Annual report on Form 20-F 2007 Annual Report on Form 20-F 2007 Document last updated 11-04-2008 10:06 CEST Annual Report on Form 20-F 2007 1 Introduction 1 1.1 Key figures 1 1.2 Financial highlights 2 1.3 Events and highlights 2 1.4 StatoilHydro's annual report 3 2 Business overview 4 2.1 Our business 4 2.2 Our history 5 2.3 Statements regarding competitive position 6 2.4 Strategy 6 2.4.1 Business environment 6 2.4.2 A strategy for growth 7 2.5 E&P Norway 8 2.5.1 Introduction 8 2.5.2 Strategy 8 2.5.3 Key events 9 2.6 International E&P 10 2.6.1 Introduction 10 2.6.2 Strategy 10 2.6.3 Key events 11 2.7 Natural Gas 12 2.7.1 Introduction 12 2.7.2 Strategy 12 2.7.3 Key events 13 2.8 Manufacturing and Marketing 14 2.8.1 Introduction 14 2.8.2 Strategy 14 2.8.3 Key events 15 2.9 Technology and New Energy 16 2.9.1 Introduction 16 2.9.2 Strategy 16 2.9.3 Key events 17 2.10 Projects 18 2.10.1 Introduction 18 2.10.2 Strategy 18 2.10.3 Key events 18 3 Operational review 19 3.1 E&P Norway 19 3.1.1 Industry overview 19 3.1.2 The NCS portfolio 20 3.1.3 Exploration 21 3.1.4 Oil and gas reserves 22 3.1.5 Production 23 3.1.6 Development 24 3.1.7 Fields in production 26 3.1.8 Decommissioning 29 3.2 International E&P 30 3.2.1 Industry overview 30 3.2.2 Portfolio management 30 3.2.3 Exploration activity 31 3.2.4 Oil and gas reserves 37 3.2.5 Production 38 3.2.6 Fields under development and in production 39 3.3 Natural Gas 47 3.3.1 Industry overview 47 3.3.2 European gas market 47 3.3.3 Gas sales and marketing 48 3.3.4 Norwegian gas transportation system and other facilities 50 3.3.5 Kårstø gas treatment plant 53 3.3.6 Kollsnes gas treatment plant 53 3.3.7 Gas sales agreements 53 3.4 Manufacturing and Marketing 54 3.4.1 Industry overview 54 3.4.2 Oil Sales, Trading and Supply 54 3.4.3 Manufacturing 55 3.4.4 Energy and Retail 58 3.5 Technology and New Energy 59 3.5.1 Industry overview 59 3.5.2 Technology development 59 3.5.3 Research and development 61 3.6 Projects 63 3.6.1 Industry overview 63 3.6.2 Projects development 63 3.7 People and organisation 66 3.7.1 Employees in StatoilHydro 67 3.7.2 Gender equality and diversity 67 3.7.3 Flexible work arrangements 68 3.7.4 Cooperation with unions 68 3.7.5 Development and rewards 68 3.7.6 Health and working environment 68 3.7.7 Safety 69 3.7.8 Organisational structure 70 3.8 Oil and gas production and sales volumes 71 3.9 Reserves replacement 73 3.9.1 Report of DeGolyer and MacNaughton 75 3.10 Regulation 76 3.10.1 The Norwegian licensing system 76 3.10.2 Gas sales and gas transportation 78 3.10.3 Gas directive of the European Union 79 3.10.4 HSE regulation 79 3.10.5 Taxation of StatoilHydro 79 3.10.6 The Norwegian state as a regulatory authority 80 3.10.7 The Norwegian state's direct participation in petroleum operations on the NCS 80 3.10.8 Marketing and sale of the SDFI's oil and gas 81 3.10.9 Petoro AS - The SDFI management company 82 3.10.10 Gassco AS - The gas transportation operating company 82 3.11 Competition 83 3.12 Property, plant and equipment 83 3.13 Related party transactions 83 4 Financial performance 84 4.1 High activity level in new organisation 85 4.1.1 Group profit and loss analysis 86 4.1.2 Group outlook 89 4.1.3 Segment performance and analysis 91 4.1.4 Exploration and Production Norway 92 4.1.5 International Exploration and Production 96 4.1.6 Natural Gas 99 4.1.7 Manufacturing and Marketing 102 4.1.8 Eliminations and other operations 104 4.1.9 Reported volumes 104 4.2 Liquidity and capital resources 105 4.2.1 Table of principal contractual obligations and other commitments 108 4.2.2 Investments 109 4.2.3 Material contracts 110 4.2.4 Impact of inflation 111 4.2.5 Critical accounting judgements and key sources of estimation uncertainty 111 4.2.6 Off balance sheet arrangements 113 4.3 Use and reconciliation of Non-GAAP measures 114 4.3.1 Return on average capital employed after tax (ROACE) 114 4.3.2 Normalised production cost 114 4.3.3 Net debt to capital employed ratio 115 4.4 Implementation of International Financial Reporting Standards (IFRS) 116 5 Risk review 117 5.1 Risk factors 117 5.1.1 Risks related to our business 117 5.1.2 Risks related to the regulatory regime 121 5.1.3 Risks related to our ownership by the Norwegian state 122 5.2 Market risk 123 5.2.1 Risk management 124 5.2.2 Quantitative and qualitative disclosures about market risk 128 5.3 Legal proceedings 133 6 Shareholder information 134 6.1 Dividend policy 135 6.1.1 Dividends 135 6.2 Purchase of equity securities by the issuer and affiliated purchasers 136 6.2.1 StatoilHydro share savings plan 136 6.2.2 Purchase of StatoilHydro shares for subsequent cancellation 137 6.3 Information and communications 137 6.3.1 Investor contact 137 6.3.2 Ticker codes 137 6.4 Major shareholders 137 6.5 Market and market prices 139 6.6 Taxation 140 6.7 Exchange controls and other limitations affecting shareholders 143 6.8 Exchange rates 143 7 Corporate governance 144 7.1 Ethics Code of Conduct 144 7.2 Articles of association for StatoilHydro ASA 145 7.3 General meeting of Shareholders 145 7.4 Board of directors 147 7.4.1 Audit committee 150 7.4.2 Compensation committee 150 7.5 Corporate assembly 151 7.6 Management 151 7.7 Nomination committee 153 7.8 Independent registered public accounting firm 154 7.9 Compensation to the governing bodies 155 7.10 Share ownership 156 7.11 Controls and procedures 156 8 Consolidated Financial Statements 158 8.1 Notes to the Consolidated Financial Statements 164 8.1.1 Organisation 164 8.1.2 Significant accounting policies 164 8.1.3 Merger with Hydro Petroleum 173 8.1.4 Significant acquisitions 175 8.1.5 Segments 176 8.1.6 Remuneration 179 8.1.7 Other expenses 179 8.1.8 Financial items 180 8.1.9 Income taxes 180 8.1.10 Earnings per share 182 8.1.11 Property, plant and equipment 183 8.1.12 Intangible assets 185 8.1.13 Equity accounted investments 186 8.1.14 Non-current financial assets 186 8.1.15 Inventories 187 8.1.16 Trade and other receivables 187 8.1.17 Current financial investments 188 8.1.18 Cash and cash equivalents 188 8.1.19 Shareholder's equity 189 8.1.20 Financial liabilities 191 8.1.21 Pension obligations 193 8.1.22 Asset retirement obligations and other provisions 199 8.1.23 Trade and other payables 200 8.1.24 Leases 200 8.1.25 Other commitments and contingencies 201 8.1.26 Related parties 203 8.1.27 Financial risk management 204 8.1.28 Financial instruments by category 207 8.1.29 Financial instruments and hedging activities 209 8.1.30 Subsequent events 212 8.1.31 IFRS transition 212 8.1.32 Supplementary oil and gas information (UNAUDITED) 219 8.2 Report of independent registered public accounting firms 228 8.2.1 Report of Ernst & Young AS on the financial statements of StatoilHydro ASA 228 8.2.2 Report of Ernst & Young AS on StatoilHydro's internal control over financial reporting 229 8.2.3 Report of Deloitte AS on the carve-out financial statements of Hydro Petroleum 230 9 Terms and definitions 231 10 Cross reference to Form 20-F 233 11 Forward looking statements 235 1 Introduction 1.1 Key figures INCOME RETURN CASH FLOW NOK billion % NOK billion 200 25 100 20 150 80 15 60 100 10 40 50 5 20 2006 2007 2006 2007 2006 2007 Cash flow used in investing activities Net operating income Net income Return on average capitalemployed after tax Cash flow provided by operating activities OIL PRODUCTION/PRICE GAS PRODUCTION/PRICE PROVED OIL AND GAS RESERVES 1,000 bbl per day USD/barrel 1,000 boe per day NOK/scm billion boe 1,200 100 800 4 8 900 75 600 3 6 600 50 400 2 4 300 25 200 1 2 2006 2007 2006 2007 2006 2007 Average oil price Brent Blend Entitlement oil production Average gas price Sales equity gas production Natural gas Oil and NGL TOTAL RECORDABLE INJURY FREQUENCY SERIOUS INCIDENT FREQUENCY CARBON DIOXIDE million tonnes 8 4 20 6 3 15 4 2 10 2 1 5 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 StatoilHydro, Annual Report on Form 20-F 2007 1 1.2 Financial highlights For the year ended 31 December (in NOK million, except per share amounts) 2007 2006 Financial information Total revenues and other income 522,797 521,482 Net operating income 137,204 166,164 Net income 44,641 51,847 Cash flows provided by operating activities 93,926 88,593 Cash flows used in investing activities 75,112 57,175 Interest-bearning debt 50,539 54,772 Net interest-bearing debt 25,461 43,779 Net debt to capital employed 12.4% 20.5% Return on average capital employed after tax 17.9% 22.9% Operational information Combined oil and gas production (thousand boe/day) 1,724 1,708 Proved oil and gas reserves (million boe) 6,010 6,101 Production cost (NOK/boe) 44.1 28.4 Reserve replacement ratio (three-year average) 81% 76% Share information Ordinary and diluted earnings per share 13.80 15.82 Share price at Oslo Stock Exchange on 31 December 169.00 165.25 Dividend paid per share (1) 8.50 9.12 Weighted average number of ordinary shares outstanding 3,195,866,843 3,230,849,707 (1) See Shareholders information section for a description of how dividends are determined and share repurchases.