceeds from shares issued – – – – Treasury shares purchased/sold – – 1.5 1.5 Share issues – – – –
At 31 December 2005 904,856 226.2 (2.4) 223.8
Number of Ordinary Treasury 2006 – NOK mill shares (1,000)* shares shares Total
At 1 January 2006 904,856 226.2 (2.4) 223.8
Share option scheme: – value of services provided – – – – – proceeds from shares issued – – – – Treasury shares purchased/sold – – (3.5) (3.5) Share issues – – – –
At 31 December 2006 904,856 226.2 (5.9) 220.3
Number of Ordinary Treasury 2007 – NOK mill shares (1,000)* shares shares Total
At 1 January 2007 904,856 226.2 (5.9) 220.3
Share option scheme: – value of services provided – – – – – proceeds from shares issued – – – – Treasury shares purchased/sold – – 1.2 1.2 Share issues – – – –
At 31 December 2007 904,856 226.2 (4.7) 221.5
* Adjusted for share splits approved by the General Assembly in June 2005 and June 2006.
The total number of Ordinary Shares is 904,856,912 shares with a par value of NOK 0.25 per share. All issued shares are fully paid.
98 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 17. Equity (continued) (continued) See note 23 on share options and share-based payments.
The Board of Directors has been authorised by the Annual General Meeting to increase the Company’s share capital by up to NOK 20,000,000 by issuing up to 80,000,000 shares with a face value of NOK 0.25, at a price and other subscription terms to be stipulated by the Board. The authorisation also covers a capital increase against contributions in kind, including in connection with mergers, and was given for two years from the date of the general meeting.
The Company’s Board of Directors has been authorised by the Annual General Meeting to buy Treasury Shares within the framework of the Public Limited Companies act.
At 31 December 2007, the Company held 18,873,960 Treasury Shares. In addition, DNO ASA holds 40,000,000 call options on Treasury Shares with expiry date 4 March 2008 and a strike price of NOK 5.00, and 40,000,000 call options on Treasury Shares with expiry date 7 January 2008 and an adjusted strike price of NOK 2.50. DNO International ASA has also written 40,000,000 put options on Treasury Shares with expiry date 4 March 2008 and a strike price of NOK 5.00.
Purchases and sales of Treasury Shares are made when the Board of Directors regard the transaction to be favourable for the shareholders.
Other reserves Share premium/ Available- Other paid-in Hedging for-sale Other Trans- NOK mill capital reserve investm. reserves lation Total
Balance at 1 January 2005 79.8 (130.2) 20.4 (0.1) (91.6) (121.7)
Revaluation, net of tax – – 66.2 – – 66.2 Treasury Shares: – – – – – – – Sale of Treasury Shares 1,080.6 – – 489.2 – 1,569.8 – Purchase of Treasury Shares – – – (486.0) – (486.0) Options granted – – – 5.7 – 5.7 Derivative contracts Treasury Shares – – – (478.7) – (478.7) Dividends – – – (529.8) – (529.8) Cash flow hedges:* – Fair value gains/(losses), net of tax – – – – – – – Transfers to net profit, net of tax – 130.2 – – – 130.2 Currency translation differences: – Group – – – – 14.8 14.8
Balance at 31 December 2005 1,160.4 – 86.6 (999.7) (76.8) 170.5
DNO International ASA Annual Report and Accounts 2007 | 99 Note Disclosures Note 17. Equity (continued) (continued) Other reserves Share premium/ Available- Other paid-in Hedging for-sale Other Trans- NOK mill capital reserve investm. reserves lation Total
Balance at 1 January 2006 1,160.4 – 86.6 (999.7) (76.8) 170.5
Revaluation, net of tax – – (36.0) – – (36.0) Treasury shares: – Sale of Treasury Shares 35.8 – – 823.1 – 858.9 – Purchase of Treasury Shares – – – (1,056.6) – (1,056.6) Derivative contracts Treasury Shares – – – 14.3 – 14.3 Dividends – – – – – – Cash flow hedges:* – Fair value gains/(losses), net of tax – – – – – – – Transfers to net profit, net of tax – – – – – – Currency translation differences: – Group – – – – (81.1) (81.1) Transferred to retained earnings 130.0 130.0
Balance at 31 December 2006 1,196.2 – 50.6 (1,088.9) (157.8) –
Balance at 1 January 2007 1,196.2 – 50.6 (1,088.9) (157.8) –
Revaluation, net of tax – – – – – – Treasury Shares: – Sale of Treasury Shares (44.8) – – 894.8 – 850.0 – Purchase of Treasury Shares – – – (814.5) – (814.5) Derivative contracts Treasury Shares 1) – – – (32.1) – (32.1) Dividends – – – – – – Cash flow hedges:* – Fair value gains/(losses), net of tax – – – – – – – Transfers to net profit, net of tax – – – – – – Currency translation differences: – Group – – – – – – Transferred to retained earnings – – – (3.4) – (3.4)
Balance at 31 December 2007 1,151.4 – 50.6 (1,044.1) (157.8) (0.0)
100 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 17. Equity (continued) (continued) 1) Changes in derivative contracts Treasury Shares:
Premium, purchase of call option (247.0) Reclassification of premium call options exercised 208.7 Reversal of provision, written put options not exercised 195.8 Provision, written put option (189.6) Reclassification of settled forward contracts – Additional forward contracts purchased –
Total changes in derivative contracts Treasury Shares (32.1)
* Cash flow hedges: Fair value gains/(losses) indicates the fair value adjustment charged directly to equity this period for the remaining balance at the end of the period. Transfers to net profit indicates the opening balance adjustment for cash flow hedges realised in the period that has been transferred to the income statement.
Retained earnings Retained NOK mill earnings Total
Balance at 1 January 2005 314.4 314.4
Profit for the period 299.0 299.0 Dividend (40.3) (40.3)
Balance at 31 December 2005 573.1 573.1
Balance at 1 January 2006 573.1 573.1
Profit for the period 61.1 61.1 Dividend – – Transferred from other reserves (130.0) (130.0)
Balance at 31 December 2006 504.2 504.2
Balance at 1 January 2007 504.2 504.2
Profit for the period 1,006.3 1,006.3 Dividend – – Equity effect of disposal of subsidiary 858.1 858.1 Available-for sale-investments, revaluation net of tax 4.1 4.1 Currency translation differences group (172.9) (172.9) Transferred from other reserves 3.4 3.4
Balance at 31 December 2007 2,203.2 2,203.2
DNO International ASA Annual Report and Accounts 2007 | 101 Note Disclosures Note 17. Equity (continued) (continued) The Company’s shareholders at 31 December 2007 Shares % Interest
Goldman Sachs International 81,716,269 9.22 JP Morgan Chase Bank 55,059,544 6.21 Larsen Oil & Gas AS* 45,263,220 5.11 Morgan Stanley & Co. Inc. 34,027,923 3.84 ABG Sundal Collier Norge ASA 25,169,400 2.84 Euroclear Bank S.A/N.V. 16,126,551 1.82 Corleone II AS 16,000,000 1.81 Nordea Bank Norge ASA 12,422,201 1.40 Vital Forsikring ASA 10,951,359 1.24 Bear Stearns Securities Corp. 10,875,124 1.23 EGD Holding AS 10,000,000 1.13 JP Morgan Chase Bank, nominee account 9,649,217 1.09 Neumann Holding AS 8,800,000 0.99 Clearstream Banking S.A 8,682,941 0.98 State Street Bank and Trust Co., nominee account 8,085,191 0.91 Nordea Bank Denmark AS 8,032,323 0.91 Borea Noterte II 8,000,000 0.90 JP Morgan Bank Luxembourg S.A 7,520,191 0.85 DnB NOR Bank ASA 7,052,946 0.80 Other Shareholders 502,548,552 56.72
Total number of shares excluding Treasury Shares 885,982,952
Treasury Shares at 31 December 2007 18,873,960
Total number of shares including Treasury Shares 904,856,912
* Company controlled by Berge G. Larsen, Excecutive Chairman
102 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 18. Interest-bearing liabilities Years ended 31 December (continued) NOK mill 2007 2006 2005
Non-current Convertible loans – – – Bonds 1,976.4 1,754.3 1,396.5 Liabilities to financial institutions – – – Mortgage loans – – –
Total non-current interest-bearing liabilities 1,976.4 1,754.3 1,396.5
Current
Current portion of bonds – – – Liabilities to financial institutions 50.0 55.7 100.0
Total current interest-bearing liabilities 50.0 55.7 100.0
Total interest-bearing liabilities 2,026.4 1,810.0 1,496.5
In March 2006, DNO made a buy-back of the bonds DNO03 and DNO04. The bonds were refinanced with new bond issues maturing in 2011 and 2012. Costs related to the buy-back amounted to NOK 33.4 million.
On 27 February 2006, DNO signed a new bond loan facility for an amount up to NOK 1 billion, with funding on 2 March 2006.
The loan is issued at par (100%). DNO has a call option after three years at 103%. The initial issue under the loan facility, with a floating interest, was for an amount of NOK 200 million. On 18 August 2006 funding was increased by NOK 100 million.
As of 27 February 2006, DNO also made additional drawdowns on existing bond loan facilities with NOK 280 million on DNO06 and NOK 120 million on DNO07. Both loans mature in 2012. Loan funding took place on 2 March 2006.
On 8 November 2006, DNO funded a USD 25 million drawdown under the bond loan facility DNO05.
On 19 January 2007, DNO funded a NOK 300 million drawdown under the bond loan facility DNO07.
On 30 November 2007, DNO signed a new loan agreement for an amount of NOK 50 million with a floating interest. The loan matures on 28 November 2008.
There is one covenant related to the different bond loans, which requires that net interest-bearing debt should not exceed three times the booked equity. At 31 December 2007, DNO satisfies all loan agreement requirements.
DNO International ASA Annual Report and Accounts 2007 | 103 Note Disclosures Note 18. Interest-bearing liabilities (continued) (continued) DNO has had one finance leasing agreement related to a central production facility (CPF) in Yemen. The leasing period was 18 months, ending 31 March 2007. The discount rate used was 7%. The net carrying amount at 31 December 2007 is NOK 0.
Interest-bearing bonds:
Non-current interest-bearing bonds:
Effective Fair value Carrying amount interest NOK mill NOK mill Ticker Undrawn rate OSE Curr. Amount facility Interest Maturity 2007 2007 2006 2005 2007 2006 2005
(ISIN NO0010226574) DNO03 NOK 25.5 NIBOR+3.5% 01/06/09 8.24% 26.3 26.7 309.0 25.5 25.5 300.0 (ISIN NO0010226582) DNO04 NOK 29.0 Fixed 7.9% 01/06/09 7.92% 29.0 31.4 210.2 29.0 29.0 200.0 (ISIN NO0010270523) DNO05 USD 85.0 15.0 LIBOR+3.5% 06/06/12 8.89% 446.6 584.9 300.0 459.9 580.0 300.0 (ISIN NO0010283732) DNO07 NOK 615.5 84.5 Fixed 7.215% 12/10/12 7.22% 557.0 528.5 411.8 615.5 531.7 406.1 (ISIN NO0010283724) DNO06 NOK 580.0 420.0 NIBOR+3.5% 12/10/12 8.23% 579.9 306.8 199.5 580.0 315.5 200.0 (ISIN NO0010302649) DNO08 NOK 300.0 700.0 NIBOR+2.5% 02/03/11 7.21% 300.3 298.9 – 300.0 300.0 – Borrowing issue costs (33.5) (27.4) (9.7) (33.5) (27.4) (9.7)
Total interest-bearing bonds 1,905.6 1,749.8 1,420.9 1,976.4 1,754.3 1,396.5
The maturity of interest-bearing liabilities is as follows: Years ended 31 December NOK mill 2007 2006 2005
0 – 12 months 50.0 55.7 100.0 Between 1 and 2 years 54.5 – – Between 2 and 5 years 294.3 349.8 800.0 Over 5 years 1,627.6 1,404.5 596.5
Total interest-bearing liabilities 2,026.4 1,810.0 1,496.5
The carrying amounts of the Group’s interest-bearing liabilities are denominated in the following currencies: Years ended 31 December NOK mill 2007 2006 2005
NOK 1,574.9 1,279.5 1,100.0 USD 451.5 530.5 396.5
Total interest-bearing liabilities 2,026.4 1,810.0 1,496.5
104 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 19. Provisions for other liabilities and charges Years ended 31 December (continued) NOK mill 2007 2006 2005
Non-current Asset retirement obligations* 2.1 17.4 18.1 Other long-term obligations** 14.2 23.6 67.0
Total non-current provisions for other liabilities and charges 16.3 41.0 85.1
Current Withholding tax – – 21.8 Provisions, derivative contracts Treasury Shares*** 197.2 198.2 163.0 Other provisions and charges 63.3 139.4 39.6
Total current provisions for other liabilities and charges 260.6 337.6 224.3
Total provisions for other liabilities and charges 276.9 378.6 309.4
* Asset retirement obligations (AROs) are related to future well closure, decommissioning and removal expenditures for oil installations. The obligations are imposed and defined by national and international legal requirements.
According to the terms of production licenses on the Norwegian Shelf, the Group has a duty to remove offshore installations as required by the authorities upon termination of production or when the license expires. The asset retirement obligation is made on the basis of an assumed removal concept, based on the Norwegian Petroleum Act of 1996 and on international regulations and guidelines. The asset retirement obligation for 2005 and 2006 relates to PL048B Glitne and PL048D Enoch and consists of provision for plugging of wells and removal of well heads and pipelines. The asset retirement obligation is calculated at net present value with a discount rate of 8% and is expected to expire in 2010. The activities on the NCS were carried out through the Norwegian subsidiary NOIL Energy ASA, which was combined with Pertra ASA in November 2007. The asset retirement obligation for 2007 relates to the removal of wellhead in UK.
No significant removal costs are expected to accrue in connection with the on-shore activity in Yemen and Kurdistan. In accordance with the production sharing agreements, the production facilities and the operating equipment will be transferred to the authorities when the fields are no longer commercial.
** Royalty obligation to Unocal in connection with the acquisition of their 31.25% share of the West Heather/Broom field in 1997. The extent of the obligation is contingent on cumulative income exceeding cumulative expenditures at the Broom field. The total liability is currently estimated at USD 9.9 million, but is pending on future production performance of the field and development in oil prices. The liability expires in 2011 independent of the life of the field. After royalty payments made in 2007, the provision at year end is NOK 21.6 million, of which NOK 7.4 million is classified as current liabilities as this relates to estimated payments for 2008. The provision is based on forecasted production levels for the Broom field. The highest rate of royalty (USD 1.10 per boe) has been assumed in the calculations, implying an expected future oil price above 30 USD/bbl.
DNO International ASA Annual Report and Accounts 2007 | 105 Note Disclosures Note 19. Provisions for other liabilities and charges (continued) Asset Other Prov. (continued) retirem. non- treasury Other NOK mill oblig. current shares current Total
Balance at 1 January 2005 16.6 6.0 133.3 40.3 196.3
Charged to consolidated income statement: – Additional provisions 1.5 42.6 3.5 39.4 87.0 – Unused amounts reversed or reclassified – 18.4 (2.7) (18.4) (2.7) Charged to equity: – – Additional provisions – – 161.4 – 161.4 – Unused amounts reversed – – (75.3) – (75.3) – Contracts exercised – – (57.3) – (57.3) Exchange differences incurred and charged against the provision during the period – – – – –
Balance at 31 December 2005 18.1 67.0 162.9 61.3 309.4
Charged to consolidated income statement: – Additional provisions 1.2 – 2.4 109.9 113.5 – Unused amounts reversed or reclassified – (13.8) (1.6) 13.8 (1.6) Charged to equity: – Additional provisions – – 195.8 – 195.8 – Unused amounts reversed – – (161.4) – (161.4) – Contracts exercised – – – – – Exchange differences incurred and charged against the provision during the period (1.9) (29.6) (0.0) (45.6) (77.1)
Balance at 31 December 2006 17.4 23.6 198.2 139.4 378.6
Charged to consolidated income statement: – Additional provisions 51.8 – 3.6 29.5 85.0 – Unused amounts reversed or reclassified (67.2) – (2.4) – (69.6) Charged to equity: – Additional provisions – – 193.6 – 193.6 – Unused amounts reversed – – (195.8) – (195.8) – Contracts exercised – – – – – Exchange differences incurred and charged against the provision during the period – (9.3) – (105.6) (114.9)
Balance at 31 December 2007 2.1 14.2 197.2 63.3 276.9
The effect of a change in the discount rate in 2006, related to the asset retirement obligation for Glitne, amounts to NOK 0.44 million.
106 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 19. Provisions for other liabilities and charges (continued) (continued) Forward contracts and written put options are recognised as liabilities with a corresponding adjustment to equity. Option premiums are recognised as equity.
*** Provisions Treasury Shares (NOK mill)
Forward contracts, Treasury Shares – Written put options, Treasury Shares 197.2
Total provisions Treasury Shares 197.2
Note 20. Commitments and contingencies
a) Lease obligations The Group has no operational lease obligations.
DNO rents the premises at Stranden 1, Aker Brygge. The annual rent is NOK 3.6 million and the agreement expires 30 June 2014.
b) Legal disputes At 31 December 2007 DNO International ASA group is not subject to any legal disputes. All previous legal disputes have been settled.
c) Expected contractual obligations/license commitments The Group has the following expected obligations relating to its interests in own and partner-operated oil and gas fields:
Expected contractual obligations/license commitments (NOK million) 2008
Drilling and exploration 594.0 Field development 401.5
Total contractual obligations/license commitments related to future investments 995.5
d) Guarantees at 31 December 2007
NOK mill Continued Discontinued Total
Parent Company guarantees to external parties on behalf of companies in the group – – – Other Parent Company guarantees to external parties – – – Other guarantees to external parties 1.2 – 1.2
Total guarantees 1.2 – 1.2
DNO International ASA Annual Report and Accounts 2007 | 107 Note Disclosures Note 20. Commitments and contingencies (continued) (continued) In addition to the above mentioned guarantees, Parent Company guarantees have been issued to the Kurdistan Regional Government and the Ministry of Oil and Minerals Yemen for PSA obligations.
e) Liability for damages/insurance The Group’s operations involves risk for damages, including pollution. Installations and operations are covered by an operations insurance policy.
f) Other The Parent Company is subject to an ongoing tax audit for the period 1996– 2004. The Board expects no material effects from the audit.
Note 21. Trade and other payables
Years ended 31 December NOK mill 2007 2006 2005
Trade creditors 26.9 9.5 8.3 Public duties payable 3.0 6.8 16.3 Prepayment from customers – – – Debt to employees and shareholders – – – Other accrued expenses 74.6 163.8 104.7 Overlift, entitlement method – 2.1 –
Total trade and other payables 104.6 182.1 129.3
Terms and conditions of the above financial liabilities: Trade payables are non-interest bearing and are normally settled on 30 to 60 day terms.
Other payables are non-interest bearing and have an average term of one to two months.
108 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 22. Earnings per share Years ended 31 December (continued) NOK mill 2007 2006 2005
Net profit attributable to ordinary equity holders of the parent 1,006.3 61.1 299.0
Weighted average number of Ordinary Shares (excluding Treasury Shares) 883.8 886.0 879.9
Effect of dilution: Options – 2.4 1.5
Weighted average number of Ordinary Shares (excluding Treasury Shares) adjusted for the effect of dilution 883.8 888.5 881.4
Earnings per share, basic 1.14 0.07 0.34 Earnings per share, diluted 1.14 0.07 0.34
Earnings per share, basic for continuing operations 0.10 0.11 0.30 Earnings per share, diluted for continuing operations 0.10 0.11 0.30
Earnings per share adjusted for share split as of 22 June 2005 and share split as of 15 June 2006.
Basic earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of Ordinary Shares in issue during the period, excluding Ordinary Shares purchased and held as Treasury Shares.
Diluted earnings per share is calculated by adjusting the weighted average number of Ordinary Shares outstanding to assume conversion of all dilutive potential Ordinary Shares.
DNO International ASA Annual Report and Accounts 2007 | 109 Note Disclosures Note 23. Share options and Share-Based Payments (continued) Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: 2007 2006 2005 NOK per share if not otherwise stated Avg Avg Avg exercise Options exercise Options exercise Options price (1,000)* price (1,000)* price (1,000)*
At 1 January 5.9 4,800.0 4.6 6,400.0 1.1 3,400.0 Granted – – – – 6.1 4,800.0 Forfeited – – – – – – Exercised 5.9 (4,800.0) 0.5 (1,600.0) 1.1 (1,800.0) Lapsed – – – – – –
At 31 December – – 5.9 4,800.0 4.6 6,400.0
* Adjusted for share split approved by the General Assembly in June 2005 and June 2006.
A total of 1.2 million Ordinary Share options were granted to board members at the General Assembly in June, 2005, of which all are exercisable. The exercise price of the granted options is equal to the market price of the shares on the date of the grant (22 June 2005). The options expired 21 June 2007. The options are settled in equity.
In addition, a share-based bonus scheme exists. Refer to note 5 for further information.
The fair value of the options granted to the Board has been determined using the Black-Scholes valuation model. The significant inputs in the model were share price at the grant date (adjusted for split and dividend), exercise price of NOK 24.41, risk-free interest rate 2.50%, and expected exercise after 18 months. Volatility is based on historic volatility.
Since the options granted have no vesting conditions, the fair value of the options granted, estimated to total NOK 5,7 million, has been booked in full to equity in 2005 with a corresponding entry to the income statement. No options have been granted in 2006 or 2007.
Note 24. Group companies
Ownership Business and voting NOK mill address interest (in %) Share capital
DNO Yemen AS Oslo 100.0 291.0 DNO UK Ltd London 100.0 0.0 DNO Invest AS Oslo 100.0 2.0 DNO Iraq AS Oslo 100.0 0.6
110 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 25. Related party disclosure (continued) The following table provides details of the Group’s related party transactions in 2007. See also note 5 on remuneration.
Years ended 31 December Related party (NOK mill) Transaction 2007 2006 2005
Increased Oil Recovery Ltd Sub rent of DNO apartment (terminated) 0.2 0.6 0.7 Sub rent of DNO London office 1.0 0.7 1.3
Increased Oil Recovery AS Project consulting agreement 4.2 4.2 3.7
Kver AS Bergen office – administration agreement 1.7 1.9 1.9
Hartlepool United FC Sponsor agreement (terminated) – 1.2 1.2
Other Consulting services 0.8 0.8 0.8 Seismic services (InSeis AS) – – 1.9 EM data – Farm-in Jaguar (Rocksource) – – 0.2 Coverage of legal costs of tax audit 3.4 1.6 –
11.3 11.0 11.7
Description of transactions with related parties:
Increased Oil Recovery AS (IOR AS) – Closely related party At 31 December 2007, Berge G. Larsen holds a 28% ownership interst in Increased Oil Recovery AS, and 49% is owned by a closely related party to Berge G. Larsen. DNO has a consultancy agreement with IOR AS, which states that IOR AS has a consulting agreement with IOR Ltd. IOR Ltd has a part time employment agreement with Berge G. Larsen.
Through this series of agreements, IOR Ltd/AS provides DNO with project consulting services. For 2006 and 2007, IOR Ltd/AS has not drawn the fee.
In 1996 IOR AS transferred free of charge the strategy of a new type of oil company to DNO on the condition that if the strategy proved successful, IOR AS would be compensated. The strategy proved successful and in 2002 the Board offered 3 million option shares, well above market price, which the General Meeting the same year cancelled by a group trying to take control over DNO. No other compensation has so far been paid.
Kver AS – Closely related party Berge G. Larsen owns 51% of Kver AS. DNO has entered into an administrative agreement with the company. Under the agreement, DNO is required to pay office lease, ICT expenses and secretarial and travel expenses in Bergen.
DNO International ASA Annual Report and Accounts 2007 | 111 Note Disclosures Note 25. Related party disclosure (continued) (continued) Increased Oil Recovery Ltd (IOR Ltd) – Related party Berge G. Larsen is part time employed by Increased Oil Recovery Ltd (IOR Ltd) and holds an indirect ownership of 32% in the company. Subrent of the DNO London office and London appartment is paid through IOR Ltd. IOR Ltd receives a 5% handling fee for administration of the office and appartment agreements. The sub rent agreement has been terminated.
Hartlepool United FC – Related party DNO International ASA has a sponsor agreement with Hartlepool United FC in the United Kingdom, in which IOR Ltd owns a 93.79% interest. In 2007, no sponsor contribution has been paid to Hartlepool United FC and the agreement has been terminated.
Dove Energy Inc. – Network party A company not controlled by Berge G. Larsen (minority shareholder), owns indirectly a minority interest in Independent Oilfield Rentals (IOR) Ltd which owns Dove Energy Inc. Dove is operator of Block 53 in Yemen and Block 6 in Syria where DNO is a partner.
Other Bjørge Gretland, previous member of the Board, receives an annual payment of NOK 0.8 million for financing, restructuring and other services provided to DNO International ASA and its subsidiaries.
Anders Farestveit, previous Vice-Chairman of the Board, owns 9.6% of the company Wavefield Inseis ASA. The company provided seismic services for DNO in 2005.
Coverage of legal costs of tax audit relates to costs incurred by DNO, DNO companies and companies associated with key personnel in DNO. A final settlement will be made when the case is closed.
In addition to the above mentioned transactions, there are also transactions between Group companies.
Overhead expenses in the Parent Company DNO International ASA, are allocated to the subsidiaries based on how much they have used the services provided by the Parent Company.
Licenses have been sold from the Parent Company DNO International ASA to the subsidiary DNO Yemen AS at market prices.
112 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 26. Significant transactions in 2007 and Events after the balance sheet date (continued) Significant transactions in 2007 Restructuring of Norwegian operations In June 2007, DNO announced its intention to carry out a private placement towards existing shareholders and new investors followed by a subsequent offering in its wholly owned Norwegian subsidiary Det Norske Oljeselskap ASA. The transactions were carried out as the first step to support Det Norske Oljeselskap’s ambition to become the largest Norwegian independent E&P company on the Norwegian Continental Shelf (NCS). Det Norske Oljeselskap was immediately after the private placement registered over the counter (OTC) and had an intention to apply for a listing on the Oslo Stock Exchange within 12 months. In October 2007, DNO announced that an integration agreement had been entered into with Pertra ASA and DNO’s subsidiary Det Norske Oljeselskap ASA in order to combine the two companies and thereby creating the second largest Norwegian oil company.
The combination of the companies was structured as an exchange offer put forward by Pertra. The parties pre-agreed that DNO would hold a maximum of 39.97% of the combined company. Prior to the exchange offer, DNO made a secondary sale of shares in Det Norske Oljeselskap ASA to professional and institutional investors, bringing the DNO shareholding in the subsidiary down to approximately 60%.
As a consequence, Pertra would swap all, or the majority of the outstanding shares in Det Norske Oljeselskap ASA with an exchange ratio set to 3:1 (3 existing shares in Det Norske Oljeselskap gave 1 new share in Pertra). The combination was approved by the General Meeting in all three companies on 8 November 2007. The government approved the transaction on 13 November 2007.
Subsequent to the combination, Det Norske Oljeselskap ASA changed its name to NOIL Energy ASA, Pertra ASA changed its name to Det norske oljeselskap ASA, and DNO ASA changed the name to DNO International ASA.
The restructuring of DNO’s Norwegian activities gave a net profit of NOK 915 million for 2007. In addition, DNO strengthened its cash position by approximately NOK 660 million following the initial sell down prior to the transaction.
DNO’s shareholding in Det norske oljeselskap ASA (previously Pertra ASA) is regarded as an investment in an associated company and is accounted for using the equity method.
As a result of the divestment of the Norwegian subsidiary NOIL Energy ASA in November 2007, information about significant transactions in 2007 for this company is not included in this note.
Commencement of test production in Kurdistan region of Iraq In June 2007, DNO started extended test production from wells at the Tawke Field in Kurdistan in order to gather additional reservoir – and well-productivity information. The produced volumes during test production has been delivered to the domestic market by tanker trucking.
Revised reserve estimates for Tawke In December 2007, DNO announced new revised estimates of oil volumes in Tawke, based on the latest data available and initial results from the reservoir modelling studies utilizing such data. The new estimates of the oil volumes in the Tawke field was presented to be (100% basis):
• The gross volumes of oil in place range from 0.9 million barrels to 1.9 billion barrels with a current expected value of 1.3 billion barrels. DNO International ASA Annual Report and Accounts 2007 | 113 Note Disclosures Note 26. Significant transactions in 2007 and Events after the balance sheet date (continued) (continued) • The gross recoverable oil reserves range from 150 million barrels to 370 million barrels, with a current expected value of 230 million barrels.
Award of new license in Yemen Through a farm-in in July 2007, DNO acquired a 57.78% participating interest as operator in Block 52 in Yemen. Block 52 is located in the Sayun-Masila Basin, close to DNO’s existing license interests in Yemen. The farm-in is based on a work program commitment consisting of seismic data acquisition and the drilling of exploration wells.
Following the farm-in, the license partners in Block 52 consists of DNO (57.78%), Ansan Wifks (22.22%) and The Yemen Company (20% carried).
Revisions of reserves in Yemen During the fourth quarter of 2007, adjustments of the reserve estimates in Yemen were made. The basis for the reserve updates were production history, recent drilling and well results and updated geological/geophysical evaluations which indicated lower remaining reserves than previously expected. The net reduction in remaining reserve estimates for DNO in Yemen was approximately 10.0 mboe and had an effect on depreciations charges in the fourth quarter of approximately NOK 50 million.
There is still work to be undertaken in order to complete the reserve assessment. A full status report of the reserves will be given in the Annual Statement of Reserves (ASR).
Plan for development and operations (PDO) – Equatorial Guinea A plan for development of the Green Sand structure, where DNO has a 5% working interest, was submitted to the authorities in August 2007.
Clarifications concerning the development plan and concept solutions are ongoing with the authorities.
Award of new license in Yemen In February 2007, DNO’s subsidiary, DNO UK Limited, was awarded 40% (as partner) in UK block 21/16b. Elixir Petroleum (UK) Limited serves as operator (40%) on the license. Sosina Exploration Limited is also a partner in the license (20%).
Bond loan drawdown In January 2007, DNO made a drawdown on the bond loan facility DNO07 of NOK 300 million. This issue was combined with the existing tranche of NOK 320 million, bringing the total issue size under this facility up to NOK 620 million.
Events after the balance sheet date Dry well – Yemen The Berhout #1 exploration well in block 32 commenced drilling in November 2007 and was drilled to a total depth of 1,821 meters. The well was dry and subsequently plugged and abandoned.
114 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 26. Significant transactions in 2007 and Events after the balance sheet date (continued) (continued) Ongoing exploration drilling Yemen The Yaalen #1 well in Block 47 commenced drilling on 4 January 2008 and is the first exploration well drilled by DNO in this license. The Dahgah #1 exploration well in Block 43 commenced drilling on 9 January 2008.
Kurdistan region of Iraq The Hawler #1 well commenced drilling on 14 November 2007 as the first well in the Erbil PSC area.
The Summail Extension #1 well commenced drilling on 19 November 2007. The Summail Extension prospect is located in the south-western area of the Dohuk PSC.
Amendments to Production Sharing Contracts (PSC) in Kurdistan region of Iraq In accordance with the local Petroleum Law approved by the Kurdish Parliament, the PSCs held by DNO have been reviewed by a committee appointed for such purposes. Following this review there are three PSCs as follows:
Tawke PSC Dohuk PSC Erbil PSC
Working interest 55% 40% 40% Paying interest 68.75% 50% 50% Royalty 10% 10% 10%
The purpose of the amendments was to bring the PSCs into conformity with the Oil and Gas Law of the Kurdistan Region of Iraq and the standard commercial terms published by the KRG last year, including royalty, cost recovery and profit sharing components.
The additional terms and participating interests will be disclosed by Kurdistan Regional Government in due course.
Potential claim – PSCs in Kurdistan In connection with the above mentioned review of the PSCs in Kurdistan, DNO is facing a potential claim related to third party assignments. No provision has been made in the financial accounts.
Note 27. Dividends paid and proposed
Ordinary distribution of dividend No ordinary dividend has been distributed in 2007.
Extraordinary distribution of dividend No extraordinary dividend has been distributed in 2007.
Proposed dividends No dividends have been proposed for 2007.
DNO International ASA Annual Report and Accounts 2007 | 115 Note Disclosures Note 28. Working interest proven and probable reserves and resources* after (continued) royalty (unaudited) Million boe NORTHERN EUROPE YEMEN KURDISTAN AFRICA DNO GROUP Reserves Resources Reserves Resources Reserves Resources Reserves Resources Reserves Resources Total
31 December 2005 0.8 35.1 53.5 – – – – – 54.3 35.1 89.4
Discoveries, additions and extensions 0.4 30.0 4.6 4.4 55.0 3.6 – 1.3 59.9 39.3 99.3 Acquisition of reserves/resources – – – – – – – – – – – Divestment of reserves/resources – (3.0) – – – – – – – (3.0) (3.0) Revision of previous estimates 0.3 – (29.4) – – – – – (29.1) – (29.1) Other – – – – – – – – – – – Year 2006 production (0.4) – (5.0) – – – – – (5.4) – (5.4)
31 December 2006 1.1 62.1 23.7 4.4 55.0 3.6 – 1.3 79.7 71.4 151.2
Discoveries, additions and extensions – – – – 88.4 (3.6) – – 88.4 (3.6) 84.8 Acquisition of reserves/resources – – – – – – – – – – – Divestment of reserves/resources (1.1) (62.1) – – – – – – (1.1) (62.1) (63.2) Revision of previous estimates – – (10.0) (0.9) – – – 0.2 (10.0) (0.7) (10.7) Other – – – – – – – – – – – Year 2007 production – – (4.2) – (1.0) – – – (5.3) – (5.3)
31 December 2007 – – 9.5 3.5 142.3 – – 1.5 151.8 5.0 156.8
Associated reserves and resources 31 December 2007 2.9 44.7 2.9 44.7 47.7
Total reserves and resources 31 December 2007 2.9 44.7 9.5 3.5 142.3 – – 1.5 154.7 49.7 204.5
* Reserves according to DNO’s Annual Statement of Reserves, classification as in Norwegian Petroleum Directorate (NPD) class 1-3. The resources corresponds to class 4, 5 and 7 in the definitions from NPD. The figures represent best estimate (P50 base case).
As discussed in the accounting principles, estimation of oil and gas reserves and resources involves uncertainty. The figures above represent the management’s opinion of what is the most likely quantity of oil and gas that will be recovered from the fields, given the information available at year end. The estimates have a large spread especially in fields where we have limited data. The uncertainty will be reduced as more information becomes available through production history and reservoir information.
Discoveries in 2006 relate to the Tawke field in Kurdistan, the Goliat field in Norway, Godah, Bayoot and Hekma in Yemen and Equatorial Guinea in Africa. Revision relates to the Nabrajah field. Discoveries in 2007 relate to the Tawke field where there has been an upgrade of the gross reserves from 100 mboe to 230 mboe. Further on, revisions were made in all Yemen fields, where Nabrajah was the largest with 7.2 mboe in reduction. The sale of the Norwegian subsidiary (holding assets in the Norwegian Continental Shelf) has been classified as divestment and amounts to 63.2 mboe in 2007. In Equatorial Guinea a PDO was submitted and the resource base was revised.
116 | DNO International ASA Annual Report and Accounts 2007 Note Disclosures Note 28. Working interest proven and probable reserves and resources* after (continued) royalty (unaudited) (continued) Associated reserves and resources represent DNO’s shareholdings in Det norske oljeselskap ASA (‘Det norske’). The reported reserves and resources in Det norske at 31 December 2007 was a total of 129 million barrels of oil equivalents, and DNO’s ownership was 36.92%.
Working interest share in Yemen and Kurdistan includes DNO’s share of cost oil resulting from carried interests.
The production in 2006 and 2007 includes diesel volumes used as fuel.
The following table reflects DNO’s net entitlement (after royalty) proven and probable reserves*
NORTHERN EUROPE YEMEN KURDISTAN AFRICA DNO GROUP Million boe Reserves Reserves Reserves Reserves Reserves
31 December 2005 0.8 28.1 – – 28.9 31 December 2006 1.0 14.1 22.7 – 37.9 31 December 2007 – 5.8 49.5 – 55.3
Net entitlement reserves in Yemen and Kurdistan are based on economic evaluations of the Production Sharing Contracts and include a volume related to the notional tax paid on behalf of the contractors by the government.
* Reserves according to NPD class 1-3 only. Associated reserves from shareholdings in Det norske oljeselskap ASA have not been included.
DNO International ASA Annual Report and Accounts 2007 | 117 Parent Company Accounts Contents 119 Profit and Loss Statements 120 Balance Sheets 122 Cash Flow Statements
Notes to the Accounts 123 1 Accounting Principles 126 2 Other operating revenues 126 3 Remuneration, severance pay, salaries, options and pensions 130 4 Other operating expenses 130 5 Net other financial items 131 6 Taxes 132 7 Property, plant and equipment 133 8 Subsidiaries and investment in associates 133 9 Other current receivables 133 10 Cash and cash equivalents 134 11 Shareholders equity 134 12 Guarantees and commitments 134 13 Interest-bearing liabilities 135 14 Current liabilities 135 15 Financial Instruments and Risk Management 135 16 Health, Safety and the Environment 135 17 Related parties disclosure 135 18 Events occurring after the balance sheet date 136 19 Money Market Funds 136 20 Earnings per share 136 21 Intercompany
137 Auditor’s Report 138 Glossary and Definitions
118 | DNO International ASA Annual Report and Accounts 2007 NOK 1,000 Note 2007 2006 Profit and loss statements 1 January – 31 December Operating revenues Other operating revenues 2 2,348,050 33,379
Total operating revenues 2,348,050 33,379
Operating expenses Exploration expenses 71,225 45,035 Ordinary depreciation 7 410 655 Payroll and payroll-related expenses 3 24,193 13,608 Other operating expenses 4 28,008 15,563 Total operating expenses 123,836 74,860
OPERATING PROFIT/(LOSS) 2,224,214 (41,481)
Net other financial items 5 (69,694) 59,219
PROFIT/(LOSS) BEFORE TAXES 2,154,520 17,739
Income taxes 6 – 54,000
ANNUAL PROFIT/(LOSS) 2,154,520 71,739
Transferred from/to other equity 2,154,520 71,739
Total allocations 2,154,520 71,739
Earnings per share, basic 20 2.38 0.07 Earnings per share, diluted 20 2.38 0.07
DNO International ASA Annual Report and Accounts 2007 | 119 As at 31 December Balance sheets Assets Note 2007 2006 (NOK 1,000) FIXED ASSETS Intangible assets Deferred tax assets 6 250,000 250,000
Total intangible assets 250,000 250,000
Tangible assets Oil and gas fields 82,759 48,638 Other tangible assets 808 1,076
Total tangible assets 7 83,567 49,714
Financial assets Shares in subsidiaries 8 1,014,116 707,616 Investment in associates 8 1,917,358 – Intercompany receivables 21 1,369,503 1,570,707 Other investments 11 – Long-term receivables – –
Total financial assets 4,300,988 2,278,323
Total fixed assets 4,634,555 2,578,037
CURRENT ASSETS Inventories, trade and other receivables 9 24,608 4,825 Money market funds 19 63,322 50,957 Derivative financial instruments 15 814 7,655 Cash and cash equivalents 10 684,409 219,779
Total current assets 773,153 283,216
TOTAL ASSETS 5,407,708 2,861,254
120 | DNO International ASA Annual Report and Accounts 2007 Balance sheets (continued) As at 31 December (NOK 1,000) Assets Note 2007 2006 SHAREHOLDERS’ EQUITY Paid-in capital Share capital 226,214 226,214 Treasury Shares (4,718) (5,918) Share premium account 32,456 32,456 Other paid-in capital 178,225 176,973
Total paid-in capital 432,176 429,725 Oslo, 27 March 2008 Retained earnings Retained earnings 2,695,856 541,335
Total retained earnings 2,695,856 541,335
Berge Gerdt Larsen Non-executive Chairman Total shareholders’ equity 11 3,128,032 971,060
LIABILITIES Provisions for liabilities and charges Other liabilities and charges 12 21,688 37,413 Trygve Bruvik Executive Vice-Chairman Total provision for liabilities and charges 21,688 37,413
Other long-term liabilities Long-term interest bearing intercompany debt 21 130,586 – Elin Karfjell Non-executive Director Bond loan 13 1,976,448 1,754,287
Total other long-term liabilities 2,107,034 1,754,287
Current liabilities Interest-bearing short-term debt 13 50,000 50,000 Gunnar Hirsti Non-interest bearing short-term debt 14 100,955 48,494 Non-executive Director Total current liabilities 150,955 98,494
Total liabilities 2,279,676 1,890,194 Marit Instanes Non-executive Director TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 5,407,708 2,861,254
Collateral 13 Guarantees 12 Financial instruments 15
Helge Eide Managing Director
DNO International ASA Annual Report and Accounts 2007 | 121 Years ended 31 December Cash flow statements Note 2007 2006 (NOK 1,000) Operating activities Profit before tax 2,154,520 17,739 Taxes paid 6 – – Depreciation and write-down of tangible and intangible assets 7 410 655 (Gain)/loss on sale of operating assets and securities (2,340,479) (51,287) Changes in net current assets and other accruals 110,001 (259,187)
Net cash flow from operating activities (75,548) (292,081)
Investing activities Proceeds from sale of subsidiaries 629,979 – Acquisition of subsidiaries 8 (500,000) (462,986) Payments made for investments in oil and gas field 7 (34,263) (22,338) Payments received on disposal of tangible fixed assets – 37,779 Payments made for acquisitions of bonds, securities, stocks and shares (10,000) (50,957) Payments received on disposal of bonds, securities, stocks and shares (11) 54,232 Net cash flow from other investments and sales 201,205 313,571
Net cash flow from investing activities 286,910 (130,700)
Financing activities New interest-bearing debt 13 300,000 357,830 Repayment of interest-bearing debt 13 – (50,000) Purchase of Treasury Shares and options 11 (1,721,588) (1,038,819) Sale of Treasury Shares and options 11 1,725,290 886,251 Dividend paid in cash 11 – –
Net cash flow from financing activities 303,702 155,262
Effects of change in currency (cash and cash equivalents) (49,183) (49,058)
Cash and cash equivalents 1 January 219,779 536,354 Net change in cash and cash equivalents 464,630 (316,576)
Cash and cash equivalents 31 December 10 684,409 219,779
122 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 1. Accounting principles General The financial statements are presented in accordance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles. The accompanying notes are an integral part of the financial statements.
Use of Estimates The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reported periods. Actual results could differ from those estimates.
Functional currency The financial statements are presented in Norwegian Kroner (NOK), which is the functional and presentation currency of the Company.
Consolidated financial statements The consolidated financial statements of the DNO Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and have been presented separate from the Parent Company accounts.
Investments in subsidiaries and associated companies Investments in subsidiaries and associated companies are recorded at historical cost.
If expected discounted future cash flow from the investment is lower than the carrying value of the investment, an impairment charge is recorded and a new cost basis of the investment is established.
Valuation and classification of balance sheet items Assets and liabilities linked to the flow of goods are classified as current assets and current liabilities. Receivables and liabilities not relating to the flow of goods are classified as current assets or current liabilities if they are short-term, that is normally due within one year. Shares and investments not intended for permanent ownership are classified as current assets.
Other assets are classified as fixed assets and other liabilities as long-term liabilities.
Shares, bonds, certificates, etc. Shares, bonds, certificates, etc. classified as current assets are valued at the lower of their historical cost and market value. Other shares classified as fixed assets are valued at their cost price and written down in the case of permanent and significant decline in value. Money market funds are valued at fair value.
Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with insignificant interest rate risk and with original maturities of three months or less.
Property, plant & equipment Property, plant and equipment are carried at cost less accumulated depreciation and impairment charges. Capital lease assets are recorded at the present value of future lease obligations or fair value if lower.
DNO International ASA Annual Report and Accounts 2007 | 123 Notes to the Accounts Note 1. Accounting principles (continued) (continued) Capitalised costs for oil & gas properties are depreciated using the unit-of-production method. The rate of depreciation is equal to the ratio of oil and gas production for the period to proved and probable developed reserves. In addition to capitalised cost, estimated future investments, that have been considered in the calculation of the Company’s reserves, are added to the basis for depreciation. For capitalised acquisition costs, the rate is equal to the ratio of oil and gas production for the period to proved and probable reserves.
The Company records impairment provisions when the book value of oil and gas fields, or other assets where separate cash flows can be identified, exceeds discounted future expected cash flows. The impairment amount is the difference between the book value and the fair value of the asset. Capitalised costs relating to production are depreciated under the unit-of-production method.
Liabilities relating to the acquisition of license interests for which the Company has entered into long-term bank financing agreements are classified as long-term liabilities.
Amortisation of capital lease assets is included in ‘Depreciation, depletion and amortisation’.
Machinery and equipment is depreciated using straight-line method based on estimated useful life. Estimated useful life varies between 3-5 years for these assets.
Exploration and development costs for oil and gas properties The Company employs the ‘Successful Efforts’ method to account for exploration and development costs. All exploration costs, with the exception of acquisition costs of licenses and drilling costs of exploration wells, are charged to expense as incurred. Drilling costs of exploration wells are temporarily capitalised pending the evaluation of potential existence of oil and gas reserves. If reserves are not found, or if discoveries are assessed to not be technically and commercially recoverable, the drilling costs of exploration wells are expensed. Costs of acquiring licenses are capitalised and periodically assessed for impairment. All costs of developing commercial oil and/or gas fields are capitalised. Preproduction costs are expensed as incurred.
Interest expenses and own expenses relating to development projects Interest expenses and own expenses relating to development projects are capitalised and depreciated under the unit-of-production method. Expenses related to financing are capitalised and amortised over the loan period.
Leases Leases that substantially transfer all the risks and rewards of ownership to DNO (financial leasing) are recognised as assets in PP&E at the present value of the minimum lease payments, or if lower, at fair value. The assets are amortised according to plan. The instalment part of the lease obligation is classified as interest-bearing debt in the balance sheet. The obligation is reduced by paid rent after deduction of estimated interest expense. The interest expense is recorded as a financial expense. Operational leases are expensed as incurred.
Deferred taxes Deferred taxes are computed according to the liability method. Based on the tax rates and tax provisions applicable on the balance sheet date, deferred taxes are computed on temporary differences between the carrying amount of the Company’s assets and liabilities in the financial statements and the carrying amount of the Company’s assets and liabilities for tax purposes. The effect of uplift is recognised as earned at the time when investments are made in qualifying assets. Deferred tax benefits and deferred tax liabilities in the same tax regime are netted in the balance sheet. Capitalisation of deferred tax benefit presupposes that future application can be rendered possible. 124 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 1. Accounting principles (continued) (continued) Pension obligations The Company records pension schemes according to the Norwegian accounting standard for pension costs. The Company has contribution plans for its employees. For contribution plans, only the contributions paid during the period are expensed.
Revenue Recognition Revenue from sale of goods are recorded at the time of delivery. Revenue from services are recorded when the service has been performed.
Maintenance and repairs Maintenance and repairs are expensed as incurred. Significant costs considered to increase the production capacity or to extend the useful economic life of the facilities are capitalised.
Financial instruments, etc. The Company uses various financial instruments to manage its exposure to fluctuations in exchange rates, interest rates and commodity price risks. Instruments meeting hedging criteria are valued together with the hedged item (unrealised gains/losses are not recognised). Instruments not meeting hedging criteria, are valued in separate portfolios at the lower of their historical cost and market value (unrealised losses are expensed). Unrealised gains are not taken to income.
Foreign currency transactions Cash items denominated in foreign currencies are converted using exchange rates on the balance sheet date. Realised and unrealised currency gains and losses are included in the annual profit/(loss). Foreign currency transactions are recorded using exchange rates on the date of transaction.
Options to the directors of the board and management See note 1 about Accounting principles in the consolidated accounts for information regarding options.
Allowance for doubtful accounts Allowances for doubtful accounts are made for foreseeable losses on trade receivables.
Contingent gains/losses According to Norwegian accounting standards relating to contingent items, provisions are made for contingent losses that are probable and quantifiable, while contingent gains are not taken to income.
Cash flow statement The cash flow statement is based on the indirect method. Cash equivalents include bank deposits and liquid funds maturing in less than three months.
Comparable figures Comparable figures for previous years have been prepared to reflect changes in accounting principles and presentation (classification).
DNO International ASA Annual Report and Accounts 2007 | 125 Notes to the Accounts Note 2. Other operating revenues (continued) NOK 1,000 2007 2006
Other operating revenues 7,571 – Gains from sale of license interests1) – 33,379 Gains from sale of subsidiaries2) 2,340,479 –
Total other operating revenues 2,348,050 33,379
1) Gains from sale in 2006 relates to an internal group transaction where Block 44 and Block 72 in Yemen was sold to the subsidiary DNO Yemen AS.
2) Gains from sale of subsidiary relates to sale of shares in NOIL Energy ASA. For further information related to the sale, see note 9 in the consolidated accounts.
Note 3. Remuneration, severance pay, salaries, options and pensions
NOK 1,000 Payroll expenses 2007 2006
Salaries, bonuses, options etc. 21,022 16,447 Employer’s payroll tax expense incl. payroll tax on options1) 2,761 (3,400) Pensions 426 396 Other personnel costs 1,197 790 Reclass. of payroll and payroll-related expenses to Exploration and Production (1,213) (626)
Payroll and payroll-related expenses 24,193 13,608
Average number of man-labour years 10.3 7
1) Hereof reversal of accrued social security of KNOK 5.524 in 2006.
Payroll expenses relating to participation in non-operated licenses are classified as exploration and production costs in the profit and loss statement.
PensionS DNO has a defined contribution scheme for employees in the Company. The pension costs in the 2007 accounts are related only to premiums for the employees of the Company. DNO meets the Norwegian requirements for mandatory occupational pension (‘obligatorisk tjenestepensjon’).
126 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 3. Remuneration, severance pay, salaries, options and pensions (continued) (continued) Director, executive and key management remuneration Remuneration to the Directors of the Board
NOK 1,000 2007 2006
Berge G. Larsen, Executive Chairman1) 205,000 210,000 Trygve Bruvik, Vice Chairman 180,000 185,000 Elin Karfjell, board member – – Marit Instanes, board member – – Gunnar Hirsti, board member – – Anders Farestveit, former Vice-Chairman 180,000 185,000 Bjørge Gretland, board member 180,000 185,000 Helge Eide, Managing Director and board member 230,000 222,500
Total 975,000 987,500
Hereof, NOK 925,000 relates to Director’s fees for DNO International ASA in 2007.
1) Consultant fees to Increased Oil Recovery Ltd for hire of executive chairman management services were NOK 4.2 million in 2007 (NOK 4.2 million in 2006). No severance pay agreement has been entered into with the executive chairman.
Remuneration to Managing Director and key managment in 2007 Other incl options (NOK mill) Salary Bonus Pension excercised Total
Helge Eide, Managing Director and Executive Director 3.67 0.03 0.05 9.37 13.12 Ivar Brandvold, Chief Operating Officer 1.28 – 0.04 0.02 1.34 Tore Lilloe-Olsen, Corporate Head of Exploration 0.50 – – – 0.50 Haakon Sandborg, Chief Financial Officer 1.94 0.17 0.04 – 2.15 Magne Normann, Managing Director, DNO Iraq AS 4.36 0.23 0.05 0.83 5.47 Sven Erik Lie, Managing Director, DNO Yemen AS – – – 3.13 3.13
No loans have been granted and no guarantees have been issued for executives, shareholders or directors.
DNO International ASA Annual Report and Accounts 2007 | 127 Notes to the Accounts Note 3. Remuneration, severance pay, salaries, options and pensions (continued) (continued) Shares and Options held by directors, executives and key management personell as at 31 December 2007
Directors of the Board and key management Shares Options
Companies controlled by Berge G. Larsen, Executive Chairman 45,302,504 – Trygve Bruvik, Vice-Chairman 1,999,996 – Elin Karfjell, board member – – Marit Instanes, board member 18,288 – Gunnar Hirsti, board member – – Helge Eide, Managing Director and Executive Director 2,400,000 – Ivar Brandvold, Chief Operating Officer – – Tore Lilloe-Olsen, Corporate Head of Exploration 2,000 – Haankon Sandborg, Chief Financial Officer – – Magne Normann, Managing Director, DNO Iraq AS 1,371,996 – Sven Erik Lie, Managing Director, DNO Yemen AS – –
Total 51,094,784 –
See note 23 in the consolidated accounts for more information about share options.
Except from syntetic options, no options were expensed in 2007.
Auditors’ FEES
All figures are exclusive of VAT (NOK 1,000) 2007 2006
Auditor’s fee 1,250 1,200 IFRS/USGAAP – 185 Other financial auditing 453 327
Total, auditing fees 1,703 1,712 Other assistance 188 Tax assistance 345 154
Total auditors’ fees 2,236 1,866
Declaration regarding determination of salary and other remuneration to the Managing Director and other senior employees The management remuneration for 2007 was in accordance with the directions approved by the General Meeting in June 2007. Annual bonus for 2007 was set to 3 months salary for all employees.
128 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 3. Remuneration, severance pay, salaries, options and pensions (continued) (continued) According to the new article in the Norwegian Act relating to public limited liability companies paragraph 6-16 a, cf paragraph 5-6, third section, the general meeting shall consider the board’s declaration regarding determination of salary and other remuneration to the general manager and senior employees for the coming financial year. The Board will propose the following declaration for the Annual General Meeting to consider:
The Board of Directors of DNO International ASA has, since 2003, had a compensation comittee which considers questions related to the compensation to the managing director and key management. When determining the methods that shall be used for evaluating the remuneration and possible bonus, options- and other incentive arrangements, the committee shall ensure that the size of the remuneration reflects the duties and responsibilities of the employees, and that the arrangements also shall contribute to the long-term added value for the Companys’s shareholders.
Fixed salary No upper or lower limit for the determination of fixed salary to key management has been set by the Board for the coming financial year, beyond the main principles set out above.
Variable elements In addition to the fixed salary, the Company has the following arrangements in order to keep management priorities in accordance with goals and strategies, set by the Board:
Annual bonus Bonus arrangements have been in place for several years to ensure priority for important business objectives. The annual bonus is maximised to three months salary. Target figures are partly financial or operational, including HES.
Share-based bonus scheme The objective of the scheme is to ensure a continuous high focus on developing value for shareholders, in addition to strenghtening the incentive programme for management and resource persons in the Company. Payment under the scheme is calculated on the rise in the Company’s share price in the bonus period, within specified share price intervals. No shares or ordinary options are granted under this bonus scheme.
Total limit for the share-based bonus scheme is NOK 16.3 million, based on a minimum share price of NOK 15.60 as of 30 June 2008. The threshold for payments under this scheme is a share price of NOK 12.00. Estimated value recognised as of 31 December 2007 is NOK 1.3 million. Key management as defined above are included in the scheme. All other ordinary bonus payments will be deducted in a possible share-based bonus payment.
Severance pay agreements The Managing Director will be entitled to severance pay corresponding to 2-3 times his annual remuneration, depending on the circumstances.
Severance pay agreements (equal to one or two times annual salary) have also been entered into with the following key employees in DNO International ASA: Ivar Brandvold – Chief Operating Officer, Tore Lilloe-Olsen, Corporate Head of Exploration, Magne Normann – Managing Director, DNO Iraq AS and Haakon Sandborg – Chief Financial Officer.
DNO International ASA Annual Report and Accounts 2007 | 129 Notes to the Accounts Note 4. Other operating expenses (continued) NOK 1,000 2007 2006
Lease expense – buildings and equipment 5,882 1,328 Materials and supplies 105 44 Travel expenses 1,669 1,045 Legal expenses 5,464 (266) Consultant fees 19,833 23,416 Other general and administrative costs 13,112 14,872 Management fees to group companies (18,057) (24,876)
Total other operating expenses 28,008 15,563
Note 5. Net other financial items
NOK 1,000 2007 2006
Interest received 21,638 26,685 Interest received from group companies 158,634 106,031 Gain on foreign exchange 26,555 24,940 Reversal of write-down on intercompany receivables – 8,163 Gain on converting debt to shares in PDR ASA – 49,786 Net gain/(loss) on sale of securities – 17,907
Total financial revenues 206,828 233,512
Interest expense (178,101) (125,436) Loss on foreign exchange (79,265) (8,066) Other financial expenses1) (19,155) (40,791) Total financial expenses (276,521) (174,293)
Net other financial items (69,694) 59,219
1) In 2006, Other financial expenses include NOK 33.4 million related to the buy-back of bond loans.
130 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 6. Taxes (continued) NOK 1,000 2007 2006
Taxes payable – – Change in deferred taxes – 54,000
Income taxes – 54,000
Effective tax rates
2007 2006
Profit/(loss) before taxes 2,154,520 17,739
Expected income tax according to nominal tax rate (28%) 603,266 4,967 Adjustment of deferred tax assets 52,069 (53,897) Tax-free gain on sale of shares (655,334) – Other items – (5,070)
Total income taxes – (54,000)
Effective tax rate (including change in deferred taxes) 0% (304%)
The tax effect of temporary differences and losses carried forward:
NOK 1,000 2007 2006
Other current items (1,972) (1,972) Property, plant & equipment (495) (495) Other fixed items (receivables, abandonment, etc.) (18,630) (18,630) Losses carried forward (287,324) (235,255)
Total, basis for deferred taxes/(tax assets) (308,421) (256,352)
Deferred tax asset allowance 58,421 6,352
Total deferred taxes/(tax assets) (250,000) (250,000)
Capitalised deferred tax assets 250,000 250,000
Capitalised deferred tax liabilities – –
Tax rates effective at 31 December 2007 have been used to calculate deferred taxes. The tax rate is 28% for revenues in Norway. Capitalised deferred tax assets relate to activities taxable in Norway.
DNO International ASA Annual Report and Accounts 2007 | 131 Notes to the Accounts Note 6. Taxes (continued) (continued) The deferred tax asset is recognised based on identified and available tax planning opportunities. In addition to utilisation of group contribution in future years, this includes possible sale of assets, if considered feasible and favourable.
The carrying forward period for the unused losses in Norway is indefinite.
Note 7. Property, plant and equipment
License- Exploration- Other Total NOK 1,000 costs costs PP&E PP&E
Cost 1 January 2007 17,138 31,500 4,345 52,984 Additions 2007 7,033 27,088 142 34,263 Disposals 2007 – – – – Transfers 2007 – – – –
Cost 31 December 2007 24,172 58,588 4,487 87,248
Accumulated depreciation 1 January 2007 – – (3,269) (3,269) Depreciation 2007 – – (410) (410) Write-downs 2007 – – – – Disposals and transfers 2007 – – – –
Accumulated depreciation & write-downs 31 December 2007 – – (3,679) (3,679)
Book value 31 December 2007 24,172 58,588 808 83,567
Book value 31 December 2006 17,138 31,500 1,076 49,714
Exploration costs are capitalised pending the evaluation of potential existence of oil and gas reserves.
Other PP&E are depreciated using the straight-line method based on an estimated useful life of three to five years.
132 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 8. Subsidiaries and investment in associates Company’s Ownership and Company’s Company’s Company’s Book (continued) Subsidiaries owned by business voting interest share capital equity in proft/(loss) in value in DNO International ASA address (in %) in NOK 1,000 NOK 1,000 NOK 1,000 NOK 1,000
DNO Yemen AS Oslo 100% NOK 291,000 1,055,672 310,638 481,000 DNO UK Ltd London 100% GBP 0 (150,280) (28,628) 0 DNO Iraq AS Oslo 100% NOK 600 406,920 132 500,116 DNO Invest AS Oslo 100% NOK 2 000 3,542 (14,787) 33,000
Total 2007 1,315,854 267,355 1,014,116
Company’s Company’s Ownership and Company’s proft/(loss) in Fair Investment in business voting interest equity in NOK 1,000 Number of value in associated company address (in %) in NOK 1,000 (Ownership share)* shares NOK 1,000
Det norske oljeselskap ASA Trondheim 36.92% 1,315,573 (5,312) 23,967,500 1,917,358
Total 2007 1,315,573 (5,312) 1,917,358
* DNO’s share of result in ownership period.
Note 9. Other current receivables
NOK 1,000 2007 2006
Trade receivables 6,693 521 Prepayments and accrued income 141 264 Other current receivables 17,773 4,040
Total other current receivables 24,608 4,825
Note 10. Cash and cash equivalents
NOK 1,000 2007 2006
Cash and cash equivalents, non-restricted 681,544 217,807 Cash and cash equivalents, restricted 2,865 1,973
Total cash and cash equivalents 684,409 219,779
DNO International ASA Annual Report and Accounts 2007 | 133 Notes to the Accounts Note 11. Shareholders equity Treasury Paid-in Total (continued) Shares, Treasury Share capital, Other other Share number Shares, premium Treasury paid-in paid-in Other NOK 1,000 capital (1,000)* amount account Shares equity capital equity Total
Shareholders’ equity on 1 January 2007 226,214 5,918 (5,918) 32,456 1,156,415 (979,441) 176,974 541,335 971,060 Purchase of treasury shares including options – 20,000 (20,000) – – (850,794) (850,794) – Sale of Treasury Shares including options – (21,200) 21,200 – 35,759 816,286 852,045 – Profit for the year – – – – – – – 2,154,520
Shareholders’ equity on 31 December 2007 226,214 4,718 (4,718) 32,456 1,192,174 (1,013,949) 178,225 2,695,856 3,128,032
* Adjusted for share split approved by the General Assembly in June 2006.
The total number of Ordinary Shares is 904,856,912 shares with a par value of NOK 0.25 per share. All issued shares are fully paid.
The Company has issued a put option on own shares.
For other information regarding the Company’s equity and shareholders, see note 17 in the consolidated accounts.
Note 12. Guarantees and commitments
For information regarding guarantees and commitments, see notes 19 and 20 in the consolidated accounts.
Note 13. Interest-bearing liabilities
See note 18 in the consolidated accounts for information on other interest-bearing liabilities.
134 | DNO International ASA Annual Report and Accounts 2007 Notes to the Accounts Note 14. Current liabilities (continued) NOK 1,000 2007 2006
Accounts payable 26,644 1,535 Public duties payable 3,030 5,426 Accrued interest 31,660 22,753 Provision for loss, financial instruments 16,060 903 Provision for dividend – – Accrued expenses and other current liabilities 23,561 17,877
Total non-interest-bearing current liabilities 100,955 48,494
Note 15. Financial instruments and risk management
In accordance with NGAAP, financial instruments meeting the hedging criteria are valued together with the hedged item (unrealised losses are not recognised). Instruments not meeting the hedging criteria, are valued in separate portfolios at the lower of their historical cost and market value (unrealised losses are recognised). Unrealised gains are not taken to income.
In 2006, DNO entered into an oil price put option for 2010 with a strike price of USD 40. The purchase price was NOK 11.6 million. Market value of the derivative at 31 December 2007 was NOK 0.8 million, which equals the booked value.
See notes 13 and 14 in the consolidated accounts for further information on financial instruments and risk management.
Note 16. Health, safety and the environment
The Company’s activities were carried out in accordance with official requirements relating to the natural environment.
Note 17. Related parties disclosure
See note 25 in the consolidated accounts for further description of transactions with related parties.
Note 18. Events after the balance sheet date
For more information on events after the balance sheet date, see note 26 in the consolidated accounts.
DNO International ASA Annual Report and Accounts 2007 | 135 Notes to the Accounts Note 19. Money Market Funds (continued) DNO International ASA has placed surplus liquidity in money market funds with an investment profile based on short-term interest certificates.
NOK 1,000 2007 2006
Storebrand Kapitalforvaltning 53,322 50,957 Larvikbanken, time deposit 10,000 –
Total 63,322 50,957
Note 20. Earnings per share
For information regarding earnings per share, reference is made to note 22 in the consolidated accounts.
Note 21. Intercompany
Long-term intercompany receivables
Currency 2007 2006
DNO UK Ltd GBP 151,333 144,637 DNO Iraq AS USD 1,055,294 791,558 DNO Invest AS NOK 162,876 196,971 DNO Yemen AS USD – (298,166) DNO Yemen AS NOK – 379,495 NOIL Energy ASA NOK – 356,212
Total long-term intercompany receivables 1,369,503 1,570,707
Long-term intercompany debt
Currency 2007 2006
DNO Yemen AS USD 510,081 – DNO Yemen AS NOK (379,495) –
Total long-term intercompany debt 130,586 –
Intercompany receivables and debt are interest-bearing with an average interest rate charged for 2007 of 7.8% and 7.0% for 2006.
136 | DNO International ASA Annual Report and Accounts 2007 Statsautoriserte revisorer Foretaksregisteret: NO 976 389 387 MVA
Ernst & Young AS Tel. +47 24 00 24 00 Olso Atrium Fax. +47 24 00 24 01 Postboks 20 www.ey.no NO-0051 Oslo To the Annual Shareholders’ Meeting of DNO International ASA Medlemmer av Den norske Revisorforening
Auditor’s Report for 2007 We have audited the annual financial statements of DNO International ASA as of 31 December 2007, showing a profit of NOK 2 154.5 million for the Parent Company and a profit of NOK 1 006.3 million for the Group. We have also audited the information in the Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit. The financial statements comprise the financial statements for the Parent Company and the Group. The financial statements of the Parent Company comprise the balance sheet, the statements of income and cash flows, and the accompanying notes. The financial statements of the Group comprise the balance sheet, the statements of income and cash flows, the statement of equity and the accompanying notes. The regulations of the Norwegian Accounting Act and accounting standards, principles and practices generally accepted in Norway have been applied in the preparation of the financial statements of the Parent Company. IFRSs as adopted by the EU have been applied in the preparation of the financial statements of the Group. These financial statements and the Directors’ report are the responsibility of the Company’s Board of Directors and Managing Director. Our responsibility is to express an opinion on these financial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors. We conducted our audit in accordance with laws, regulations and auditing standards and practices generally accepted in Norway, including the auditing standards adopted by the Norwegian Institute of Public Accountants. These auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards, an audit also comprises a review of the management of the Company’s financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion. In our opinion; • the financial statements of the Parent Company are prepared in accordance with laws and regulations and present fairly, in all material respects the financial position of the Company as of 31 December 2007, and the results of its operations and its cash flows for the year then ended, in accordance with accounting standards, principles and practices generally accepted in Norway • the financial statements of the Group are prepared in accordance with laws and regulations and present fairly, in all material respects, the financial position of the Group as of 31 December 2007, and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with IFRSs as adopted by the EU • the Company’s management has fulfilled its duty to properly record and document the Company’s accounting information as required by law and bookkeeping practice generally accepted in Norway • the information in the Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with law and regulations.
Oslo, 27 March 2008 ERNST & YOUNG AS
Finn Ole Edstrøm State Authorised Public Accountant (Norway) (sign)
Note: The translation to English has been prepared for information purposes only.
Besøksadresse: Arendal, Bergen, Bø, Drammen, Fosnavåg, Fredrikstad, Holmestrand, Oslo Atrium Horten, Hønefoss, Kongsberg, Kragerø, Kristiansand, Larvik, Levanger, Christian Frederiks plass 6 Lillehammer, Moss, Måløy, Notodden, Oslo, Otta, Porsgrunn/Skien, 0154 Oslo Sandefjord, Sortland, Stavanger, Steinkjer, Tromsø, Trondheim, Tønsberg, Vikersund, Ålesund
DNO International ASA Annual Report and Accounts 2007 | 137 Glossary and Definitions 2P Proven and probable reserves Basement The rock underlying the typical oil-bearing or oil-generating formations Boe Barrels of oil equivalents Bopd Barrels of oil per day Contractor An oil company operating in a country under a Production Sharing Agreement on behalf of the host government for which it receives either a share of production or a fee Cost oil The oil (or revenues) used to reimburse the contractor for exploration costs, development capital costs and operating costs CSR Corporate social responsibility DD&A Depletion, depreciation and amortisation EBITDA Operating profit/(loss) adjusted for depreciation and amortisation, impairments and abandonment expenses EBITDAX EBITDA plus exploration cost (including the cost of dry wells and impairment of oil and gas fields) FDA costs Finding, developing and acquisition cost Finding cost The amount of money spent per unit (barrel of oil) to acquire reserves. Includes discoveries, acquisitions and revisions to previous reserve estimates Government take The sum of royalties and governmental share of oil profit, including that of a governmentally controlled enterprise Income taxes payable under PSA Income tax paid by the government on behalf of the oil company. The tax is paid out of the Government share of oil profit KPI Key performance indicator Mboe Million barrels of oil equivalent Netback EBITDA adjusted for taxes paid Probable Reserves which are not yet proven, but which are estimated to have a better than 50% chance of being technically and commercially producible Production Sharing Agreement (PSA) A contractual agreement between a contractor and a host government, whereby the contractor bears all exploration costs, risks, development and production costs in return for a stipulated share of the production resulting from this effort Profit oil Production remaining after royalty and cost oil, which is split by the government and the contractors according to the Production Sharing Agreement
138 | DNO International ASA Annual Report and Accounts 2007 Glossary and Definitions Possible Reserves which at present cannot be regarded as probable, but which (continued) are estimated to have a significant but less than 50% chance of being technically and commercially producible Proved Reserves which, on the available evidence, are virtually certain to be technically and commercially producible, i.e. have a better than 90% chance of being produced Netback EBITDA adjusted for paid taxes Net entitlement The percentage interest ownership after deducting royalty and the government share. Includes volumes related to the income tax paid by the government on behalf of the contractors Net entitlement reserves Reserves based on net entitlement production Recycle Ratio Netback from RoO per barrel divided by Finding, Development and Acquisition Cost per barrel Reserve Replacement Ratio (RRR) Gross Reserve Growth divided by Production Result of Operations (RoO) A measure of the efficiency of DNO’s producing assets. Result of Operations include revenues and expenses associated directly with DNO’s crude oil and gas producing activities ROACE Return on average capital employed. Net profit/(loss) adjusted for after tax, interest, expenses/average capital employed Royalty A fraction of gross oil production, before any attribution to cost oil, payable to a governmental body Spudding Initiation of drilling operations TSR Total shareholder return Unit-of-Production Depreciation Method of depreciation for capital costs. This method attempts to match the costs with the production with which those costs are associated Unrisked Gross potential reserves (3P) before applying a risk factor Working interest The percentage interest ownership a company (or government) has in a joint venture, partnership or consortium after deducting the royalty from gross revenues (production). This method has previously been referred to as the gross method Working interest reserves Reserves based on working interest production
DNO International ASA Annual Report and Accounts 2007 | 139 Notes
140 | DNO International ASA Annual Report and Accounts 2007 Fast facts and figures
The vision to Balanced portfolio We hold and operate a diverse explore innovatively. and balanced exploration portfolio, with particularly strong potential of unrisked resources in Yemen The strength to and Kurdistan. deliver consistently. Profitability We have high-margin producing assets generating strong cash flow for reinvestment in future growth Discover DNO opportunities. an International Oil Exploration Transparency and Production Company We are transparent in our business practices and reporting, controlling DNO is an independent international upstream oil the Group risks operationally in and gas company. DNO’s main objective is sustainable line with corporate governance growth and value creation through smart exploration, guidelines. cost-effective field development and high-margin production. DNO is committed to conducting its activities in a socially, environmentally and Partnership economically responsible manner. We form long-term trusted DNO International ASA is now focused on its assets partnerships with operators and in the Middle East, the UK and Africa. Our interest on governments, behaving ethically and the Norwegian Continental Shelf is operated through with integrity in the communities in our investment in the associated company Det norske oljeselskap ASA. We have a proven track record as a ‘fast which we work. to market’ developer and low-cost operator of assets, by rapidly commercialising our asset finds and acquisitions Skills and knowledge and extending the life and commercial viability of our We are skilled operators and fast to existing sites. We form long-lasting partnerships and we have built a reputation for being a trusted operator and market, adopting best practices and quick decision-maker. latest technologies in all aspects of our business. DNO International ASA DNOInternational DNO International ASA Stranden 1, Aker Brygge 0250 Oslo NORWAY Phone: (+47) 23 23 84 80 Fax: (+47) 23 23 84 81 DNO International ASA
Annual Report and Accounts Report 2007 Annual Annual Report and Accounts 2007
Visionary Oil & Gas Exploration and Production www.dno.no