ANNUAL REPORT 2005 FOR THE SDFI AND PETORO One of our values in Petoro is boldness and innovative thinking, a theme we Contents touch on in this annual report – including the way we have chosen to illustrate it. We challenged art historian Lau Albrektsen to select and provide brief 2 Key figures for the SDFI descriptions of artworks or architectural gems which represent transitions or paradigm shifts in European comprehension, thought and expression over 3 Highlights of 2005 20 generations. 4 Kjell Pedersen: Boldness and innovative thinking 8 Directors’ report 2005 Our interest lies in the actual change, in the processes which get us to see, 24 Health, safety and the environment understand and do things differently. And innovative thinking is by no means 27 Management team for Petoro AS confined to broad trends in world art. We have more than enough practical 30 Carbon dioxide injection: double dividends themes and issues in the Norwegian petroleum industry which need to be approached in new ways. 34 Carbon dioxide injection: important for improving the recovery factor 36 Improving governance boosts value creation If the illustrations in this report succeed in arousing a little curiosity, 40 Corporate governance encouraging reflection and perhaps even stimulating innovative thinking, we 43 SDFI appropriation accounts will have achieved our aim. 44 SDFI capital accounts 45 SDFI income statement 46 SDFI balance sheet at 31 December 2005 47 SDFI cash flow statement 48 SDFI notes 67 Audit letter from the Office of the Auditor General 70 Petoro AS income statement 71 Petoro AS Balance sheet 72 Petoro AS Cash flow statement 73 Petoro AS Notes 79 Auditor´s report Development of Emergence of Impressionism/ Vitalism/Cubism Painting as an space and per- glass and iron in Expressionism: in the early 20th autonomous mode spective in the architecture during the birth of century – of expression – Renaissance – the 19th century – modern painting – page 38 page 68 page 6 page 22 page 28 Front cover: Detail of Interior of the Gare Saint Lazare, Claude Monet, 1877. See also page 32. 2 3 Key figures for the SDFI* Highlights of 2005 Production Profit and cash flow • Net profit of NOK 113 billion – best financial result for • Petoro secured acceptance in 2005 for many of its the SDFI in Petoro’s history. proposals on governance and increased influence for Gas Oil Profit Net cash flow • One large discovery and several smaller ones. the partners in production licences on the NCS. New 1 350 135 • Four new developments sanctioned by the licences: agreements are being developed by the Norwegian Oil 1 200 120 Ringhorne East, Tordis improved oil recovery, Oseberg Industry Association (OLF). 1 050 105 Delta and the Tampen Link pipeline. • Petoro was commissioned by the government just 900 90 • Two new fields on stream: Kristin and Urd. before Christmas to lead work on identifying oil fields 750 75 • New reserves: 177 million barrels of oil equivalent which could use carbon dioxide injection as a method 600 60 added to the portfolio. for improving profitable offshore recovery. The results 450 Billion NOK 45 • Oil production reduced substantially, partly offset by of this work will be incorporated in a report due to be Thousand boe/d 300 30 higher gas sales. submitted to the government on 1 June 2006 on the 150 15 • New cost rise and delay on Snøhvit, delay in drilling possible creation of a carbon value chain. 0 0 and production start-up on Kristin. 01 02 03 04 05 01 02 03 04 05 • Four people died on installations within Petoro’s area of activity. Oil and gas prices Remaining reserves Oil price Gas price Gas Oil and NGL 450 1.80 9 400 1.60 8 350 1.40 7 Financial data 300 1.20 6 250 1.00 5 (NOK million) 2005 2004 2003 2002 2001 200 0.80 4 Billion boe 150 0.60 3 Operating revenue 152 683 120 807 101 699 103 709 125 562 NOK per barrel 100 0.40 NOK per cubic metre 2 Operating profit 113 069 83 653 68 621 70 366 86 318 50 0.20 1 Net profit 113 172 82 343 68 154 67 417 86 688 0 0.00 0 Cash flow from operational activities 122 181 98 820 85 045 82 078 108 344 01 02 03 04 05 01 02 03 04 05 Cash flow used for investing activities 19 661 16 492 14 465 13 140 16 513 Net cash flow 99 175 81 401 69 005 66 082 94 548 Costs Personal injuries Operational data 45 9 40 8 Production – oil and NGL (1 000 b/d) 788 886 933 949 1 140 35 7 Production – dry gas (scm/d) 73 70 65 61 58 30 6 Production – oil, NGL and dry gas (1 000 boe/d) 1 244 1 324 1 341 1 333 1 508 25 5 Remaining reserves (million boe) 8 422 8 773 9 095 8 478 9 369 20 4 Reserve replacement ratio* (three-year average in %) 96 88 84 25 N/A 15 3 Reserves added* (million boe) 177 88 1 104 95 95 10 million working hours 2 Oil price (USD/bbl) 53.03 37.57 28.76 24.20 24.02 Billion Norwegian kroner 5 1 Oil price (NOK/bbl) 344 254 203 196 216 Average number of injuries per 0 0 Gas price (NOK/scm) 1.47 1.07 1.00 0.93 1.21 01 02 03 04 05 03 04 05 * Excluding changes to the portfolio from the addition/disposal of interests in production licences. * The figures for 2001 have been adjusted for the sale of 15 per cent of the SDFI portfolio's assets to Statoil at 1 June 2001. Similarly, the 2002 figures have been adjusted for the sale of 6.5 per cent of the SDFI portfolio to other companies in that ye ar. 4 5 Kjell Pedersen Boldness and innovative thinking President and CEO I do not want to be a prophet of doom, particularly The fact that Statoil and Shell have jointly announced with today’s oil prices. On the contrary, my point is similar plans for a value chain embracing a gas-fired that even while we are working determinedly to catch power station at Tjeldbergodden and carbon injection the two birds sitting in the bush, we have huge oppor- on Draugen, and later on Heidrun, indicates the tunities for value creation in the mature part of the momentum that this issue has acquired. NCS. That view is based on our big remaining reserves, the extensive infrastructure we have already installed, We have opted to illustrate this annual report with and the expertise we have built up in this industry. paintings and architecture which represent paradigm shifts in European history. Without pressing the com- “Boldness and innovative thinking” is one of the values on which we in Petoro But things do not just happen. If we continue to work parison too far, I believe it could also be valuable for base our business. It has occasionally presented us with some difficult ques- in the way which has previously been successful for us, our industry to reflect over the basis for such changes tions. How can you be bold in Norway’s oil industry? Where does the boundary even moderate estimates of production development on in mindset. What was it that prompted Michelangelo, go between boldness and foolhardiness? Are we able to think innovatively? the NCS could be difficult to attain. At Petoro, we want Monet and Munch to break with accepted perceptions How can we make a contribution? to be a driver in ensuring that our industry takes the of the world and the way it should be understood and right steps and adapts in time. If we do, I am con- presented? vinced that it will be possible to achieve – and perhaps even exceed – the most optimistic production curves Or, for that matter, what characterises the people who An easy option is to look for the answers in the com- I am accordingly very gratified with the results you can for our mature areas. If we also succeed in catching rejected received wisdom by insisting on the presence mitment to the far north. Developments in the Barents read more about in this annual report. We can present those birds in the bush, a high level of daily production of oil beneath the North Sea? What prompted some- Sea and the northern and outermost parts of the a profit of no less than NOK 113 billion for the SDFI in from the NCS can be viewed in a very long perspective. body to decide to develop huge concrete platforms for Norwegian Sea demand courage, strength and drive – 2005 – an almost inconceivably large sum. 300 metres of water? And what drove those who qualities I associate with being bold. That makes it all the more gratifying to see that a pushed through, against strong opposition, the decision But since we can have more than one thought in our growing number of operators and other licensees on to produce the thin oil zones in the Troll field? Activities in such regions demand a high level of heads at a time, I would also express my concern over the NCS want to adopt the new opportunities provided expertise and a strong commitment in a number of the fact that both current cash flow and future dreams by technology to operate installations in a smarter and They had thought innovatively and boldly. areas – the highest safety and environmental stan- are diverting attention from today’s reality and the more integrated way between sea and land.